Welcome!

Good morning — thanks for checking into DOMUS: we are the real estate newsletter, specially curated to provide you with the most important trends, news, deals, and more in practically no time.

Daily Interest Rate Check

Northwestern Mutual Milwaukee Investment

Northwestern Mutual has started a $500 million redevelopment project for its North Office Building in downtown Milwaukee. The building, part of a 2 million-square-foot campus project, will become home to 2,000 employees by 2027. Renovations will bring it up to the standards of the company's existing skyscraper. Despite a 23.6 percent vacancy rate in Milwaukee's office market, positive signs include tenants returning to offices under hybrid work models. Northwestern Mutual is partnering with small businesses, and a tax increment financing plan is in place. This investment underscores the company's commitment to Milwaukee.

Private Lending Perspective on CRE

Alex Horn, the managing partner and founder of private lender BridgeInvest, discussed the impact of rising interest rates on the commercial real estate (CRE) landscape:

1. Interest Rate Hikes: The Federal Reserve began raising interest rates to combat inflation, which spiked due to supply disruptions caused by the COVID-19 pandemic. Despite a significant decline in inflation, concerns remain about persistent demand in the economy, which could necessitate keeping rates higher for an extended period. The current expectation is that rates will peak around 4.6% at the end of 2023, as per the Fed's projections.

2. CRE Market Impact: The quick and consecutive interest rate hikes over the past year have had a notable effect on the CRE market. Transaction volumes were down about 64% year-over-year in the second quarter of 2023, and property values decreased, with the Green Street Commercial Property Index showing a 16% drop since March 2022.

3. Opportunity for Private Lenders: The higher-rate environment has created an attractive scenario for private CRE lenders. Private lenders can structure floating-rate debt with high short-term interest rate floors, locking in higher rates throughout the loan term. Even if short-term rates stabilize or fall, lenders benefit from borrower refinanceability and increased property values due to lower cap rates.

4. Borrower Preference: Bank financing, historically the preferred option for CRE borrowers, has seen a decrease in origination volume and tightened underwriting standards. This has led borrowers to seek certainty and faster execution, making private lenders like BridgeInvest increasingly appealing.

5. CMBS Delinquencies: CMBS delinquency rates have increased, particularly for certain property types. Office properties face challenges due to the rise of remote work, while multifamily, industrial, and retail sectors are experiencing stronger fundamentals.

6. Banking Industry Stress: The CRE industry's challenges vary across sectors, but office properties, especially in cities like San Francisco and Chicago, are particularly affected. Smaller banks, which hold a significant amount of CRE loans, may face increased regulation as a result of the recent banking liquidity crisis.

7. Interest Rate Cap Costs: Interest rate cap prices have significantly increased amid the Fed's interest rate hikes. Borrowers may need to consider alternative options, such as selling properties or refinancing at higher fixed rates. BridgeInvest does not require interest rate caps for its loans.

8. Safe Investments: Horn suggests that an investor's position in the capital stack, combined with a conservative loan-to-value (LTV) ratio, is key to generating risk-adjusted returns. BridgeInvest focuses exclusively on originating floating-rate, senior secured CRE loans, positioning investors favorably in the current market environment.

Overall, the higher-rate environment has led to increased interest in private lending for CRE deals, offering borrowers more certainty and flexibility in a changing market landscape.

Office Development in Boston

Boston's office development market stands out, defying economic challenges, mainly due to its thriving life science sector, which has surged in recent years. Life science properties have gone from 5% of office construction a decade ago to over 25% in the last two years. Boston leads the nation in life sciences development, with 12.4 million square feet under construction. This has propelled Boston to the top of the list for office development in the U.S., with nearly 14 million square feet under construction, accounting for 5.7% of the total office stock.

Major developments like Fenway Center and One Boston Wharf are reshaping the city's skyline. Boston's office market remains healthy, with $1.21 billion in transactions in the first seven months of the year, second only to Manhattan among gateway cities.

Coworking spaces are also growing, with 2.9 million square feet in 72 locations. Regus and WeWork are among the key players in this sector.

In summary, Boston's office development market thrives, driven by its robust life science sector and impressive projects, making it an outlier among gateway cities in the post-pandemic era.

That's All For Today

Thanks for checking into DOMUS.

If this email was forwarded to you, subscribe for free here!

This is not professional and / or financial advice, the information in this newsletter is provided for educational and informational purposes only.