Real Pain for Real Estate (Brokers)

A daily market update from FS Insight — what you need to know ahead of opening bell

“Some form of suffering is always inevitable. The process of taking action is the process of choosing your pain.” — James Clear

Overnight

National Association of Realtors agrees to slash commissions in $418M settlement (Axios)

North Korea fires missile as Blinken visits Seoul (BBG)

Putin wins Russia election in landslide with no serious competition (RT)

Reddit’s $6.5B IPO is oversubscribed by up to five times (RT)

Uber to pay $178 million to settle lawsuit from Australian taxi drivers (WSJ)

Niger ends U.S. military ties following accusation of Iran uranium deal (WSJ)

Heady news: Viagra may also be good for your brain (WSJ)

Ryan Reynolds-backed payments processor nears buyout deal (WSJ)

CEO of Hertz Global Holdings has decided to step down (Hertz)

Trump economic advisers float three names for Fed Chair (WSJ)

Tick-killing pill, a potential new weapon against Lyme disease, shows promising results in human trial (Ars Technica)

Nvidia AI developer conference kicks off with new chips in focus (Yahoo Finance)

Swisscom agreed to acquire Vodafone’s Italian business in an $8.7B deal (BBG

Saudi Arabia’s PIF is in early talks to acquire the kingdom’s flagship carrier Saudia (BBG

U.S. bullish options skew at most extreme level since 2008 (FT)

U.S. PE funds struggle to cash out from China (FT)

Consumer debt is stinging like never before (BBG)

UBS is targeting M&A opportunities in US (RT)

Super Micro Computer stock has been outperforming Nvidia (WSJ)

Nasdaq 100 YTD is beating Apple by most since 2013 (BBG)

US equity funds drew record inflows last week (FT)

~40% of Japan’s $4T offshore funds to ignore first BOJ hike (BBG)

Mike Lynch goes on trial over Silicon Valley’s ‘largest fraud’ (FT)

Goldman bumped pay for top three execs by 24% (RT)

Home buying costs may fall amid groundbreaking antitrust settlement (WSJ)

U.S. is investigating Adani Group over potential bribery (BBG)

U.S. is investigating Meta for role in drug sales (WSJ)

Honda and Nissan will partner on EV development (AP)

First news

  • Although saved by multiple bells so far, commercial real estate is bringing delayed pain to the economy, hitting banks first.

Charts of the Day

Real Pain for Real Estate (Brokers)

Real Pain for Real Estate (Brokers)

Real Pain for Real Estate (Brokers)

MARKET LEVELS

Overnight
S&P Futures +20 point(s) (+0.4% )
overnight range: -1 to +21 point(s)
 
APAC
Nikkei +2.67%
Topix +1.92%
China SHCOMP +0.99%
Hang Seng +0.1%
Korea +0.71%
Singapore -0.03%
Australia +0.07%
India +0.15%
Taiwan +1.0%
 
Europe
Stoxx 50 +0.21%
Stoxx 600 -0.0%
FTSE 100 +0.14%
DAX +0.2%
CAC 40 +0.06%
Italy +0.12%
IBEX +0.32%
 
FX
Dollar Index (DXY) -0.01% to 103.42
EUR/USD +0.1% to 1.09
GBP/USD flat at 1.2736
USD/JPY +0.07% to 149.15
USD/CNY +0.02% to 7.1982
USD/CNH +0.0% to 7.2059
USD/CHF -0.05% to 0.8834
USD/CAD +0.02% to 1.3545
AUD/USD +0.11% to 0.6567
 
Crypto
BTC -0.29% to 68076.01
ETH -1.25% to 3587.66
XRP -1.21% to 0.6117
Cardano +0.25% to 0.6805
Solana +3.57% to 208.89
Avalanche +7.56% to 62.78
Dogecoin -3.65% to 0.1477
Chainlink +3.16% to 19.22
 
Commodities and Others
VIX +2.22% to 14.73
WTI Crude +0.97% to 81.83
Brent Crude +0.8% to 86.02
Nat Gas +5.74% to 1.75
RBOB Gas +0.8% to 2.743
Heating Oil +1.6% to 2.771
Gold +0.11% to 2158.36
Silver -0.19% to 25.14
Copper -0.34% to 4.099
 
US Treasuries
1M +0.9bps to 5.3696%
3M -0.1bps to 5.374%
6M -0.3bps to 5.3198%
12M -1.1bps to 5.0463%
2Y -1.5bps to 4.7128%
5Y -0.2bps to 4.3239%
7Y flat at 4.3258%
10Y +0.2bps to 4.3083%
20Y +0.7bps to 4.5562%
30Y +1.3bps to 4.4415%
 
UST Term Structure
2Y-3 M Spread narrowed 0.6bps to -69.5 bps
10Y-2 Y Spread widened 1.5bps to -40.9 bps
30Y-10 Y Spread widened 1.1bps to 13.1 bps
 
Yesterday's Recap
SPX -0.65%
SPX Eq Wt -0.19%
NASDAQ 100 -1.15%
NASDAQ Comp -0.96%
Russell Midcap -0.09%
R2k +0.4%
R1k Value -0.02%
R1k Growth -1.11%
R2k Value +0.66%
R2k Growth +0.15%
FANG+ -1.21%
Semis -0.74%
Software -2.8%
Biotech +0.28%
Regional Banks +0.53% SPX GICS1 Sorted: Energy +0.23%
Utes +0.11%
Indu +0.08%
Materials +0.08%
Fin -0.05%
REITs -0.09%
Cons Staples -0.11%
Healthcare -0.35%
SPX -0.65%
Cons Disc -1.14%
Comm Srvcs -1.17%
Tech -1.29%
 
USD HY OaS
All Sectors -1.4bp to 352bp
All Sectors ex-Energy -0.8bp to 339bp
Cons Disc -1.8bp to 293bp
Indu -2.5bp to 262bp
Tech -1.1bp to 430bp
Comm Srvcs -0.2bp to 552bp
Materials -1.5bp to 322bp
Energy -2.6bp to 289bp
Fin Snr -0.3bp to 329bp
Fin Sub -0.5bp to 249bp
Cons Staples +1.2bp to 305bp
Healthcare -1.1bp to 432bp
Utes -0.0bp to 220bp *
DateTimeDescriptionEstimateLast
3/1810AMMar Homebuilder Sentiment48.048.0
3/194PMJan Net TIC Flowsn/a139.845
3/202PMMar 20 FOMC Decision5.55.5
3/219:45AMMar P S&P Manu PMI51.852.2
3/219:45AMMar P S&P Srvcs PMI52.052.3
3/2110AMFeb Existing Home Sales3.944.0
3/2110AMFeb Existing Home Sales m/m-1.53.09

MORNING INSIGHT

Good morning!

We have 46 NEW SMID GRANNY SHOTS. The updated list appears below.

The new SMID Granny Shots follow the same methodology as our “traditional” Granny Shots. Recall, the granny shot stock ideas are the stocks that appear in at least two of our 7 investment strategies.

  • We believe the SMID Granny Shots could benefit from the multiple themes and secular tailwinds as well, similar to the “traditional” granny shots.

Communication Services: CARG 4.35% , SSTK -3.45%
Consumer Discretionary: BLD -0.98% , CVNA 1.21% , DECK 2.49% , DFH 0.56% , HIBB, IBP -3.23% , OSW N/A% , PBPB 20.56% , SHAK -0.40% , TAST, TPX 0.93% , WING 2.44% , WSM -3.07%
Energy: REX 0.19%
Financials: AX 1.60% , CRD/A, ENVA 1.32% , HCI -0.10% , OPFI -1.81% , PAGS 0.87% , TREE -1.62%
Healthcare: IMGN, NBIX 1.42% , SMLR 5.04%
Industrials: AYI 1.80% , CDRE, GBX 0.05% , GMS 0.97% , HY -4.03% , MLI 0.95% , ROCK 1.20% , SCS 0.46%
Information Technology: BELFB 1.43% , DBX -3.01% , MS 0.85% .

TECHNICAL

Copper’s breakout should help FCX and SCCO push higher.

Real Pain for Real Estate (Brokers)

Silver is starting to show evidence of accelerating to catch-up with Gold’s push back to new all-time highs.

Real Pain for Real Estate (Brokers)

Click HERE for more.

CRYPTO

Polyhedra Network, the infrastructure company behind zkBridge, has raised $20 million in a strategic round led by Polychain Capital. Other investors included Animoca Brands, Emirates Consortium, Hashkey Capital, MH Ventures, and others. The strategic round values Polyhedra at $1 billion, representing one of the highest valuations among private deals in 2024. Polyhedra utilizes zk proofs at the base of its products to ensure security, scalability, and trust minimization. zkBridge is their key product, securing over 20 million cross-chain transactions between 25 chains. The funding will be used to escalate Polyhedra’s continued growth by hiring new employees and exploring new global markets.

ClearToken, a centralized crypto clearing house, raised $10 million in a seed round from investors including Laser Digital (Nomura), GSR, Flow Traders, LMAX Digital, and Zodia Custody. Clearing houses serve as a buyer/seller for all transactions, finalize trades, settle accounts, and regulate asset delivery, providing better risk-management and reducing counterparty risk. There is a lack of clearing houses within the crypto industry – partly due to blockchains’ inherent nature – but ClearToken believes many institutions will still prefer to use central counterparty clearing (CCP) services. ClearToken hopes to clear all regulatory hurdles in the U.K. and has begun the regulatory clearing house process with the Bank of England. They plan to offer preliminary settlement services this year and clearing services in the next 12-18 months.

MetaCene, a leading meta-MMO gaming platform, raised $10 million via a series A round led by Folius Ventures and SevenX Ventures. Other investors included The Spartan Group, Mantle Network, Animoca Brands, and Longling Capital. MetaCene is striving to create a borderless on-chain homeland, uniting MMORPG players, content creators, and Web3 enthusiasts. MetaCene was founded by gaming industry veterans from studios such as Blizzard, Shanda Games, and Perfect World. The funding will be used to accelerate MetaCene’s ambitious vision and attract top talent across tech, design, and community management.

Click HERE for more.

FIRST NEWS

Office Space Race. While the Covid-19 pandemic dramatically increased office vacancies across the U.S., the logical, expected wave of distressed office building sales has yet to materialize, and although vacancy rates have risen from 11% pre-pandemic to 17%, exceeding levels seen during the 2008 financial crisis, only 3.5% of 2023 office deals so far have involved a distressed seller, per MSCI Real Assets data.

Several factors are temporarily staving off forced sales. A strong economy means most office tenants are still paying rent, and lenders hesitate to push borrowers into selling properties at depressed values. Complex office loans with multiple lenders also make foreclosures difficult. Some owners are doubtless holding out hope for a rebound in demand and interest rates to ease refinancing.

Delayed, yet inevitable

And yet, hope or not, the office sector’s fundamentals point to an eventual flood of distressed sales. CBRE Group estimates U.S. office owners face a $72.7 billion refinancing shortfall through 2025 as leases roll over and tenants downsize by a whopping 30-40%. Over 600 office loans have already been transferred to special servicers to deal with defaults, though only 5 have resulted in losses so far.

The delay allows some opportunistic investors such as Reven Capital to raise capital targeting the coming distress. Major real estate firms on the level of Blackstone and Brookfield are positioning on both sides: handing back office keys while also looking to lend to struggling owners.

While deferred, a rise in office fire sales appears inevitable given the sector’s, to put it mildly, challenging outlook – as offices present what some are calling ‘the buying opportunity of our generation’ for investors able to identify well-located properties amid the coming shakeout.

Cash-flush investors await commercial real estate shakeout

It’s true that U.S. commercial real estate transactions fell more than 50% in 2023, but bargains remain elusive. Global real estate funds operated by private equity firms were sitting on a record $544 billion in dry powder as of Q2 2023, up from $457 billion at the end of 2022, per Preqin data. The largest increases were in opportunistic funds targeting distressed deals.

Apart from the ones mentioned above, several more factors are, for now, stalling a fire sale of troubled assets. Many property owners secured loan extensions and forbearance during Covid, but that Band-Aid is being removed as regional banks, under regulatory pressure, pull back on commercial real estate lending, forcing some developers to find new financing sources.

At the same time, abundant capital from investors such as Manhattan landlord SL Green’s new $1 billion debt fund and Blackstone’s acquisition of a $17 billion Signature Bank loan portfolio is providing liquidity and delaying some distress situations. The two firms above, as well as Brookfield and Cohen & Steers – all publicly traded – are also bullish on distressed real-estate lending. Ironically, Blackstone and Brookfield are simultaneously vacating some of their offices.

Overall commercial real estate distress totaled $85.8 billion at the end of 2023, up from $56.9 billion a year earlier, per MSCI data. That is still well below the $194.8 billion peak during the 2008 financial crisis.

Some early opportunistic investors like Noble Investment Group have been acquiring pandemic-battered hotels at discounts. As more troubled assets are inevitably flushed out, they stand to scoop up property at cyclical lows. While stalled so far, that highly anticipated liquidation wave appears inevitable as the real estate cycle plays out.

Banks face growing commercial real estate distress

Inevitably the long-feared pain from the commercial real estate downturn is now hitting banks across the globe, with lenders on three continents disclosing major losses and damage from troubled property loans.

Shares of New York Community Bancorp infamously plunged by double-digit percentages after revealing problems in the bank’s commercial real estate book and setting aside $552 million for potential losses, up from $62 million last quarter. In Japan, Aozora Bank’s stock fell over 20% after warning its struggling $1.9 billion U.S. office loan portfolio will likely lead to its first annual net loss in 15 years. In Switzerland, private bank Julius Baer took a $700 million provision on soured property loans to Austrian landlord Signa Group.

The battering highlights banks’ frontline position in the commercial real estate downturn, given their large exposures to property owners and developers. Risks are acute for smaller and regional lenders with outsized commercial mortgages relative to big banks.

While the pandemic-driven office habits upending the sector took root nearly four years ago, the damage has been slow and uneven as landlords were cushioned by existing long-term leases gradually burning off.

With over $2.2 trillion of U.S. commercial loans maturing by 2027 according to Trepp, the reckoning appears to be accelerating as pricey loans unable to be refinanced come due. Of course, higher interest rates and weaker property cashflows amid the economic slowdown raise refinancing risks, and, predictably, analysts are warning of a potential vicious cycle as tighter credit leads to fire sales that further erode bank books.

The banking turmoil has revived broader systemic fears, though many investors remain sanguine that most institutions have ample reserves and falling rates could provide relief. Still, the widespread commercial property exposure means more banks are likely to feel growing strains. Analysts are warning that the pain in the office sector is just starting. A rolling recession may linger as the downturn cycle plays out. WSJ

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