Capital Stack Comeuppance & Miami Turns It Down

Capital Stack Comeuppance

Second City no longer, but perhaps not in the way it would have wanted: Chicago is leading the nation’s CMBS carnage, with a new KBRA study estimating that 75% of CMBS backed by the city’s office buildings is distressed. Chicago was trailed in the pain rankings by Denver (65%), Houston (57%) and Philly (52%), while New York was at 25% and LA at 30%.

Nationwide, across $168B in office CMBS, about 31% of it is distressed, per KBRA. “I think it’s a pretty tangible concern,” report author Mike Brotschol told CO, in that “we’re proper fucked but I can’t say that” manner that all analysts must master.

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Capital Stack (cont.)

One Chicago example of just how rough things are: Michael Shvo & Deutsche Finance bought the iconic “Big Red” at 333 South Wabash for $376M in ‘20, compared to seller John Buck’s $108M ‘16 purchase price. The tower has $240M in CMBS debt on it, but cash flows are down, property taxes have jumped by $4M, and anchor tenant Northern Trust is doing a wave of layoffs.

Meanwhile, with the dream of significant rate cuts deferred, the cost of hedging has shot back up. Here’s WSJ

The price of a one-year extension for an interest-rate cap on a $100M mortgage at a 3% strike rate is now $2.1M. Back in January, when the market expected more rate cuts, the same extension cost $1.3M.  

Borrowers who want extensions are being asked to make a blood oath 🩸 by kicking in more equity, as happened with SL Green & Vornado at 280 Park last month on a $1B loan - they put in $100M. Others are coming to grips with the fact that a sale – even at depressed prices – may be their only option.

“Last year, borrowers were saying, ‘I just need three months for rate cuts to kick in’,” CWCapital’s Alex Killick told WSJ. “We aren’t hearing that anymore.”

Madison Realty Capital’s Josh Zegen, speaking on Bloomberg TV, said “typical equity buyers of real estate are not really there.”

“Many of the institutional equity funds want to provide more structured credit (pref, mezz),” he added. “They don’t want to take the last-dollar exposure.” The juice for Madison recently has been in lending to private credit players such as Fortress and Northwind, by providing warehouse lines, loan-on-loan financing, and A-notes.

Vibe Check: Brokerage Earnings

Newmark has levered up in anticipation of big deals ahead: The firm issued $600M in new senior debt and also renewed its $600M credit facility. One particular area of interest: deals in the $2T worth of CRE debt coming due by 2027. A third of those loans would need to be sold, a third would need to be recapped and the rest would need advisory to find new bankrollers, per CEO Barry Gosin.

“We are at the beginning of a once-in-a-generation opportunity for Newmark to grow its business,” he added. The “Kabuki dance” that owners and lenders have been involved in would shake out in the brokerage’s favor, he added. More on financials here.  

CBRE’s Bob Sulentic said last spring that the firm had billions in the M&A pipeline, but it’s been quiet so far. The firm made profits of $126M in Q1, but the talk was mostly of improved global office leasing and cost-cutting. "Our expectations for profit growth in 2024 are now driven to a greater degree by the cost components of our business, which are within our control," said CFO Emma Giamartino. Financials here. JLL, too, had a good quarter, with profits of $66M, and CEO Christian Ulbrich focused on slow and steady growth in his remarks. Financials here.

Meanwhile, Colliers wants M&A action - says it has $1B to play with.

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Quickies

• Billionaire Todd Boehly (Chelsea ⚽️ boss) forms JV w AECOM Capital to invest in CRE - both equity & pref: Targeting $3B over 5Y 

• Ivan Kaufman’s Arbor Realty Trust announces at-the-market offering of up to 30M shares (h/t short seller Viceroy) - more on Arbor here 

• Bloomberg renews nearly 1M sf at Vornado-controlled Bloomberg HQ

• Freddie Mac wants in on the home equity loan market – why that matters 

• Andy Myers Shangri-La Industries files for bankruptcy after allegations of embezzling millions 👏 in CA homeless housing funds

• Kushner to lose $15M deposit on aborted $186M multi deal after choosing to fight on

• Two Trees says 485x (421a sequel) won’t be enough to save its River Ring Williamsburg rental megaproject (more on NY’s new housing deal here)

South Florida Turns Down the Volume

Easy, papi: Miami-area multifamily developers are waking up to macroeconomic realities. Apartment construction starts are down 41% in Miami-Dade and 21% in Palm Beach County over the past 2 quarters compared to a year ago, per Dodge Construction Network stats cited by TRD. Some developers are opting to go the condo route instead – “the margins are very razor tight, and let’s just say capital right now is not leaning to multifamily,” Dan Kodsi told the publication – while others are holding off on construction. “The apartment business is a nickel and dime business,” Kodsi added. The pipeline is still hella impressive – over 40K units are under construction in the region, compared to the record 42.5K in ‘22.

Meanwhile, in the nation’s shiniest office market, Brickell, things are getting interesting. The frenzy of out-of-towners setting up shop has cooled, and out of the nearly 3M sf of office space planned, none is preleased – which will make it harder to convince a lender to dance 💃 

Postscript: Tibor Hollo, Master Builder

A fully realized life. Tibor Hollo, the South Florida developer who died last week at 96, is one of the key reasons Miami’s skyline looks the way it does today: he built the city’s largest condo in the 80s, built Brickell’s first high-rise, kicked off the redevelopment of the ​​Arts & Entertainment District (fka Omni) and built the tallest tower on the East Coast outside NYC (Panorama Tower). He got rocked in the 80s along with many of his peers – at one point he worked things out with lenders over $364M in personal debt – but real estate development is about long-term survival, and survive he did.

“I learned to be very conservative, not to overborrow because there are always ups and downs,” he said in 2012. “And you can bet your bippies the cycles will be coming.”

When Ken Griffin decided it was time to play city-shaper, Hollo had something big to sell him: a Brickell waterfront site for which the hedge funder coughed up $363M, or a galactic $3,300 psf.

So that’s Hollo’s resume, and it stacks up against anyone’s. Then you add in the biography – sent to Auschwitz at 14, mom doesn’t make it out, comes to America, first job 45 cents/hr – and you have something pretty remarkable. Rest well.

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