office and industrial_canstockphoto5780696 800x315

Troubled loans tied to office buildings across the U.S. are on the rise, with commercial borrowers in Chicago, Denver, Philadelphia and San Francisco among the hardest hit.

The rate of delinquent or specially serviced commercial mortgage-backed securities 2.0 loans rose to 6.8 percent in August, up from 4.5 percent in June last year, the Silicon Valley Business Journal reported, citing figures from Kroll Bond Rating Agency.

More properties face foreclosure as landlords struggle to fill vacant offices, while refinancing office towers becomes a tougher challenge.

CMBS 2.0 conduit loans made after the Great Recession make up $600 billion in commercial real estate debt, or 13 percent of the $4.5 trillion commercial real estate debt market. The national office distress rate was 8 percent.

Of the nation’s top 20 markets, the distress rate of commercial mortgage-backed security loans last month was 7.2 percent, according to KBRA, after rising in 15 cities.

Chicago tops the list for troubled loans at 22.7 percent, followed by Denver at 19.1 percent, Philadelphia at 14.2 percent and San Francisco, where a third of its offices are empty, at 13.9 percent.

The rate of distressed commercial debt was nearly 14 percent in Houston, more than 7 percent in New York, and approaching 6 percent in Los Angeles and nearby Riverside, according to a KBRA chart.

A smaller number of loans backing large office properties has generally driven distress rates higher in major markets, Roy Chun, senior managing director and head of CMBS surveillance at KBRA, told the Business Journal.

But he said some markets show an increase in distressed loans because of other properties. In Houston, for instance, the hotel delinquency rate hit 56.1 percent.

The overall delinquency rate peaked at 10.2 in 2012 after the Great Recession, with office properties peaking at 10.5 percent during that period. Delinquent apartment or condominiums peaked at 15.4 percent, according to KBRA data.

During the peak of the 9 pandemic, the overall delinquency rate was 9.8 percent, with lodging reaching 23 percent. The distress rate among hotel properties has since fallen to 7.2 percent.


Source: The Real Deal


champion porsche_photo credit champion porsche 800x315

A local automotive dealership is proposing a new Porsche complex in Pompano Beach.

Copans Motors, Inc. wants to build a two-story Champion Porsche dealership with a four-story parking garage at 300 N.W. 24th St., about 300 feet south of Copans Road.

If approved, it will be built on the same 11-acre property where Copans Motors, doing business as Champion Porsche, operates a converted 116,733-square-foot retail building as a maintenance and parts facility.

The new complex will also be next door to Champion Porsche’s current dealership complex at 300 W. Copans Road.


Source:  SFBJ

forecast_man looking through binoculars_canstockphoto12539853-2 800x315

Forecasts are helpful, but how accurate they are is what ultimately counts.

CBRE undertook a review of the forecasts it made at the beginning of the year and updated its outlook through year-end and into 2024.  For the most part, the company has nailed the trends that have been occurring in the CRE capital markets, with a few exceptions.

Namely, it has altered its prediction about the timing of a recession due to the resilient economy and persistent inflation. It now predicts if one happens it will occur in late 2023 or in the first quarter of 2024, one quarter later than it originally thought. A recession may bring a mild increase in unemployment to about 5%. Other headwinds of higher interest rates may affect growth negatively in this year’s second half and the restart of student loan payments may pare consumer spending. CBRE has adjusted its 2023 GDP growth forecast upward to 0.6% and 2024 growth forecast downward to 1.3%.

Investors have been cautious so far this year in their transactions, with volume down by 60% year-over-year in the second quarter. Uncertainty about interest rates and the outlook and tighter credit conditions are expected to continue to be hurdles to deal flow, but more stable conditions are coming, it predicts, before year-end. That should bring pick-up in investment activity, CBRE says.

Cap rates have increased by about 125 basis points for most property types but variations occur by market and are closer to 200 bps for office assets. By early 2024 there should be cap rate stabilization for all property types, except offices, which won’t stabilize until next mid-year.

Investment volume is forecast to decline by 37% year-over-year this year and increase by 15% next year due to greater certainty about interest rates and as the economic outlook supports stronger purchasing activity.

Finally, an interest rate cut is not expected until early 2024 and the 10-year Treasury rate will end this year at 3.8% before falling closer to 3% late next year.


Source:  GlobeSt.

off lease only_photo credit wptv 800x315

Florida used car dealership chain Off Lease Only filed for Chapter 11 bankruptcy reorganization on Sept. 7, and announced plans to “orderly wind down” its business.

The Palm Springs-based company, along with affiliates Off Lease Only Parent and Colo Real Estate Holdings, filed Chapter 11 petitions signed by CEO Leland Wilson in U.S. Bankruptcy Court in Delaware.

The companies listed between $100 million and $500 million in both assets and debts.

The company — which has five Florida dealerships, one near Orlando International Airport and the others in West Palm Beach, North Lauderdale, Opa-locka and Bradenton— is closed to the public, according to its website. All of its locations are leased; the Orlando property’s landlord is Dallas-based Spirit Realty LP.

Off Lease Only made this decision because of “significant challenges and competitive pressures resulting from unprecedented changes to the automotive retail landscape,” it said in a news release. “The industry has been impacted by inventory scarcity, and vehicle price inflation stemming from supply chain disruptions and multiyear declines in new vehicle production. Elevated pricing and rising interest rates have further deteriorated conditions in the automotive retail market, weakening consumer demand and affordability.”


business handshake_canstockphoto598958

Dollar volume of sale leaseback deals rose 8.3% to $5.1 billion in the second quarter over the first, while the transaction count remained in line with 165 versus 173 in comparing the same two quarters, according to SLB Capital Advisors.

Two significant transactions helped spur the dollar volume in the second quarter: Realty Income’s acquisition of EG America’s convenience store portfolio for $1.5 billion and Benderson Development Company’s acquisition of Kiewit’s corporate offices for $500 million. But most deals continue at lower numbers or in the $2.5 million to $25 million range.

Specific sectors fared differently and are worth noting. Industrial property transactions decreased from historical levels and represented only 39% of all transactions for the quarter. In contrast, retail, which many observers have worried about, represented an uptick and increased to its highest contribution level since the pandemic. 

Pricing trends. Sale leaseback cap rates have moved up 100 to 200 basis points from two years ago in 2021. The cap rate increase has been more pronounced in non-core markets for smaller credits with lower quality facilities. The impact has been less pronounced in core markets for higher quality facilities with stronger credits. Financing headwinds and inflation have been the two primary drivers, which have resulted in a risk-off environment for most buyers. Because the cost of capital has increased in the last 18 to 24 months, sale leaseback cap rates remain well inside company weighted average cost of capital or WACCs.

M&A arbitrage opportunity. In the second quarter, average purchase price multiples dropped across all deal sizes. While the M&A valuations have declined, this provides increasingly attractive sale leaseback value arbitrage across various industry sectors driven by the delta between business and real estate multiples. Attractive arbitrage opportunities are prevalent for the most part across many middle-market sub-sectors.

North American M&A activity. Deal value fell in the second quarter for a total of those closed or announced at a combined value of $467 billion. But the report said it should not be viewed as a dead market, just below the average pre-pandemic first half levels. The key reasons for less M&A activity are a risk-off financing environment and a mismatch between seller and buyer valuation expectations. Yet, corporate buyers who have strong balance sheets and sizable platforms are likely to benefit in this climate.

Net lease REIT snapshot. Net lease REITs reported $5.4 billion in acquisitions for the second quarter, a rebound from the first when they were $3.1 billion. The reason is attributed to REITs taking a good share of acquisition volume. The net lease REITs reported $2.8 billion of equity offerings in the second quarter, up from $1.6 billion in the first quarter.

By region. The South led in sale-leaseback activity by deal count, comprising 40% of all transactions. The Northeast led in dollar volume with $1.6 billion. In comparing dollar volume, the West closely followed the Northeast with $1.4 billion, then the South came in with $1.3 billion. Last place went to the Midwest with $0.8 billion. When looking at last year’s results, the West experienced the biggest decline in activity, dropping from $7.4 billion to $1.4 billion. The markets that face the most challenges are tertiary rather than core markets. But the good news is that sale leaseback pricing continues to be attractive across all geographic areas for those with strong credit and who are experienced operators, the report said


Source:  GlobeSt.

muv_medical cannabis dispensary rendering_26655 s dixie highway naranja_Image Courtesy of RJ Realty 800x315

Ronald Osborne_blue shirt 480x480Ron Osborne, Managing Director/Broker of SperryCGA | RJ Realty, represented the Buyer, GCDC LLC, a foreign investor, in the purchase of a 1,730-square-foot retail property located at 26655 S. Dixie Highway in Naranja.

The deal closed August 30.

GCDC, LLC purchased the property from POR Naranja, LLC for $2,769,230.

The seller was represented by Barry Wolfe and Alan Lipsky of Marcus & Millichap.

This is the sixth transaction Ron Osborne has completed with this buyer and his second purchase of a property with a cannabis tenant.  The investor likes the higher returns with annual rent increases as well as the true NNN leases that all tenant improvements are handled by the tenant.

Osborne believes the upside in these transactions is the future full legalization for statewide recreational use and decriminalization. At that time, the cap rates will decrease dramatically, and the valuation will increase.  While this may take several years, the investor is receiving a better than average return.

Osborne has represented GCDC, LLC for the last year and they are looking to acquire additional properties this coming year. Due to the higher cost of capital and the cost of windstorm insurance, they will be seeking higher returns.


word legal on colored cubes_canstockphoto24518740 800x315

The second quarter of this year brought good news for property managers who lease to legal tenants.

In an analysis of law firm transactions of more than 20,000 square feet across the country, leasing activity for the first half of this year represented the strongest on record since the start of the pandemic, according to Savills.

Activity increased 22.3% in the first six months, compared to the same period a year ago. The 1.6 million square feet leased in the second quarter is above the 1.4 million square feet quarterly average since the start of the pandemic.

More key may be that law firm leasing volume is normalizing as firms commit themselves to long-term needs for office space unlike some other industry sectors that prefer to lease short-term.


Source:  GlobeSt.

yellow default button on keyboard_canstockphoto110189794 800x315

Concerns that banks could be overwhelmed by CRE loan defaults could be largely unnecessary, according to what S&P Global Market Intelligence is hearing from banks.

“Concerns about future defaults center on office buildings, which have been affected by home working trends. Some banks moved their loss coverage ratios for office loans into the high-single-digit percentages. PNC Financial Services Group Inc., for example, said its 7.4% allowance means it is ‘reserved for whatever happens,’” the firm wrote.

Between 2017 and 2019, the average portion of total CRE loans that were delinquent was 0.57%, according to S&P Global. At the peak of the pandemic, in the fourth quarter of 2020, it was 1.02%.

The rate has risen from 0.77% in the first quarter of 2023 to 0.82% in the second quarter. In the July 2023 Senior Loan Officer Opinion Survey conducted by the Federal Reserve, “87.9% said standards are tighter than long-term averages and 51.7% said they expect to tighten further over the second half of 2023,” the firm quoted.

“The good news is we’re working with our sponsors,” Clark Starnes, vice chair and chief risk officer of Truist Financial Corporation, said in a July 2023 earnings call, according to an Insider Monkey transcript. “We don’t see our clients in any way just walking away from the loans. We have long-term relationships there. And so, we’re looking at things like asking them to refit, bring in more equity, give us an LC, bring us some interest reserves. We may do some AB note splits while as they attempt to sell the property. So, we’ve got a lot of tools in the tool chest and we’re working all of those. Our goal is to be early on this and work with as many borrowers as we can. And hopefully, the market will improve and will have good success.”


CFO Mike McGuire said, “While problem loans have increased in recent months, we believe overall issues will be manageable in light of our laddered maturity profile, conservative LTVs, and reserves which for office totaled 6.2% of loans held for investment.”

Another example that S&P Global mentioned was PNC Financial Services Group, which has a 7.4% allowance “reserved for whatever happens.”

“Banks including Capital One Financial Corp. and Synovus Financial Corp. moved to cut exposure through portfolio sales, though such transactions are being held up over uncertainty about pricing,” the firm wrote.

PacWest, whose stability had been of concern, sold off its loans portfolios and was acquired by Banc of California in July.

There have also been reduced CRE transaction volumes, as has reported, and that by its nature lowers the number of additional loans that would otherwise have come about.

Not all banks may be safe, but it does seem that many have taken precautions in advance.


Source:  GlobeSt.

times square billboards for brevard and palm beach counties 800x315

A little chest thumping never hurt anybody — especially when business is sizzling during inflationary times.

In a case of “strike while the iron is hot,” or perhaps before it turns cold, the Business Development Board of Palm Beach County just took its decade-old “Wall Street South” campaign to midtown Manhattan with the purchase of one-day ads on giant electronic billboards in Times Square and nearby neighborhoods.

“Wall Street South. Head for Palm Beach, Florida,” said one. “Wall Street South. Your Future Is Bright in Palm Beach, FL.” said another.

Fort Lauderdale’s Downtown Development Authority, meanwhile, is circulating a report declaring that its central business district and Flagler Village are generating as much economic activity as Port Everglades and Fort Lauderdale-Hollywood International Airport. For this, think about amounts for each entity that are north of $30 billion a year.

The heads of both agencies are advocates of maintaining hard-earned momentum in a highly competitive economic development game made more difficult by stubborn rising costs for businesses and households.

Kelly Smallridge, president and CEO of the development board, said in an interview that her nonprofit agency caught a deal that was hard to resist: Color ads in three locations for $20,000 — not only for this past Wednesday, but for the forthcoming New Year’s Eve celebration as well.

“This is probably the boldest strategy from an advertising perspective  we’ve engaged in anywhere in Manhattan,” Smallridge said. “I can’t image the hype that’s going to take place when it airs on New Year’s Eve.”

Development board representatives have been visiting New York for years touting the county’s “Wall Street South” campaign, which is designed to persuade executives from financial firms to locate or relocate offices, including headquarters, in Palm Beach County.

Smallridge said her agency was approached by a billboard ad firm and offered a discount rate designed for nonprofit agencies.

“We got very lucky and took advantage of it,” Smallridge said. “We could no way afford the real cost. They approached us to see if we wanted to buy it. They never would have had us on their radar had not been such a big story already. Every time you go to Manhattan, people say, ‘it’s not if we will move, but when.’”

She said the ads appeared at the Times Square Tower, the 43rd Rotunda, and on the “I Love NY” Board at 1530 Broadway,

In a statement, the Business Development Board says that since 2019, it has helped 100 firms open offices in Palm Beach County, which is home to 57 billionaires and 70,000 millionaires. Over the years, the board has even connected headmasters of local schools with company executives to assure them that their children will receive top-notch educations in the county’s schools.

“The 10-year campaign has yielded great results and has certainly boosted our economy in Palm Beach County from Boca Raton to Jupiter,” Smallridge said. “Among those gains: higher salaried jobs, more philanthropic donations to local nonprofits, and companies “run by very smart people. They want to be ingrained in the community,” she said of the newcomers. “None of them has received any financial incentives to move here. We are definitely becoming a finance hub in the Southeastern United States. It’s going to be a continuous effort and we’re not going away any time soon.”

A Surge In Fort Lauderdale

Jenni Morejon, the DDA president and CEO, said the downtown’s growth has its “building blocks” in the wake of the recession triggered by the housing collapse 15 years ago.

A report commissioned by the DDA and authored by Walter Duke + Partners, a commercial real estate appraisal firm,  concludes that the downtown area, which is defined as a 2.2-square-mile area that runs north of 17th Street to the central business district, Flagler Village and Sunrise Boulevard, “has an annual economic impact of $35.7 billion, a $6 billion increase from 2019.”

The impact figure rivals Port Everglades and Fort Lauderdale-Hollywood International Airport, the authority says. They combine for more than $105 billion in economic activity such as jobs, generation of tax revenue and business transactions.

“There are 40 new developments “somewhere in the review pipeline, with some approved by a city review committee,” said Morejon. “I think the sustainable growth in downtown Fort Lauderdale is certainly something unique. Not a lot of cities get that. We’ve grown in population about 35% since 2020, a little over 60% since 2018 and almost a complete doubling of population since 2010.”

The downtown area is now roughly 26,000, according to the report.

The DDA, though, has no plans to broadcast highlights of its uplifting report on Times Square billboards. In the past, Visit Lauderdale, the tourism promotion agency for Broward County, has advertised its latest campaigns there.


Source: SunSentinel

debt_underwater_canstockphoto15437094 800x315

A somber portrait of the state of U.S. capital markets and their impact on CRE has emerged from Newmark’s second quarter Capital Report.

It depicts a landscape of low loan originations, fewer lenders, underwater loans, troubled debt about to mature, and rising cap rates across a wide swath of the CRE spectrum.

Loans are hard to get in this new world. CRE debt origination is down 52% in 1H 2023 compared to the prior year and 31% compared to before the pandemic. Equally concerning, there are 32% fewer active lenders in the market today compared to a year ago.

“The small and regional bank lending engine that has driven the CRE market is rapidly slowing with no clear replacement,” the report noted. 

And this is affecting the entire banking industry, not just regional banks. All property types and lending sectors are affected, “though office, debt funds and CMBS/CRE CLOs (commercial real estate collateralized loan obligations) are negative outliers.” Loan originations are down most dramatically for multifamily.

Furthermore, banks are being more restrictive about whom they lend to and the assets they are willing to consider.

And if loans are hard to get, some of those that were made in the good times and are coming due will create new headaches. Newmark predicts that $1.4 trillion in debt will mature in 2023-2025 — but with significantly higher debt costs than when the loans were originated. On top of that, many loans are actually or nearly underwater, especially recently issued property and office debt.

The report also identified clear increases in transaction cap rates, “which now appear distinctly unattractive relative to the cost of debt capital, possibly excepting office REITs.”


Source:  GlobeSt.