Commercial Real Estate—Buy, Sell Or Hold?

question marks on post it notes

The commercial real estate market was beaten, broken and left for dead by Covid-19 in 2020.

It roared back to life in 2021 with record-breaking sales of $809 billion, but like cops pulling up to a rowdy frat house all-nighter, the arrival of unrestrained inflation and soaring interest rates may signal the party’s over. That has many real estate investors at a strategic crossroads wondering, “do I buy, sell or hold?”

Privately owned commercial real estate has historically offered a strong hedge against inflation. The owners of properties with short-term leases such as apartments, self-storage, and manufactured home communities can quickly raise rents to match inflation, as measured by the Consumer Price Index. That’s a significant advantage as the CPI topped 8% in March and April, reaching 8.6% in May, the highest rate since 1981. Then, like today, inflation was driven by a dramatic spike in oil and gas prices and an unrestrained Treasury flooding the economy with money.

In 1980, newly installed Federal Reserve Chairman Paul Volcker responded by strangling the flow of currency to such an extent that in December 1981, mortgage rates hit 20%. Inflation quickly declined, but at a cost of 10.8% unemployment, a decline of 3% in GDP, and not one but two recessions. While inflation is the friend of many landlords, recession is not, and the commercial real estate business began a decade-long decline.

A recession has followed every sharp increase in inflation over the past 75 years, and the current gravity-defying trend shows no sign of fading. The Producer Index – what manufacturers pay for raw materials – rose .08% in May, doubling the .04% increase in April, for an annual rate of 10.8%. Those costs will be passed on to the consumer, driving the CPI yet higher. Gas is over five dollars, and diesel is flirting with six. Given that sudden spikes in energy costs preceded six of the last seven recessions, and the Commerce Department reporting an unexpected decline in retail sales in May, another recession seems inevitable.

Investment real estate performance and GDP rise and fall together. A weak economy creates a decline in business and consumer spending, limiting the ability of landlords to raise rents. Pandemic resistant, “essential businesses” like Dollar General and Walgreens have been highly favored by investors. However, with leases holding their rents flat for 10-15 years, landlords will be losing money every year, as will big-box retail and office building owners with long-term leases not indexed to CPI. The Fed’s more aggressive monetary policy will create higher long-term interest rates, provoking a recession and stricter commercial lending requirements. Higher rates and loan equity requirements result in lower returns, causing investors to retreat and property values to fall. For investors with such assets who are alarmed by a disintegrating economy and contemplating a sale, it may be best to hold and wait for the inevitable recovery.

The cycle of decline and recovery often occurs over a decade or more. Property owners under 50 can afford to wait for the next upcycle if the market sees a significant correction. Commercial real estate always trends up over decades, and for 25 years has outperformed the S&P 500 Index, with average annualized returns of 10.3% and 9.6%, respectively. And, unlike stocks, bonds, and cryptocurrency, real estate has never been worth zero. For those younger investors, this may be the right time to buy.

“While rates are being managed higher as a deterrent to inflation, they are still historically low. Buyers who can lock in fixed rate debt on income property at current rates of 5.5% to 5.6% today will be winners as these rates are likely to be the lowest they may ever see,” said TowneBank Commercial Mortgage President, David Beatty.

Named a “Top Ten US Bank” by Forbes in 2022, TowneBank is a leading commercial real estate lender in Virginia and North Carolina.

What’s the case for selling in the current market? Few people doubt that commercial real estate values have reached a cyclical peak after a 12-year bull run. Secretary of the Treasury Janet Yellen recently expressed concern to the US Senate Banking committee that banks and non-bank lenders such as insurance companies and hedge funds maybe be overleveraged at a time of rising interest rates. Knowing cash is king, there is anecdotal evidence that portfolio owners are choosing to boost liquidity with strategic dispositions at apex pricing. In what may be a record-breaking sale for a single such property, an Arizona company paid $363 million for Jamaica Bay, a manufactured home community in Fort Myers, Florida.

Many investors anticipate a wave of defaults when acquisitions at aggressive pre-COVID prices can’t cover the debt service when their loans soon reset at higher rates. When real estate crashed in 1973, legendary investor Sam “Gravedancer” Zell, the father of the modern REIT, picked up dozens of high-quality apartment buildings at a fraction of replacement cost. Zell used the massive cash flow from those assets to buy office buildings at 50 cents on the dollar when the real estate market crashed again in the 1980s, becoming a billionaire. Today, the post-COVID “hybrid working” trend is driving tenants from center city office buildings to the more affordable suburbs. Those tenants who remain are demanding aggressive rent concessions to stay.

Foreshadowing a coming market correction are dozens of “distressed” real estate funds, amassing billions of dollars. Global investment firm Angelo, Gordon & Co. L.P. has in 36 months attracted $11billion in investment to its “distressed debt and special situations” platform. Investors are betting on a spike in real estate loan defaults, with banks forced to sell their debt at deep discounts to maintain FDIC liquidity requirements.

What about the smaller investor or owner/user? If you’re a doctor over 60 wanting to cash out the equity in your medical office building to facilitate a more comfortable retirement, now may be the time to sell and lease back. The demand for these properties is ceaseless due to their resilience during economic slumps. Montecito Medical is one of the nation’s largest privately held companies specializing in healthcare-related real estate acquisitions and a leader in sale and leaseback transactions. Since inception in 2004, Montecito has closed healthcare real estate transactions of over $5 billion.

“With the population of Americans over 65 projected to more than double by 2040, medical office real estate fundamentals are highly secure. That makes this category recession-resistant and a haven for capital at times when other commercial real estate sectors may be struggling. This was proven in both the Great Recession of 2008 and again during the Covid-19 pandemic,” said Chip Conk, chief executive officer of Montecito. “We built our entire business around medical office and the market has validated that strategy over and over. We remain as bullish as ever on this sector.”

Sale-leasebacks are increasingly common in other asset categories such as industrial real estate, perhaps the hottest commercial real estate category of all.

Owners with management-intensive assets like single-family rentals, manufactured home communities, and small apartment buildings may want to relax, travel, and otherwise enjoy the result of decades of hard work. They can use IRS Code Section 1031 to trade into management-free “absolute net,” single-tenant retail, enjoying historically low interest rates, avoiding capital gains and pocketing tax-free cash.

Being sensitive to economic cycles when buying, selling or hanging on is essential for success in commercial real estate.

 

Source: Forbes

 

/by
,

Car Demand Fizzled Two Years Ago But Now Delray Beach Has Two Dealerships The Works

car dealership_canstockphoto1977857

Despite car sales waning since the beginning of the pandemic, Delray Beach is seeing significant reinvestment in the industry with a pair of large new dealerships in development.

Earlier in June, the city gave preliminary approval for a new 4.3-acre Hyundai dealership at 2419 N. Federal Highway. As a result, Delray Hyundai would move from its current location just south of George Bush Boulevard into the new property, which is twice as large.

Additionally, a new AutoNation Land Rover Jaguar dealership is being planned for 1001 W. Linton Blvd., adjacent to a Mercedes-Benz dealership. Plans have been submitted to the city and are currently under review.

This comes less than a year after Tesla opened a service center in Delray Beach along Federal Highway.

The commitment to new dealerships comes after the industry experienced significant losses at the beginning of the pandemic. In 2020, rental car companies sold off more than 770,000 vehicles, a third of their combined fleet, according to the Washington Post.

Additionally, inflation and supply chain issues have caused car prices to skyrocket with new car prices jumping 12.6% since last year, according to Fortune Magazine. In May, new car sales dropped 11% from April, marking the lowest level since December, according to Bloomberg.

Karl Brauer, an executive analyst at iSeeCars.com , said supply-chain issues, such as a global shortage in microchips, which are vitally important for new cars, have helped cause the significant drop.

“We don’t have enough cars being produced and that’s causing people to keep their current car, which restricts used-car supply,” Brauer said. “[That] causes old and new [car] prices to shoot up like they have in the past 18 months.”

While the supply-chain issues are causing significant problems, Brauer said he thinks there’s “optimism and some valid thinking [in the industry] that this is transitory” and that eventually the microchip issues will be resolved and help stabilize the business model.

AutoNation “continues to both build and buy dealerships, so clearly there’s confidence at that level for these kind of dealer conglomerates to continue to grow whether the buy existing dealers and add them to the mix or build brand new ones,” Brauer said.

Delray Beach currently has 22 car dealerships, Planning and Zoning Board member Christina Morrison said during a public meeting.

The proposed Hyundai dealership would be built on a vacant lot that’s remained undeveloped for more than a decade and an adjacent pottery store. The land was purchased for $10 million in January, according to Palm Beach County Property Appraiser records. Nearby businesses include Gunther Volkswagen and Gunther Volvo dealerships, a car wash, a home furnishing store, and bicycle shop.

The project would help revive the area and create new employment opportunities, said Bonnie Miskel, an attorney representing the developer, in documents submitted to the city.

Miskel added the dealership would “allow for a multimillion-dollar investment in construction and related costs and the creation of scores of new jobs” as well as an increase in property values.

Planning and Zoning Board member Allen Zeller was in favor of the new dealership, noting that “not a lot has happened” in the area over the past decade.

“That area is blighted,” Zeller said. ”The buildings are old buildings most of them. The only newer development is associated with car dealership and automotive businesses on Federal Highway.”

Board member Joy Howell, who voted against the project, questioned whether another car dealership was the best use of the city’s scarce available land while the city faces a housing shortage.

“I think we’re kind of making the decision as if it’s a choice between a blighted lot and car dealerships,” Howell said. “What if you had a developer who came in and said I want to put townhouses on this big, huge parcel? I mean, developers I know are looking for large in-fill lots if they can find them.

“We already have some townhouse developments on Federal right now and if you had more, that’s when you get restaurants and little retail and walkability. I could see that as a vision for that part of Federal, not going more in the direction of the big, humongous car dealerships.”

The project will go before the City Commission for final approval later this year.

 

Source:  NewsBreak

 

To receive more information on available properties and off-market listings, please complete the form below:

 

/by

The Impact Of Interest And Inflation On Industrial Real Estate

industrial warehouse_canstockphoto12614040 800x532

The Good News

Industrial leasing fundamentals are still positive after a banner 2021. Despite a hearty influx of new deliveries, national vacancy rates fell for the sixth straight quarter to 3.4 percent as occupiers absorbed 110.8 million square feet in first quarter 2022.

As such, the average national asking rent climbed to $7.62 per square foot, marking a 7 percent increase over fourth quarter 2021 and becoming the largest quarter-over-quarter increase since at least 2000.

In addition, investor transaction volume for the first quarter 2022 was strong, reaching $33.2 billion, the second-highest total ever for a first quarter showing and a notable achievement following a year that saw a record amount of capital pour into the industrial sector. There is still record levels of liquidity in the domestic markets, and overseas capital has an even longer runway.

In first quarter 2022, developers delivered 90 million square feet of new inventory, effectively equal to first quarter 2021. While strong by historical standards, this influx of new space barely moved the needle on vacancy for most markets. According to JLL research, the pipeline of under-construction space grew to 531 million square feet, of which more than a quarter is in the mega-box size category of 1 million square feet and larger.

There appears to be a bifurcating of markets between the coastal/port markets and non-port markets. Port markets have seen year-over-year rent growth eclipse 23 percent, compared to 16 percent in non-port markets. Further, despite a near 40-basis-point pricing premium, these coastal cities represent an attractive opportunity for investors looking to secure long-term net operating income growth.

The (Less) Good News

While projects continue to be mired in delays due to materials and labor shortages, the volatility in material pricing itself has started to calm. However, prices are still going up for these materials, thanks to inflationary pressures. Tight labor and housing markets, supply chain constraints, growing production and energy costs, and surging consumer demand are all key contributing factors to our rising inflation, which in May reached the highest levels since 1981 at 8.6 percent.

Real concerns surrounding inflation and rising interest rates are causing investors to assess their underwriting. Negative leverage is beginning to be the primary driver of capitalization rates due to the cost of capital. It’s possible to mitigate some of this negative leverage with the exponential rent growth that is still occurring in many markets. However, if and when rent growth moderates, there will likely be some downward pressure on values.

The Overall Outlook

JLL anticipates that vacancy will continue to decline for industrial product, likely bottoming out at sub-3.0 percent. From a landlord perspective, any shifts in rates have not impacted the need for space. The supply chain is still not right-sided, which means that tenants are not at pre-pandemic supply levels in their warehouses. Even if there were to be a pull-back in consumer spending, there would still be a significant shortage of warehouse space throughout the country.

Businesses are also still shell-shocked from the massive disruption to their supply chains that occurred during the pandemic and are re-thinking their distribution models. “Just in time” delivery used to drive decisions. There’s since been a pivot to “just in case”, both in terms of product and in terms of space-banking due to rental rates increasing quickly.

Workforce considerations are also driving these locational decisions, as are rising fuel costs due to inflation. Tenants are approaching expansions, especially to non-gateway markets more carefully, as the rent savings from moving to tertiary locations is likely offset by higher transportation costs.

However, real estate is only a fractional part of overall cost for these businesses (estimated at 3 to 6 percent). The inflationary pressures in terms of real estate costs likely pale in comparison to the inflationary and interest rate impacts on the rest of their business.

Given these factors, it is anticipated that market rents will continue to increase across the industrial sector. Most investors are underwriting 7.0 percent or higher in most markets and anticipate rising rents through 2023.

Speculative development will likely continue, though will be impacted by supply chain and regulatory restrictions. Capital is virtually non-existent for non-permitted and phased development (two to three years until completion). Upfront due diligence for construction debt is becoming far more robust, with more focus on appraisals and underwriting assumptions.

Capital markets underwriting has changed significantly in second quarter 2022. There has been re-pricing of many assets, which was initially driven by changes to the debt market but are now more driven by overall risk assessment. The most attractive type of industrial property has become value-add product with near-term roll or vacancy.

The buyer pool has also decreased for industrial assets, as investors are pivoting away from asset classes that aren’t near the peak of pricing (ie. retail). Most investors are now underwriting slightly higher investment rates, particularly at the end of their projected holding period.

Overall, the entire real estate class could benefit from this period of economic volatility and continue to outperform the broader equity markets. Some market participants are assuming that this volatility is short term. Others believe that a slowdown in the economy could create arbitrage opportunities. Investors are stress testing for an inflationary environment, rate increases and a potential recession. It’s likely that this will continue for the second half of 2022 until the direction of the economy becomes clearer.

 

Source:  CPE

To receive more information on available properties and off-market listings, please complete the form below:

 

/by
,

Are We In A Shifting Market?

increasing graph_canstockphoto56135097

We have been in a Seller’s market for the last several years. Properties have been sold at values that have not been seen since before the great recession of 2007-2008.  The Federal Reserve has artificially kept the interest rates low and the President in 2020 and 2021 pumped billions of dollars into the economy.  Yes, this helped some people during the pandemic, but also prevented the normal cycle we have seen over the last 40+ years.

In South Florida, every 10 to 12 years, we have seen a down swing in property values, adjustments and corrections for a few years.  The downcycle was due to change around 2020, but, instead, the market heated up.  Why? Due to the movement of large corporations, senior level executives and large private investors moving to South Florida.  This was due in part to the pandemic and no personal income tax.  This kept home prices from declining and values dramatically increasing.  They also sold their investment properties in the high tax states such as NY, NJ, California, Pennsylvania, etc. and purchased replacement properties in Florida.

Why is the market starting to shift now?  Because the Fed is looking at multiple rate increases (4) this year of  75 basis points each meeting. We could see interest rates as high as 6% to 7%, before the end of the year.  This means that Capitalization (Cap) rates must also move up, which will cause the pricing to decline.  We have seen this already occurring in other states in recent weeks.  This will make Buyers happy and put Seller’s in a state of reverse sticker shock, and, in some cases, they may even pass on good sale prices because they do not believe prices are declining.  Buyers are already refusing to accept some of the low cap rates on non-credit tenant transactions.  Transactions will slow in the third and fourth quarter of this year except for seller’s that are now trying to complete their 1031 exchanges.  These only will happen on truly all cash sales with no debt as the current rates are in the 4.75% to 5.5% range from banks and you can’t buy a property with leverage at a 4% to 4.75% cap rate.  The returns are breakeven to negative.

So, I believe we are entering a stabilizing market, we will see adjustments in the next 12 to 18 months, but not a crash.  It won’t be a Sellers or a Buyers’ market, but a market at equilibrium.  This means that both sides will walk away giving a little to make a transaction happen.

If you are a seller there is still time to take advantage of this market, but you need to be realistic and move quickly. Properties need to be properly unwritten with management fees (5%), vacancy and collection rates (5%), reserves for replacements, adjustments for increased property taxes based on sale, and a reasonable cap rate.

SperryCGA can help you still take advantage of the market. We have 60 offices throughout the US, with 8 offices here in Florida.

 

To receive more information on available properties and off-market listings, please complete the form below:

 

/by

CRE Investment Performance Has Been Sizzling

fire_hot 800x530

If you’ve been invested in commercial real estate, you’ve had a superb trailing four quarters—on average. But that depends on what properties your money sat. As for the future, that’s looking uncertain.

Aegon Asset Management, in its June 2022 US CRE market insights, gave the initial data credit to the National Council of Real Estate Fiduciaries (NCREIF) Property Index. For the four quarters that ended in March, try a 21.9% total return: income return of 4.2% and capital appreciation, 17.2%. That’s better than the previous 17.7% in 2021.

Aegon called it “a continuation of the extraordinary total returns produced during 2021.” Hard to argue with the wording. But, depending on the property type, things split out quite differently.

Industrial was on top with a total of 51.9%. Multifamily, which has been second mentioned by many in the field, saw 24.1%. But remove those standouts from the average and the returns of other property types didn’t have the pizazz. Retail only managed 7.1%, and office, 6.8%.

Time for a breath, because after “these stunning results … investors are eyeing the challenges above,” Aegon noted.

The big and immediate elephant in the room is the Federal Reserve’s response to inflation. The agency is trying to manage a double challenge in its mandate: cool inflation without sending the economy into a recession and setting unemployment numbers sailing.

But the ongoing strength of the jobs market, with roughly 2 empty jobs for every person looking, likely means, as Fed watchers are saying, a higher interest rate hike than the 50 basis points that had seemed to be in the cards. Back in January, Fed Chair Jerome Powell said at a Senate Banking Committee hearing, “If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will.”

With the increasing pace of inflation, there’s a strong chance that the Fed will raise its benchmark interest rate by 75 to even, yes, 100 basis points.

“Commercial mortgage lenders are absorbing some of the rate increase by squeezing spreads but borrowing costs are increasing albeit with ready availability,” Aegon wrote. “The increase will make it tougher for investors to hit performance targets if historically low borrowing costs had been assumed to continue indefinitely.”

A faster increase in interest rates could also set off a so-called hard landing, especially considering ongoing supply chain problems, the war in Ukraine, and ongoing Covid problems in some major manufacturing areas, like China.

Then there’s also uncertainty about whether companies will use office space the way they used to, what will happen in housing as prices continue to rise faster than household incomes, and how some big industrial space users are backing off from what had until recently been a warehouse acquisition mania. And, of course, if consumers are being hit in the wallet, retail will eventually share the pain.

 

Source:  GlobeSt.
 

To receive more information on available properties and off-market listings, please complete the form below:

 

/by

Construction Costing More, Taking Longer To Complete Amid Huge Demand

blueprint_plans_construction_canstockphoto1543570 800x533

A shortage of materials is putting construction on hold as workers wait months for back-ordered items to become available. The construction industry is also seeing the highest price hike in more than 50 years.

The U.S. Census Bureau said construction costs have increased nearly 18% between 2020 and 2021. That’s the largest year-to-year increase they have seen in material costs since 1970.

“Copper has doubled, steel has gone up, aluminum has increased,” Conor Barry, vice president of business development at Miami Systems Inc., said.

Barry said huge demand is putting pressure on supply.

“We have lead time constraints, material shortages related to customs and overseas imports,” Barry said.

With these challenges, tenants have been forced to expect delays. At ISG Marketing, their office took longer to build than expected.

“It means double the rent when you’re trying to get into a new space and also coordinate the move of 700 employees from the old facility to the new facility,” Josh Slater, the CEO of ISG Inc. said. “So, we were able to make it. Everything worked out, but it’s not without its issues.”

But those in the construction industry are hopeful prices will fall back down.

 

Source:  WPTV

/by

Buyer Demand Remains High for Corporate Sale-Leaseback Deals

Business handshake, the deal is finalized_canstockphoto18035820

The corporate sale-leaseback market is coming off a record-high first quarter for deal-making. Despite repricing occurring in the wake of rising debt costs, industry insiders remain optimistic of continued strong momentum ahead in the remainder of the year.

The $8.4 billion in sales logged in first quarter is on par with fourth quarter 2021 activity and nearly triple the $2.9 billion in transactions recorded in the first quarter of 2021, according to a market analysis by SLB Capital Advisors.

“That is the biggest first quarter that we’ve seen. The dollar volume was driven largely by two casino deals, but the 186 is the highest count that we’ve seen over the last few years by a good 20 to 30,” says Scott Merkle, managing director of SLB Capital Advisors.

The casino transactions included VICI’s acquisition of the Venetian Resort, Expo and Convention Center for $4 billion and GLPI’s acquisition of two Cordish Companies’ Live! properties for $674 million. Merkle also attributes activity to the huge volume of M&A activity that occurred in 2021.

Traditionally, companies use sale-leasebacks as a financing tool to monetize or “unlock” 100 percent of the equity tied up in real estate. That capital is often used to reinvest back into the business, improve balance sheets or finance expansion. Another catalyst for sale-leasebacks is M&A activity, with the acquiring entity using a sale-leaseback on the real estate of the business they are buying to help finance the acquisition. According to BMO Capital Markets, the U.S. saw 478 M&A transactions last year that were valued at nearly $1.9 trillion.

“A lot of times what we see on the M&A side is groups that will utilize that sale-leaseback as part of the capital stack, and there was an incredible amount of M&A activity last year,” says Jeff Tracy, a director at the Stan Johnson Co. in Tulsa, Okla. A sale-leaseback of the real estate can bring in 20 to 30 percent of the overall capital stack needed, which helps to reduce the amount of equity and/or debt a buyer needs to bring to the table, he adds.

Some industry experts estimate that industrial assets represent nearly half of all corporate sale-leaseback transactions, and expansion of the industrial sector over the past few years has provided fresh inventory for eager buyers. “Our business has never been more brisk. We are seeing a lot of activity as corporate users continue to look to monetize their industrial real estate and corporate-owned facilities, because they realize it’s a better use of funds to be able to put that capital to work within their business,” says Erik Foster, a principal and head of industrial capital markets, Capital Markets at Avison Young in Chicago.

Market adjusts to higher rates

The broader market is adjusting to higher costs of debt financing for real estate, which has climbed 150 to 250+ basis points since January 1. Although sources agree that rising interest rates haven’t changed the volume of sale-leaseback deals that are getting done, it is resulting in price adjustments and fewer bidders.

“As debt has gotten more expensive, buildings can’t sell as aggressively as they did a couple of months ago,” notes Foster.

On average, cap rates have increased between 25 and 75 basis points, depending on the building, location, tenant and term.

“The better locations and better credits are going to be less impacted, because there is a significant amount of capital still out there that is chasing deals,” says Tracy. The smaller or more challenging credits and tertiary locations are seeing bigger moves in cap rates, he adds.

Although there is still significant capital targeting sale-leasebacks, the bidder pool has thinned with some investors that have pushed pause amid the repricing that is occurring. Instead of getting 10 offers, a sale-leaseback listing might get six or seven now, because buyers are being more cautious, notes Merkle. SLB Capital Advisors is currently working on a sale-leaseback of an industrial portfolio valued between $75 million and $100 million. First round offers came in during the first week of April with nine groups that advanced. Typically, buyers increase their offers when moving to the second round. However, due to the rise in interest rates, many moved in the opposite direction, lowering their price. The deal is under LOI and moving forward, but the pullback on bidding speaks to how buyers are moving more cautiously, notes Merkle.

Stan Johnson Co. is working on the sale-leaseback of a portfolio of properties for a recreational vehicle business. One of the bids received was structured with a floating cap rate. The bidder included a cap rate range that allowed the seller to choose the rent level they wanted to set, as well as a fixed basis point spread over treasury to account for rate fluctuations.  So, depending on how rates moved prior to the deal closing, the cap rate also could move. “That is something I haven’t seen before, and I think it points to the fact that groups still have a desire to get deals done and they need to deploy capital. But they’re trying to be creative as possible in not only making sure they are competitive, but also protecting themselves from a downside scenario of a big interest rate move,” says Tracy.

Avid buyer interest

Rising interest rates could cool what has been a white-hot seller’s market for sale-leasebacks over the past year. However, industry participants are still optimistic about the near-term outlook.

“While cap rates have risen, real estate is still at incredibly attractive levels for owner-operators to monetize their real estate in a sale-leaseback,” says Merkle.

When one looks at sale-leaseback from a multiple perspective, multiples on real estate that might have been 15x are now 14x. Those numbers are really compelling for a business to execute a sale-leaseback when their business is worth multiples of say 8-10x, he adds.

SLB Capital Advisors has seen an uptick in pitch activity, inquiries from companies considering a sale-leaseback on assets, in recent weeks.

“So, in spite of the pricing environment shifting rapidly over the past 45 days, we’re still in an environment where there is a ton of activity, and I expect to see a lot of continued sale-leaseback activity through the balance of the year,” says Merkle.

Another reason for that optimism is that there is still a significant amount of investor capital aimed at sale-leasebacks.

“The buyer pools are more diverse and deeper than I have ever seen in my career, and that continues to put pressure on pricing and provides owners with great liquidity options,” notes Foster.

W.P. Carey Inc. alone recently announced that it had entered into $400 million in new investment agreements since the end of first quarter. The net lease REIT specializes in corporate sale-leasebacks, build-to-suits and the acquisition of single-tenant net lease properties.

In addition, more investors have entered the sale-leaseback market looking to acquire assets.

“There has been a huge wall of capital looking to be deployed into sale-leasebacks. We’ve seen even more buyers step up to the plate over the last 12 months or so,” says Merkle. Some buyers are moving more cautiously, but there is still a lot of capital available for sale-leasebacks, he adds.

 

/by

‘Real Estate Is On Fire’: South Florida Property Valuations Soar — But So Could Taxes

fire_hot 800x530

Propelled by scorching demand, rising prices and a torrent of new construction, South Florida’s property values have escalated steeply, providing a boon to owners of homes and commercial and industrial real estate — but also raising the prospect of big tax hikes and a deeper housing affordability crunch.

Preliminary estimates of taxable property values just released by Miami-Dade and Broward counties show valuations for all types of property rose more than 10% overall in both counties as of the end of 2021 compared to the previous year. That’s faster than values had risen in many years.

In Miami-Dade, property values increased at an overall annual rate not seen in 15 years. Countywide, the taxable value of properties rose by $34 billion to a total of $372 billion, or a whopping 10.2% jump, between 2020 and 2021. New construction accounted for $5.292 billion of that increase.

Pedro J. Garcia, the Miami-Dade property appraiser, said in a statement the county last saw an overall double-digit increase in values in 2007. The 2021 growth rate nearly triples the level of increase recorded in 2020, when South Florida’s taxable property values rose significantly in spite of widespread economic impact from the start of the ongoing COVID-19 pandemic.

The biggest increase by far came in the small city of Sweetwater. Largely due to an annexation in late 2021, the city’s property values rose a head-spinning 56.3%. It also has seen a boom in high-rise residential construction catering to Florida International University, which sits across Southwest Eighth Street in west Miami-Dade.

Unusually, every single municipality and taxing district in Miami-Dade, as well as unincorporated areas, saw a substantial increase in taxable property values. That includes some, like the area covered by Miami’s Downtown Development Authority, a special tax district stretching from Brickell to Edgewater, that had seen a slight decline in values the previous year.

/by

Multifamily Land Grab Expected To Slow As Interest Rates Rise

land_canstockphoto82175202

Rising interest and insurance rates are projected to slow down South Florida multifamily investments following a year of frenzied buying, according to a recent report from Franklin Street.

Dan Dratch, director of multifamily investment sales at Franklin Street’s Fort Lauderdale office, says real estate investors and developers could hesitate even as apartment rental rates continue to soar and vacancies shrink.

“We have been in such a low interest rate environment, which has been fueling sales in the last couple of years,” Dratch said. “There’s a little bit of uncertainty… [Investors] want to know if it costs more to borrow the money and put more money down, or pay less.”

Adding to the uncertainty is rising property insurance rates in the wake of extreme weather events. This hurricane season is expected to be a particularly busy one.

“I know owners who are seeing a 20% to 30% increase on insurance, sometimes higher,” he said. “We have not been hit with a major hurricane [in five years]. If that happens now, it will affect things even further.”

South Florida saw significant rent growth in the first quarter of 2022, according to a Franklin Street report on the multifamily market, with year-over-year rents increasing 16% in Miami-Dade, 20% in Broward, and 23% in Palm Beach County.

At the same time, multifamily buildings were trading at premium rates.

In Miami-Dade County, each apartment unit averaged at $412,612 for new top-of-the-line Class A buildings, $327,394 for Class B buildings, and $207,592 for Class C.

In Broward County, units averaged $419,137 per unit for a Class A, $313,599 for a Class B, and $205,736 for Class C apartment buildings.

In Palm Beach County, apartments averaged at $413,253 per unit for a Class A, $320,410 for a Class B, and $206,812 for a Class C apartments buildings.

There weren’t many available apartment units on the market during the first quarter either.

Palm Beach County had a vacancy rate of just under 1%. Miami-Dade’s dropped to 3.3%. Broward’s vacancy rate increased slightly from the previous quarter to 4.1%, yet the county “also saw more deliveries than the other two counties in the market,” the report stated.

When it came to construction deliveries, Broward County led the tri-county area with 719 apartments added in the first quarter of 2022. In Miami-Dade, 497 new apartment units were added. In Palm Beach, 171 units were completed.

All three counties had fewer apartments finished in the first quarter of 2022 than in each of the quarters of the previous year, the report noted.

In spite of rising interest rates, labor shortages, and supply chain issues, construction of new apartment units are still “above historical averages,” the Franklin Street report noted. In the first quarter, development has commenced on 1,402 multifamily units in Broward, 869 in Miami-Dade, and 976 in Palm Beach County.

The confluence of apartment building transactions, low vacancies, and migration of well-paid remote workers propelled rents in South Florida during the pandemic. Multifamily investors were quick to seize the opportunity and bought up properties at a record pace.

“Most of the owners we were talking to were surprised that they got into a situation where tenants are creating a bidding war for the unit,” Dratch said.

Often, when longtime local renters were given rent increases, they would renew, unable to find cheaper options.

“They are finding it might be worse elsewhere,” Dratch.

While rents are going up everywhere in the United States, the average rents in South Florida are higher than the national average.

According to the National Association of Realtors, the average effective rent — meaning the average rent a landlord receives after deducting expenses such as leasing commissions and tenant improvements — throughout the U.S. was $1,578 a month in the first quarter of 2022, a 12.2% increase over the year before.

 

Source:  SFBJ

/by

Expanding Your Real Estate Portfolio: Types Of Real Estate To Consider

businessman sitting in a desk writing the word investment in the foreground_canstockphoto18030876

For those investors searching for assets that can withstand the test of time, I believe real estate prevails. Whether through a market crash, health crisis (like a pandemic) or even an increase in interest rates, real estate can still work for you. While I admit it can be challenging to find new deals right now, if the price is right, who can stop you from investing?

Overall, downturns are inevitable, and as investors, we need to prepare for them. If you’re investing in equities, for example, you shouldn’t focus on one category alone. The same thing goes with real estate; you need to expand and diversify your real estate portfolio to lessen the impact of any downturn. It has been shown time and time again that being prepared helps beat future recessions.

Real Estate Portfolios

A real estate portfolio is simply a collection of investment properties that are cash flowing and appreciating. As income-producing properties, they are assets. They include short-term rentals, rent-to-own properties, commercial properties and home leases.

As investors, when we start accumulating properties and get into the process of building our portfolios, we want to expand those portfolios as much as we can. Therefore, a few properties will generally not be enough. It is essential for you to always be prepared whenever you enter a deal. To do this, you need to diversify your property portfolio as much as you can to mitigate the risk that comes with it. Once an investor, always an investor.

What To Consider In a Property Portfolio

Investing in properties is broad, and you can be as creative as you want to be. For example, who would have thought that Airbnb would cause a decline in hotel check-in rates? Innovation can rock any industry. You need to bulletproof what you have and adapt to changing times. On that note, the following are some options you may want to consider adding to your portfolio in 2022.

Single-Family Rental

Investors never veered their eye from single-family rentals (SFR) as these captivate renters who seek a spacious area—especially since working from home is the new normal. Millennials are eyeing these types of properties to have more breathing spaces, and more retirees are starting to prefer to settle in a single-family setup than in retirement facilities. The single-family rental has always been an investment, but it gained more attention over the years after the global financial crisis.

Moreover, regional migration plays a role in this booming single-family rental (SFR) scenario, and metros in the south like Miami and Phoenix exceed other regions in terms of rent growth. As shifting demographics and generational needs intensify single-family rental (SFR) demands, it’s only rational to add this to your portfolio.

Hotel To Apartment Conversions

Many hotels have become less lucrative with fewer check-ins, yet they still have to maintain high operational costs. Unfortunately, continuously cutting down hotel prices will not necessarily increase patrons.

It should be noted that the conversion of a hotel to an apartment comes with costly renovations. But even if investors have to shell out costs for renovations and hotel conversions may seem to be the lower-end option for the real estate market, investors/developers can still expect a higher return. The reason? Generally, renovation costs are lower than building new developments from the ground up. Plus, it’s easier to market units from hotel conversions.

Industrial Projects

Industrial projects, such as warehouses and logistics, are often not as popular when compared to multifamily rentals. Most investors like multifamily rentals since people will always need somewhere to live. Still, with the booming e-commerce industry and the recent disruption in office space, these types of properties can be a relevant addition to your portfolio.

Conclusion

In conclusion, innovation is not confined to the tech industry. Even real estate, an industry traditionally adverse to major changes, needs to adapt and develop.

There are great opportunities in the market today for you to expand your portfolio. A winning combination of a secure environment for investments and a robust and diversified economy can help tremendously but also prepare for downturns. Be sure to monitor your investments and portfolio closely (or hire someone you can trust to manage them for you) and take advantage of the tax benefits.

 

Source:  Forbes

/by