This is set up for those wanting to chat about Real Estate Investment Trusts (REITs).
Try to keep this chat line open for REIT discussions–only rule is to leave politics aside.
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12/9/2023
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Some real estate news, from Bloomberg. Sector weakness is not over.
— Bloomberg Odd Lots has a podcast on weakness in multi-family real estate. IMHO, worth a listen. (“Another Part of Commercial Real Estate Is in For a Reckoning.”)
The usual suspects (higher interest rates vs inability to push up rents) but in unusual places like the Sunbelt (where unseasoned developers gambling with cheap interest only loans overbuilt). Like offices, nobody is selling, and buy-sell spreads are wide, because owners don’t want to admit values are down. “Extend and pretend” is becoming more difficult for lenders since some properties are nowhere near covering operating expenses.
— From Bloomberg Radio’s muni bond reporter: reports of high defaults in Senior Living Properties, which many think are “safe” investments. Muni CEFs hold the bonds, and I would guess some REITs hold properties, sometimes included the category of Healthcare. I was surprised that a quick Google popped up ~7% to 11% as a default rate on Senior Living facilities
— Existential question of the day. Not from Bloomberg but in the local news and of interest to holders of NYC offices REITs. Congestion pricing is coming to midtown NYC soon. Private cars driven into NYC will soon face a large additional fee of $15 to $22, trucks up to $36, taxis and Uber $1-2.50.
Does it make workers more or less likely to want to come to work in NYC in those big expensive half-empty offices owned by the likes of Vornado and SL Green? I tend to think employers will not want to reimburse and workers will want to work from home. Still thinking about this.
JMO. DYODD.
Bear, from the West coast. Just wondering if you saw my post about San Francisco and Bay area.? Talk about multifamily overbuilt. Several mention of discount or 2 months free rent or free parking that they normally charge for. Even my son who doesn’t follow real estate has noticed how many projects we have in the north bay and more coming that are not finished yet.
Charles – seeing similar in the south bay. housing is sitting vacant (even newly built) and landlords are having to offer incentives to try to find people to move in.
Article on overall decline in CA https://archive.ph/ydDe4
There is a lot of clamor in CA (including from our newshound governor) for “more rental housing,” and the state is penalizing cities that don’t meet the arbitrary “new housing” targets set by the legislature. However, it. seems that the market rates for housing are not “affordable”, so the clamor is shifting toward government housing.
Don’t get me wrong – people need to have access to housing, but having local or county governments in the landlord business (which is what is discussed with growing frequency) isn’t the answer. They started doing more of that during COVID (took over hotels/motels, vacant apartment building) and they simply can’t manage anything. Even some of our school districts are now trying to get into the landlord business.
Nightmare in the making.
Private, A nightmare indeed. We were heavily invested in directly in rental housing in CA for decades prior to, and through Covid. Dozens of “front doors” across the southern 1/2 of the state. I’ll spare the details, though during and after Covid in CA a significant part of rental owners’ property rights were transferred to the state and local jurisdiction’s control and treated as social safety nets. We sold everything. I would not even buy a CA REIT at this point. The headlines notwithstanding, I don’t think the average person has any idea of what really happened in that space.
Halloween is over, but scary real estate headlines are not —
— WeWork’s bankruptcy is adding to the glut of big city office space. WW is the largest private renter in the US with 20m square feet. Its been contracting. WW removed 45 sites from inventory since August, about half of those in New York. That is impacting valuation. The value of a vintage building 90% leased to WW with a 77 million mortgage fell from 127 million to 42 million. Its mortgage is in foreclosure. Increasing vacancies are pushing values down. “We believe the value of Class B and Class C buildings will probably be 55 percent less than they were prior to the pandemic,” a NYT source said. (See the Reddit quote below.)
Interestingly. I couldn’t find any public REITs confessing to big hits for lost rents. Back in 2019, during WW’s first round of troubles, NAREIT reported that public REITs had limited exposure to it. Empire State avoided them entirely. Vornado was a cheerleader in 2019 but now claims to be out. BXP admits to having WW as a tenant.
“WeWork Files for Bankruptcy Amid Glut of Empty Offices. The move is a blow for landlords who have rented space to the co-working group, which is planning a “comprehensive reorganization” that includes cutting some of its leases.” — NY Times 11/6/2023
“WeWork Bankruptcy Would Deal Another Blow to Ailing N.Y. Office Market. The fallout would be particularly hard for landlords already struggling with piling debt and companies scaling back their office footprint.”
— NY Times, 11/4/23 (shared link, free access)
https://www.nytimes.com/2023/11/04/business/wework-bankrupcty-office-real-estate.html?unlocked_article_code=1.8kw.U-aE.qJ3rK0ZU3k_R&smid=url-share
— The WSJ has yet another write-up on “Office to apartment conversions”, Every Modern Mayor’s Dream. Conversions were slow in 2022. They are expected to pick up somewhat this year, but face headwinds from high rates, reluctant lenders and weakening demand for pricey apartments. Also, renters tend to like things like windows and plumbing in their apartments.
“Turning Empty Offices Into Apartments Is Getting Even Harder. Only 3,575 apartment units were converted from office space last year. The already fraught process now faces even more challenges.” — The WSJ
https://www.wsj.com/real-estate/commercial/turning-empty-offices-into-apartments-is-getting-even-harder-b6659020?st=hloihd3906fqchd&reflink=desktopwebshare_permalink
— WolfStreet has a recent write up on WW and its fall.
— And finally, a perceptive comment on Reddit Investing from an Average Joe who’s noticed that office occupancy is down but building prices are not. Clocked 170 replies and 385+ faves.
“I’m in and out of lot of buildings in a major US city. It’s unreal the amount of empty offices that are just sitting. Entire buildings of empty offices. Plenty have been available for lease for over 2 years. No one wants them. Feels like a huge crash coming, but nothing has happened. Eventually these RE companies are going to have to dump these spaces, which will trigger more than just a real estate crash. ”
A great time for REIT traders, flippers, and authors of “Buy Of A Lifetime” REIT articles at The Other Website but not so much so for buy-hold investors.
Just my opinion. DYODD.
A round up of scary real estate news and headlines for a cold and damp Halloween night:
– Real estate brokerage stocks are tumbling after hours on the news that a jury, consisting of citizens who may have bought a house at some time and paid a big sales commission or who may know someone who did, found that price fixing by brokers was well, price fixing. The jury ordered damages, ~1.8 billion, to be paid. The lawyers will argue this and appeals will be likely filed. Reportedly, there are other similar cases out there. Zillow, Redfin, National Association of Realtors, Keller Williams, and Home Services of America are mentioned in the news stories.
Barrons has dire predictions of falling commissions and mass layoffs of realtors. Not a word about a 3% commission leaving more in consumers pockets than a 6% commission and in some sense making housing slightly more affordable.
— It was noted here by Tim on 10/18 that Pimco had given up 22 hotels encumbered by 240 million of debt. A bit of googling lead me to the Pimco website. In 2021 Pimco was seeing opportunities in lodging in the post pandemic world (“Opportunities in the Lodging Sector” , 12/2021). Just recently, In June 2023 Pimco suggested “targeting stressed assets in turbulent markets” and offered this tidbit of advice, LOL:
“The hotel sector has recovered from the pandemic-induced downturn and remains resilient despite a deteriorating economic backdrop and rising operating costs. ”
Pimco has a solid well reasoned analysis which I linked below. You would almost think it wasn’t coming from a company that was handing back property to its lenders. (“Investors should focus on high-conviction, tactical deployment into stressed and deeply discounted assets facing immediate liquidity pressures…”)
Real Estate Reckoning
https://www.pimco.com/en-us/insights/economic-and-market-commentary/economic-outlook/real-estate-reckoning
— The WSJ has a story on tightening real estate lending. Regionals are starting to show stress. PNC’s problem CRE loans have doubled. (I have to wonder whether Bank Of The Ozarks, aka OZK, an aggressive construction lender that seems to be doing well, will increase lending and get pulled into the vortex since other lenders are stepping out.) —
“The Money Has Stopped Flowing in Commercial Real Estate. Decline in construction loans has been particularly severe as lenders continue to cut back, ”
Just my opinion. DYODD.
Here’s something from St Louis (home to several of us)
A 1.5 million SF skyscraper (AT&T tower) in St Louis is being auctioned w a starting bid of $2.5 million or <$2 SF. This is shocking given the building was sold by AT&T to a REIT for $205 million in 2006.
Troubles began not long after the sale in 2006 as AT&T moved employees to nearby buildings w/ its HQ in Texas and far fewer employees in downtown St Louis. By 2017, the building was nearly vacant. That same year, the lender sued the owner and foreclosed on the property
Just last yr, the building sold for just $4 million at an auction – this is the second time the building is going to auction in the last 2 years
Also, for what it's worth, I do get to talk to private real estate managers for my day job, and they all confirm that the story of turning empty office into apartments is just that…. way too hard and costly.
Looks like a busy Monday in the real estate business. Apparently stock deals, since there is no real money around anymore.
Spirit SRC / Realty Income O
Physicians Realty DOC / Healthpeak Properties PEAK
“Buy REITs, they ain’t making any more of them.” – Will Rogers, updated.
Wonder how this will affect SRC-PA ? Already near it’s 52 week low.
SRC-A will be assumed by O and remain outstanding – O’s senior unsecured are rated A3/A-
“In addition, Realty Income intends to assume approximately $173 million of Spirit’s outstanding Series A Preferred Stock at an annual cash dividend of 6.0%, which is redeemable at par and is expected to remain publicly traded on the New York Stock Exchange.”
https://www.realtyincome.com/investors/press-releases/realty-income-acquire-spirit-realty-capital-93-billion-transaction
On first blush this seems odd since SRC-A does have Change of Control provision that seems to give them an option to redeem or give the shareholder conversion rights. Since SRC shares will be going away, you would think Change Of Control is going to be taking place, wouldn’t you?
https://www.sec.gov/Archives/edgar/data/1308606/000119312517297887/d396442d424b2.htm#supprom396442_7 See S-24
Bear, How are you feeling about hotel REITS? See SA article couple weeks ago on PEB ? and Rob in Vegas comment they sold a hotel in San Francisco with almost a 40% loss to book value. These hotel reits are having a double whammy getting hit with being shut down in 2020 and slow recovery. Even with travel volume best in years they put off capitol expenditures and now higher rates for borrowing now making it difficult to roll over loans.
Charles, I have no opinions about the hotel REITs right now. I don’t know anything about PEB. I’m not looking to add any hotel REITs but I’m not as pessimistic on the hotel REITs as the SA authors seem to sound.
As far as I can tell, travel seems to be back with a vengeance. New York was hopping with tourists last week. Occupancy from all reports is good. ( N.Y. Hotel Occupancy Soars 10% As Tourists Flock To The City – Bisnow 91/23 ) I think the occupancy rate was ~86%, which is very good.
Of course there are other parts to the equation, like what rates those rooms bring in and increases in interest expenses when debt rolls over. And, when you drill down, whether the hotels that a REIT owns cater to leisure travelers or business travelers.
Well BJ i’m off to Europe soon and I’ll see how things are on the other side of the pond.
Wine country has more than it’s share of Lookie Lou’s now almost all year round. My turn to be a tourist and stand in the middle of the road.
Have fun.
Rite Aid will be closing around 154 stores and rejecting their leases. While the impact on REIT rents is not yet clear, from the lack of press releases, it seems that there may not be much impact on the REITs. Initial reports are that Regency/Urstadt, Kimco, Retail Ops and Brixmor each have 10 or more Rite Aid stores in their portfolio. (Those they may not be closing: most of RAD’s 2,200 stores will remain open. )
Rite Aid is closing more than 150 stores. Here’s where they are.
https://finance.yahoo.com/news/rite-aid-closing-more-150-130500400.html
Store list in the bankruptcy filing , scroll to page 22
https://www.scribd.com/document/678403216/Rite-Aid-Store-Closures?ftag=YHFa5b931b
Just my opinion. DYODD.
If the experience of Carl Icahn in making a sure bet against beleaguered shopping malls is an example, there may be hope for office buildings. The only thing you need is a smart operator on the other side of the trade.
Icahn correctly saw shopping malls were in trouble but apparently placed the wrong bet. He is now complaining of market manipulation. Or as an Icahn attorney put it, “Artificial acts that are non-economic and with an intent to manipulate derivatives markets are against the law and actionable.” In short (intentional pun) somebody paid more for a property than Icahn anticipated and his bet didn’t work out.
(FWIW, a shark tactic in the Financial Crisis was making a small losing bet after placing a large bet on the other side of the trade. e,g, buying up a small bond issue to push a corporate default then collecting on the credit default swaps. “Non-economic” but very profitable. )
A worthwhile read if only to hear Icahn complaining about how market manipulators are ruining his day. Barrons, may require a subscription. Free summary on The Other Website.
Carl Icahn Bet on the ‘Big Short 2.0.’ Now He Says the Game Was Rigged.
A wager against U.S. shopping malls looked like a sure thing but hasn’t worked out that way
https://www.wsj.com/finance/investing/carl-icahn-bet-on-the-big-short-2-0-now-he-says-the-game-was-rigged-1ce090aa?mod=hp_listb_pos1
Yup, he was “right,” yet still lost.
Whoops!
Office real estate in San Francisco / SV is still having vacancy issues, according to Wolf Street. 36% worth to be precise in SF. Counterintuitively, with vacancies up in Silicon Valley (27%) so are asking rents. Someone has to pay the taxes, maintenance and utilities. Some of the “leasing activity” is an optical illusion: merely downsizing companies moving into smaller spaces.
Some buildings will go back to the lenders. There is cheery news: office building sales are resuming, supposedly a good sign. The sales are at huge discounts though. The weakness in offices hasn’t prevented 3 Wall Street firms from rating a SF office REIT as a “buy.”
Despite the AI Hype, Office Markets in San Francisco & Silicon Valley Get Even Worse
https://wolfstreet.com/2023/10/04/despite-the-ai-hype-office-markets-in-san-francisco-silicon-valley-get-even-worse/
Not seeing anything to get excited about in office REITs in SF or elsewhere. Just my opinion. DYODD.