The banks are going to be all right?

Well, at least the big ones will be, according to the Federal Reserve’s latest stress test: All 31 banks it measured withstood its hypothetical shock scenario.

The Fed laid it on thick, modeling out an unemployment rate of 10% (we’re at 4%) plus a 40% drop in CRE values and a 36% fall in housing prices. That would be on top of the losses the property sector has already taken, including a 35% decline in office values from 2020 to 2024.

“In a lot of respects, there should be a sense of comfort that banks can weather a very nasty storm,” Chris Marinac, head of research at Janney Montgomery Scott, told Reuters. “Though this doesn’t mean the Fed thinks commercial real estate is out of the woods. It’s still early innings in this credit cycle.”

CRE only makes up 4.3% of the loan books at the largest banks, according to Moody’s. Goldman Sachs has the highest real estate risk, with the Fed saying its projected loan loss for the industry is 15.9%. 

Banks of all sizes hold a sizable portion of CRE debt — Moody’s said yesterday that 38% of the $4.7T in outstanding CRE loans is at U.S. banks. The delinquency rate is “manageable,” Moody’s said, with 3% of CRE loans at the biggest banks past due.

Of course, lately, no one was all that worried about the JPMorgans of the world. It’s the smaller regional banks that have been failing and have continued to draw warnings about their risk levels.

— Jay Rickey, Catie Dixon, Mark F. Bonner and Kayla Carmicheal

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On Our Radar

• Walgreens will shutter a “meaningful percent” of U.S. locations. The drugstore megachain slashed its outlook this morning, citing a weakening consumer environment. A specific number of closures hasn't been announced, but it said it was reviewing a quarter of its 8,600 stores. This feels like deja vu: Last June, Walgreens announced the closure of 450 stores in the U.S. and UK.

• Pinstripes has its earnings call at 5 p.m. ET today. The bowling eatertainment concept went public via SPAC last year, and last month, it teamed up with Newmark as part of its push to add 150 U.S. locations. 

• Is the UK in store for a “sharp correction”? That’s the warning from the Bank of England today, which worries about the effects of lingering high inflation and unpredictable geopolitics — including more than 80 worldwide elections.

• The first U.S. presidential debate of the season starts at 9 p.m. ET. President Joe Biden will face off with former President Donald Trump. We’re keen to see how the mute button will actually work (or not), and we want to hear what the candidates have to say about inflation, interest rates, the “vibecession,” national debt, Chinese tariffs, supply chain constraints, affordable housing and taxes. And yes, politics are a real estate story.

• American GDP is still growing … slightly. The third reading of Q1 data is up 1.4% this morning, driven mostly by retail trade, finance, insurance and construction. Analysts predict a Q2 rebound of 3% or more.

• Yes, chef! The Bear Season 3 dropped on Hulu last night. The show shot more on location in the Windy City this season (traffic was itself a bear), so Kayla hopes it finally feels more like her Chi-town as opposed to a show that visually could take place anywhere in the U.S.

This Morning’s News

INDUSTRIAL — Brookfield To Purchase 83 Industrial Properties (CoStar): In its biggest industrial deal in five years, Brookfield is nearing a deal to acquire dozens of properties from DRA Advisors for around $825M. Learn more about the portfolio.

REITs — Private REITs Dive Back Into Market (CoStar): Amid falling property prices, private REITs are seizing the opportunity to ramp up acquisitions — 15 out of 19 REITs posted higher investments last month. Who's buying what?

PROPTECH — Proptech Funding Drops Dramatically (Bisnow): After the most tumultuous year in proptech yet, venture capital funding into proptech is down 14% in the first half of this year and is down 86% from the first half of 2022. Catch up on the latest state of the sector.

FINANCE — Fed's Bostic Supports One Rate Cut This Year (MarketWatch): Federal Reserve Bank of Atlanta President Raphael Bostic remains in favor of a single interest rate cut in 2024, maintaining a cautious stance on adjusting monetary policy amidst ongoing economic uncertainties. Read more here.

OFFICE — Members-Only Club Sues Michael Shvo For Fraud, Seeking $600M In Damages (Bisnow): Core Club has sued Shvo in New York State Supreme Court, alleging Michael Shvo convinced it to partner with him with “tales of grand expansion” but didn’t deliver on promised developments, performed substandard construction and attempted to seize a stake in its business. Uncover the rest of the Shvo saga.

FINANCE — Faropoint Seals $915M For Urban Industrial Fund (Faropoint): Faropoint has closed its Urban Industrial Value Fund III, raising $915M. The fund, which has already acquired 80 urban industrial warehouses in 12 states, is looking to acquire more than 200 warehouses over its deployment period. Read more details about the fund.

Today’s Deep Dive: After A Decade Of Dominance, Sovereign Wealth Funds Are Forced To Evolve

Norges Bank, China Investment Corp., Abu Dhabi Investment Authority and the Canada Pension Plan Investment Board — these are names you may not have known 15 years ago, but they have become CRE household names the world over the last few years.

They were behind some of the splashiest buys of the last cycle, from London to New York to Houston. 

Now sovereign wealth funds are stepping back a bit, inching their real estate allocations down from an average of 7.5% this year to 7.2% in 2025. 

It might not sound like much, but we’re talking billions of dollars here, and any pullback from sovereign wealth funds will ripple through the investment market.

Read the full story here.

FINANCE — Blackstone Could Boost CMBS Market (CoStar): Blackstone’s dealings in commercial mortgage-backed securities alone could lead to higher issuance levels this year. The details on this year's primary CMBS driver.

OFFICE — Office Vacancy Rates Will Slam Values (BNN Bloomberg): Moody's projects office vacancy rates in the U.S. could hit 24% by 2026, reducing commercial real estate values by up to $250B. Read more about Moody's outlook.

CONSTRUCTION — Job Growth Expands Across States (Associated General Contractors of America): Construction employment grew in 39 states from May 2023 to May 2024. 26 states added construction jobs between April and May. Discover more about the latest hiring trends.

INDUSTRIAL — Global Net Lease Divests Americold Portfolio (Global Net Lease): Global Net Lease has sold a real estate portfolio of nine cold storage facilities leased to subsidiaries of Americold for $170M at a 7.88% cash cap rate. GNL says it will use proceeds from the sale to reduce outstanding debt. Learn more about the acquisition.

RETAIL — L.L. Bean Expands Retail Presence (Retail Dive): L.L. Bean is broadening its audience by expanding its brick-and-mortar presence beyond New England. It’s also investing $50M into its flagship campus in Maine, which is said to be the state’s second-largest tourist attraction. Here's more about how the retailer is growing.

DATA CENTERS — Growth Stalled By Global Power Shortages (CBRE): Large corporations face increasing difficulties securing data center capacity, with low supply, construction delays and power challenges impacting all markets, CBRE reports. Find out more about the challenges surrounding data centers.

DATA CENTERS — Illinois Provides Funding For State’s First Black-Led Data Center Project (Bisnow): Metro Edge Development Partners has received $3.4M in state funding to build a five-story data center on Chicago’s West Side. It is expected to break ground early next year and will reportedly be the first data center built by a Black developer in Illinois. Learn more about it.

INDUSTRIAL — Supply Chain Disruptions And Industrial Real Estate (Newmark): Newmark explains how supply chain disruptions are poised to impact industrial market activities in the second half of 2024. Here's how.

ARCHITECTURE — Business Conditions Remain Soft (AIA): The American Institute of Architects’ monthly report shows a continued softening in business conditions across U.S. architecture firms even as inquiries into new projects continued to increase. Read the full report.

HEALTHCARE — Growing Investor Interest In Behavioral Health Facilities (Colliers): A new report from Colliers looks at the demand for behavioral health patient care facilities, which grew as an investment class when many sought mental health and other treatments during Covid lockdown and subsequent period of uncertainty. Chart healthcare's growth in recent years.

FINANCE — GCM Grosvenor Invests In OlivePoint (OlivePoint): GCM Grosvenor’s real estate platform has committed $50M to OlivePoint’s new investment fund, which seeks to capitalize on opportunities created by the interest rate market environment. Get more details about the transaction.

ESG — Blackstone Considers IPO For Sustainability Business (Bloomberg): Blackstone may pursue an initial public offering for its $5B sustainability consulting business Legence, which its website touts has helped maximize efficiency at more than 5.5B SF in over 22,000 buildings. Learn more about Legence.

CONSTRUCTION — Inside Saudi Arabia's Construction Boom (Bloomberg): Saudi Arabia, which has started projects valued at over $1.25T since it announced its Vision 2030 initiative 8 years ago, is on track to become the world's largest construction market. Track its progress.

HOSPITALITY — GrowthCurve Acquires Duetto (GrowthCurve Capital): GrowthCurve Capital has acquired Duetto, a hotel revenue management platform used by more than 6,000 hotel and casino resort properties in more than 60 countries. Read more about it.

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The First Draft is produced by Director of Newsletters Jay Rickey, Managing Editor Catie Dixon, Editor-in-Chief Mark F. Bonner and Deputy Newsletter Editor Kayla Carmicheal, with an assist from ChatGPT. We’d love your feedback! Email us at firstdraft@bisnow.com. 

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