At their core, commercial mREITs operate simple businesses. They write short-term, floating-rate loans collateralized by pre-stabilized (transitional) commercial real estate assets. They then turn around and lever up the returns on these loans using financing from bank warehouse facilities and CLOs.  

The business model is a win-win-win for the mREITs, their borrowers, and the banks that finance their loans. The mREITs capitalize on the attractive spread between returns on transitional CRE loans (roughly 300-400 bps over SOFR) and their costs of financing (roughly 175-250 bps over SOFR). Borrowers that own transitional assets performing below their economic potential benefit from access to short-term prepayable loans until their assets stabilize and are ready for long-term fixed financing. Lastly, the banks that finance mREIT loans benefit from lower regulatory capital requirements on warehouse facilities, which allows them to earn higher cash-on-cash returns by lending to mREITs vs. making CRE loans directly.  

A brief History of Commercial mREITs: 

The Commercial mREIT business model found its footing post-GFC when banks and CMBS markets pulled away from writing CRE loans backed by construction and transitional projects. Banks also faced higher regulatory capital requirements against such loans, which were deemed riskier vs. loans backed by stabilized CRE. Commercial mREITs stepped in to capitalize on the void left by banks and CMBS lenders. Over the last 15 years, mREITs have grown from ~0.3% to ~1.6% of all CRE loans outstanding. 

*mREITs holdings are adjusted to exclude consolidated CMBS securities as a result of VIE treatment. 

Outlook: 

Today, the lending backdrop is attractive for transitional and bridge lenders, including commercial mREITs. CRE asset values have bottomed out and are improving as measured by Green Street’s Commercial Property Price Index (CPPI), reducing the risk inherent in these loans. On the other hand, while lending spreads have declined vs. the highs in ’22 and ‘23, they remain elevated vs. long-term averages. Lastly, the cost of financing with bank warehouse facilities and CLOs has declined. Together, these factors suggest that commercial mREITs will continue to increase their share of the CRE lending market over the near to intermediate term.  

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The increased investor interest in tertiary markets has not gone unnoticed by Green Street, and we are proud to launch detailed coverage on an additional 334 markets across four core property sectors: apartments, industrial, office, and strip centers. Green Street’s goal has always been to help commercial real estate investors make the best possible capital allocation decisions: In the public market through REIT stock selection; in the private market through sector and market selection. The expanded tertiary market coverage aims to provide clients with the high-quality data they are looking for to better evaluate investment prospects in these smaller cities. What may or may not come as a surprise to Green Street clients, the “biggest little city in the world” – Reno, Nevada – screens as attractively priced across all four core property sectors. While submarket selection within Reno is key, the city benefits from being a top-10 casino / gaming hub, drafts off its close proximity to the affluent Lake Tahoe area, and sports the first Tesla Gigafactory to boot.

Green Street’s new tertiary market coverage looks similar to our existing coverage of the Top 50 markets in the U.S., complete with 5-year forecasts for operating fundamentals, cap rate time series, market grades, and commercial property price indices – all delivered through an interactive user interface and enhanced Market Snapshot reports. As per Green Street standards, all data is standardized to consistent definitions for easy comparability. A new feature rolling out with our tertiary market expansion is GreenStreetAI™ – our first formal implementation of artificial intelligence and large language models into the Green Street product suite. Green Street is taking a cautious approach in its adoption of artificial intelligence, and GreenStreetAI™ is initially limited to the tertiary market commentaries and basic data collection. That said, we are nonetheless excited about its possibilities.

For more information about Green Street’s U.S. Tertiary Market Data expansion or to schedule a personalized walkthrough, click the link below.

Learn more about Green Street U.S. Tertiary Markets

1. There are 387 U.S. metropolitan statistical areas (MSAs) as defined by Census. Green Street categorizes these MSAs as “Top 50” and “Tertiary,” the former containing 50 markets and the latter 334 markets. Green Street has three less markets than Census, as three MSAs are included within the market boundaries of the Green Street Top 50.
2. As measured by Green Street’s sales transaction database.

Disclosure: The Green Street Forecasting tool is an estimation of future events based on market trends in historical data that have proved to provide actionable insights during past market cycles. Green Street makes no representations or warranties as to any future performance of such metrics under any market cycles.

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While the industry survived, its operators did not get out unscathed. For instance, Regal Cinemas filed for Chapter 11 bankruptcy in mid ’22 and ultimately closed around 50 locations in the U.S. Many smaller independent operators faced a similar fate, with several closing a portion or all their locations due to the headwinds that commenced in early ’20. Overall, the industry – which like most retail concepts was overbuilt – shuttered >5% of its footprint since the pandemic hit. 

However, there are several reasons to suggest that peak closures are behind us. First, Hollywood is not going anywhere, and production companies are far more likely to focus on high-budget theater releases where the ROI is greater versus at-home content. Second, many streaming platforms are not profitable. Lastly, tech giants Apple and Amazon have both committed $1B to cinematic content (not streaming) in the next few years.  

While there may still be closures, these are expected to be underperforming and/or cap-ex-starved theaters. Box office revenue remains ~20% below pre-Covid levels thus far into ‘24 but has improved following the release of blockbuster hits such as Dune: Part Two and Deadpool & Wolverine, which broke records. Box-office revenue is estimated to end ’24 around $8.5B and $9.8B in ’25 (13% below ’19).  

Investors and critics alike will be eagerly watching as movies continue to hit the big screens, as the success of such releases will seemingly dictate the fate of many theaters across the U.S.  

Learn more about Theater assets by talking to a CRE specialist about the Retail sector today.

The post Theaters and a Case of ‘Long Covid’ appeared first on Green Street.

In fact, CRE debt funds are seeking to raise an additional ~$50 billion in capital over the near term, according to Commercial Mortgage Alert, a Green Street news publication. Over the last decade, CRE debt funds have nearly doubled in size from an estimated $65 billion to ~$125 billion. Today, these funds primarily originate short-term (~3-5 year), floating rate loans at spreads (~300-550 bps) that are significantly wider than their alternatives.

Now, back in the days of the Global Financial Crisis (GFC), these debt funds rose to their original popularity due to their “regulatory arbitrage” that required banks to hold 1.5x higher equity against them as opposed to more stable assets. This allowed debt funds to step in and fill the hole left by banks that was filled by Blackstone, Starwood, Apollo and the like.

Today, in an environment with uncertain regulatory capital requirements, a pull back from banks that echoes the GRC, and pessimistic risk profiles across multiple sectors, these debt funds are increasing in popularity yet again. And even though there are still constraints holding debt funds back from their big boom, such as their focus on transitional real estate assets as opposed to more stable income producing properties, their significant growth seems inevitable at this point.

This growth seems to be impending, but it is far from an easy road at this point. But that’s not to say that the juice isn’t worth the squeeze.

In fact, there is currently 4x the size of all debt funds assets sitting on bank balance sheets that rests perfectly in debt funds’ target zone. Not to mention just how much dry powder these debt funds are currently sitting on.

The primary issue holding CRE debt funds back is that they are traditionally a key source of capital for transitional CRE projects. After a project reaches a stabilized point, the sponsors tend to “grow out” of the CRE debt fund world and graduate to more lower-cost, long-term sources of financing. But even this roadblock is currently being worked on by certain big-name joint ventures in the debt fund market.

All signals seem to point towards growth for CRE debt funds as an increasingly more reliable and long-term source of financing in the constructional project world as it graduates towards more stabilized projects.

And as the assets managed continue to evolve into more long-term investments, so to will debt funds’ deployment and equity.

To learn more about the origin, past, and future of CRE debt funds, read Green Street’s latest report on “Private “CREdit” in the client research library to see the opportunities that lie in these alternate funds.

Learn more about CRE debt funds by requesting a sample report or talking to a CRE specialist on Private Credit today.

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Some market participants are beginning to forecast long-awaited changes in CRE office vacancy rates. But it seems as though certain secondary factors are not being considered with these optimistic projections. New Green Street data shows that without considering additional supply and modern corporate policy towards in-office work, these projections seem to be out of touch with the wider scope of the office occupancy dilemma.  

New Green Street data gives the complete picture in our recent report “The Black Hole of Office Occupancy” as we dive into the deeper interconnected issues changing the tone of these overly optimistic projections.  

Now, even based on insights from March of ’23, hope for optimistic forecasts regarding CRE office vacancy rates is understandable given the long and cascading fall of office demand since the pandemic first began in ’19. According to Wall Street Journal, the WFH (work from home)  hybrid culture, coupled with the increasing focus on cost-conscious corporate budgeting, has created a massive dive in square footage with spikes in availability and vacancy – a bad trio for any office occupancy calculation.  

Some market experts believe that these numbers represent a hard bottom to the office occupancy problem that will likely be bouncing back strong with a what Investopedia has called V-Shaped recovery. But this is quite likely an over-optimistic interpretation of the situation. There are two theories to how the market will likely recover – and the optimistic one is far less likely when considering all the factors.  

What factors aren’t being considered in the optimistic “V-shaped” recovery projections are the rates of both new office supply and the in-office job growth. Ignoring these two numbers could give you the expectation that the rapid recovery forecast is reliable. However, the theory fails to consider the dark reality of how deep in the (black) hole CRE office vacancy is currently. 

“The last four years of disruption in the office market have been the worst on record… The cumulative amount of office space vacated since ’19 surpasses the amount seen during the dot-com bubble and dwarfs that of the Global Financial Crisis.”  

– Dylan Burzinski, Green Street’s lead office analyst 

Not only that, but the theory also fails to account for compounding factors such as an absorption rate of supply equal to that of 2019 pre-pandemic levels. Given the refocusing of work what the Harvard Business Review defines as the  WFH and hybrid models, such an absorption rate is highly unlikely. Additionally, while the in-office growth rate continues to decline, new office supply has steadily moved in the opposite direction.  

It’s safe to say that instead of the dials shifting in favor of a V-shaped, 5-year recovery (which is already an aggressive assumption given it took the market 11 years to recover from the Global Financial Crisis alone) we could very well be looking at a recovery rate at nearly twice that. 

The deeper data analysis on the situation can be found by requesting the report and further Green Street data in the form below. Be sure not to miss out on the reality of the Black Hole Of Office future and what you can – and should be doing – to adjust your underwriting for more profitably pessimistic purchases.  

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“It’s not every day one of the top names in commercial real estate brokerage starts his goodbye tour. But as Real Estate Alert exclusively reports, CBRE’s Chris Ludeman is retiring, effective May 1. Even though the 40-year veteran – the firm’s president of global capital markets – will stay on as a senior advisor through yearend, it’s a changing of the guard at CBRE.”

Real Estate Alert breaking news report reviewing Luderman’s step down with direct statements from CBRE.

Real Estate Alert is widely recognized as the market’s early warning system for buyers and sellers of major U.S. CRE properties. The newsletter has covered the commercial real estate sector through multiple market booms and crises for more than thirty years. Real Estate Alert’s veteran reporting team closely monitors transaction activity and market trends, enabling us to offer timely insights and actionable intelligence on investment opportunities across asset classes. Newsletter Readers are able to leverage top players’ investment tactics, spot imminent risks and opportunities, and garner a recruitment edge.

Gain first-hand information on behind-the-scenes dealings, securing the competitive advantage you need to detect opportunities.

Real Estate Alert‘s weekly publication breaks the most meaningful stories in the commercial real estate space. 

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The two analysts suggested stabilization moving forward for asset values. However, they mentioned there will likely be a couple more quarters of downward revisions to appraisal-based indices like the Nareit MPI. Traditional sector values – Apartments, Industrial, Office and Strip Centers – are down about 21% in aggregate pricing, which the two prefaced as a sign for what’s to come.  

According to Green Street, commercial real estate is roughly fairly valued today. Ryan walked through the methodology behind this conclusion by expanding on expected returns relative to their investment alternatives. He also analyzed expected returns to provide insight on Green Street’s proprietary sector allocation changes specifically for the traditional sectors. 

Rob provided valuable insights on each sector and outlined which markets have fared better or worse than anticipated. In the apartment sector, Chicago, Orange County, and Pittsburgh are each leaders in the top 50 markets due to the strength in fundamentals during 2023. For the office sector, Palm Beach and Miami are poised for near-term growth and high risk-adjusted returns. With lowering cap rates and positive long-term growth, Miami and Los Angeles are expected to thrive amongst the top 50 industrial markets. Salt Lake City strip centers have experienced declining vacancy rates at a much faster rate than most and will continue to benefit from more declines over the next few years. 

The two analysts also dove into a market allocation analysis of non-traditional sectors. With different markets outperforming across the board, there was an almost an equal number of upgrades and downgrades for Self-Storage, Senior Housing, and Single-Family Rental sectors  in 2023. 

Watch the full webinar 2024 Identifying CRE Opportunities: A Market-Level Analysis to get more proprietary analytics for specific markets in each sector. 

To keep up with Green Street’s differentiated perspective and receive notifications for future posts, opt-in for insights.

Hungry for more Green Street webinar insights? Click here to view our on-demand replay library.

Want to learn how you can incorporate Green Street’s insightful analyst intelligence like this and sector specific research in your investment strategy? Speak with a member of our team today.

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Marie Dormeuil, Head of European Market Analytics, opined on changes on the horizon for core commercial property sectors at the market level. She provided valuable insights on each sector independently and then explained how they correlate to each other when observing fundamentals expectations, valuation, pricing, and returns.

Key Takeaways

M-RevPAM growth – a Green Street proprietary metric that combines effective market rent and occupancy –  was the go-to measure  used by Green Street’s research team to assess the estimates from 2023 and review which sectors have fared better or fared worse than anticipated across the four core sectors.

The residential sector saw a continuous and stellar growth in 2023 as demand continued to outstrip supply.  For industrial, rent growth continued its support trajectory as demand remained stronger than our original underwritings despite increases in vacancies. The retail sector, after seven years of tepid growth and downward revisions, has gone through a reset phase. Thus, translating to a better starting position moving forward through 2024. Office is the only sector that was further revised down, mostly due to further rental growth erosion and prevalent vacancies.

Upon analyzing the factors behind these changes, Marie outlined the expectations for 2024 by geography and sector.

According to Marie, Gothenburg and Stockholm are poised to outperform in three out of the four core sectors in 2024. Conversely, Manchester and Madrid are expected to underperform amongst the group.

Watch the full webinar Pan-European Private Markets: Take Your Pick to get a  deep dive and proprietary analytics for specific markets in each sector.

To keep up with Green Street’s differentiated perspective and receive notifications for future posts, opt-in for insights.

Hungry for more Green Street webinar insights? Click here to view our on-demand replay library.

Want to learn how you can incorporate Green Street’s insightful analyst intelligence like this and sector specific research in your investment strategy? Speak with a member of our team today.

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