Manus Clancy is head of data strategy at LightBox
U.S. investors survived a near-death-experience in early August, but after a terrifying jump in volatility, the markets rebounded and managed to end the month on an upbeat note.
The August panic started with the release of dismal July employment numbers and an uptick in interest rates in Japan. This double whammy sent U.S. equities tumbling over a three-day stretch as volatility readings surged and Treasury yields plummeted.
The selloff had investors and analysts calling for the Fed to intervene, with some expecting an emergency Fed cut of 50 basis points or more.
But the indexes recovered without Fed Chair Powell needing to pull out the defibrillator. Powell and other previous Fed Chairs have been quick to break the glass at the outset of past spikes in volatility. However, the fact that the markets muddled through without the “Fed put” probably will serve the markets better in the long term.
As it was, the markets quickly stabilized after the three-day swoon and by the end of the month, stocks were again approaching record highs.
All of this was good news for commercial real estate (CRE) markets. During past market tumults, lenders have pulled back sharply, and capital became constrained. However, the swift resolution of the early-August turmoil, without any significant or lasting impact on risk spreads or capital availability, is worth celebrating. By month-end, the normal 2024 level of transaction activity was restored.
Aid and Comfort from Jackson Hole
While the Fed Chair was not willing to intervene during the early-August panic, he did soothe investors near month-end with his remarks at the annual Jackson Hole confab. Powell revealed that the time had come for rate cuts, all but assuring that September would bring the first reduction in the Fed Funds rate.
Retail Earnings
One of our passions is analyzing retail earnings given their significant impact on retail property values and retail CRE loans.
The ‘Dark Ages’ of retail, from 2015 to 2020, were marked by relentless competition from e-commerce leading to thousands of store closures, dozens of major retailer bankruptcies, and a wave of retail loan defaults. Fortunately, the market has stabilized in recent years as many retailers have ‘right sized’ their operations over the past decade.
The most recent quarter brought a mixed bag for retailers. Among the winners were the value-based sellers: Walmart, Target, and TJX Companies (T.J. Maxx, Marshalls, HomeGoods and Sierra) as those operators benefited from consumers looking for bargains amid rising prices. Not to be left out, Nordstrom, Kohl’s, Urban Outfitter, and Abercrombie and Fitch also announced better-than-expected earnings.
However, commentary from several retailers indicated that the summer of 2024 brought a slow-down in consumer spending and that the prospects for the next 12 months remained unclear.
On a more negative note, home improvement giants Home Depot and Lowe’s highlighted a sharp decline in consumer spending over the summer. Both of those retailers have been impacted by the stagnant housing market caused by higher interest rates and peak property values.
Hotel Activity Returns
For most of 2024, while most of the CRE market was slowly seeing transaction activity increase, the hotel market was left in the dust.
August, however, saw some sizable deals:
- Ares Management and Rida Development paid $1 billion for the 1,621-Key Hyatt Regency Orlando. The seller was Hyatt Hotels with the property trading for $621K per key, a 7.30% cap rate and a 42% increase over the 2013 sales price. Michael Loeb paid $53.3 Million for a 16% stake in the NYC Crown Plaza Hotel representing $421K per key.
- Larry Ellison paid $277 million— $893K per key—for the 310-room luxury hotel, Key Eau Palm Beach Resort in Florida.
- Dune Drifter, a new hospitality startup, acquired the 125-Key Pacific Edge Hotel for $80 million from Highgate Hotels. This deal reflects a price of $640K per key and a noteworthy 39% increase over the 2017 sales price.
- Procaccianti Companies Inc. paid $73.5 Million for the Newport Harbor Hotel & Marina on America’s Cup Avenue in Newport, RI.
Other Bright Spots
Multifamily:
- Equity Residential paid $964 million for a 3,500-unit multifamily portfolio in Dallas/Fort Worth, Atlanta, and Denver, representing $275K per unit. Seller: Blackstone.
- Equity Residential paid $126 million for a 320-unit apartment building in Atlanta. Seller: Trammell Crow and Diamond Realty. Metric: $395K/unit
- Avalon Bay paid $95 million for a 306-unit multifamily apartment building in Atlanta. This purchase represents $310K per unit, up 21% from 2017. Seller: Bell Funds.
- Cortland paid $104 million for a 298-unit apartment building in Arlington, VA, less than a mile west of Amazon’s HQ2 in Crystal City, Va. Seller: Dweck Properties. Metric: $350K/unit.
- Foulger Pratt and Tryline Capital (and a third undisclosed institutional investor) paid $108 million for The Belgard in D.C. Seller: Wood Partners and CBRE Investment Management. Metric: $311K/unit.
- Harbor Group International paid $133 million for a 352-unit apartment property in Reston, VA, which also includes a parking garage and an 80,000-square-foot Wegmans. Metric: $378K/unit
- Blackrock Realty Advisors acquired a 218-unit, 55-and-over apartment complex in Wayland, MA for $98 million. The seller was developer Wood Partners. Metric: $450K per unit.
Self Storage:
Harrison St. paid $200 million for a 19-property, 1.4 million-square-foot self-storage portfolio. Metric: $143/sf.
Industrial:
- EQT Exeter paid $151 million cash for a six-property, 822K square-foot industrial portfolio in Phoenix. Metric: $184/sf
- EQT Exeter acquired a 1.2 million square-foot property in Middletown, PA for $170 million. Metric $142/sf. Seller: Core5 Industrial Partners.
Office (Yes, Office)
Fashion Nova has acquired a Beverly Hills office that will serve as its new global headquarters for the fashion retailer. Fashion Nova paid Tishman Speyer for $118 million which represents a healthy $674 per square foot.
Office Leases (Yes, Office Leases)
- Amazon signed a five-year renewal at Two Galleria Tower in North Dallas, upsizing from 100K to 240K square feet and taking a chuck out of Dallas’ office space.
- Yeshiva University signed a 32-year lease for160,000-square-foot space at Herald Center in Midtown Manhattan.
- Law firm Morris, Manning & Martin inked a 100,000 square-foot lease for its headquarters at Two Alliance Center.
- Bank of America has signed a 10-year, 553,799-square-foot lease renewal at Hallmark Center I in Addison, Texas.
- Christie’s auction house extended its 400,000 square-foot lease at Rockefeller Center for another 25 years with landlord Tishman Speyer.
- Vertex Pharmaceuticals renewed a 1.1 million square-foot office lease in Boston, pushing the lease out 15 years to 2044.
Not So Bright
Office:
Cousins Properties and Town Lane paid $83 million for a 526,000 square-foot office in Atlanta. This purchase represents $157 per square foot, a 30% drop in value from its last sale in 2003.
The Last Word
This may be a contrarian take given all the Sturm und Drang in the CRE market for the last 24 months, but here goes: the CRE market may be shaping up for better-than-expected Q4 in 2024.
Why the optimism?
The near-death experience from early August—and the fact that the market corrected without Fed intervention— should boost sentiment. Expressed another way, what doesn’t kill us makes us stronger. The fast rebound should make investors more confident about deploying capital.
The yield on the 10-year has remained under 4.00% for almost a month, hovering around 3.80% to 3.85% for the last few weeks. The lower yields— along with inflation continuing to fall— should continue to support asset prices. No one will want to be left behind if yields continue to fall.
Transaction activity has inched up every month since March. The buyer base has expanded, and acquisitions have been diverse across property types and geographic regions.
For all these reasons, we believe the next several months could bring positive surprises in transaction activity. Stay tuned.
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