A report from the Wall Street Journal. “Some of the most conservative real-estate funds are suffering from falling property values, putting their fund managers in a tough spot as investors look to cash out. Now that the pandemic has caused values of hotels, retail properties and even many office buildings to tumble, investors are lining up to cash out of these funds. That has put fund managers in a bind: They either have to sell property into a stormy market to raise that cash, or tell investors they can’t get some or all of the money they want back.”

“The San Diego Employees Retirement System tried to redeem about $85 million from the $9.5 billion AEW Core Property Trust in the first quarter, but its consultant said it has received only a fraction of its request. ‘To date, 16% has been paid, and it will likely take several quarters to receive the full amount,’ said a September report from Townsend Group.”

“Overall, more than 15 of the 25 open ended core funds tracked by the National Council of Real Estate Investment Fiduciaries have investors waiting to redeem tens of billions of dollars worth of investments, according to industry participants. The Council said it doesn’t tabulate redemptions.”

“Those 25 funds had a total of $267.1 billion gross real-estate assets at the end of September, according to the Council. Their redemption issues mean more headaches for cash-starved investors in these funds, including public pensions that, as of March 31, held $4.93 trillion less than the cost of promised future obligations, according to Federal Reserve data.”

“UBS Trumbull, meanwhile, has been dumping properties at highly discounted prices. The fund sold its roughly half stake in Water Tower Place, a mall in Chicago, to its partner Brookfield Asset Management for a nominal amount, according to people familiar with the matter. It also sold Stamford Town Center, a retail property once valued at over $200 million for $20 million, essentially the value of the land, people said.”

“UBS Trumbull fund also suffered because it pursued a low-leverage strategy since the financial crisis of 2008. Lower leverage is typically considered a more conservative strategy. But it backfired for UBS, partly because debt has been so cheap in recent years. If the fund had put more leverage on properties it could have given them back to their lenders and just lost the amount of equity they had invested.”

From Bloomberg. “America’s ailing malls suffered a pair of body blows over the weekend as two major landlords followed their ever-growing list of bankrupt tenants into Chapter 11 protection. Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc. sought protection from creditors Sunday, citing pandemic-induced pressures on their tenants and, in turn, themselves. Together the two REITs account for some 87 million square feet of real estate across the U.S., according to court papers.”

“‘There’s too much retail real estate in the U.S.,’ said Lindsay Dutch, a REIT equity analyst.”

From Bisnow New York. “‘In the rental market, there is nothing to be super-positive about right now. We are in the middle of an awful supply-demand issue, and it’s difficult to be upbeat about that,’ MNS CEO Andrew Barrocas said. Queens tells a similar story. Some 10,000 condominium units are expected to have been delivered over the last decade by the time we reach the end of this year. The total new development condo pipeline is under 4,500 over 2021, 2022 and 2023.”

“‘Some of these buildings will not go condo at all,’ Nancy Packes said in an interview, adding she has received calls from marketing firms talking about turning buildings that were set to be condo into rentals, though she declined to give specifics. That ‘rental escape’ strategy is not an option for Manhattan, she said, because the units are too big and pricey.”

“It may simply come down to price. New Empire Real Estate Group CEO Bentley Zhao, whose firm is selling Six Garfield, a new ground-up, 33-unit condo in Park Slope, said condos priced under $1M are selling at a steady pace. In Manhattan, where the company’s projects include a condo development at 208 Delancey St. on the Lower East Side, asking prices are generally down around 10% in the $2M price range. ‘Anything above $2M is not moving quickly,’ he said.”

“The upper echelon of the market was already oversupplied well before the pandemic, with luxury buyers skittish about the election and a host of policies like the one-time tax on second homes introduced last year and the possibility of a pied-à-terre tax said to be putting them off. The pandemic is just another reason for those kinds of buyers to wait, Halstead Property Development Marketing President Stephen Kliegerman said. ‘That high-end buyer is waiting a bit longer to see if the market softens a bit more before jumping in,’ he said.”

The Denver Post in Colorado. “Apartment rents in Denver are declining at a much faster clip than the rest of the metro area and the state overall, and the pandemic is likely why, according to the October Rent Report from Apartment List. The median monthly rent on a two-bedroom apartment in Denver was $1,560, down 0.8% from September and 5.2% from a year ago.”

“Rent growth is softening across other metro markets, but not at the pace seen in Denver. The median rent on a two-bedroom apartment in Broomfield was down 2.1% year-over-year to $1,970, while Lone Tree rents were down 1.3% to $2,050, Arvada rents dropped 1.2% to $1,420, and Englewood rents fell 0.8% to $1,580. ‘We’re finding that central cities are seeing much steeper declines than their suburban counterparts all across the country,’ said Igor Popov, chief economist with Apartment List.”

“San Francisco apartment rents are down 21.7% since the pandemic started in March and New York rents are off 15.3%. Other core cities with double-digit declines in median rents include Seattle; Boston; San Jose, Calif., and Washington, D.C. ‘Relatively fewer renters have been moving to the Denver metro for new jobs due to a mix of recession and remote work impacts. At the same time, the secondary cities in the region have gotten a boost in demand,’ Popov said.”

“For most of the past decade, developers focused on building luxury high-rise apartments in downtown areas. The units tended to be smaller, but the trade-off was that they were close to attractions. But with many venues closed and more people working from home because of the pandemic, the focus has shifted to lower density and more living space. ‘I definitely think this will start to affect development, albeit with a lag. Feels like the key buzzword of the last decade was ‘walkability’ and with the pandemic there just haven’t been the same number of places to walk to I suppose,’ Popov said.”

The San Francisco Chronicle in California. “Luxury apartment buildings downtown aren’t quite as appealing as they once were. The allure of being just steps from the office, well, isn’t so alluring when you’re working from home for the foreseeable future. These are some of the spaces offering the best deals right now, with two to three months rent-free almost standard, and this SoMa building is going one step further.”

“The building is currently offering a three-month rent credit in addition to ‘an array of lifestyle enhancing packages that fit the new normal.’ Residents can choose between the ‘remote worker,’ which includes 12 months of a cable/internet credit up to $200 per month, an Amazon Echo Dot, and Tile Mate Tracker, the ‘mind-body mover,’ which includes 12 personal training session, six 60-minute massage sessions, a fitness cooling towel, fit tracker, and NEMA-branded yoga mat and glass water bottle; the ‘do-gooder,’ which includes a $2,000 donation to the local charity of your choice; or the ‘move maker,’ which includes a credit toward movers or a relocation expert up to $1,000, bedroom blackout shades, a Dyson air purifying fan and a bottle of wine and NEMA-branded wine glasses to celebrate.”

“Apartments start at … drumroll … $1,795/month! That’s for a 492-square-foot studio. Zumper reported the median rent of a studio in SoMa is $2,051.”

The Globe and Mail in Canada. “Real estate investors are increasingly trying to get out of closing on their newly built condos in the Toronto region, as rents plummet and banks toughen borrowing qualifications for rental properties. Selling the right to buy the new condo, also known as assignment sales, has soared during the past few months of the coronavirus pandemic, according to realtors.”

“It is a sign of weakness in the condo market beset by a glut of new units, declining rents and a dwindling number of renters. ‘We are seeing a massive wave of assignments of people who don’t want to close in this market,’ said Simeon Papailias, senior partner with REC Canada, which brokers hundreds of preconstruction sales every year.”

“Since the pandemic started early this year, the rental vacancy rate in the Greater Toronto Area has reached its highest level in more than a decade and the average rental price is 9-per-cent lower than the previous year, according to industry research group Urbanation Inc. At the same time, the number of available rental units has spiked. A record 23,000 new condos units will be completed in the Toronto region this year, and another 22,434 are due next year, according to Urbanation. It estimates that 50 per cent were bought as rental units.”

“Now, real estate investors who are due to close on their new condos worry that they won’t be able to cover their mortgage payments with rent. Since the pandemic began, lenders have become stricter with their qualifications, including in some cases requiring bigger down payments and not accepting down payments that were borrowed.”

“‘The financing has gotten a lot more difficult,’ said Matt Elkind, senior broker with Connect Realty, an expert in preconstruction sales. ‘The banks’ appetite to lend to investors is down significantly. An individual, six months ago, would have qualified without problem. They’re not now,’ he said.”

“Some banks are asking prospective borrowers for a 35-per-cent down payment to qualify for the mortgage, whereas in the past, 20 per cent would suffice. Lenders are also recognizing less of the rental income as part of the borrower’s total income. For example, before the pandemic, a lender would count 80 per cent of the prospective rental income as part of the borrower’s total income. Now, the same lender will only recognize 50 per cent of that income, according to real estate experts.”

“‘For people whose only income is rental, it is hard to qualify,’ said Bernadette Laxamana, mortgage broker and president of Karista Mortgage in B.C. If buyers don’t qualify at a bank, they are forced to seek alternative lenders, which typically charge higher interest rates. ‘They are having to look at options where the money is much more expensive. That is where people are having problems,’ Mr. Elkind said.”

From Marijuana Business Daily in Canada. “When Aurora Cannabis acquired greenhouse design firm Larssen in late 2017, it was a shot across the bow of rival Canadian marijuana producers. In short, the Alberta-based producer was signaling to the industry it intended to win the ‘funded capacity’ race at any cost – even if that meant buying the company designing your greenhouse. Many of the greenhouse transactions in the industry at the time ultimately led to direct real estate losses worth millions of dollars and ‘balance sheet adjustments’ worth billions of dollars, financial statements show.”

“Like most Aurora M&A deals of that era, the purchase of Larssen for an undisclosed sum did not pan out. Instead, Aurora’s acquisition of Larssen illustrates the lack of focus demonstrated by the largest cannabis companies: Were they in the business of delighting customers, building greenhouses or selling stock?”

“Three years later, Aurora quietly admitted in a regulatory filing it was selling Larssen back to its original owner ‘for a nominal amount.’ In the same filing, Aurora said Larssen recorded a net loss from discontinued operations of 9.84 million Canadian dollars ($7.1 million). Many of the large greenhouses financed or acquired amid the chaotic cannabis bubble were simply never needed to meet the level of demand that was forecast in the early years of legalization, as Marijuana Business Daily reported weeks after the Larssen acquisition.”

“So why did cannabis producers build so many greenhouses independent of demand forecasting? In the case of at least Aurora, executive bonuses at the time were partially tied to building cannabis production in Canada and establishing new facilities outside Canada, a regulatory filing shows. That created an incentive for executives to not only pursue M&A to build up production capacity but also to continue building out their own massive facilities.”

“They were effectively incentivized to build greenhouses, fueling investor – not consumer – demand. Some also say Canadian cannabis companies went public too early, which encouraged and incentivized the wrong decision-making, said Daniel Sax, a cannabis industry investor and adviser. ‘This became not a business-building industry for a bit. It was a press-release industry. Everything was a press release. The bigger the number, the better. The more grandiose the vision, the better,’ he told MJBizDaily.”

“Similar deals were seen across the industry. Vancouver, British Columbia-based Sunniva spent CA$25 million on its ‘Canada campus’ as of late 2018, according to regulatory filings. It sold the property this summer for CA$6.8 million. In May, Aurora accepted an offer for a greenhouse in Exeter, Ontario, for what appeared to be approximately half its CA$17 million listing price and one-third of the original purchase price.”

“Mary Durocher, president of Fox D Consulting in southwestern Ontario, noted that the market for cannabis greenhouses today is nowhere near what it was five years ago. ‘We’ve got probably a dozen clients who have their facility up for sale, just because they don’t have the funds to operate them,’ she said. ‘Dreams are high. It will sit on the market for a few months, and they will come to the realization once they’ve got no offers or significantly lowballed offers.’”

“Some executives do not really understand the buyers’ market, she said. ‘I can understand that is quite difficult. If I spent CA$100 million and my return was only CA$10 million, I’d be quite upset as well. But from my perspective, growing up in Leamington, it blew my mind from the beginning. Who is spending CA$100 million on a greenhouse? We just built one for 8 (million).’”