These properties are being offered at significant markdowns by developers grappling with debt repayment challenges.
Investment firms, having amassed substantial cash reserves during the COVID-19 pandemic, are keen on purchasing these discounted properties. Ares Management, for instance, is acquiring 3 million square feet of office space and has proposed to buy assets tied to $500 million in high-priority property debt. This comes at a time when the commercial real estate sector is wrestling with approximately $2.81 trillion in loans due to mature by 2028, amid dwindling demand and exorbitant debt costs driven by high-interest rates.
February 15, 2024
Rich Banjo, co-president of Artemis Real Estate Partners, told the WSJ, "We're in a period of time where it's great to have dry powder." Artemis recently closed a $2.2 billion fund last year, which has been actively purchasing discounted properties.
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According to the WSJ, private-equity firms managing global real estate funds had $544 billion in cash in Q2 2023, a significant increase from $457 billion in Q4 2022. Distressed commercial property escalated to $85.8 billion by the end of 2023, up from $56.9 billion at the end of 2022.
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Investors are particularly eyeing office building owners who have seen their profits dwindle due to the widespread shift to remote work instigated by the COVID-19 pandemic, resulting in reduced office space requirements. Hotel owners struggling to maintain their properties and apartment buildings lagging in construction schedules due to pandemic-induced supply chain disruptions and work stoppages have also been on investors' radar.
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Commercial property interest rates are experiencing upward pressure due to the Federal Reserve's hikes to the federal funds rate, now set between 5.25% and 5.50% - the highest in 22 years - in a bid to curb soaring inflation.
The downfall of leading developer China Evergrande Group, triggered by a judicial decision in January, has resulted in the liquidation of over $300 billion in liabilities. This could potentially depress global property prices as the company offloads assets. The escalating cost of borrowing has led to a $1 trillion depreciation in global office property values.