Which CRE Assets Are The Best Options For 2023?

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Commercial real estate investors in the Americas favour multifamily and industrial as their top investment choices for 2023.

In the evolving market, the recent survey by global real estate firm Colliers reveals that investors are anticipating asset value declines in the coming year, due to the higher cost of capital, construction, and operations, as well as availability of product.

There has already been a rapid pricing reset in the US, UK, and some other countries, but it has not been universal.

Colliers expects stabilization of the global real estate market by mid-2023.

David Amsterdam, president, US Capital Markets & Northeast Region, says that, in the US, investors will find opportunities in the gateway markets as liquidity events force decision making.

“This will allow buyers to reposition assets, through reinvestment or conversion. Alternative asset classes such as life science are viable targets, while residential conversions are also gaining traction,” he said.

The report also shows that investors in the Americas are less concerned that their EMEA and APAC peers about deglobalization, demographic pressure, and currency fluctuation. Inflation remains a key concern for its impact on asset values.

The top investment choice for 2023, as cited by respondents to Collier’s global poll, is multifamily.

The asset class has led US sales volume in recent years and is set to continue.

“The U.S. is vastly under-housed and this won’t be solved in a short amount of time. This is exacerbated in a higher interest rate environment with the cost of building materials rising and labor shortages prevalent,” said Aaron Jodka, Director of Research, US Capital Markets.

Industrial takes second place with last mile distribution properties continuing to try to capture momentum from e-commerce. This is also seen as a defensive strategy due to strong occupancies and rising rental rates in this asset class.

ESG-compliant properties in central business districts are the key focus for office investors: “ESG is beginning to have a meaningful impact on investment decision making,” the report states. However, in secondary markets, value-add is more important than energy efficiency.

For retail, grocery-anchored centres are the top choice while luxury is the key for hotel investments.

Life science, data centres, and student housing are the main focus areas for alternative asset classes. Core investors have the most negative outlook on office, as 55% expect losses for the asset type.

The report highlights that investors have more capital on the sidelines than ever before, ready to jump on opportunities.

“Recapitalization, preferred equity, and mezzanine debt strategies are gaining traction and attention. Liquidity remains widely available, though the sources of capital have changed,” the report states.

 

Source:  Wealth Professional

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CRE Predictions For 2023: Distress, Opportunity And Another ‘Roller Coaster’ Year

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After the last three years, there are few real estate professionals brave enough to make confident predictions about what will happen in 2023 — other than to say once again to expect the unexpected.

“We expect 2023 to herald a whole lot more of the same relative to 2022, and by that, I mean it’s likely to be a similar roller coaster ride,” Moody’s Analytics Head of Commercial Real Estate Economics Victor Calanog said. “It’s not all downs, it’s a lot of ups and downs.”

Commercial real estate enters 2023 pointing in the opposite direction as it did a year ago. The Federal Reserve has pushed its benchmark rate to 4.5% after starting 2022 near zero, a rapid change in the state of affairs that has ground sales volume to a standstill and killed deals around the country.

Rents at multifamily and industrial properties have soared this year, but amid the Fed’s aggressive campaign to rein in inflation, demand for both has started to come down. More significantly, demand for office space has never approached pre-pandemic levels, and office occupancy is still below 50% of what it was in most large markets.

Meanwhile, predictions of a recession next year — and whether the overheated recovery will end with a hard or soft landing — have intensified. Nothing is predictable these days but something of general consensus is taking place on apartment rents, the U.S. economy, return to office and how the Fed may behave in 2023.

It might not turn into a nightmare year along the lines of 2008 — but it certainly “won’t be pleasant,” CBRE predicted — and it will likely be defined by what doesn’t happen more than what actually does.

“I think we’re in for a tough road,” said Andrew Steiker-Epstein, the vice president of sales, leasing and marketing at New York developer Charney Cos. “I think you are going to see just very low transaction volume, and not a lot of things happening.”

Bisnow spoke to nearly a dozen industry leaders to gather predictions for the year ahead in CRE. Here is what stood out:

The Housing Crisis Won’t Abate, Even As Rents Stabilize

Eye-watering rent increases are expected to keep slowing down this year after posting records in 2021 and the beginning of 2022.

“The last of the Covid-era discounts will expire in 2023, bringing even more inventory to market,” said Diane Ramirez, the chief strategy officer of Berkshire Hathaway HomeServices New York Properties. “I think there’s going to be a lot of turnover of apartments. That’s going to help with supply, and with supply, you might get a little bit of an easing with prices, so I think the rental market is going to just become a little more normalized.”

Shimon Shkury, founder of multifamily sales brokerage Ariel Property Advisors, saidrental growth will no longer see a rapid ascent, but he doesn’t expect it to start coming down because “there’s not a tremendous amount of new product that is opening up.”

That spells bad news for the tens of millions of Americans who are paying more than 30% of their income on rent. The housing crisis isn’t going away next year — and it will likely get worse, Nuveen Impact Investing Senior Portfolio Manager Pamela West said.

“I’ve seen a ton of numbers quoted from different sources, but we’re somewhere between 6 and 7 million units in deficit of housing,” West said. “If we were to build 100,000 units per year of affordable housing, it would still take us 20 years to catch up to what we need. It’s just a ridiculous statistic and the needle moves every year, and so in 2023, it’s going to move again, and it’s going to move away from us.”

She said housing is a “purple” political issue and is on governments’ agendas more than in previous years, but the required urgency is not yet there, and it’s unlikely to show up in 2023.

“I don’t think we’ll go backwards on any policies, but my concern is that we’re not really going to move forward either,” West said.

Recession? Maybe. But Distress Is Coming

The predictions on the style of recession vary wildly, from deep to shallow to not coming at all.

“The market really hasn’t given up on the possibility that there will be a soft landing, that we’re going to avoid a recession,” Calanog said. “We think that the probability of a recession in the United States now lies between 55% to 65% over the next 12 months.”

Goldman Sachs, for its part, has put the chances of a recession at 35%. Almost uniformly, real estate players have arrived at the conclusion that some form of correction will come next year, particularly for deals made at the top of the market last year.

“We’re heading to what you refer to as a liquid recession,” said Ran Eliasaf, the founder of real estate private equity firm Northwind Group, which has $3B in assets under management. “It’s hard to say if we’re gonna hit a full-blown recession, or it’s just gonna be a milder one, but there’s definitely a big correction in pricing as well as valuation. That has to happen.”

Marx Realty CEO Craig Deitelzweig is predicting a “shallow” recession, characterized by companies shedding employees following the hiring spree in 2021. His company has been lying in wait for opportunities to pounce on assets whose owners aren’t able to withstand the current market conditions.

“Those opportunities have presented themselves in Washington, D.C., but in New York, the come to Jesus moment hasn’t yet arrived,” Deitelzweig said. “I thought we would see more in New York, but I’m hearing quarter one is when we’ll really start to see more of those opportunities. The firm will continue to look for assets in New York, and in other parts of the country like Atlanta and Austin. A lot of debt comes due in 2023, 2024,” he said. “They have debt coming due, and they either don’t have the capital to improve the buildings or they don’t have the wherewithal to do it.”

 “The bank pullback from CRE lending has already led to some borrowers seeking out debt funds like his for products like condominium inventory loans in New York,” Northwind’s Eliasaf said. “The quality of borrowers that need financing solutions increased, because they would usually get the solution from the bank and that doesn’t exist. I think we’re going to be very busy 2023 as well.”

A sluggish market makes for a tough time for appraisers, said Grant Norling, a co-founder at Valcre, a software company for appraisal firms, but next year is set to bring more activity for the industry as owners, and their lenders, face challenges with their assets.

“There’ll be other aspects of the other sectors of the appraisal industry that start picking up quite a bit,” Norling said. “Any bank that has troubled assets, or they’re looking at pre-foreclosures … they’ll want to be appraising their assets for loan monitoring purposes. So that portion of the industry we anticipate will fire back up.”

Office Usage Will Rise With The Threat Of Layoffs

Office usage is top of mind for 2023 across the board, with some predicting workers will try to ease their fears about the state of the economy by heading into the office more frequently next year.

“I think part of the reason why the sentiment has been weak on office is because a lot of companies have had challenges in fully mobilizing their employees back to the office,” Empire State Realty Trust Chief Operating Officer and Chief Financial Officer Christina Chiu said. “Tech layoffs, maybe some of the financial firms’ layoffs and how that rolls through the system, especially in light of rising interest rates and economic uncertainty … I think some of that will make it easier for companies to bring people back and get people more confident about the use of office.”

Deitelzweig predicted office occupancy will jump by 10%, while Shkury said he thinks usage “absolutely” is going to go higher. Steiker-Epstein of Charney Cos. said 2023 is more likely the year office owners accept the workplace is fundamentally altered.

“I think there’s going to be a slow trend of people coming back,” Deitelzweig said. “It’s never going to be near where it was.”

Calanog took another viewpoint: While employers might demand more workers back at their desks — and some are already doing so — that phenomenon might proved short-lived.

“Would you really feel good about working for an employer that uses the potential threat of layoffs to get you to go back?” Calanog asked. “Yeah, you might comply in the short run, and then guess who’s gonna be stepping up their résumé?”

Interest Rates Could Start Coming Down Before Year-End

Last week, the Federal Reserve hiked the benchmark interest rate half a percentage point, hitting its highest rate in 15 years. The targeted range reached between 4.25% and 4.5% — and Fed officials are now forecasting raises to be around 5.25% by the end of 2023. Real estate has a more optimistic take, however.

“I think that we peaked in terms of interest rate growth — I hope so at least –—and I think that there is some likelihood that we’ll see a lower interest rate environment in a year from now,” said Shkury, though he said he can’t predict that with any certainty.

“I think we’ll see a pause in March and they start dipping in June,” Marx’s Deitelzweig added.

“There are some who are talking about the possibility of rates coming down next year … There’s a number of folks in the last few weeks who are entertaining that possibility, giving a greater probability to that happening than they were weeks before,” Trinity Place Holdings CEO Matt Messinger said. “I am certainly more optimistic about the possibility of potentially opportunistically being able to refinance certain debt obligations at the tail end of ‘23.”

Industrial Down, Retail Up

Industrial real estate, long the darling of the industry, could be facing a challenging 2023.

 “The sector is suffering from lack of available space and limited new construction coming online,” said Turnbridge Equities Managing Principal Ryan Nelson. “This stagnation can be attributed to the current and impending capital market dislocation we are seeing and this will further exacerbate supply chain delays as industry players navigate finding space,” he wrote in an email. “From a developer’s standpoint, higher interest rate and the potential for a recession will threaten prospective industrial developments.”

Speculative construction has been the norm — of the record 700M SF of industrial space under construction in the middle of 2022, just 26% was pre-leased, according to Cushman & Wakefield.

“But while future development is still needed, construction will be limited due to capital market dislocation and distress,” Nelson said.

But in a complete reversal of fortune, there is a growing sense that the worst is over for the embattled retail market.

“The pessimists all said it would take years for the New York retail market to recover from the pandemic, but the numbers don’t lie,” Patrick Smith, who is vice chairman of retail brokerage at JLL in New York, wrote in an email. “By the close of 2022, we expect the number of retail leasing transactions this year to surpass that of 2019 and mark a return to normalcy as we go into the new year.”

Sublease space dropped nearly 11% last quarter and leasing velocity was up 7.4% year-over-year in Manhattan, per the brokerage.

“It seems that lenders have become more positive on retail, along with some buyers, under the notion that they’ve been downside-tested on multiple fronts: Covid-tested, internet-tested, e-commerce tested,” Chiu said.

 

Source: Bisnow

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Florida Investors Remain Confident Despite Financial Knowns And Unknowns

The Chinese proverb—“may you live in interesting times” —seems to ring true in today’s financial market. Just ask real estate investors faced with the uncertainty of future Fed monetary policy, the path of inflation, the tough year for equities, and sagging retirement portfolios. The Business Roundtable just reported CEO sentiment is deteriorating, with falling earnings estimates, a shaky housing market, and remaining supply chain issues.

Meanwhile, consumer spending is up, savings are down, and borrowing is growing—even as interest rates are rising.

In a lunchtime capital markets panel at the 2022 ULI Florida Meeting in Miami, top real estate investment leaders shared insights on investing in today’s uncertain environment and more specifically, in Florida. The prevailing takeaway seemed to boil down to an investor’s risk tolerance in uncertain times.

“There are things that we know we don’t know. We know activity has started to slow. The economy has started to slow. But what we don’t know is exactly how all these dynamics will play out,” said Darin Mellott, director of research & analysis for CBRE. “We know the inflation story is global, it’s persistent, and it’s high. There are some glimmers of hope here. It appears to be peaking. The central bank has been hiking at a record pace, not just here in the U.S., but across the globe, and this presents particular challenges for capital intensive industries such as ours.”

In the face of these unknowns, what are investors expecting? Recession or not, we’re in much choppier economic waters today. Real estate can be complicated but at its core, it’s supply and demand, said Jonathan Pollack, Sr., managing director, Blackstone. Even with a focus on migration, job growth and asset classes, the unpredictability of interest rate cycles adds to market nuance.

“If you ask 20 different experts on Wall Street that are in research roles and you get 20 different answers,” he said. “It’s very hard to predict so that means you stay close to home and do things that seem safer and more obvious in a world that could be headed into a recession or more challenging environment.”

Warren de Haan, managing partner and Co-CEO with ACORE Capital, compared this moment to the opening weeks and months of the pandemic. People thought “return to work” and normalcy was around the corner. “We all need hope,” he said.

“I’m not a rocket scientist, but CEOs are going to reduce their consumption. Put those factors together, along with everything else that’s going on, and that leads me to believe I need to be on defense, not offense right now for my portfolio,” he said. “That will play out for us at Acorn in two ways…. getting ahead of the issues, great communication with our borrowers and investors, and secondly, what will happen from that, the opportunistic stuff, special situations, high-yield lending opportunities.”

This “lag effect” is critical, said Lauren Hochfelder, co-CEO and head of Americas for Morgan Stanley Real Estate Investing. Undue optimism related to high retail spending and consumer optimism leaves us “wanting to believe positive things…and easy to be lulled into this belief that it’s all good. The reality is that the impact on the consumer…will push us into a mild recession. Europe will be even more dramatic.

“Once we have more clarity, the markets will recover reasonably quickly, so we need to stay active during this market environment,” she said. “Once we get to a place where these guys get back to lending at an attractive rate and you can adjust your costs of capital back, it’s less interesting.”

Lack of certainty among the Fed is not unreasonable, given they’re dealing with the continued fallout from “one of the largest financial experiments of all time, which was $10 trillion in cash just being given out to the world,” Pollack said. “That just has to filter through somehow. I don’t think anyone can tell you how this plays out.”

Rate hikes and quantitative tightening, as well as increased regulation are putting pressure on the market. Spread conditions in the real estate market in the coming year are equally uncertain given market conditions. Risk versus capital type, in the absence of liquidity, coupled with rate instability, “the big traditional bond buyers are not as active as we want them to be,” de Haan said. “When they become active again, when we achieve some rate stability, even if that rate range is on the higher end, we should see the bond buyers come back in. They’re an important part of the ecosystem, because that will drive spreads down, and the second thing it will do, it will clear off some of the collateral from the bank’s balance sheets into the securities market.”

What will the future hold, once this settles out remains puzzling? Preferred property types, or those considered “lily pads” for safe investments will continue to be industrial, interim housing, self-storage, and life science in the right markets, Pollack said. Hochfelder believes capital will return to retail, somewhat in response to sales, yield premiums and creative financing, as well as those in preferred places.

Some take the view that “whether we’re right or wrong, we want to be leveraged in more secular tailwinds than cyclical ones. Twenty or 30 years ago, 75 percent of institutional real estate was in office and retail, and today, those are dirty words.”

Mellott wondered where there may be cause for concern. De Haan spoke of downsides affecting multifamily, which could face affordability or construction cost issues.

Statewide, Florida has outperformed other markets, from its influx of population and regulatory drivers, and investors have taken note. Asked whether they appreciate one Florida market over another, or if one outpaces the rest, Hochfelder noted that the entire state is enjoying the “demographic tailwinds,” yet Miami’s arrival as a “gateway market” sets it apart. “Some of the other markets referenced are very, very strong secondary markets.”

What should give investors confidence in Florida, from city hall to Tallahassee, is that “politicians are playing to win,” Pollack said. “If you want to be where there’s growth, there’s going to be growth in Florida because they all want the growth and they’re coming after it aggressively.”

De Haan has been asked whether Miami “will get a black eye” from the FTX debacle and crypto fallout. He believes quite the opposite.

“Miami showed everybody that they’re open and intelligent about attracting talent, they are business friendly, the infrastructure is here, and they’re open for business,” said De Haan.

 

Source:  ULI

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Sale-Leaseback Market Comes In Hot To End 2022

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The sale-leaseback market continued to shatter records in November despite declining M&A activity and rising interest rates, according to new research from SLB Capital Advisors.

There were 237 discrete transactions in the third quarter nationally, pushing the period to the strongest quarterly performance in deal count since Q4 2019. Dollar volume was down, however, over Q2 figures as no large casino transactions closed.

The Northeast led sale-leaseback dollar volume with $1.6 billion in deals, while the South had the most number of transactions at 87, followed by the West region with 72. Industrial was a major driver for sale-leaseback activity and accounted for 58% of all such transactions in the quarter.

The majority of all sale-leaseback deals are in the $5 million to $25 million range. However, marquee deals for Q3 included Boston Properties’ acquisition of Biogen’s HQ for $592 million and Oak Street’s acquisition of a QVC/HSN distribution portfolio for $443 million.

SLB analysts say the fourth quarter of 2021 was the ”best pricing environment to date,” with pricing holding strong throughout most of the first part of the year. Cap rates began to widen in Q3 as buyer caution ramped up, however. But “while pricing has widened, strong credits and robust business models are still driving attractive pricing from investors, even in non-core markets, particularly in the industrial real estate sector,” SLB analysts say.

In addition, net lease REITs had a banner quarter, reporting $4.4 billion in acquisitions for Q3 2022, a figure in line with the previous four quarters. Net lease REITs also continued capital formation in Q3 with $1.9 billion in equity offerings.

“Rising interest rates may lead to less competition as levered buyers sit on the sidelines; some analysts expect the REITs to take share over the near term as many maintain a highly favorable cost of capital,” SLB Capital Advisors analysts say.

M&A activity also declined across the quarter, though SLB says “a massive amount of capital” estimated at $800 billion remains available for attractive acquisitions. M&A deal value for Q3 fell by 50% from the peak set in Q4 2021, and “with future earnings of companies discounted at higher rates, there is a significant impact to valuations across sectors,” SLB analysts say.  All told, 4,457 deals closed for a combined value of $490 billion, declines of 19% and 4%, respectively from Q2 to Q3.

 

Source:  GlobeSt.

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Auto Dealership Breaks Ground In Coconut Creek With $16M Loan

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A Mazda dealership broke ground in Coconut Creek after the dealer secured a $16.14 million construction loan.

Toyota Motor Credit Corp. provided the mortgage to Pompano Autoplex LLC, managed by Don Lia of Huntington, New York-based Lia Motor Group. His company owns 10 dealerships, including Mazda of Palm Beach.

The loan secures the 5-acre site at 3757 Coral Tree Circle. The dealer purchased the property for $5.1 million in 2020 and demolished an office building there. It was previously used by Waste Management.

Coconut Creek Mazda was approved for a two-story building of 16,094 square feet for a showroom, sales center and offices. It would be attached to a three-story building of 90,582 square feet, consisting of 8,898 square feet of auto service with 16 repair bays and a parking garage. There would be 455 parking spaces on the site between the surface parking and the garage, including 318 spaces for dealer inventory.

The dealership was designed by J.A.O. Architects & Planners in Boca Raton.

While it might seem odd for Toyota to finance construction of a Mazda dealership, the two automotive companies have been working closely together since forming an alliance in 2015. Toyota owns a minority stake in Mazda.

 

Source:  SFBJ

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Miami, South Florida Still Great Place To Invest, Financial Experts Say

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In spite of rising interest rates and an uncertain economy, South Florida’s commercial real estate market is still an attractive place to invest in, finance experts say.

That was the general consensus among those who spoke at Tuesday’s Urban Land Institute’s Florida Summit at the JW Marriott Marquis Miami.

During a panel discussion on capital markets, panelists Acore Capital managing partner and co-CEO Warren de Haan; Morgan Stanley Real Estate Investing co-CEO Lauren Hochfelder; and senior managing director Jonathan Pollack said credit markets have tightened significantly as the Federal Reserve raised rates in an effort to control inflation. As a result, investors and lenders have become more particular with where they put their money.

However, South Florida and the rest of the Sunshine State are still appealing places for investors thanks to its rising population and openness toward business.

“Politicians in both the state and local level [in Florida] are playing to win,” Pollack said. “You want to be where there is growth and there is going to be growth in Florida.”

 

Hochfelder said South Florida has “officially arrived as a gateway primary market.” Within the area, there’s investor appetite for all real estate asset classes, including new Class A “trophy offices.”

Due to remote working trends in most of the U.S., office buildings elsewhere are seen as a risky endeavor. But in South Florida, the return-to-work trend is about 86%, compared to New York and San Francisco which is “half of that,” Hochfelder added,

De Haas, who recently moved from Los Angeles to Miami, said he was struck by the positivity of the people living in South Florida who desire to “do good” and “move the economy forward.”

“I think Miami showed everybody that they are … business-friendly, that the infrastructure is here, and they are open for business,” he said.

Since the pandemic, wealthy individuals, well-paid professionals, and businesses have been migrating to South Florida thanks to the lack of a state income tax, decent weather, and a pro-enterprise atmosphere, brokers and developers have told the Business Journal. This has resulted in rising rents for apartments, industrial, retail, and office.

CBRE’s Director of Research and Analysis Darin Mellott, who moderated the panel discussion, said the post-pandemic migration is part of a broader story across the Sun Belt, a region in the southern U.S. where taxes are generally low. However, he added, the growth that took place in South Florida outperformed other Sun Belt metropolitan areas.

“People coming to Florida are here for the long term,” Mellott said.”They are comfortable with this market.”

Yet, rougher times are coming for South Florida. As the years go by, so, too, will the adverse effects of climate change and sea level rise.

“While the issue is intermittent right now, it’s going to become a regular and bigger problem in the future,” he said.

In the more immediate timeframe, Mellott said the nation as a whole will likely face a mild recession next year with unemployment reaching as high as 5%.

“While we do think things will slow the next couple of quarters, we do see recovery at the end of next year,” Mellott said.

 

Source:  SFBJ

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Small Market, Suburban Office Sales Take The Lead

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Small market and suburban office sales lately are holding up better than their urban counterparts for three reasons: they are smaller assets, they are better basis plays, and they are typically occupied by users who are more likely to have returned to work, according to Craig Tomlinson, Senior Vice President of Northmarq.

He tells GlobeSt.com this and that for Q3 22 in the net lease office sector, there were 71 arm’s length sales in small markets and 90 large (primary) markets.

For small markets, the average deal size was 34,000 SF and avg sale price was about $8.5 million and modest $245.00 SF.

In large markets, Tomlinson said the buildings averaged 54,000 square feet, selling for $25.5 million, a “whopping” $480 per square foot,” Tomlinson said.

“Smaller loan amounts and lower basis muted the effects of negative leverage for these buyers,” he said. “Small market office buildings are typically occupied by tenant’s who decision makers are local and more likely to mandate return to work measures.”

Tomlinson said all these factors gave small market office a leg up and he expects the trend to continue.

Flight to Quality ‘Will Drive Tenancy for Foreseeable Future’

The Newmark Office Report finds that “overall transaction cap rates have been stable, but there have been some relatively notable shifts within the office market. The spread between central business district (CBD) and suburban cap rates had closed in 2022.

“Higher-quality, Class A assets in suburban markets have performed better than CBD office markets thus far in 2022,” according to Newmark. “Similarly, secondary office market yields have closed relative to major metros, highlighting the strength of non-gateway markets, including Dallas, Austin, Atlanta, etc.”

Furthermore, Newmark’s report said that flight to quality “will drive tenancy for the foreseeable future, though high-quality assets in dynamic suburban markets may hold an advantage over traditionally stable downtown assets.”

Relatively high availability, downward pressure on rents and greater demand for a vibrant worker experience will benefit the upper tier of the office market.

For those with more risk appetite, capitalizing on low pricing for Class B+/Class A- buildings with plans to modernize “could be attractive, along with build-to-core in markets structurally lacking in top-tier office space.”

 

Source:  GlobeSt.

 

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People Continue To Relocate To Florida In Record Numbers

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Despite any detrimental weather events, a record high number of relocating US homebuyers are figuring, “How can we not afford to move to Florida.”

Their reasoning is for affordability’s sake, as half of the top 10 migration destinations are in Florida (Cape Coral, North Port-Sarasota and Orlando are on the list, along with Miami and Tampa), reported Redfin this week.

This, despite Hurricane Ian, one of the deadliest, most destructive storms in US history, landing in the Sunshine State in September.

In October, with no data yet to show what impact the hurricane will have had, GlobeSt.com reported that migration to Florida could fall in volume, according to John Burns Real Estate Consulting (JBREC).

“Southwest Florida has ranked as one of the top destinations for net migration in the US with over 20,000 residents moving into the region in the last four years,” the firm wrote. “While we expect some slowdown in population growth in the near term, the eastern suburbs could gain market share.”

Anywhere But Here

Overall, 24.1% of U.S. homebuyers looked to move to a different metro area in the three months ending in October, which is on par with the record high of 24.2% set in the third quarter and up from roughly 18% in 2019.

Significantly higher mortgage rates, elevated inflation and a somewhat choking economy has cooled the US housing market over the second half of 2022, leading many to seek relative affordability elsewhere.

Las Vegas and Sacramento are other attractive alternatives among Sunbelt markets. Conversely, homebuyers looked to leave San Francisco, Los Angeles, New York, Boston and Washington, D.C., according to Redfin.

 

Source:  GlobeSt.

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Industrial Cap Rates Expected To Rise But Outlook For Seasoned Investors Remains Strong

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

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Institutional Investors Eye CRE Despite Slump In Confidence

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Institutional investors are continuing to increase target allocations to real estate despite the first decline in confidence among the segment in five years.

The tenth annual Institutional Real Estate Allocations Monitor by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate notes that “decreased conviction coupled with portfolio overallocation has resulted in a slowdown of deployment pacing,” but adds that institutions are expecting to increase allocations to real estate by 30 basis points to 11.1% next year.

The survey’s conviction index, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, declined from a ten-year high of 6.5 in 2021 to 6.0 in 2022, reflecting what analysts are calling a “cautious view” of the market.

Meanwhile, target allocations to real estate ticked up for the ninth straight year to 10.8% in 2022, signaling the potential for an additional $80 to $120 billion of capital allocations to CRE. Institutions are forecasting a further increase of 30 basis points in 2023, which would be the largest year-over-year increase in nearly a decade. Institutions in the Americas are expecting to increase allocations by 40 basis points, while those in the EMEA and APAC regions expect to increase allocations by 30 basis points and 20 basis points, respectively.

The report notes that the asset class’s track record as an outperformer continues to attract capital inflows, as many investors note they are expecting attractive buying opportunities to emerge over the next two years. Specifically, “investment pacing is expected to accelerate over the coming quarters, and investors are positioning themselves to capitalize on potential distress and dislocation resulting from current market volatility,” the report notes.

Public pensions have the highest target allocation to real estate at 12.6%, while insurance companies have the lowest target allocation at 5.9% (but are expected to increase to 6.5% in 2023). And institutions with less than $50 billion in AUM continue to allocate a larger percentage of their portfolios to real estate than those with an AUM of greater than $50 billion.

Twenty-eight percent of institutions report that they expect to increase target allocations over the next year, down from 33% in the prior year.

“While institutions have slowed their pace of deployment in the face of overallocation, it is likely they’ll be highly active in the next two years as compelling investment opportunities emerge following this period of uncertainty,” said Douglas Weill, Managing Partner at Hodes Weill & Associates. “If market volatility leads to distress and dislocation, the next several years may prove to be good vintage years for capital deployment. There are already signs of institutional capital returning to the market to take advantage of distress, with several pensions and sovereign wealth funds actively investing in public REITs and debt securities, and deploying capital into credit strategies.”

 

Source:  GlobeSt.

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