CRE Analyst

Here are the trends and events that we think will define commercial real estate in 2024.

A solution to the CRE industry's biggest catch-22 ---- Historical barriers ---- 1. Our industry's primary pre-requisite: Valuation Our guest speakers, mentors, advisors, corporate clients, etc. consistently say valuation is the most important real estate skill. 2. ARGUS is ubiquitous When firms call us looking for talent, they regularly tell us that candidates need to "know ARGUS." ...not just the mechanics of ARGUS, they need judgmental expertise around inputs and outputs. 3. Modeling training We audited the real estate training space and found the following... -- Excel training is widely available and affordable. These skills are table stakes. -- ARGUS mechanical training is available to Altus clients and undergraduate/graduate students. -- No training pulled together Excel, ARGUS, AND valuation. ---- The CRE Catch-22 ---- Early career professionals need actionable skills, but you can't get this expertise without experience. ---- Our solution ---- Our "Valuation in ARGUS" class mimics on-the-job experience by giving participants: 1. Background training on valuation fundamentals Early-career professionals often fall into circuitous traps due to a lack of awareness of valuation fundamentals and ranges of reasonable assumptions. We start from scratch, providing a detailed background on valuation principles, key assumptions, and a range of reasonable assumptions around those assumptions. 2. Step-by-step case study You work for a pension fund that owns 49% of a real office building in Seattle. Your firm wants out. Your partner is a REIT. Before your boss engages the REIT about being taken out, you need to estimate what the property is worth. We give you a 100-page, step-by-step instruction book that guides you through the valuation process. 3. Scenario modeling Once you have a complicated model that you built and understand, we give you real-world scenarios to model. E.g., WeWork gives back 15% of the leased SF during their bankruptcy. How does that affect your valuation? 4. Capstone case study Now that you have sea legs, you're charged with coming up with a value for one of the most widely recognized assets with several major wrinkles: The Empire State Building. Hundreds of tenants, gross and net leases, observatory income, office cap rates/discount rates. What's it worth? ---- Format ---- -- Asynchronous learning on your own time -- Real-world delivery deadlines -- Live office hours 2x a week -- 40+ hours of detailed instructional videos -- Textbook and case study books -- Excel templates and guidance -- Individual feedback -- ARGUS access -- Ability to sit for ARGUS certification exam -- Easy-to-access app to learn on your phone ---- Next steps ---- Our next ARGUS in Valuation course kicks off next week. Please contact John Lewis Barber or Brittany Morrison if interested. PS - This deck summarizes feedback from our last Valuation in ARGUS class.

'Fraudcasting,' CRE-CLOs, the FBI, a short seller, and a mortgage REIT: Arbor Realty's growing headache... Quick background: 1. Late last week, Bloomberg reported that the Department of Justice is investigating Arbor Realty Trust related to its reporting of loan performance. 2. Viceroy Research, a short seller, has been shooting arrows at Arbor for months. Sample open letters: With regards to Fraudcasting (7/12/24), Cream of the Flop (3/26/24), Baloney with a side of flimflam (2/21/24), Slumdog Millionaires (11/16/23), 3. Viceroy sent a letter to Arbor's auditor last week, highlighting several relatively extreme claims, which we highlight in this post. Our perspective: It's worth noting that Viceroy is inherently conflicted. The firm makes money by betting against companies and then highlighting those companies' potential problems in the worst possible light. We don't necessarily endorse Viceroy's findings. However, we have been highlighting (for years) that multifamily problems will likely lead the real estate market down. To date, these problems haven't manifested, which either means: (a) our estimates were wrong, and there won't be many multifamily defaults, or (b) we weren't wrong; problems just haven't surfaced yet. Since Arbor was one of the largest lenders in that space when rents and values hit their post-pandemic peak levels, we think it's important to continue pulling on this thread. What do you think of Viceroy's claims? PS - Stay tuned for case studies on specific Arbor properties in future posts.

Where there’s smoke? Six months ago we said: “This little sliver of the CRE debt space (CRE-CLOs) is worth watching closely. We wouldn't be surprised to see delinquencies spike, and some sponsors announce complete wipeouts.” Update: Delinquencies are up but managers have substituted collateral to keep CRE-CLO losses low. Perhaps more surprisingly, the managers’ losses remain relatively low. Now, at least one big loan sponsor (Arbor) is reportedly being investigated for sugarcoating their financials. How do you see the current situation: a) losses aren’t as bad as advertised. b) losses won’t be bad unless there’s a recession. c) losses are already real, but they’re being hidden.

New reality… “I sent my resume, but they never called me back.” “The interview went well, but I didn’t get the job.” “I’d work there for free, but they still won’t hire me!” “I work so much harder than everyone else, but I didn’t get the promotion.” “I got laid off.” These are all actual quotes from conversations we’ve had over the last few weeks with early-career real estate professionals. Young people in our industry are shell-shocked because… — Everyone gets $100k+ real estate jobs right out of school. — My comp goes up 20% per year, or I’m leaving. — I only work on amazing projects. This is the only professional environment they’ve ever known. This is their reality. But there’s a new reality: fewer jobs, harder assignments that require skills, less compensation, more layoffs, etc. The best thing young professionals can do to outperform in this new reality (which, by the way, was the reality until pre-zero interest rates) is to develop their valuation/ARGUS skills. None of the quotes above were from people with strong valuation or ARGUS skills. Want to know where you stand? We built a quick self-assessment to give you a read on your valuation and ARGUS skills. See the link in comments. No catch. P.S. - know someone who is building their valuation expertise? Forward them the link so they can get a real-time read on their progress.

Diving into the real estate cycle... Last year's primary multifamily headline: Supply wave This year's emerging headline: Demand wave Silver linings... 1. Responsive supply: Developers, investors, and lenders slammed on the brakes. 2. Responsive demand: Jay Parsons attributes strong demand to a combination of slower inflation, a relatively strong job market, wage growth outpacing rent growth, and fewer moveouts to purchase. 3. An overall tighter cycle: Downcycles are always painful. And, for better or worse, that isn't going to change. Cycles are an inherent part of investing. The key is for downcycle pain to be concentrated on the investors who earned the pain vs. spilling over to other investors. The memorable downcycles are extreme and disorderly. ...but perhaps the current cycle proves that tough times can be extreme AND orderly, paving the way to an orderly rebound.

ICYM: Green Street called the market's bottom over the holiday weekend... After 2.5 years of falling property values, GreenStreet's property value index showed the first monthly increase on the strength of apartment values and flattening in other sectors. “Property pricing bottomed late last year and it’s been on the rise since then,” said Peter Rothemund, Co-Head of Strategic Research at Green Street. “There are a few property types where pricing is lower, but for everything else, pricing is flat or higher since the end of last year." More about Green Street's CPPI: -- Time series of unleveraged U.S. commercial property values -- Captures currently negotiated prices -- Institutional quality properties -- Real-time reads released within days of month-end -- Asset-weighted instead of equal-weighted Commercial properties are inherently non-commodities, which makes indexing imperfect. Most real estate indexes are based on transactions, creating substantial lags and sometimes (in times of rapid change and bid/ask gaps) more questions than answers. We follow the Green Street index closely because it leverages Green Street's large team of researchers who aggregate feedback on what properties would trade for today if they were to transact.

One of the largest data center owners (Digital Realty) released an incredible stat last quarter... Tenant bookings in 1Q were about 2x their typical quarter, driven by large users. Wow

WeWork just emerged from bankruptcy. Biggest winners and losers... -- Adam Neaumann walked away with nearly $800 million. -- The lawyers and consultants who worked on the bankruptcy restructuring racked up more than $100 million in fees. They get paid before anyone else. -- SoftBank reportedly lost about $12 billion. -- WeWork reported last week that it cut its future lease obligations in half, resulting in about $12 billion of lost revenue to landlords. ----- WeWork 1.0 Post Mortem ----- IPO 2021 Post BK Enterprise val $47B / $9B / $12B Liabilities $34B / $23B / $12B Equity $13B / ($14B) / $400M ----- WeWork 2.0 ----- "Nine months ago, WeWork commenced its restructuring to address its high-cost, legacy lease portfolio and dramatically reduce its corporate debt. During this period, the Company renegotiated hundreds of office leases with its landlord partners and closely collaborated with its largest creditors and other financial stakeholders. As a result of these efforts, WeWork’s approved Plan of Reorganization positions the Company to deliver sustainable, profitable growth, excellence in service delivery and innovation, and an enhanced member experience." “We have worked closely with the largest landlords around the world and one thing is clear: they believe in the future of the flexible office and they believe in the future of WeWork,” added Peter Greenspan, Global Head of Real Estate at WeWork. “As global office demand continues to move toward flexible approaches, only WeWork has the technology, community and data to support landlords in creating truly outstanding offerings for modern organizations. We’re grateful to each and every landlord who came to the table to collaborate with us over the past nine months, and we look forward to building on our existing partnerships far into the future.”

Hasty generalization fallacy: A claim made on the basis of insufficient evidence. "The worries about apartment loans add to a litany of problems facing commercial real estate. Older office buildings are suffering because of the shift to working from home. Hotels are hurting because people are taking fewer business trips. Malls have been losing ground for years to online shopping." "The issues facing apartment buildings are varied. ... As a result, almost one in five multifamily loans is now at risk of becoming delinquent, according to a list maintained by the data provider CRED iQ." From "Apartments Could Be the Next Real Estate Business to Struggle" (NY Times) -------- Most of this article is reasonable (and mirrors what we've highlighted for 2+ years) with one huge exception: The claim about one in five multifamily loans being at risk of becoming delinquent is egregiously inaccurate. The depth of this inaccuracy is too detailed to explore in a short post, but a few quick thoughts... -- The article almost certainly focuses on CMBS and CDO data (Michael Haas please confirm since CRED-IQ was directly cited in the article as the source of the extremely high DQ rate). -- Agencies are the dominant source of multifamily financing and continue to have a very low DQ rate (i.e., CMBS DQ% = Agency DQ% x 5). -- The article also probably includes special servicing and watchlist loans in its "risk of becoming delinquent" category, but all maturing loans go on watchlist, which makes using it as a direct stress indicator unreliable. e.g., 18% of industrial CMBS loans are on "watchlist" despite a sub 1% DQ rate. Why does this matter? Most people, even real estate players, don't follow the nuances of commercial real estate. The path of least resistance is to follow "doom loop" headlines, which explains their popularity. But there's a drawback... Overly simplistic and/or inaccurate reporting tend to promote bubbles during some phases of the cycle and fearmongering in others. This is a decent example. Are multifamily delinquencies a $20B or a $400B problem? If 20% of multifamily CMBS falls into delinquency, that's about $23 billion of problem multifamily loans. But if 20% of all multifamily loans fall into delinquency, the industry would be looking at $390 billion of problem loans. Details matter. We have predicted that multifamily defaults and losses will lead to negative surprises over the next few years, but this is in no way a $400 billion problem for lenders. PS - It's fruitless and not our intent to blame media outlets and/or individual reporters. Their job is incredibly challenging. Our industry is nuanced, and there's no shortage of sources trying to push their narratives. ...which is why we post.