7 Investment Tips To Keep In Mind Investing In 2023 Commercial Real Estate

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There’s no denying that uncertain financial times lie ahead. A recent poll by Bloomberg cited that 70% of economists predict a mild recession in 2023, following moderate growth the previous year. The U.S. economy faces the headwinds of increasing interest rates, stubborn inflation, a stagnant job market, and weak market exports abroad.

Despite these troubling signs, however, those in commercial real estate enjoy a unique position. There’s far less leverage in the consumer and financial sectors than during the Great Financial Crisis, and plenty of liquidity remains ready and able to deploy in long-term vehicles. The overall uncertainty will lessen demand and potentially unearth value-add opportunities, and different asset types will experience different momentary signs of distress while others will experience boosted demand.

Overall, prices and demand are shifting, and the time may be nigh for those looking to invest in real estate, whether for the first time or for those who make their livelihood. These seven ideas to keep in mind will keep the investor prepared to face 2023 with awareness and agility, well-positioned to strike opportunities when the iron is hot.

1. Trouble Unearths Opportunity

In times of distress, opportunities usually arise. Assets or markets facing headwinds today may eventually develop into solid, long-term holding investments. Good real estate fundamentals (location, location, location) remain essential even in challenging economic cycles. Those who can shore up their capital nicely will be best prepared to take advantage of opportunities as they arise. If you’re in a position to take advantage of low prices in well-positioned asset types or markets, next year may be the time to invest and many great investors often say the outcome is won at acquisition.

2. Capital Costs will Likely Stabilize Soon

This last year, the Fed’s continual interest rate hikes increased overall cost of capital, making debt and equity much more expensive. These hikes resulted in lower leverage, higher debt service, and greater discount rates, which lowered net present values or created higher yield requirements. Additionally, fixed income yields increased and, when adding in the risk premiums associated with CRE, added to required property yields (or cap rates).

Number shifts like these aren’t so bad when they’re infrequent, but the Fed’s aggressive measures to curb inflation have made deal-making much more expensive. However, the latest increase to between 4.25 and 4.5% in mid-December points to a deceleration (the last increase was 75 basis points), a trend that will hopefully continue into 2023.

The cost of capital will likely stabilize as rate hikes taper off – encouraging stakeholders to start investing again. Additionally, a massive supply of capital seeking placement means plenty of liquidity. We’re still seeing demand continue to bid up deals to healthy values, particularly for good buys in good markets. Now’s the time to get your ducks in a row and prepare for quick action if you want to access good deals ahead of the competition.

3. Real Estate Buffers Against Stubborn Inflation

Real estate, as an inherently longer-hold investment vehicle, remains a haven that better buffers against stubborn inflation than other capital markets, thanks to its predictable cash flow. Lease terms that allow for underlying rent increases connected with rising costs or annual/regular rate increases in both long-term and short-term leases (e.g., in offices and multifamily) allow landlords to adapt more quickly to rising costs and keep up with inflationary changes.

Even though inflation is finally (hopefully) tapering, commercial property represents an excellent long-term option. But don’t forget: operational expenditure also inflates, so lease structures where tenant covers all or a portion of expenses can be important.

4. Now’s the Time to Lean on Your Broker

Partnership and expertise are more important than ever. Your broker is your partner in deal-making and serves as an essential business partner as you navigate changing valuations and asset performance. Brokers provide detailed in-market knowledge and economic cycle experience and make it their business to know what’s happening in the sector – so why go it alone?

In an uncertain market, now is the crucial time to partner with someone who can find you the best comps, source the best data, and find the best buyers for your listing or next investment option. Additionally, in times like these, brokers often are better at finding off-market opportunities, which can be acquired at opportunistic pricing if buyer can navigate unique circumstances.

5. Assess Tech Stacks and Optimize for the Best Tools

In a lean market, businesses need to cut overhead spending to focus on managing costs and optimizing the best possible tools and headcount for task efficiency. Running your business affordably is essential before venturing into the market. A lean, efficient tech stack can empower you to manage business operations while minimizing spending successfully. Prioritize technology that saves time, determine what’s essential and what’s fluff, and if you can find one software that solves multiple business needs, all the better.

6. Solidify Relationships with Capital Sources and Financial Partners

Now’s the time to foster closer relationships with your capital sources, lenders, and financing partners. It’s essential to maintain these connections – they will allow you to collectively stay more agile and make smarter, faster decisions as the economic climate changes.

Open communication with these parties will position you to act fast when the time is right, ready to strike on value-add opportunities as soon as they emerge.

7. Back to Basics: Understand Your Brick-and-Mortar

This may seem like a no-brainer, but it’s even more essential to understand your tenants’ day-to-day realities. Get to know their business operations, keep a pulse on market happenings, and maintain a steady flow of communication with your operators.

A clear understanding of the present and fundamentals of your tenants’ businesses will open your eyes to potential changes and allow you to make strategic moves or adapt as needed. Additionally, clear communication is more likely to set your tenants at ease and make them more likely to renegotiate and continue their leases with you.

The Bottom Line

We’re long-term bullish on commercial real estate. With open eyes and an agile, ready-to-act team, we’re confident that the savvy investor will discover valuable ROI diamonds in the rough. These tenets are, at their core, essential elements of well-run commercial real estate operations, even in prosperous economic times. However, in turbulence, it’s all the more important to stick to your investment principles and – as always – consider the long-term while resisting short-term distractions.

 

Source:  Global Banking & Finance Review

 

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CRE’s New Sector Darling: Retail

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Retail appears to be replacing multifamily when it comes to commercial real estate darlings.

Shopping center vacancy in Q4 reached its lowest level dating back to 2007 – just one among the sparkling highlights according to Cushman & Wakefield research.

Asking rents for shopping centers rose broadly nationwide by 0.8% quarter-over-quarter (QoQ) to an average of $22.99 per square foot, while the vacancy rate declined 20 basis points to 5.7%.

Net absorption accelerated to a pace of 10.9 million square feet (msf), up from the mid-year lull where absorption averaged 9.4 msf over the second and third quarters, but down from 12.9 msf in Q4 2021.

Retail Fundamentals ‘Have Not Yet Flinched’

Barrie Scardina, executive managing director and head of retail services, Cushman & Wakefield, shared in prepared remarks, “The economic backdrop has become highly uncertain over the last several months, with retailers preparing for more challenging conditions in 2023, yet retail fundamentals have not yet flinched.

“Consumer behaviors remained healthy to close out the year: shopping mall foot traffic exceeded 2019 levels in the final two weeks of December, and holiday sales are expected to have been modestly positive. Inflation continues to be a concern for shoppers and retailers, though the rate of price increases moderated in recent months.

“Retailers seem to be confident enough that inflation and a probable recession in 2023 will not be overly disruptive to business; store openings in 2022 outpaced closures by nearly 2,500—the largest net expansion in a decade. In addition to resilience in core retail, consumer services such as medical, entertainment and dining are bolstering retail real estate demand more than they have in past economic cycles.”

Positive net absorption was found in 66 of the 81 markets tracked by Cushman & Wakefield with Chicago (1.0 msf), Phoenix (788,000 sf), Atlanta (574,000 sf), Denver (422,000 sf), Washington, D.C. (397,000 sf), Dallas/Fort Worth (392,000 sf) and New York City (353,000 sf) leading the way.

Philadelphia, Hartford, Buffalo, and Albany each saw a net decline in absorption, as did a handful of secondary markets in the South and West regions.

Retailers Still Adding New Locations

James Cook, Americas director of research, retail, JLL, tells GlobeSt.com that total vacancy had fallen to 4.2% in Q4 2022.

“While such a low vacancy might come as a surprise to some, it shouldn’t,” Cook said. “That’s because many retailers are still adding new locations. After seeing significant retail move-outs in the second half of 2020 there’s been broad demand for retail real estate across a variety of retail categories.

He said that demand has been especially strong from quick-service restaurants and discount retailers in suburban areas. Meanwhile, new construction of retail real estate has been at historic lows.

A steady demand combined with a waning supply has caused falling vacancy,” Cook said. “And all of this has driven up asking rents in nearly every major US market.”

Asking, Effective Rent Spikes Most in Over a Year

Asking and effective rents grew by 19 and 21 basis points, respectively, in Q4, according to Moody’s Analytics, the most growth they have shown in over a year.

Meanwhile, the national retail vacancy rate remained flat at 10.3% — the sixth straight quarter at this level.

“Although these numbers might not jump off the page, this increase breaks a four-quarter streak of asking rent growth that was 0.10% or less and could possibly be the momentum needed to push performance higher in subsequent quarters,” according to the report.

However, data shows foot traffic during the holiday season was down year over year in retail segments like apparel and electronics. Also, US spending on discretionary merchandise fell 5 percent during the week of Dec. 10 from a year earlier, as rising costs forced consumers to be more selective in how they spent their money, Moody’s Analytics reported.

Opportunities that Didn’t Exist in the Past

Matt Hammond, Partner, Coreland Companies, tells GlobeSt.com that demand for second-generation retail in grocery store-anchored shopping centers is as strong as ever.

“Despite the closures, we had to navigate during the pandemic, retailers who were well capitalized adapted and positioned themselves for growth,” Hammond said. “During the past 24 months, we have seen tremendous opportunities for these retailers to lease spaces that weren’t available in the past.

“We’re also dealing with limited inventory today given that ground-up development of traditional shopping centers has declined due to rising land, construction, and capital costs.

Limited inventory drives vacancy rates down and rents up. The increased cost of construction has also been a key factor driving rents. Amortized into a deal is a landlord’s tenant improvement allowance, directly affected by the increases in construction.”

He said that physical, service retail is a necessity and that even many strictly digital brands eventually come to realize that a physical store is part of the shopping experience.

“We expect to see continued positive rent growth and low vacancy into the new year as newcomers remain eager to enter the market and existing retailers take advantage of key opportunities,” Hammond said.

Simon Property Group Redeveloping Former Big-Box Stores

Laura Schwartz, regional vice president of leasing for Simon Property Group, tells GlobeSt.com that across Simon Property Group’s centers, she is seeing an uptick in foot traffic to levels that resemble those of pre-pandemic times.

“To combat vacancy and keep up with this demand, we’ve worked tirelessly to redevelop previously occupied large box stores by building out multiple retail and experiential spaces at affordable rent rates,” Schwartz said.

At Burlington Mall, the end of one wing has been completely revamped to now be occupied by Common Craft, a food and beverage destination drawing locals for craft beverages and local food, as well as the nationally recognized Fogo de Chao.

“Implementing a mix of retail, experiential, and food & beverage tenants means there is more than one draw to our centers than retail alone, opening up our potential tenant pool wider and allowing us to combat vacancy,” Schwartz said.

Experiential Retail Performing Well

Brandon Svec, National Director of U.S. Retail Analytics, CoStar, tells GlobeSt.com that retail vacancy has continued to compress due to both demand and supply side factors.

“A resurgence in experiential retail leasing, coupled with continued expansion from discounters, off-price retailers, and quick-service restaurants has supported strong demand formation,” he said.

“On the supply side, deliveries and starts remain at anemic levels, especially after accounting for the large share of build-to-suit projects.

“Further, demolitions continue at an active pace, helping to remove obsolete stock from the market. Add the fact that retail space impacted by store closures fell to its lowest level in over 15 years and you have the recipe for a very tight market.

“The one outlier has been office-dependent street-level retail within the urban core, which continues to significantly underperform the wider market.”

Discount Retailers Gobbling Up Space

Daniel J. Villalpando, partner, Cox Castle, tells GlobeSt.com that the overall decrease in vacancy rates is likely driven by the “categories” of community and neighborhood centers, power centers, and unanchored strip centers, with the best rates (not surprisingly) typically in Class A projects and projects in the suburbs.

On the contrary, the mall category continues to struggle a bit with vacancies. There has not been much new shopping center development in the last few years, so the amount of inventory has stayed flat, or even decreased. Less inventory can mean lower vacancy rates.

Data indicates retail chain closures decreased in 2021 and announced closure plans for 2022 were low, so retailers are continuing to occupy their premises, for the most part.

Some developers are filling vacancies (particularly of the department store and “big box” varieties) with offices, ranging from call centers to high-tech spaces; distribution and industrial centers; movie stages; and data centers.

Other “experiential” uses such as pickleball courts, golf-themed spaces such as Puttshack, Puttery, and Popstroke, and bowling alleys like Stars and Strikes and Main Event are becoming viable options for retail developers with large spaces to fill. These new tenants bring down vacancy rates.

When there are vacancies, discount retailers and dollar stores such as Dollar General, Family Dollar, Dollar Tree, and Five Below have gobbled up residual space, often in the 5,000- to 10,000-square-foot range.

Grocery-Anchored Development in Demand

Brett Horowitz, partner at Branch Properties in Atlanta, tells GlobeSt.com for his more recent grocery-anchored developments, he continues to see unprecedented tenant demand.

Over the last two years, our developments have been on average, at least 90% pre-leased at the completion of construction. Historically, pre-leasing at this point had hovered around 75% to 80%.”

“We believe a combination of factors including a lack of new retail construction, a larger pool of tenants seeking traditional retail space (i.e. medical tenants), and a larger desire for retailers to be closer to the rooftops in more suburban settings are the reasons for this,” he said.

“These are trends that only accelerated from the pandemic. This historic level of retail occupancy will continue to push rents as well as overall investor appetite in the product type.”

 

Source:  GlobeSt.

 

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Expiring Interest Rates To Fuel Distressed Property Sales

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An exponential increase in the cost of interest-rate caps—insurance that CRE borrowers with floating rates purchase to hedge against rate increases—may soon spawn a wave of property sales in an increasingly distressed market.

In 2019, the Mortgage Bankers Association estimated that up to one-third of all commercial property debt was floating rate, with most lenders requiring that borrowers hedge against an increase in the borrowing costs.

When interest rates were low, derivative contracts offering hedges on multimillion-dollar mortgages could be purchased for as low as $10K. Now—as the lion’s share of these insurance contracts are expiring—the cost of rate-cap hedges is as much as 10 times higher that it was a year ago, according to a report in the Wall Street Journal.

Few buyers who opted for floating-rate loans when borrowing costs were low anticipated they were going to have to rebuy a cap at the same time interest rates are peaking, the report said.

According to Michael Gigliotti, co-head of JLL Capital Markets NYC office, many property owners may not have the liquidity to pay the increased insurance costs. Gigliotti told WSJ he expects a surge in property sales this year from owners who chose to unload their assets rather than spend millions on a new rate cap.

“This is the margin call on the real estate industry,” Gigliotti said, warning that a flood of properties going on the block to avoid increased rate cap costs could turn into what he called a “first trigger” pushing down real estate values.

Interest rate caps typically enable a borrower to avoid paying additional interest rates beyond a fixed threshold. According to the WSJ report, speculative ventures, where investors acquire short-term, floating-rate debt to finance building renovations aimed at raising rents have the most exposure to the increased cost of rate-cap hedges.

Apartment owner Investors Management Group was cited as an example of the rate-cap conundrum facing property owners: in 2020, the firm took out a $24.4M loan on a 300-unit multifamily in San Antonio. The firm bought insurance that capped interest at 5%, with the hedge contract costing $22K.

The cap on the San Antonio apartment campus expires in September. The company estimates that purchasing a new two-year hedge will cost $1M—40% of the property’s annual net income.

Floating-rate mortgages on apartment buildings insured by Fannie Mae or Freddie Mac can require borrowers to put money into an escrow account to pay for a new rate cap when the old one expires.

A wave of property sales spawned by spiraling rate-cap costs would magnify an already intensifying credit crisis in commercial real estate. According to a new report from Bloomberg, almost $175B of global real estate debt already is distressed, four time more than any other sector in the global economy.

Rising interest rates and the accompanying economic downturn, which appears to be the overture of a looming recession, have created an expanding pipeline of potentially defaulting loans in an environment where property values and cash flows are under pressure in all global markets, Bloomberg reported.

 

Source: GlobeSt.

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BMW Dealership In Pembroke Pines Breaks Ground On $17M Expansion

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Miller Construction Company started construction on a new two-story showroom for Holman Automotive’s BMW of Pembroke Pines. Miller will demolish the existing structure and bring a new, modern showroom to life.

Located at 14800 Sheridan St. in Pembroke Pines, the 37,350-square-foot, state-of-the-art showroom will include office spaces, break rooms and finishes, along with floor-to-ceiling windows showcasing the vehicles throughout the entire building.  The project also includes 113 parking spaces and renovations to the service drive and sidewalks around the perimeter of the showroom.

The project is scheduled for completion during Q4 of 2023.

 

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Seven CRE Investment Strategies For 2023

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With the year starting out amid uncertainty and no small amount of pessimism, there are certain strategies that promise to play well amid the environment. Read on to find out what will work in 2023.

1. Sell Industrial Assets in Overpriced Markets 

Industrial assets in some of the “hot” markets like the Inland Empire, Orange County, Miami, Phoenix, San Francisco and San Jose, during the last few years, have seen rents increase at least 50% and cap rates compress to 3.0%-4.0%. With supply chains back to normal and less demand for products due to raging inflation, rents may decline in these markets by 20% or more. Industrial assets in these markets should be sold and the proceeds reinvested in more stable and value-priced industrial markets in the Midwest, Texas, Tennessee, and the Carolinas.

2. Sell Net Lease Properties

The net lease industry has been very robust during the last few years courtesy of the Fed’s zero interest rate policy and abundance of capital. However, with the Federal Funds rate at 4.25% and increasing to 5.0% or more by the first quarter of 2023, net lease assets will decline in value substantially as cap rates increase. The net lease investment business is really a bond spread game, by buying long-term leases at cap rates of 6.0%-8.0% and financing these assets at mortgage rates of 5.0%-7.0%. These investments tend to have long durations of twelve to fifteen years, which may cause large price decreases when rates rise. As with corporate bonds, when rates rise, the value of the net lease assets falls.

3. Increase Allocation to Public REITs and Reduce Allocation to Private CRE

The 2022 total return for public equity REITs as shown by the FTSE NAREIT All Equity REITs Index has declined by 24.95%. Many REITs are trading at or below NAV value and less than comparable private CRE values and should be purchased.

4. Sell CRE Assets in Overpriced Gateway Markets and Reinvest in Suburban and Sunbelt Markets

The majority of CRE investment and development activity pre-covid had been concentrated in the 24-hour Gateway cities that include New York, San Francisco, Chicago, Portland, Atlanta, Oakland, Seattle and Los Angeles. Many properties in these markets are suffering with large vacancies, low utilization and discounted values due to high crime and homelessness policies in these markets. Investors should sell assets in these markets and reinvest in suburban areas surrounding these Gateway cities and the higher growth and lower tax Sunbelt markets.

5. Sell Overpriced Core Assets and Reinvest in Opportunistic Assets

Institutional investors typically focus on the risk and return characteristics for various CRE investment strategies. The lowest risks are core and core plus investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage. The next riskiest investment strategies are value-added strategies which are higher risk and involve some property redevelopment, tenant adjustment or leasing, or with operational problems. The riskiest sectors are opportunistic strategies that involve a high degree of redevelopment, leasing, tenant relocation or change or may be in financial distress. Many core properties are still trading at sub-5 % cap rates and should be old. The proceeds should be reinvested in higher-return opportunistic strategies.

6. Invest in Hotel Assets with Expected Higher Inflation  

According to Smith Travel Research, the major lodging markets are forecast to achieve solid gains in RevPAR during 2023. These gains include 8.6% for the 65 largest markets and 9.3% for the 25 largest markets. Driving these returns are robust leisure travel, increasing business travel with a return to normal for the convention business and higher occupancy and average daily rate. Both occupancy and ADR are expected to increase 4.2% to produce the higher RevPAR. By year-end 2023, 53 of the 65 top markets in the STR forecast are expected to have reached, or surpassed, their 2019 RevPAR levels. Leisure-centric markets which are expected to see their 2019 RevPAR levels exceeded by 20% include Savannah, GA, Miami, FL, St. Petersburg, FL and Coachella Valley, CA.

7. Invest in CRE Proptech Businesses

One of the key growth areas of CRE is in data analytics. This business has low capital costs and high returns on equity by selling data to the CRE industry. Data analytics encompasses all aspects of big data for CRE including demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and Real Capital Analytics and many smaller local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities or sell them to larger firms. The large CRE software firms are also prime buyers for data analytics companies as they seek to diversify their software business and cross-sell the data analytics products.

 

Source:  GlobeSt.

 

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More Potential Car Tech For CRE

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Commercial real estate is coming to a point where it must be conversant with technology. Miss out on an edge and your key performance indicators could take a beating compared to competitors who use it with grace and style.

That’s one reason areas like energy optimization and carbon reduction or electric vehicle charging are going to become important. Don’t do it, and someone will jump ahead, take your better prospects, make more, and reduce your importance and future.

That’s why some tech that sounds a little out there is worth considering now. Even if too early, it might not be soon.

In this case, there is an announcement by three firms — NTT DATA, Valeo, and Embotech — that they were forming a consortium, called VEN.AI.

“The consortium combines each company’s core competencies including owned IP, the latest technology, sales and support structure and strong operations offerings,” the press release reads, “to be the go-to solution provider for production ready parking automation with global roll out capabilities.”

Why parking automation? The easy answer is a question in return, whether you had recently watched people trying to park their cars. Here’s their pitch.

“VEN.AI offers an infrastructure-based solution that has very few requirements from the vehicle side as it guides vehicles via the use of sensors, connectivity (e.g., 5G) and offboard computing to a dedicated parking spot. Automated parking solutions can be implemented in a variety of use cases including the assembly plants where vehicles are produced, outbound-logistics distribution parks, depots for vehicle fleets operators, retail outlets as well as in parking garages as an automated valet service.”

NTT is a large IT and business services provider with a global footprint. Valeo works in “electrification, driving aids, the reinvention of the onboard experience and lighting around and inside the vehicle.” Embotech develops software for autonomous driving systems.

For a commercial real estate operator, a viable system, which could be years in the waiting, might provide a valet parking vibe without depending on human drivers. Properly implemented, it would also speed retrieval of cars after they were sent down into a parking area. It would free time for people working or living in buildings and for guests or consumers. Such systems would also provide additional data on traffic that could be useful in understanding building use and characteristics of those coming and going.

Some obvious problems as well. Beyond taking years to put into place, most cars in the near future would not incorporate the collection of on-board technologies that would likely be needed. Still, as part of future planning, it’s an interesting possibility.

 

Source:  GlobeSt.

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Smaller Banks Are Stepping Into The CRE Lending Void. For Now

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The commercial real estate debt market crumpled last year, weighed down by historically aggressive interest rate hikes, but one little-watched corner of the sector has stepped in to partially fill the void.

Regional and community banks have grabbed a larger market share of commercial real estate loans as banking giants like JPMorgan Chase, Bank of America and Wells Fargo have retreated from the market.

“The local and community banks have really stepped into that space that the debt funds were in before,” said JLL Executive Managing Director Gerard Sansosti, who co-leads the firm’s national debt practice. “I don’t think they’re under the same scrutiny that the money center banks are.”

But regional banks, with assets between $10B and $100B, and even smaller community banks can only fill so much of the vacuum, and if the Federal Reserve continues to raise rates, they will start to pull back themselves before too long, experts told Bisnow.

“Unless there is more clarity to the market and the capacity loosens up a little bit, I do believe [smaller banks] will get selective,” Sansosti said.

Banks overall have taken a larger market share in CRE as other lenders, such as debt funds, CMBS and insurance companies all saw activity plummet. Banks made up 46.4% of all nonagency commercial and multifamily lending in the U.S., up from 23.1% in the same period of 2021 and 30% in the second quarter, according to CBRE. Banks made up more than 30% of lending in the second quarter, according to a CBRE report.

Michael Riccio, CBRE senior managing director and author of the report, told Bisnow that community and regional banks were the main players during this period.

He said the volatile interest rate environment “essentially shut down” lending activity from major money centers. Overall loan closings dropped by 11% from the second quarter of 2022 and 4.7% year-over-year.

Truist Financial Corp., one of the country’s 10 largest banks with nearly $550B in assets, pulled back on commercial lending as its underwriting raised projected interest rates from 5.5% in the middle of 2022 to between 7% and 7.25% today, said Mark Hancock, senior vice president of Truist’s commercial real estate lending division.

“We’re taking care of our existing clients,” Hancock said. “We’re trying to get creative where we can without breaking our guidelines.”

As a result, Tony Marquez, the president of commercial banking at Bethesda, Maryland-based EagleBank, said he’s seen more traffic through his door among developers and real estate investors.

“There is a clear indication from my vantage point that we’re getting more looks at different deals because some of the larger banks have not been as active in the past year,” Marquez said, adding that loan growth for the regional bank was 2.2% in the third quarter compared to just 1% in Q2. 

Smaller banks are able to fill this void given they receive less scrutiny from banking regulators compared to money center institutions, Sansosti told Bisnow. Money centers are subject to annual federal stress tests and limits on how much commercial real estate lending they’re able to add to their balance sheets.

Michael Barr, the Federal Reserve’s vice chairman of supervision, warned last month that the central bank could tighten stress test requirements further, even though 33 of the largest banks passed those stress tests last summer, indicating they could weather a severe recession and continue to lend, Banking Dive reported.

Smaller banks see the vacuum left by money centers as a way to grab more market share, Commercial Real Estate Finance Council Executive Director Lisa Pendergast said.

“If you’re one of the few games in town, then you have more opportunity to ensure your loan is as creditworthy as it can possibly be,” Pendergast said.

There are limits to the size of loans these banks can make, however. Most regional banks don’t lend more than $40M to $60M on any deal, Riccio said, which means investors and developers have to go to multiple banks to cobble together enough debt for bigger projects.

“They’re not going to do a $200M loan,” Sansosti said. “They’re filling a need, but it’s more in that small to medium-sized loan.”

For now, Sansosti said the smaller banks have the upper hand, pushing potential clients to also open accounts and make deposits in exchange for loans while still tightening their own underwriting standards.

But unless the Fed ceases its interest rate hikes or reverses course in the event of a severe recession, smaller banks may soon have to pull back themselves, Sansosti said.

Some regional banks have slowed down already. Bridge Logistics Properties, industrial development and investment arm of Bridge Investment Group, has historically relied upon regional banks and debt funds for its projects, Eastern Region Managing Director Greg Boler said.

Boler said Bridge is getting construction loan quotes for a future project, but with higher interest rates pushing up borrowing costs, the quotes so far are “all pretty expensive.” It’s forcing Bridge this year to pivot toward acquiring warehouses instead of developing new ones.

“We killed a lot of deals. We did keep one deal that we were bullish on because of this location and the basis from a rental rate increase,” he said. “Nobody is going to be in a rush to catch the falling knife.”

 

Source:  Bisnow

 

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Why Sale-Leasebacks Are Especially Important Now

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The current economic climate has been difficult, with Federal Reserve interest rate hikes chasing inflation. Even as some of the pressures might be reaching a plateau, the Fed has made clear that further rate increases are still planned. That has led corporate lenders to become more cautious. They’ve been tightening their standards and lowering the amount of leverage available.

“Typically, a mortgage lender will provide 75% to 80% of the loan-to-value of the property,” says Gordon J. Whiting, managing director and head of net lease real estate at Angelo Gordon. “In today’s macroeconomic conditions, it’s much harder to get access to capital, it’s harder to get a loan, and you’re only getting 60%.”

Even as the corporate lending market has become less liquid and more expensive, capital remains available for sale-leasebacks at very attractive terms. Even as property values have been dropping — though they’re still largely at or above pre-pandemic valuations — the return to a company is still better. “They’re able to get 100% of the value today,” says Whiting.

The Advantage of Renting

There’s rent to pay, yes, but unlike interest on a loan, it’s completely deductible as an operating expense. The seller can also typically negotiate control for 20 years with options to extend.

“The rental will be lower than what they’d have to pay in financing,” Whiting adds.

And the longer the lease term, the better the value to both the buyer and the seller, making negotiation of that point easier.

With the future uncertain and rates potentially going higher, there is also value in locking down a strategy with certainty.

“You’re better off doing a sale-leaseback and paying off some of the more expensive or floating rate debt,” notes Whiting. “Cash is king.”

The more liquidity on hand, the easier it is to deal with unforeseen circumstances.

Why Working Capital Now Is King

Sale-leasebacks are also a great source of acquisition financing, particularly in the current market environment, where distress may drive opportunities for strategic add-on acquisitions. Companies can use sale-leaseback proceeds to help fund new acquisitions or expand upon existing platforms. A vertically integrated company might decide to buy a supplier. Sponsors can do the same, using proceeds of a sale-leaseback done at the time of an acquisition to lower their capital costs for the deal.

“Now sale-leasebacks are another arrow in a CFO’s quiver,” Whiting says.

From Whiting’s view, the market uncertainty and potential for ongoing rate increases are also a source of danger, with a sale-leaseback being an option to consider sooner, not later.

“Time is not your friend,” he says. “In our view, we’re headed into an environment where you’re going to be glad you did it the day before and not the day after.”

 

Source:  GlobeSt.

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6 Things Investors Should Consider With CRE Market In Flux

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South Florida’s commercial real estate market is certainly in flux. Owners, buyers and sellers are adjusting to higher interest rates, continued supply chain challenges and an uncertain economic outlook.

Deals are still being done and space is still being leased. But in this inflationary environment, deals have to make sense, with a cushion to account for the unpredictability of 2023 and beyond.

With all this in mind, here are some points to consider for companies and individual investors who are involved in the commercial real estate market or are looking to get into it.

1. With more properties now getting less attractive cash flows, sellers are often grouping assets together for sales.

This can make sales transactions more complicated, and buyers need to work with their banking partner to make sure the overall risk-reward equation works for them.

2. The demise of the office market seems to be overstated. Office is still a good niche to consider.

Certainly, more people are working from home, and many companies are adjusting with new hybrid models involving employees coming in for one to two days a week instead of every day. Smart owners are adjusting by being more flexible and offering smaller floorplans. That said, leases and sales are still being done and there are some real bargains available for opportunistic buyers.

3. Higher interest rates are slowing the market, but there are still plenty of opportunities to find favorable deals.

Deals are now more expensive, and as rates have increased, a buyer’s margin for error has significantly shrunk. So smart planning is more important than ever. But there is still significant liquidity in the market and buyers and sellers are still making deals work, so we predict a healthy CRE market in South Florida for the coming year.

4. South Florida can be expected to fare better than much of the country as the economy faces an unpredictable 2023.

The reason is simple — population growth. That means more companies are looking for office space here. It means there’s more need for distribution centers and other industrial real estate. And it means people are continuing to buy houses and condos.

5. In an uncertain market, a long-term relationship with a CRE banker is more important than ever.

To get a favorable deal, owners and buyers alike need an advocate who takes the time to make sure a transaction will work for their client for the long term. This is best accomplished by having a long-term relationship with a banker who has significant commercial real estate experience. The more you can share about your business plan and the more you can talk about both opportunities and challenges, the more successful that relationship will be.

For the client, it’s important to take the time to build a relationship based on trust and consistency versus finding a different partner for every deal. And for the bank, finding ways to help the client in a wide variety of ways will make the relationship even more impactful.

 

Source:  SFBJ

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Sperry Commercial Global Affiliates | RJ Realty’s Ron Osborne Reps Buyer In Purchase Of Davie Retail Building

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Ron Osborne, Managing Director/Broker of SperryCGA | RJ Realty, represented  GCDC4 LLC, a foreign investor, in the purchase of a 3,200-square-foot, free-standing retail building outparcel located at 9180 W. State Road 84 in Davie, Florida.

The buyer purchased the property from CR Ridge Plaza LLC for $2,400,000.00, representing a 6.2% cap rate.

The deal closed December 16.

The property is currently occupied by Metro By T-Mobile on a corporate lease with 4+ years remaining. Metro has occupied the property for 20 years.

The transaction marks the fifth in which Osborne has represented the investor in the last 12 months. They will continue to acquire prime real estate in which they find strong financial fundamentals. The last two transactions have shown the trend in adjusting capitalization rate increases as interest rates increase.

In October, Osborne represented GCDC LLC in the purchase of a 5,300-square-foot retail automotive repair facility in the same retail plaza. GCDC, LLC purchased the property from CR Ridge Plaza LLC for $2,967,9335, representing a 6.2% cap rate.

Ronald Osborne“We expect the rates to continue to increase over the next several months,” commented Osborne. “This will be in both single and multi-tenant properties. Properties that are not in prime locations will see even a greater increase in rates. We are in a shifting market from a seller’s market to a stabilized market. With the lack of liquidity, a cash buyer that does not need a loan will be able to move quickly and close on transactions at better returns than those seeking financing.”

 

“I also believe the additional cost of windstorm insurance here in South Florida will drive cap rates upward,” Osborne continued. “Buyers that pay cash or those that have a good relationship with their lenders that can waive the windstorm insurance requirement will be critical in the sale of property this coming year. We looked at several STNL properties over the last four months and could not find one in the South Florida market that would offer a reasonable return and future upside. This property offers both and the client hopes to purchase another property in the first Quarter of next year. They will be looking at both single and multi-tenant properties in 2023.”

The property was listed by Stan Johnson Company.

 

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