When a Fortune 500 company puts a massive apartment portfolio consisting of 11,000 communities on the market, people take notice and ask questions.

"Investors can draw conclusions from the Lennar portfolio sale that even the largest operators become adversely affected by the changes in the construction debt market and loans coming due," says David Evans, Kidder Mathews senior associate in Los Angeles. The massive multifamily sale was described as a tactical balancing of Lennar's portfolio.

"With refinancing options requiring a significant amount of capital to be brought to the table, they preferred to take these properties to market versus reaching out to investors for capital for a cash refinance," Evans adds.

Most of the Southern California Kidder Mathews executives GlobeSt. asked pointed to industrial as the property type more likely to trade when portfolio deal volume returns, followed by multifamily, self-storage, and retail. Industrial portfolios will continue to be sold direct to investment firms such as Prologis and Rexford, Evans notes. Rick Putnam, Kidder Mathews EVP in Orange County, has a different property type in mind though: "Primarily office, which is becoming more of a specialty niche due to ongoing capital requirements."

Peter Quinn, SVP in Kidder Mathews' San Diego office, sees lenders working with borrowers to minimize defaults when the wave of loan maturities comes. Putnam expects some large sales of Class B and C product as liquidity returns, "but these lumpy maturities are dealt with." Evans asserts that new construction properties in markets that have been overbuilt, i.e., many of the Sunbelt states, will see some distress and lowering of values due to supply and demand imbalance. In markets short on supply, portfolio residential sales will continue to see high demand and strong pricing from investors.

"Regarding the wave of low maturities expected into 2024 and 2025, the view here is that with the exception of office product, other commercial real estate assets will be insulated from widespread distress," Evans adds. "There is always investor demand to buy multifamily, retail, and especially industrial, particularly at a discount."

Rates & Pricing Expectations

Expect interest rates to be lower by the third quarter, settling in the 5.5% to 6.0% range and holding steady for 24 months after that, according to Quinn. Putnam maintains that expectations for lower rates will support a hold mentality by investors as values will recover with even the most modest cuts by the Fed. Overall transaction volume will pick up from 2023 lows, but not bounce back to the high levels seen in 2021 and 2022.

Pricing uncertainty will "dissolve" during the last half of the year after interest rate stabilization, Quinn says. Yet, Putnam expects the policy uncertainty of the election cycle to add to the pricing unpredictability.

Portfolio Deal Outlook

Portfolio deals will become more prevalent, but not like during the Great Financial Crisis, says Putnam.

"Portfolio transactions will only come back in Los Angeles if they are in some form of distress, if they're in special-service receivership or foreclosure, which is a mechanism of the passing of measure ULA, the additional transfer tax on property sales above $5 and $10 million," Evans says.

Putnam expects there to be "tactical transactions for reallocation purposes," but limited wholesale deals to mostly B and C product. He adds, "Some investors will shed office product that has become non-durable, but apartments, industrial, and retail will be held."

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Brian A. Lee

Brian A. Lee is an Atlanta-based freelance writer and former editor of Western Real Estate Business magazine. The Wake Forest and University of Georgia graduate has covered commercial real estate since 2000.