Is anyone actually writing down NAV yet?
Just curious, as I know a lot of RE Investment Vehicles calculate their own NAV. Will anybody admit to actually either A) Having to mark their asset values down already or B) Selling assets at a price substantially below where NAV was estimated?
Just trying to get an idea of how much repricing pain/risk is yet to come versus how much has been realized.
On asset not transacting I haven't seen much of it in the multifamily world, people still with their heads in the sand. My guess is there's another 20%-30% discount to where we are currently. Had lunch with a lender last week, most borrowers are still ~cash neutral unless they had a heavy value-add plan and acquired it in the last ~2 years and are sitting tight (he said there was a WORLD of hurt coming for office though).
On assets that have transacted we've seen pricing come in ~15%-20% discounts to where we thought values would be and my guess is that's about right.
Not like I want to see the demise of an asset class but really can’t wait to see office values decreasing in executed contracts (actual transactions) and not just projections in some models. Large office owners/operators want to keep blowing smoke like they believe office will rebound or will be “resilient”. This is total BS. Only Class A+ office (well amenitized, well located, and built within past 5 years) will be stable going into and coming out of recession.
Another thing is I don’t see office assets appreciating in the long term, think 7-10 years, like multi or industrial will. As Gen Z workers, ages 22-26ish right now, become more senior, they’ll eventually be in positions where they get to make decisions on if they want to be in office and if they’ll enforce it for the team that they manage. Being that most of Gen Z started their career just before or during pandemic, they will be receptive to hybrid work. This means less people be in office or firms will just lease less space. You can figure out the rest. I think there will still be a need for office space but I push back on anyone saying that “creativity and collaboration only happens in office”. Office is cool 2-3x a week. Other than that, the commute sucks, lunch expenses add up, and generally I get much more done at home. Just my two cents.
I generally agree with everything you said. I do think remote/hybrid work will be hyper dependent on firm/culture though. In 7-10 years you’ll still have the guys who are 45-50 now calling the shots
Go look at the NCREIF index reports (on the website for free), both the NPI and the ODCE indices posted negative appreciation returns, meaning net write-downs. In the NPI press release, they showed the percentage of properties being written down as over 50% of portfolio (interesting chart to see).
From discussions I've heard, a lot of properties and funds were written down in 3Q and more is expected in 4Q and probably into 2023 (a lot depends on interest rates). Firms that self issue NAVs rely on appraisers, and they are known to take their time to make adjustments. So, if a property is really "down" 20% (I use quotations because these are not from sale transactions), they probably won't do that in one quarter, they will mark it over like 2 to 4 quarters. I suspect that process has begun or starting with 4Q if not 3Q.
Transaction data will be tough until stuff closes, but I'm pretty sure RCA already had negative price returns on the last monthly and quarterly measures for many asset types (can't remember overall). But, the "down" effect there takes time as so many deals just get pulled vs. closed, and those that do closed could be very very high quality (and thus not really subject to much discount) or very distressed (in theory, should have price beat up but so-called 'distressed' players have sometimes shown willingness to buy at or near market in past years...).
So, this is the constant debate at all real estate parties this year, what's going on with prices?? You can look at REITs for guidance (like the Green Street Advisors reports do), but that can be fouled up with heavy market volatility and trading action that never translates to private real property values (REIT NAV discounts and premiums don't always act like the predictor they are supposed to, they have overshot in the past, did big time during COVID). So, even this is still open to guessing games.
2023 will be interesting!
LPs aren't stupid, but they also don't want values to go down either (pensioners get pissed, they have to report poor returns, it messes up their allocation, etc.) so they usually turn a blind eye. Some LPs will focus on management fees, but the marginal cost of the higher manager fees is usually not worth the headaches I described.
I agree with you that firms should be more rigorous, but don't see it in practice.
From what I've seen in MF & Industrial, NOI on stabilized product is mostly flat, with some MF properties starting to turn leases at a negative trade-out rates, implying some minor NOI deflation may come into play in the next year or so as leases expire.
So I think a lot of the discounting on transacted assets is less due to real distress or economic deterioration but moreso higher interest rates necessitating a higher cap rate. Regardless this should be factored into your NAV but of course you have the classic "Can't lose if never sell" types who will hold their depreciated assets forever and keep claiming property value increases or holds flat and because they never actually market the property technically they never realize a loss or write-down.
I'm curious to see how this plays out over the next few years (2023 - 2026) especially as it pertains to Office. Wonder how long those owners can hang on before carry costs / interest payment make it untenable. There's a lot of discussion recently about MF conversion, but all-in costs seem to be nearly 50-100% of replacement cost (https://cre.moodysanalytics.com/insights/cre-trends/office-to-apartment-conversions/)... need to get some crazy rents to make those numbers work.
https://www.costar.com/article/723613433/brookfields-downtown-la-office-fund-seen-as-indicator-of-market-health-warns-of-cash-shortfall
https://www.costar.com/article/1965160610/pimco-hands-dallas-office-complex-to-lender-tpg-real-estate-after-anchor-tenant-leaves
https://www.bisnow.com/national/news/top-talent/great-cliff-or-slow-fade-in-ailing-office-market-rising-renewals-are-key-113403
https://www.bisnow.com/national/news/top-talent/distressed-asset-specialists-see-deals-in-reckoning-that-dwarfs-08-collapse-116944
https://nypost.com/2023/06/08/work-from-home-and-empty-offices-leading-to-doom-loop-for-nyc/
From what I've heard the office pain is going to be sooner rather than later, I've already heard lenders are taking back keys (heard this from several lenders) on some projects. 2023 will be a very painful year for office investors. I think if a building/property makes it to 2024 they're probably going to make it the rest of the way.
Wrong industry, but at the VC fund where I work (ignore title) there is no way we are marking down our investments.
Internally there is wide recognition that some investments won't be able to raise money at this valuation and will either have to cut it or run out of cash, but until we are forced by one of the two we will just keep the original valuation for audit reports and use an estimated FMV in our fundraising deck that is like 3-4x our investment (no idea the justification behind this lol).
Standard practice in my opinion, don't personally know of any other fund doing cuts on their portfolio valuation on their own initiative.
what... that's fraud
Not at all, I see from your profile that you are in PE. Probably your fund is doing something similar, no one wants to just cut the valuations if there is no need to, especially so if the fund is fundraising.
Also, good luck reducing internally the valuation of a company when you are only a VC (i.e. minority) investor. The founder will not like it all, word will get out and you will find it harder to get invited into other rounds. Most startups try to avoid a down round like if it is a death sentence.
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