The 16 Deals And Trends That Defined 2023

The collapse of Silicon Valley Bank and Signature Bank in March and First Republic Bank in May didn’t lead to the broad financial system meltdown many feared it would, but it still created shockwaves the commercial real estate industry felt for the rest of the year.

The Federal Deposit Insurance Corp. moved quickly to guarantee the loans and shore up confidence in the American banking system, but in the months that followed, underwriting tightened and regional banks, which held 62% of outstanding CRE bank loans in 2019 and had been growing their market share, pulled back from lending to the industry. In the second quarter, regional banks accounted for 25% of all new CRE loans over $2.5M, a 900-basis-point drop from Q1. 

As the year wore on, commercial real estate became more of a problem for smaller regional banks. In October, 15 of the 18 regional banks with assets ranging from $50B to $250B reported year-over-year spikes of an average of 80% in nonperforming loans. Next year could be even worse. Facing a potential $80B in losses from CRE loans next year, more regional banks — perhaps dozens or as many as 300 — could fail in 2024, a paper from the National Bureau of Economic Research said this month.

SVB and Signature had nearly $39B of real estate loans on their combined books, and First Republic had roughly $141B. While the FDIC sold SVB to First Citizens and First Republic to JPMorgan Chase, Signature's real estate loans were trickier to deal with because of their concentration in New York City, particularly in rent-stabilized housing. But the year ended with a resolution: The FDIC auctioned off stakes in the majority of Signature's loans in three chunks. A joint venture of Blackstone, the Canada Pension Plan Investment Board and Rialto Capital shelled out $1.2B for a 20% stake in a $16.8B CRE loan portfolio. 

Santander Bank purchased a 20% equity interest in a $9B portfolio of rent-stabilized multifamily loans for $1.1B, and Community Preservation Corp., Related Fund Management and Neighborhood Restore Housing Development Fund paid $171M for a 5% stake in a 35,000-unit rent-stabilized portfolio. The sale, which comes to 59 cents on the dollar, was being closely monitored, as it could reset property pricing citywide. It could still be disputed: A group led by Brookfield, which had bid 80 cents on the dollar, previously said it would launch a formal protest if CPC’s bid won.

Office real estate has been a source of pain since the pandemic began, but it all came to a head in a bigger way in 2023. Millions of employees faced new return-to-office mandates, but office usage barely made it above 50% of pre-pandemic levels. Falling occupancy and property values coincided with rising interest rates and expiring rate caps to put office owners in dire financial straits, and defaults picked up through the year. 

All of that has left office owners pleading with the federal government for assistance to counter what Barry Sternlicht called a “Category 5 hurricane” for commercial real estate. The storm has ensnared some of the industry's biggest names: Brookfield gave up multiple buildings across the country to lenders voluntarily and put more in receivership as it dealt with billions of dollars of debt maturities. Columbia Property Trust defaulted on a $1.7B loan spanning four cities in February, Monday Properties defaulted on an $841M loan in June, and Starwood defaulted on a Buckhead Atlanta high-rise in July.

Owners that did negotiate loan extensions paid millions to do so. That's just the tip of the iceberg: Researchers in December estimated that about 44% of office owners are underwater.

That has some opportunistic investors excited. Carlyle Group co-Chair David Rubenstein said in June that buying debt on downtown office buildings from banks is “the best single investment” of the year.

The release of ChatGPT last November opened the floodgates to artificial intelligence in business, and despite its reputation for moving slowly on new tech, CRE got in on the action this year. JLL in August released its own in-house large language model called JLL GPT, which uses the brokerage’s proprietary market data to answer questions posed by its employees. The use of AI for data collection and analysis has spread across the industry, such as CBRE’s use of a Nexus AI-based platform to increase efficiency and reduce costs over 1B SF it manages, or Landsec’s attempts to use AI to reduce the carbon emissions of its London HQ. 

All that information needs to be stored somewhere, and the data center industry is gearing up for big changes and big growth as AI takes hold. Global data center capacity is expected to triple in six years. Real estate giants are looking to cash in — Blackstone has begun a push to invest $8B into the sector and formed a $7B venture with Digital Realty this month. Even amid a proptech slump, some AI-centered proptech companies locked down funding, including EliseAI’s $35M infusion in June and Site Technologies’ $10M raise in November. 

There is broad agreement that AI will transform the industry. But will its rise lead to a decline in CRE labor? Most companies say no — AI can make tasks easier and deals faster but can't replace humans — but multifamily property management companies, for example, are already finding ways to trim staff by using technology.

Though WeWork spent the vast majority of the year insisting its business was healthy and improving, its missed debt payments and skipped rent payments stacked up. So it came as no surprise when the coworking giant filed for Chapter 11 bankruptcy on Nov. 6. The impact on property owners was immediate: It was granted approval by a judge to terminate 67 leases off the bat and has since asked to exit another six. Meanwhile, WeWork is renegotiating hundreds of other leases in an attempt to cut its annual rent burden by $500M, a process landlords have called “opaque and antagonistic.” Landlords have also expressed concerns about WeWork’s bankruptcy financing plan, which leans on existing lines of credit.

The bankruptcy could also have a major impact on the CMBS market, as $8.2B of CMBS loans are tied to WeWork locations, more than 21% of which is already delinquent. Those spaces may be hard to backfill due to weakness in the office market, though other coworking companies are picking through the pieces for their own expansions.

WeWork has said it intends to emerge from bankruptcy in the spring, but its initial bankruptcy filings show it could be close to out of cash in February. It will be run by a refreshed management team: CEO Sandeep Mathrani unexpectedly left in May and has been replaced by David Tolley. That same month, Chief Financial Officer Andre Fernandez resigned, and President and Chief Operating Officer Anthony Yazbeck left the company in October. 

On the heels of being found guilty of 17 counts of criminal tax fraud in December 2022, The Trump Organization spent 2023 operating under an independent monitor and fighting off a civil fraud lawsuit from the New York attorney general. The AG alleged the former president’s company manipulated property values to obtain favorable loan terms and tax payments and seeks to ban former President Donald Trump and his eldest children from working in New York real estate. The New York judge hearing the case ruled in September that the company had committed “persistent and repeated fraud” in inflating the values of its assets. The ongoing trial will determine the outcome of six other charges and the legal penalty.

The judge also revoked The Trump Organization’s licenses, but that order was temporarily halted by an appeals court in October while the trial continues. 

Trump himself testified in his defense in November, admitting that he would make suggestions for what he thought valuations should be but continuing to rail against the proceeding as a political witch hunt that lacked a victim. 

Cushman & Wakefield has also come under the spotlight for its work appraising Trump’s properties. Appraiser Doug Larson, now with Newmark, took the stand in October to deny he provided The Trump Organization with valuations on its properties despite the company using his name in documents. A Trump attorney in turn accused Larson of perjury, and Larson said in cross-examination that he did know Trump was using what he called his generic market analysis to determine its cap rates.

Both sides have rested, and closing arguments are scheduled for early January.

In a separate suit, Trump was personally charged in April with 34 counts of falsifying business documents, making him the first former president to be charged with a felony. He pleaded not guilty to the accusations, including that he used his real estate business to facilitate hush payments. He has since been charged with dozens more felonies in three other cases.

With deal flow drying up in the face of rising interest rates and the office market dealing with the double whammy of remote work, brokerages saw their business decline dramatically and their stock values drop. Five of the six largest CRE brokerages posted losses in Q1, and all six saw revenue declines continue in Q2 and Q3, with many pushing back their outlook for a recovery deeper into 2024.

As their revenues have shrunk, brokerages have aggressively slashed costs — and jobs. CBRE has announced more than half a billion dollars in cost reductions since Q3 2022, including more than $300M in layoffs. Cushman & Wakefield implemented a $130M cost-cutting program that could include selling business lines. JLL has trimmed $210M, and Newmark has eliminated $75M in fixed costs. With sales and leasing activity plummeting through the year, companies put their hopes in other income streams, such as property management, to try to stay in the black.

Although the consensus is that 2024 will be better for the brokerage industry, its job market is expected to stay in the doldrums, with limited hiring and minimal raises. That isn’t stopping young brokers from trying to enter the fray, though, even in the tough office market. 

The Federal Reserve hiked interest rates four times in 2023, bringing its total number of increases since March 2022 to 11. The capital markets fell into disarray as the cost of debt soared and credit availability became more constrained. As property values fell by double digits, buildings landed in negative equity territory, sparking defaults. Refinancing became prohibitively expensive as a record $270B in commercial mortgages matured in 2023. 

There was more distress than there had been in a decade, with $80B of CRE-backed debt in distress in Q3. Although office got much of the attention this year, Morningstar highlighted multifamily CMBS loans as particularly at risk, with $8B coming due in the second half of 2023 and the pullback from regional banks particularly affecting that asset class. Even institutional investors aren't immune: A $271M Blackstone loan backed by 11 Manhattan apartment buildings was sent to special servicing in February.

But while investors have been preparing opportunistic funds for years to take advantage of foreclosure sales, that hasn’t translated into deals. Meanwhile, the influx of bad loans is taking its toll on banks and could lead to more failures in 2024.

In 2022, New York real estate investor Nightingale Properties raised $54M on crowdfunding platform CrowdStreet to buy a 915K SF Atlanta office property. In 2023, it all fell apart in spectacular fashion. CrowdStreet announced in July that most of the money Nightingale raised for that deal and a $9M Miami Beach project was missing. 

Over the next few months, an independent fiduciary tapped by CrowdStreet accused Nightingale CEO Elie Schwartz of committing fraud and pocketing the money, including putting $12M of it into stocks and stock options in First Republic Bank shortly before it failed. In August, the Securities and Exchange Commission and Department of Justice launched their own investigations into Nightingale.

Schwartz hasn't explicitly admitted wrongdoing, but in October he agreed to pay back investors by selling his personal residences, art and jewelry. Meanwhile, Nightingale’s properties around the country have gone into foreclosure and receivership after missing debt payments, and multiple executives left the company.

CrowdStreet’s role in the debacle is also being scrutinized. The platform funneled investor money directly to Nightingale rather than placing funds into escrow, and investors questioned whether CrowdStreet vetted Nightingale sufficiently before allowing it to post offerings. Tore Steen was ousted as CrowdStreet’s CEO in August amid the allegations, though he remains on the firm’s board of directors. CrowdStreet changed its policy this year and is now placing funds into escrow.

The National Association of Realtors, the largest professional organization in America, was under the spotlight in 2023 for all the wrong reasons. Its president, Kenny Parcell, was accused of sexual harassment by multiple women and resigned in August. A leaked memo showed NAR had been informed of Parcell’s behavior in early 2022 but hadn't acted, and the memo accused NAR’s broader leadership of racist and abusive behavior and creating a toxic, hostile work environment. Redfin cut ties with NAR in October, citing the scandal and a culture of intimidation and retribution.

Then, in November, NAR and a handful of major residential brokerages were found guilty in Missouri court of conspiring to artificially inflate commissions and found liable for at least $1.8B in damages. That ruling, which spurred a wave of copycat lawsuits in other states, could upend the way residential brokers operate across the U.S. NAR intends to appeal, but meanwhile, a far larger class-action federal antitrust suit could go to trial next year. 

The industrial real estate boom of the early days of the pandemic has ended, leaving a glut of new space. A record 162.4M SF of industrial delivered in Q3, just as absorption hit its lowest levels since 2015. Big-box deals, in particular, have fallen off. Meanwhile, valuations were 16% below their March 2022 peak in October. 

After scaling way back in 2022, Amazon this year continued to indicate it overexpanded in the heyday of the pandemic, delaying the delivery of some warehouses and putting additional properties on the sublease market.

The general consensus from experts is that the slowdown is a return to normal after a few years of overheating. Rents are still rising, albeit more slowly, and the construction pipeline is starting to come down. While landlords take a breather, tenants are finding the market has turned in their favor. 

Yellow, a nearly 100-year-old shipping company that transported roughly $5B of goods a year, went into Chapter 11 bankruptcy in August, sparking a bidding war for its real estate around the country.

Yellow asked the court to back out of 37 leases, including its headquarters in Nashville, though landlords objected to the amount it wanted to pay, citing unpaid rent and property damages as reasons they should get more. The shipping company put another 160 properties, mostly truck terminals, up for sale, which drew about 540 interested companies. After multiple deals were agreed to through the summer and fall, an auction in early December resulted in 130 properties being sold for $1.9B to several buyers.

Though truck terminals have become a more attractive investment class for commercial real estate players over the past few years, the buyers of Yellow’s assets were competing freight companies.

Another wave of stadium development is nigh, as teams inked deals in 2023 to relocate. Across the board, the new deals center stadiums in mixed-use developments, often with other entertainment uses as well as housing, retail and hotels. The Washington Capitals and Wizards said in December they are leaving downtown D.C. and settling down in a $2B mixed-use entertainment district being built in Alexandria, Virginia. The Oakland A’s in April bought 49 acres in Las Vegas to build a 30,000-seat stadium less than a mile from where the former Oakland Raiders now play. The Washington Commanders could be next to relocate, as the team has been in talks with D.C. to move back into the city from Landover, Maryland.

Another tranche of teams is looking to make much shorter moves. The Philadelphia 76ers are planning to stay in Philly but are planning a new arena in Center City. That project has been hotly contested, and the team has offered to give up some incentives — and even the ground under its feet — to get approval. The Tennessee Titans are staying in Nashville but are getting a new stadium after the state approved $1.3B in public funding in April.

The Chicago Bears are set to move as well, though the destination is up in the air. The team finalized a deal in April to buy 326 acres in Arlington Heights, Illinois, though it spent the rest of the year announcing it was considering other Chicago suburbs. The Bears rounded it all out by saying in December that maybe the team would just build a new stadium in the parking lot of its current home, Soldier Field, after all. The Tampa Bay Rays are similarly looking to build a new stadium next to their current one, and the Buffalo Bills broke ground in June on a $1.5B stadium across from their Highmark Stadium in Orchard Park, New York.

At least one team isn’t booking a U-Haul, however: The Baltimore Orioles signed a new lease in December to spend another 30 years at Camden Yards.

Nontraded REITs were expected to fulfill $20B in redemption requests in 2023, a record high. Falling asset values in 2022 led to a wave of investors asking for their money back from the semiliquid funds, and starting in November 2022, many major REITs made the unprecedented decision to cap their redemptions. Throughout much of 2023, investment into nontraded REITs was exceeded by withdrawals, though requests tapered through the year. Blackstone Real Estate Income Trust, the largest nontraded REIT, saw its redemption requests peak in January at $5.5B and fall to $1.8B in November, but it only honored a small percentage of requests each month through most of the year.

Paying out billions of dollars hasn’t impacted nontraded REITs much, especially since they held large reserves, and experts say that stability proves out the alternative investment concept. Investors who couldn’t liquidate via traditional redemption instead turned to the secondary market in 2023.

Life sciences was the darling of the real estate industry in the first few years of the pandemic, but the asset class came back down to earth in 2023. Venture capital and private equity funding into life sciences slowed dramatically this year, limiting startups’ growth, and the loss of Silicon Valley Bank as a capital source particularly hurt the biotech industry. Fueled in part by fading vaccine sales, demand dwindled and lease sizes shrank while supply continued to surge, softening the lab real estate market and hitting rents. This is particularly evident in Boston, where life sciences vacancy leaped from 9.9% at the beginning of the year to 21.2% in Q4. 

New entrants to the sector are expected to fall away in the coming years as profits don’t hit projections. Even Alexandria Real Estate Equities, the behemoth in the space, saw its stock drop to less than half of its 2022 peak as it was targeted by a short seller. 

After years of pain, retail is back on the upswing, and a wave of retail M&A deals this year positioned companies to take advantage of opportunities created by the combination of rising interest rates, limited debt availability and a dearth of new retail construction since the "retail apocalypse" of 2017.

August was the height of activity. Within the span of a few weeks, Global Net Lease announced a merger with Necessity Retail REIT for $4B, Kimco Realty agreed to buy RPT Realty for $2B, and Regency Centers closed its purchase of Urstadt Biddle for $1.4B. In October, Realty Income agreed to acquire Spirit Realty Capital for $9.3B.

Many retail REITs’ profits have risen this year as fundamentals have held strong. Vacancy hit 4.8% in Q3, the lowest rate since CBRE started tracking in 2005. Construction has remained low — 2023 will likely set the fourth consecutive record for fewest annual deliveries. Investor returns are outperforming other asset classes, bringing institutional players back to the sector after years on the sidelines.

In May, Florida passed a law barring citizens of China and six other countries from owning certain types of real estate. The law took effect July 1 and prohibits citizens from China, Russia, Iran, North Korea, Cuba, Venezuela and Syria who aren't permanent U.S. residents from buying Florida real estate. It also restricts companies from those countries from buying certain types of property, particularly farmland. Chinese ownership of U.S. agriculture has spiked in the last decade. 

More than 30 states have considered or are debating legislation to curtail foreign ownership of property, and there has been discussion of a national limitation on Chinese investment into the U.S. Texas considered one such bill this year, but it was hotly opposed and didn't move out of committee.

Florida’s legislation was presented as a national security concern to limit the influence of China on the United States and keep sensitive land out of hostile hands. CRE brokers said the law lacks clarity on compliance and enforcement, and they expressed concern about what impact limiting foreign investment may have on the real estate market. 

The American Civil Liberties Union has filed a lawsuit aiming to repeal Florida’s law, and the Department of Justice has said the law is unconstitutional.