Welcome to the CRE News Digest from First American Title NCS, where we explore the biggest stories in commercial real estate. As a legacy brand working in CRE for more than 120 years, First American keenly knows the market and the forces that are impacting our clients’ businesses.
Big Picture: REITs on the Rise
Commercial real estate investment is at a crossroads as the market slowly stabilizes. According to new data, CRE investment volume was down in Q2 by 64% year-over-year, representing the fourth consecutive quarter of declines. While investment volume in nontraded REITs improved from May to June, these increases were still significantly outpaced by withdrawals.
Low property prices fueled by increasing interest rates have spurred a wave of activity from several top Wall Street firms. While many property owners have been holding out on turning over their portfolios in hopes that the market will bounce back, some have begun to sell and accept their losses. In response, firms including Goldman Sachs, BGO, and EQT Exeter have launched new nontraded REITs to scoop up distressed properties at historically low prices.
Industry experts are approaching this investment trend with optimism. Robert A. Stanger & Co. CEO and Chairman Kevin Gannon shared with Bisnow that “once we meet this test through the next several months… I think this [nontraded REIT] structure is going to take off like a rocket.”
First American Senior Commercial Real Estate Economist Xander Snyder concurs, having recently shared his perspective on investment opportunities on America’s CRE Show podcast. According to Xander, as traditional bank lenders pull back, more risk-tolerant investors pick up the slack. While the amount of capital from nonbank lenders can’t fully make up for that of banks, these opportunities still provide a solid alternative and remain attractive to real estate investors.
State of the Sector: Office
The office asset class continues to be a source of instability in the commercial real estate market. A new report from Trepp revealed that office CMBS delinquency rates increased to nearly 5% in July, up from 1.62% at this time last year.
The sector is being closely monitored as office giant WeWork announced in August they have “substantial doubt” about staying in business. If the company were to file for Chapter 11 bankruptcy, the termination of their leases nationwide would further drive up vacancy rates and prolong the asset class’s already-rocky recovery. However, according to Benzinga, a WeWork bankruptcy could potentially create new opportunities for investors. More broadly, recent deal activity indicates that some stakeholders have hope that the office sector will rebound; Fortress recently acquired a $1 billion loan portfolio from Capital One composed mostly of New York City office buildings.
For now, the industry remains in a “wait-and-see” pattern as office sector woes run their course.
Innovation: Proptech on the Upswing
The proptech market is predicted to grow at an increasing rate over the next decade or so, and CRE instability has stoked stakeholders’ appetite for new, innovative solutions to ongoing issues. Proptech is being proposed as a potential solution for the office vacancy crisis as landlords look towards new technologies to encourage their tenants to return to the office. Examples of new office proptech offerings include Swiftconnect, which streamlines credentialing and automates access to buildings for employees, and tenant experience platform VTS Activate, a tenant experience app that centralizes tools like visitor management and maintenance on one platform.
Despite a slowdown in proptech investment through the first half of 2023, investors are bullish that activity will pick up.
