1.  Commercial Real Estate Sales and Values Surge to Records

“Investors purchased a record amount of commercial real estate in the third quarter, defying warnings that the Covid-19 pandemic would erode these property values and starve the industry of cash. Instead, purchases of apartment buildings, life-science labs, and industrial properties, which serve as e-commerce distribution centers, rocketed commercial sales to more than $193 billion in the quarter.” (WSJ – subscription required, 10/26)

What you need to know:

• Commercial sales are up 19% compared to Q3 2019, the largest quarter for commercial property sales ever recorded, according to Real Capital Analytics. Sales activity for the first nine months of the year totaled $462.1 billion, a 10% increase from the same period in 2019. This is largest amount ever for the first three quarters of any year.

• Financial institutions provided $102 billion in loans to property owners via commercial mortgage securities, the largest volume for a nine-month period since 2007.

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2.  Good News for the U.S. Office Market: Net Absorption Turns Positive in Q3 2021

“The latest numbers on net absorption provide encouraging news for the U.S office sector. Data for Q3 2021 shows that net absorption, which measures the change in occupied office inventory, is turning positive in an increasing number of metro office markets.” (Colliers, 10/15)

What you need to know:

• In 3Q 2021, approximately 56% of office markets saw positive absorption, up from one-third of office markets in Q2 2021. At a national level, net absorption for the quarter was 3.2 million square feet, the first positive quarter since Q1 2020.
  
  
• In the previous five quarters, the U.S. office market saw a cumulative 153.1 million square feet of negative absorption, largely spurred by the COVID-19 pandemic. The Atlanta, South Florida, and New York markets led the way in Q3 2021 with over one million square feet of positive absorption.

Read the full article here. 

3.  Hotel Sales Rebound Quickly as Investor Sentiment Turns

“After a short lull in hotel investment activity, the preliminary total sales volume for the third quarter reached $13.4 billion, almost matching the highest third-quarter sales volume ever, $13.9 billion in 2016. Investor sentiment is favoring the sector again after a pandemic-induced drop in activity to only $918 million in the second quarter of 2020.” (CoStar, 10/25)

What you need to know:

• According to STR, operating metrics have increased sharply, with national occupancy rising to 57.6% in the first nine months of 2021, an increase of nearly 30%. In the same time frame, room rates rose by approximately 15%.

• The perceived upswing of the industry and availability of debt and equity capital markets to investors have contributed to the increase in volume. In addition, an increased appetite in
  leisure demand among American consumers has helped buoy the improved metrics.

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4. Looming Deadline Kicking Off a Flurry of Opportunity Zone Investment

“The opportunity zone program, passed into law in late 2017, comes with a series of incentives for investors to finance real estate projects and businesses in census tracts designated as needing investment. While the program will still provide benefits to investors for several more years, one of its incentives has a deadline for investors to place money into funds by the end of this year.” (Bisnow, 10/1)

What you need to know:

• The upcoming December 31st deadline relates to an incentive that gives investors a 10% step-up in the basis of their investment. This 10% step-up means that for an investor who places a capital gain of $1M into an opportunity zone fund before year-end, they can only be taxed on $900K when the deferment period concludes.

• Further, many investors are concerned that the capital gains tax rate may be increased under the current reconciliation bill before Congress. The opportunity zone program and the basis reduction can serve as a way for investors to reduce the impact of a potential tax hike.

Read the full article here. 

5.  Libor Transition Vexes Collateralized Loan Obligations Market

“The global $1 trillion market for collateralized loan obligations is lagging behind in the transition away from the London interbank offered rate. While some companies, lenders and markets have moved swiftly to adopt a replacement for the scandal-marred interest-rate benchmark, low-rated borrowers have been slower to adapt. That is causing headaches for managers of collateralized loan obligations—pools of low-rated corporate loans bundled together into securities. (WSJ – subscription required, 10/27)

What you need to know:

• CLO sales hit a record $131 billion earlier this month, already surpassing the previous full-year record. But a typical CLO comprises hundreds of loans pegged to already-varied rates, making the market one of the most difficult to shift.
• The impending Dec. 31 expiration leaves CLO managers at risk of holding loans tied to a range of short-term benchmarks, increasing the potential for interest-rate volatility that could disrupt returns. It may also leave some CLO securities with different benchmarks than those in their collateral pool, making it difficult for investors to protect against their holdings.

Read the full article here.