Everything, Everywhere, All at Once
The CRE market is struggling, everywhere. Europe’s economy grows at a snail’s pace, as cap rates, financing rates led the levered CRE Fund manager into a trap. Ditto in the U.S. despite strong service employment and GDP growth. China is a disaster, hugely overbuilt, with a nasty deflationary cycle that just began.
For CRE Fund managers, it was dammed in you do (the deal) and dammed if you don’t (you’re not a player if you pass on everything when cap rates were on the moon).
Valuations have declined, and the vicious cycle is underway where lower prices beget lower prices. Banks, the biggest lender to CRE were the willing enabler, lending into bubble valuations. Large European banks look like large U.S. banks with ~10% CRE exposure to CRE (bar chart below), however there are a handful of regional banks in Europe with excessive exposure, very similar to the regional/small banks in the U.S. Chinese banks are alarming, sitting on too many toxic assets. In the U.S. and Europe, private capital is willing to step up and provide capital solutions or proposal to buy NPLs, but in China there is a big red warning sign that everyone can see by now: lack of legal rights. TOXIC, too hot to handle unless you like to get burned (Evergrande), since foreign capital has no legal rights to enforce foreclosure and take possession of the property.
Bloomberg reported that the largest Canadian pension plan flipped the keys on its Park Avenue (NYC) office tower for $1 to its JV partners. Purchased for $300M, the owners put in an additional $100M for major renovation plus $15M in debt service to support this property that is 75% vacant. Carrying costs with $200M debt is painful for many owners that are now upside-down. The story of 360 Park Avenue (South), higher vacancy, lower valuations, high financing costs is a story that is Everywhere, Everything, All at Once. In the Golden Era of Credit, those with too much debt may feel the pinch, but lenders are earning an attractive rate of return. Smart money with deep pockets deploys when a market is distressed. |
