San Francisco's CRE is crashing

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San Francisco's commercial real estate industry is crashing due to a record-high vacancy rate of 29.5% and a stagnant sublease market.An office building at 350 California Street, San Francisco, is expected to sell 80% less than its 2019 value of $300M.

San Francisco has the largest sublease market among all U.S. metropolitan cities, and the inventory has more than doubled since Q4 of 2019.

  • According to data from CoStar, office space vacancy is at a record high throughout the country.
  • Experts believe office vacancies in San Francisco will increase as shorter-term subleases expire in the coming years.
  • A study by the real estate firm Cresa discovered that an unusual amount of sublease space in the market is driven by tech companies after the pandemic forced their employees to work from home.

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Co-founder and CEO of Apollo Global Management, Marc Rowan, said the financial stress on the commercial real estate market would be concentrated and not systemic. He said it is a bad day to be an office owner in San Francisco and Chicago.

According to Rowan, every piece of real estate purchased before the rate hikes are now worth less.

  • He clarified that this does not mean it is a bad investment and that it causes significant dislocation in the short term.
  • Rowan believes this is the opportune time to invest in company debt, and liquidity eroded by the banking crises presents a unique entry point for credit.
  • On corporate credit, Rowan said he is not surprised that investors are in a hurry to lock in the best yields on debt in over a decade.
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A Turtle Bay building that belonged to crowdfunding startup Prodigy sold for $13M at a 90% discount. Prodigy, a crowdfunding startup, raised $690M from individual investors for real estate properties in New York and Chicago. 

Prodigy became bankrupt in 2021, a year after its founder Rodrigo Niño succumbed to cancer. Many of the company's investors were from foreign companies.

  • According to The Real Deal, misleading marketing, poor corporate governance, and questionable investment strategies caused the company to implode.
  • Prodigy lost the 95-unit building on 234 East 46th Street through foreclosure after a failed attempt to redevelop it into a long-stay hotel, and its $81M refinance loan from TD Bank matured.
  • This was the only investment sale in NYC recorded between $10M ad $40M last week.
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San Jose-based PermitFlow raised a $5.5M Seed round. Initialized Capital led the investment round and saw participation from founders and executives from proptech companies.

Launched a year ago, PermitFlow's software helps contractors streamline their construction permit application and management process.

  • PermitFlow combines permitting intelligence and software automation to save preparation time, reduce errors, and increase transparency.
  • Its customers include developers and contractors from California, Texas, and Florida, supporting $600M of property value.
  • Proceeds from the investment round would be used for technology development, customer experience, and recruiting members for its engineering and operations team.
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U.S.-based real estate company Hines is looking for a buyer for its 462-unit apartment building in Calgary.Hines has over $96B in assets under management.

The company's head of Canadian operations, Avi Tesciuba, believes the property would sell for around C$200M (~$147M).

  • Tesciuba expects the housing shortage in Canada to intensify in the coming years as population growth outnumbers the housing supply in the country.
  • Hines believes the market conditions are favorable for a sale and can secure a deal for the 32-story building by this fall.
  • RBC Capital Markets Real Estate Group and Avison Young are managing the sale.
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Commercial real estate company Partners Real Estate launched its digital investment platform,Partners Finance.The platform aims to provide direct access to all Partners' investment funds and development projects to investors.

The digital platform works with accredited investors, family offices, and registered institutional advisors to invest in funds and projects.

  • Managing Director of Partners Finance, Brett Chiles, said the website eliminates gatekeeping and online access to multiple CRE property types.
  • The platform offers direct access to invest in office, industrial, retail, land, and development properties.
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  • Mill Creek Residential;landed a $107.8M loan from Bank of America for the first phase of the development of Modera Aventura.
  • Singapore government's decision to increase the Additional Buyer's Stamp Duty for residential property is expected to force high-net individuals towards commercial real estate assets.
  • The Green Street Commercial Property Price Index, which tracks the pricing of institutional-quality commercial real estate, decreased by 0.1% in April.
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