creanalyst

Hindsight may be 20/20, but this wasn’t just a bad deal.

Textbook definition of getting fleeced…

Property:
Apartments built in early 1980s

Purchase price:
$111M

Acquisition:
2022

Leverage:
75%

Syndicated equity:
$21.5M

Equity placement fee:
$1.9M

Sponsor acquisition fee:
$2.2M

Going-in cap rate:
3%

Assumed exit cap rate:
4.4%

Sponsor promote:
50% over a 10%

Underwritten investor returns:
18.5% IRR, 1.7x multiple

One-off deal? Not at all.

This syndicator put out $1.2B near the peak of the market 3-4 years ago.

Look out below.

Subject: Discuss new fund idea
Meeting host: [Investment manager]
Attendee: [LP]

12 books that’ll make you fall in love with commercial real estate (and investing)

Let’s be honest...

Like you, we’re busy real estate professionals. We are developers, investors, brokers, lenders, lawyers, and architects. We aren’t teachers by trade, but we love this business and think there’s a CRE role for nearly everyone.

The challenge? It’s an apprenticeship business at heart, and those apprenticeships have mostly disappeared. So, we built classes to fill the gap. Real-world scenarios, case studies, no grades, and a focus on skills instead of certifications.

Here’s the twist: to keep these classes affordable, we don’t pour money into marketing. Instead, we post daily on LinkedIn, sharing what’s happening in real estate through the frameworks we teach.

Our content breaks nearly every social media rule. It’s direct, opinionated, nuanced, and targeted. But somehow it clicks; our engagement rate is 8.5x our peer set average, which says more about your interest and support than anything we’re doing.

So, thank you for engaging. Your comments, likes, and shares keep this experiment alive. If you’re curious about our classes, drop into a Friday info session. Or just keep following along.

Ps - DM us anytime with confidential tips, insights, or feedback.

CRE internship openings…
Good news: internships provide unique career onramps. Bad news: most Summer internships are filled by Christmas.

These roles are still posted but are scheduled to close in the next few days.

.so apply now if you haven’t landed a summer internship. Links below.

LinkedIn tends to suppress external links, but please share, comment, or forward to anyone who might be interested.

-—————

Berkshire Research
https://lnkd.in/gCCRdD39

Berkshire Investment Management
https://lnkd.in/gyggskjw

Berkshire Capital Markets
https://lnkd.in/eAMm9J3H

Berkshire Portfolio/Asset Management
https://lnkd.in/gc5sfetM

Blackstone Capital Markets
https://lnkd.in/g8-YEnED

Blackstone Core+
https://lnkd.in/gjzA9x7R

Blackstone Asset Management
https://lnkd.in/gYS2aJgT

Blackstone Acquisitions
https://lnkd.in/g-6tRRPa

Bridge Investment Group Senior Living
https://lnkd.in/gf9_QReV

Brookfield Hospitality
https://lnkd.in/gBCH4t82

Clarion
https://lnkd.in/gnYUjZ4d

Greystar Investments
https://lnkd.in/gtmZ6ywe

Greystar Development
https://lnkd.in/gPw23TFC

KKR Client Solutions
https://lnkd.in/gGE_5BNK

KKR Capstone
https://lnkd.in/ggB7uac4

KKR Infrastructure
https://lnkd.in/gTt93kUM

LBA Realty
https://lnkd.in/gtn8gqjk

Starwood Asset Management
https://lnkd.in/gtcqA2Mf

Starwood Capital Hotel Asset Management
https://lnkd.in/gDQJ-aPE

StepStone Private Equity, Infrastructure & Real Assets
https://lnkd.in/gcJq-yNi

TA Realty
https://lnkd.in/epQdxSV9

“Getting an entry-level job at Blackstone is 12 times harder than getting into Harvard. I doubt I’d be able to be hired today.”

Steve Schwarzman, Blackstone CEO

62,000 applicants for 169 positions.

This choke point could be a sign of what’s to come for commercial real estate investment roles.

Why?

Commercial real estate investing has traditionally been the best white collar example of an apprentice-based field.

Traditional CRE investor career path:

In your 20s, work long hours processing data in Excel/Argus, building presentation decks, reviewing estoppels, etc. …in exchange for a perch that allows you to see how decisions are made.

Typical comp: $75-150k a year.

In your 30s, become more of a decision maker while continuing to process information and increasingly recruiting/training younger associates to process information.

Typical comp: $200-500k a year.

In your 40s and 50s, get more opportunities to replace retiring decision makers as windows open for value creation. Spend significantly more time “thinking” and much less time “processing”.

Typical comp: $1m+.

Thousands of people have followed this path, defined by an entry point where ambitious 20-somethings traded their primary asset (time) for skills, which they leveraged to build wealth in the back half of their careers.

Problem…

We think we’re in the early innings of AI blowing up this path before it starts. There will almost certainly be fewer entry points.

Solution…

Focus on building real estate thinking skills instead of processing skills.

Ps - How much do you think the best Excel modeler made last year?

How much did the best real estate investor make? One indicator: Blackstone’s Jon Gray made nearly $300 million last year.

Less bid, more ask: Sobering fundraising trends

“Dry powder” gets a lot of attention, but capital’s influence on volume and pricing is nuanced.

Two subsurface realities:

1. Every dollar comes with return expectations. Closed end funds are inherently value-oriented (non core), and open end funds are much more income-oriented (core/core plus.) Higher returns = lower prices.

2. Closed end funds have defined hold periods. Investors want their money back after __ years.

Here’s the sobering part…

CRE markets experienced an epic fundraising run with non-core capital between 2015 and 2022, and most of those funds had stated lives of 7 years. Those investors want their money back. I.e., there will be sellers.

What about buyers? Closed end fundraising has fallen off a cliff. It’s also been extremely concentrated in the the big mega funds. Less capital on the buy side in the near term.

These dynamics could create stronger pressures on the sell side, putting upward pressure on sales volumes and downward volumes on pricing.

Scenario:
— You bought a $100M property with $65M debt.
— That property is now worth $78M due to higher cap rates.
— You’ve lost $22M on paper and have $13M in remaining equity.
— Lenders will only finance $51M.
— At maturity, you must come up with $14M or face foreclosure.

Your loan is about to mature, and the bank is playing hardball.

Do you come up with the $14M to save $13M?

Where do you get the additional $14M?

What % of AAA-rated SASB bonds have experienced interest shortfalls?

This week’s megadeal started ten years ago...

“Equity Residential to Acquire $1 Billion Apartment Portfolio from Blackstone Real Estate”

— $964M for 3,572 units, 11 properties in Atlanta, Denver, and DFW.
— Buying below replacement cost was a key driver.
— The properties were sold from three different Blackstone vehicles: (i) BREIT, the non-listed REIT for retail investors with redemption queues, (ii) BPP, the core+ vehicle for institutional investors with redemption queues, and (iii) BREP, one of Blackstone’s flagship closed-end opportunistic funds.
— Blackstone is selling but still likes apartments, stressing that this was a win for everyone involved.

-— Beneath the headlines -—

This week’s deal deservedly got a lot of attention.

…perhaps because, despite many pundits calling for 6% cap rates and doom loops, it’s the third $1B+ apartment deal to be announced over the last four months.

However, we think the most interesting story behind this deal started nearly ten years ago when EQR sold $6 billion of apartments to focus on “gateway” markets.

The biggest move was announced in October 2015 when EQR sold a $5+ billion portfolio to Starwood.

EQR’s then-CEO said it was an extremely opportune time for the REIT to monetize the portfolio:

“Not only have we demonstrated the enormous value created for our shareholders through the realization of an unlevered internal rate of return of 11.1%, but we have also narrowed our focus, which will now be entirely directed towards our core, high-density urban markets...”

CoStar reported that EQR’s selloff wouldn’t slow as it intended to sell another 5K units at a weighted average cap rate of 6% to 6.25%, as EQR excited South Flordia, Denver, and New England.

Postmortem assessment:

Was it a good or bad decision by EQR to exit ten years ago and now get back into these markets?

We’ll follow up with our take in the next few days.

“Private wealth rushes in...”

Is this wall or capital the future of real estate fundraising? More on our LinkedIn page.

Cracks in the multifamily foundation?

https://www.linkedin.com/posts/cre-analyst_cracks-in-the-multifamily-foundation-syndicators-activity-7208450564148322305-QB-4?utm_source=share&utm_medium=member_ios