They said it

“If you think about past real estate cycles and where we’ve seen distress, they’ve largely occurred in markets and situations where the market was oversupplied. We are in exactly the opposite situation.”

Michael Arougheti, chief executive officer of Ares Management, speaking on the firm’s Q2 2022 earnings call last week.

What’s happening

German lender syndicates NYC green loan
This week Aareal Capital Corporation, a subsidiary of the German lender, announced it had arranged a $370 million green loan – $290 million of which was syndicated to Crédit Agricole Corporate & Investment Bank, Helaba and Deutsche Pfandbriefbank. The new financing replaces the previous $197.8 million mortgage, has a term of up to five years and bears interest at a floating rate of 2 per cent over Term SOFR. SL Corp will use the debt to refinance its share of New York’s 100 Church Street office property, which underwent a major refurbishment in 2010. The deal appealed because the asset was “outstanding” in the post-covid marketplace, said Douglas Traynor, Aareal Capital Corporation’s chief executive officer.

Generation volatility
In an unusual – and perhaps unprecedented time for the global commercial real estate markets – there are a few factors keeping Blackstone’s commercial real estate debt business grounded: data, conservative leverage and a keen understanding that real estate of the future will be much different than it is today. “[Capital preservation] is job number one, and in order for us to achieve that, we have to believe that the value of the real estate will grow, and this has to do with the modernisation of purpose,” said Jonathan Pollack, head of the structured finance group at Blackstone, in an interview with affiliate title Real Estate Capital USA published this week. Read the full story here.

Evergrande’s debt crisis deepens
International bondholders were left wanting following last Friday’s progress report from Evergrande, China’s highly indebted property developer. Creditors had expected the announcement to contain details of a preliminary restructuring proposal for its $300 billion of debts, $20 billion of which are held by international investors, as part of a self-imposed deadline to restructure its liabilities. But in a statement Evergrande simply outlined the potential use of equity in its offshore subsidiaries to repay bondholders, adding that it was “working closely and communicating regularly with the creditors…on conducting an orderly and necessary due diligence of the group’s core business” and discussing potentially practicable restructuring proposal options for the offshore debts.

Investment dip
Preliminary figures published by consultant Savills last week [see here] suggest European real estate investment volumes were down during the second quarter of the year. Savills said the figures suggest Q2 volume was slightly less than €60 billion, a 20.2 percent drop from the same period last year – albeit a particularly strong quarter – and a 10.5 percent decline compared with the previous five-year average. The dip is hardly a surprise, given the impact of the Russia-Ukraine war, soaring inflation and rising rates.

Based on what Savills described as “growing economic headwinds and the recent shift in the investment market”, it has revised its outlook for the year down from its €300 billion forecast last quarter, with a year-end volume of €267 billion to €284 billion now expected.

Trending

US recession ruminations
With GDP widely expected to decline for a second straight quarter, there is fresh debate as to whether the metric would truly mean the US economy is in recession. According to CMBS investor Karlis Ulmanis, a portfolio manager at Dupont Investment Management, this might not be the case because no two recessions are the same. “A lot of people [who are] projecting recession haven’t really said that we’re going to contract by 3 or 4 or 5 percent, [but] it might be just a 10th of a percent, you never know,” Ulmanis said. While there are concerns over a potential recession’s effect on the CRE debt market, there are opportunities to be had. Read Real Estate Capital USA’s latest coverage on this here.

Ask for more
Despite fears that a UK recession will be deeper than expected [paywall], and a growing cost of living crisis, investors are maintaining their confidence in the country’s real estate, according to the alternative real estate platform ASK. Investors in the London-based firm indicated that they will look to make an average 25 percent increase in their allocation to real estate in the next 12 months. Meanwhile, 86 percent said they have already increased or have kept their allocation the same in the past 12 months.

But the responses – drawn from ASK’s investor base of mainly UK high-net-worth individuals and family offices – did suggest lower risk strategies will be order of the day, with investors stating a preference for shorter term, first charge loans.

Data snapshot

Leasing momentum continues
Following a robust first quarter of office take-up in central London, the second quarter registered a further 2.6 million square feet of leases – 3 percent ahead of the 10-year quarterly average and the fourth consecutive quarter with over two million sq ft leased. Data compiled by JLL said that this brought the year-to-date total to 5.1 million square feet, 71 percent above the amount transacted in the corresponding period in 2021 and 7 percent ahead of the long-term H1 average.

Loan in focus

Golden triangle loan
As record levels of take-up across the European logistics market persist, and vacancy rates remain at record low levels, Deutsche Bank is leaning in to the UK’s big box sector. The German lender has provided a £110 million (€131 million) loan to Griffen UK. The five-year facility is secured against a 1.9 million-square-foot, two-asset UK logistics portfolio in the UK’s so-called ‘golden logistics triangle’ in the West Midlands. Prime industrial rents in the triangle, which is within a four-hour drive of 90 percent of the Britain population, grew 114 percent in the five years to 2021, according to real estate adviser JLL. The fully occupied portfolio comprises Desford Campus, which covers three logistics warehouses totalling 1,651,229 square feet, and is located seven miles west of Leicester and Griffen Park, a 220,700 square-foot single tenant logistics warehouse in Milton Keynes.

Today’s Term Sheet was prepared by Lucy Scott, with contributions from Daniel Cunningham and Samantha Rowan