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“Once-in-a-generation” is the way some big CRE fund managers have described current investment opportunities — even in office, which as a class has offered questions and doubt. Some of the funds have brought in billions for debt investment.

However, when it comes to owning property, many global investors are pulling back and showing their inner bear. Starwood Real Estate Investment Trust, which started seeing a big wave of redemption requests in late 2022, has drawn more than $1.3 billion of its $1.55 billion unsecured credit facility since the beginning of 2023 following heavy redemption requests, the Financial Times reported. Before 2023, the REIT hadn’t tapped its credit line. At the current rate, it will run out of credit and cash in the second half of this year unless it borrows more or sells more property assets, the FT says.  In 2023, investors withdrew $2.6 billion from Starwood and $12.4 billion from Blackstone’s BREIT.

Part of the issue is liquidity, a point Starwood CEO Barry Sternlicht made 18 months ago during its initial big redemption crisis.

“We’re not a hedge fund,” he said when speaking with Newmark president Jimmy Kuhn at a New York University Schack Institute’s capital markets conference. “We can’t liquidate our properties overnight at attractive prices. We have to manage liquidity.”

 

Most recently at the Milken Institute Global Conference, Sternlicht said, “There’s a huge distressed cycle ahead of us.”

In general, CRE isn’t the best mechanism for liquidity, as shedding assets takes time. When interest rates are likely to be higher for longer than many predicted, there’s concern about being caught in maturing investments that need refinancing but can’t afford it.

There are also attending dynamics. The 10-year Treasury, even though yields have dropped since better inflation news earlier this week, still offers well over 4.3% at low risk. And money going into equities has rebounded, with the Dow Jones Industrial Average flirting with an all-time high of 40,000.

Bank of America’s fund manager survey, as reported by Investing.com, was the most bullish since November 2021. Cash levels are 4%, a three-year low. Eighty percent of the respondents still expected rate cuts in the second half of 2024 and no recession. “Furthermore, the survey shows fund managers expect the first drop in global GDP and EPS expectations since Sep 2023 as US macro pessimism jumps, although a soft landing is still the consensus,” the site wrote.

But a bull attitude in the survey doesn’t extend to CRE, the FT separately wrote. A net 28% of managers were underweight the real estate sector in May, down 13 percentage points on the previous month, according to Bank of America’s latest global fund manager survey, it reported. Allocations are at a 15-year low, which might not be surprising as CRE has thrived on a low-interest, high-leverage macroeconomic diet.

 

Source:  GlobeSt.

 

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Florida Gov. Ron DeSantis has signed a bill that amends the state’s Live Local Act, doubling down on the original law’s intent to clear red tape, spur new residential and mixed-use development and bring down housing costs.

The Live Local Act originally passed at the beginning of 2023, providing major funding and tax incentives for developers to build mixed-use and multifamily projects, overriding some local zoning regulations and banning rent control across the state outright.

But while the law was considered a major step toward addressing the state’s housing affordability crisis, local governments pushed back, implementing development moratoriums or dragging their feet on building approvals that under the new law were now strictly a matter of administrative routine without public hearings.

Disagreements over the law led the Florida legislature to double down, passing what’s being called a “glitch bill” by legislators to address the problems that arose from the original law. The new legislation, signed Thursday by DeSantis, clarifies uncertainties in the law that local municipalities had used to prevent development or extract concessions from developers.

The clarifications prevent municipalities from restricting projects up to 150% of the currently allowed floor area ratio; provides height protections for single-family neighborhoods; removes parking requirements for transit-oriented developments while reducing parking requirements by 20% for developments within half-a-mile of a transit hub; and added tax exemptions for land and common areas included in developments, not just the residential units. The law now also extends to for-sale condo units, in addition to apartments.

The new law also prohibits Live Local Act projects within airport flight paths, noise zones, and those that exceed airport height restrictions.

The Live Local Act is “the most comprehensive change to Florida’s zoning laws in decades,” said Anthony De Yurre, a land use and zoning attorney with law firm Bilzin Sumberg, in a prepared statement. De Yurre, who helped craft much of the legislation, added that developers have been “waiting for these revisions and clarifications to tweak their projects or update” their plans. “The final bill enhances the probability of Live Local Act projects getting approved, financed and built,” De Yurre said.

The new law goes into effect immediately.

 

Source:  CoStar

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Commercial real estate investors, owners and occupiers all have been monitoring whether the Federal Reserve will impose interest-rate cuts in 2024 after rapidly rising rates have substantially increased the cost of doing business.

Earlier this month, the Fed signaled it needed to see more progress toward its inflation target of 2% and decided to maintain its key lending rate. At that meeting, Fed Chairman Jerome Powell said gaining greater confidence around inflation “will take longer than previously expected,” although he also said he felt inflation would move back down in 2024.

For executives in commercial real estate, waiting for those rate cuts may prolong the uncertainty being felt in the market today.

Mark Roberts, managing director of research at Dallas-based real estate investment and development firm Crow Holdings, said the underpinnings of why the Fed hasn’t cut interest rates — a strong economy and labor market — are actually good fundamentals for commercial real estate.

He added that for many buyers and sellers of real estate, a reset to the new rate environment has already begun, noting that values are down on average 22% in the past seven quarters. That’s unlocked some deal momentum, but cumulative transaction volume in the first quarter of this year was still at its lowest level since 2013, according to Altus Group. It estimated $31.6 billion transacted across major property types in the U.S. in the first three months of the year, down 28% compared to the same quarter last year.

“The other side of the coin is, what does it mean for those who utilize a lot of leverage in their investments?” Roberts said. “For leveraged buyers, it’s not necessarily the best time, and that’s why a lot of dry powder is stacking up.”

Others in commercial real estate echoed that sentiment, saying there’s a lot of capital sitting on the sidelines that hasn’t yet been deployed — waiting, in large part, for more certainty in the broader U.S. economy.

At the end of 2023, when the 10-year Treasury rate had dropped to below 4% and borrowing rates began to stabilize, there was a greater sense of optimism that that capital raised would be put to work sometime this year, said Andrew Alperstein, partner at PricewaterhouseCoopers LLP’s financial markets and real estate group. But a stronger-than-expected economy this spring has dampened some of the optimism around any forthcoming rate cuts.

Still, even if cuts were to occur later or are more modest than previously expected, Alperstein said most real estate principals have accepted that a sub-3% environment isn’t coming back anytime soon and have begun re-pricing within the new market conditions.

“There’s a reality that has set in that rates are going to be at least moderately higher for a period of time, and investors will hopefully move forward on that premise,” Alperstein said. “What we’ve also seen is that sellers have not really been wanting to sell unless they had to. Folks have been watching closely for evidence of distress sales and forced sales — and yes, we’ve seen some, but not as many as people probably thought. We’ve got an interesting couple of quarters ahead.”

Buyers right now are generally motivated because of equity that’s available, Alperstein said. And more borrowers may be forced to make decisions on their CRE-backed loans if a higher-than-longer rate environment persists.

But more deals in general will mean broader confidence in the market on what the new norm is in returns and values, Alperstein said.

“That will hopefully be a positive thing,” he said. “I think we hoped we’d get this sooner, but some of the uncertainty around rate cuts and the increase in the 10-year [Treasury rate] has slowed that progress.”

Ripple effect on leasing decisions

Although a delay in interest-rate cuts arguably has the most direct impact on commercial real estate buying and selling, it’s also factoring into how companies think about their real estate leasing decisions.

Rob Kane, senior executive vice president and co-leader of Dallas-based Lincoln Property Co.’s corporate advisory and solutions group, said the cost of capital and interest rates ripple through most every significant decision among the occupiers with which his firm works.

“If rates are higher for longer, it means continued uncertainty around decision making,” Kane said. “Internally, it means their business is more expensive to run, and I think we’re seeing, in certain cases, a lot of focus on capital containment and preservation. It’s very difficult for a [chief financial officer] to make a long-term decision when they have uncertainty around long-term rates.”

The past four years have been marked by uncertainty around real estate decisions by companies large and small, with many opting to sign short-term renewals as they figure out how much space they need in a post-pandemic world that embraces hybrid work. Some of that uncertainty has begun to ease, with a greater number of office tenants signing longer deals and relocating to newer towers, but a higher-for-longer rate environment may mean other companies will continue to prolong more-permanent space decisions.

It’s become common for companies to take less square footage in higher-quality office buildings, Kane said. He added that while some tenants will opt to delay their decision-making in an effort to cull spending during a higher-for-longer market, others will try to seize opportunity now.

“There are a significant number of companies … that will be able to make decisions and are going through the process to take advantage of the volatility to trade into higher-quality assets,” Kane said. “I think you’re going to continue to see that playing out across the country.”

That, in turn, will have wide-ranging effects on lenders and owners, Kane said, including accelerating the amount of distress facing lower-quality properties, which tenants are leaving in favor of newer buildings.

Impact on new construction

Since the Fed began increasing interest rates in 2022, new construction across major commercial real estate sectors has slowed.

Industrial construction starts dropped for the sixth consecutive quarter, to less than 40 million square feet breaking ground in Q1. For 2024, CBRE Group Inc. previously forecast that multifamily starts would fall by 45% this year from their pre-pandemic average and by 70% from their 2022 peak.

Office, the most challenged commercial real estate sector, has seen new-construction groundbreakings decline for five consecutive quarters, according to Jones Lang LaSalle Inc. In Q1, JLL recorded less than 300,000 square feet of office construction starts, the lowest total in nearly 40 years of data.

As the cost of financing remains higher than where it’s been recently, and traditional CRE lenders remain more tepid in their lending to the sector, that’ll continue to dampen the future pipeline for most property types, including traditionally hot ones like multifamily and industrial.

“The returns that developers need to target are just not going to be achievable with the cost of financing and the cost of construction and the availability of financing,” Alperstein said. “As we look out 24 months, there’s going to be a window of time there where there will be very little new supply hitting the market, and that will most likely be positive for the fundamentals of multifamily, industrial and even some retail.”

Roberts said persistently higher interest rates will mean the next real estate cycle will shift into a new equilibrium in supply and demand, where structural occupancy rates will be higher than where they’ve been in recent years,

In industrial real estate, for example, the long-term occupancy rate in the past 20 years has hovered about 93%, but the long-term average will start to move higher, closer to 97%, Roberts said. That overall is a good thing, to sustain the warehouse market’s investment environment, he added.

Some owners and developers will continue to turn to new or alternative financing mechanisms to get deals done — including new construction, experts say.

“There is capital out there for creative financing,” said Brent Maier, real estate advisory leader at Baker Tilly. “It comes down to relationships and the appetite for cost. If you go to a nontraditional lender, sometimes that money can be more expensive, but if you have a good asset or a good deal, it generally pencils out if it is attractive.”

 

Source:  SFBJ

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The Federal Reserve usually speaks as one. But it’s a big organization with many individuals, including those with their own reputations and areas of responsibility. And some have been coming out to question how many, or if any, interest rate cuts will be on the table for 2024 at all.

Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, is the most recent voice wondering what degree of cuts might be possible. He wrote about the multiple factors that were making any prediction difficult. Disinflation has “stalled,” underlying economic demand has remained strong, and monetary policy is “much tighter” than before the pandemic.

In a discussion at the 2024 Milken Institute Global Conference in Los Angeles, California, replying to questions from New York Times’ economic reporter Jeanna Smialek, he said, “Inflation seems to have gone sideways while economic growth has remained resilient. It’s led me to question is monetary policy having as much downward pressure on demand as I would have otherwise expected.”

He pointed to the housing market, which has remained “remarkably resilient” given 30-year mortgage rates up to about 7.5%. He acknowledged questions about whether the so-called neutral interest rate — the short-term interest rate when the country sees full employment and stable inflation — might be higher than what the Fed has expected. It’s a point that Vanguard has raised.

If the neutral rate was higher than Fed estimates, “Instead of two feet down on the brakes, maybe only one, or possibly not much at all,” Kashkari said.

There are multiple scenarios he offered going forward, “the most likely” being that “we stay put for an extended period of time, until we get clarity on is disinflation in fact continuing, or has it, in fact, stalled out.”

If disinflation starts again or the country sees “marked weakening in the labor market,” there might be interest rate cuts this year, Kashkari said. “Or if we got convinced eventually that inflation is embedded or entrenched now at 3% and that we need to go higher, we would do that if we needed to.” “That’s not my most likely scenario, but I can’t rule it out.

Back in January, Christopher Walker, a Fed governor, notedthat economic news at the time was good.

“But will it last?” Walker asked. “Time will tell whether inflation can be sustained on its recent path and allow us to conclude that we have achieved the FOMC’s price-stability goal. Time will tell if this can happen while the labor market still performs above expectations. The data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024. However, concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed.”

 

Source:  GlobeSt.

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A lot of financing and refinancing strategies among CRE owners have become waiting games. Hold until interest rates eventually go down — putting off loan maturities or new purchases as much as possible — until they can get themselves out of trouble.

One of the types of tools for floating rate interest loans have been interest rate caps, which offer some protection against the increase of interest rates when some benchmark like SOFR crosses a threshold. At least until the rate cap fees started jumping in 2020 and the costs started to crush transactionsby May. Things continued to get worse by October. And then … they kept getting worse. In 2023, the rate cap cost increases were crushing even more CRE transactions.

Concerns eventually started to ease as inflation seemed to be coming under control and there was a growing thought that the Federal Reserve would start cutting rates. Three times during 2024. Granted, that three cuts of probably 25 basis points each would be less than now, but the total 75-basis point amount wouldn’t be terribly compelling.

However, the thought of future rate cuts provided hope. Not now.

“The one-month forward curve shows that investors now think the secured overnight financing rate, or SOFR, which is closely related to the federal-funds rate, will be 4.825% at the start of 2025,” the Wall Street Journal wrote. “This implies up to two small cuts this year. Back in January, six cuts were expected.”

An improvement of cap rates had begun because the risk of the provider having to cover higher interest rates looked as though it would slow and then abate. Not now, because the expectation for rate cuts is becoming more pessimistic.

“The cost of these caps has become a major headache for property owners, according to Carol Ng, a managing director at risk-management firm Derivative Logic,” the Journal wrote. “The price of a one-year extension for an interest-rate cap on a $100 million mortgage at a 3% strike rate is now $2.1 million. Back in January, when the market expected more rate cuts, the same extension cost $1.3 million.”

But there are other estimates. Chatham Financial’s interest rate cap calculator looking at 3% constant SOFR strike rate on $100 million is almost $4.61 million, making that $2.1 million estimate look good in comparison.

 

Source:  GlobeSt.

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The multifamily fall from grace over the last couple of years was unexpected by most at the market’s pandemic highs. The increase in interest rates have hit hard, as have some other factors.

But according to Ralph Rosenberg, partner and global head of real estate at global investment firm KKR, problematic conditions should start tapering off after 2025, leaving strong possibilities for rent growth and opportunities to “buy high-quality properties below replacement cost while achieving attractive long-term yields.”

The factors confounding multifamily certainly start with interest rates.

“Debt levels relative to equity are higher in multifamily than in some other segments, a loan maturity wall looms, and interest rate caps are expiring, putting many owners in the position of refinancing at a time when their properties are worth less than their acquisition basis and interest rates are much higher,” Rosenberg wrote.

He notes that multifamily is one of the most leveraged of CRE investments. That makes refinancing challenging. There is a loan maturity wall, reduced availability of financing, and high debt loads.

That’s only one part. As GlobeSt.com has previously reported, 2023 saw a record number of apartment unit deliveries added to inventory and 2024 is expected to top that by half again. These aren’t evenly distributed across the country, but the concentration in places even with high increases in population is still enough to depress prices, occupancy rates, and rent growth.

In addition, operational costs have increased.

“Floating-rate interest payments rose faster than income from rent and fees,” the firm said. Falling valuations aided in negatively affecting debt service coverage ratios, making many properties fiscally unsustainable to the lender. Also, utilities and property taxes have continued to climb, adding to multifamily difficulties.

“Over $250 billion in multifamily loan debt matures in 2024 alone, and some owners will face a gap upon refinancing,” they wrote. “Likewise, as interest rate caps typically last for three years, many owners are looking at a sharp increase in the cost of debt.”

KKR expects a tough couple of years in a deleveraging cycle. Owners and investors who can hold on during this period face different conditions coming out. There is the chance of lower interest rates, although the degree and pace of any reductions are up in the air now. Demand for units will grow as the rising expenses and difficulty of continuation of building make it virtually impossible to keep pace with additional units. Currently, supply growth forecasts for many metropolitan areas are below the 2018-to-2022 five-year average, and that wasn’t adequate to satisfy market needs.

Buyers with sufficient resources will find many opportunities.

“Consider what would happen to a multifamily property purchased in February 2024 at a 5.5% cap rate (a measure of the one-year yield on a property calculated by dividing NOI by asset value) with 50% leverage,” they wrote. “Assume that NOI grows at a 3% CAGR. As interest rates come down, it might be possible to sell at a cap rate of 5.0% five years later, in 2029. That equates to an internal rate of return of roughly 14.5% over five years, which is attractive for a historically stable, in-demand asset class.”

 

Source:  GlobeSt.

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The total amount of distressed CRE reached more than $88.6 billion by the end of 2024’s first quarter through the addition of net $2.7 billion, according to a new MSCI capital trends report.

The net addition was the result of $9.9 billion new property distress offset by $7.2 billion worked out during the quarter.

For current distress, office is far and away the largest property type example, with almost $38.2 billion. That’s followed by retail’s nearly $21.9 billion, roughly $14.2 billion in hotels, about $10 billion in multifamily, $1.6 billion in retail, and $2.8 billion in other types.

More than half of the new distress was office. Retail was the only category in which there was a net reduction in distress, with $1.5 billion in additional properties and $1.9 billion in workouts during the quarter. One deal — Kerring’s $963 million purchase of the retail space at 717 Fifth Ave. — brought the “share of troubled asset sales to 8.9% for the retail sector,” MSCI wrote.

“While the net addition of distress has tapered over the past three quarters, sales out of distress have increased,” the firm said. “Troubled asset sales accounted for 3.9% of all deal volume in the first quarter of 2024. The last time distressed sales constituted this large a share of the total market was in late 2015, with the sale of Stuyvesant Town/Peter Cooper Village in New York.”

While distressed sales have spiked, a similar amount was seen in 2018. As a share of total sales, the last time they reached this point was in 2016.

More concerning is potential distress, which MSCI defines as indicating “possible future property-level financial trouble due to events such as delinquent loan payments, forbearance and slow lease up/sell out, among others. This also includes CMBS loans placed on master servicer watchlists.”

Total potential distress at this point is $205 billion. Multifamily leaps ahead of even office ($50.3 billion) in this category with $56.1 billion. Hotel sits at $28.6 billion; retail is $28.4 billion; industrial is $27.1 billion; and other types come to $15.3 billion.

It’s important to remember that potential distress isn’t the same as a projection of what will happen. Instead, it’s a calculation of what might happen, with a lot of time and space for that to change for the better or worse.

Total current distress is highest in the Northeast at $29.0 billion. Second highest is the West, with $16.3 billion. Then, in volume order, come the Midwest ($13.2 billion), Mid-Atlantic ($10.9 billion), Southwest ($9.8 billion), and Southeast ($9.4 billion).

 

Source:  GlobeSt.

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In 2023, total commercial real estate mortgage borrowing and lending was estimated at $429 billion, marking a 47 percent decline from $816 billion in 2022, and a 52 percent fall from the record high of $891 billion in 2021. These figures are highlighted in the Mortgage Bankers Association’s 2023 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation.

The MBA survey, which does not include data from smaller and mid-sized depositories, recorded $306 billion in loans closed by dedicated commercial mortgage bankers in 2023, a 49 percent decrease from $595 billion in 2022.

Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, commented, “Higher interest rates, uncertainty about property values, and concerns over the fundamentals of some properties contributed to a sharp decline in CRE borrowing and lending last year. The reduction was widespread across all major property types and capital sources. The continued increase in the total CRE mortgage debt indicates that the drop in originations mainly reflected a lower borrower demand, influenced by fewer sales transactions and refinances. Where possible, property owners opted to hold steady.”

Woodwell also noted, “2024 seems to be starting slowly as well. High interest rates will likely remain a hindrance for many property owners, but with over $900 billion in loan maturities expected, and possibly a growing acceptance of these rates, we might see more activity in the market this year.”

Regarding specific property types, multifamily properties experienced the highest lending volume in the previous year, with an estimated total of $264 billion, and $178 billion of that directly tracked by dedicated mortgage bankers. First liens made up 96 percent of the dollar volume closed by mortgage bankers.

Mortgage banking firms reported closing $306 billion of CRE loans in their names and acting as intermediaries on another $225 billion. These firms also served as investment sales brokers for transactions worth $225 billion.

Depositories emerged as the top capital source for CRE mortgage debt, followed by life insurance companies, pension funds, government-sponsored enterprises (Ginnie Mae, Fannie Mae, and Freddie Mac), private label CMBS, and investor-driven lenders.

 

Source:  The World Property Journal

 

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The number of commercial foreclosures in the U.S. has steadily increased, from a low of 141 in May 2020 to 625 in March 2024, according to an updated report from ATTOM.

That represents a 6% increase from the prior month and a 117% increase from last year. The real estate data tracking firm also noted that California, New York, and Florida were the states with the most foreclosures.

New York had a total of 61 commercial foreclosures in March 2024, a 5% increase from the prior month and a 65% increase from a year ago. Florida saw increases of 30% and 107%, respectively. Texas saw increases of 31% and 129%, and New Jersey saw increases of 31% and 133%.

Foreclosure filings on commercial real estate property in California in January 2024 were triple the number of foreclosures in January 2023, according to ATTOM data. Banks in California have a great deal of exposure to commercial real estate with 31% of Golden State bank portfolios carrying three times larger loans than capital.

The recent increase in foreclosures follows a multi-year low of just 141 in May 2020, reflecting the immediate impacts of the pandemic and swift response measures like moratoriums and financial aid for owners.

“Despite challenges like the COVID-19 pandemic and evolving economic policies, the market demonstrated remarkable adaptability,” ATTOM reported. “Initial pandemic-related foreclosures were followed by a stabilization as businesses adjusted to new realities.”

 

Source:  GlobeSt.

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Cap rates for the single-tenant net-lease sector increased for the eighth consecutive quarter in Q1 2024, jumping to an average of 6.64% across all major asset types.

STNL asking cap rates for office properties hit 7.6% in Q1, followed by industrial, which averaged 7.02%, and retail, which jumped to 6.42%, according to the latest market report from The Boulder Group.

According to The Boulder Group’s Jimmy Goodman, the current cycle of STNL cap rate increases is the longest since 2014. In an interview at GlobeSt.’s Net Lease conference in NYC this week, Goodman said STNL cap rates will remain elevated until the Fed starts cutting interest rates.

“I think we’re at status quo, this is the new normal until the Fed moves to cut rates,” Goodman said. “Everyone had this level of hope last year that we would have rate cuts this year, but 2024 is looking a lot like 2023.”

“Now, people are hoping for a rate cut in Q3, but it probably won’t be a large cut,” he added. “Until then, nothing will change. Cap rates will increase or plateau. I don’t see them decreasing any time soon.”

The new status quo also is likely to keep transaction volume at a minimum — one description we heard is “flatlining” — as buyers are few and far between and sellers refuse to reprice their deals to higher cap rates.

Most of the players in the STNL market are in it for the long-term, typically with 10- or 20-year leases, and they can wait out the down cycle, Goodman noted.

“It’s a steady cash flow. The lenders, the equity, they know they’re going to get a check from the tenant,” he said. “If a $2M Starbucks just got built, it’s got a 10-year lease and they know they’re going to get paid.”

Sellers are still in denial about bringing their pricing in line with the new status quo on cap rates, Goodman suggested.

“If you’re a developer, you still want to make money off your merchant developer deals. The public REITs and people that are subject to financing can’t pay the cap rates the developer wants, and the developer doesn’t want to be upside down,” he said.

“Everyone is staring at each other and nobody is blinking,” Goodman added.

 

Source:  GlobeSt.