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Ron Osborne, Managing Director/Broker of Sperry – RJ Realty, represented the Seller, Repair Business Holdings LLC, and the  Buyer, 1543 S STATE RD 7 LLC, in the sale and purchase of 1543 S. State Road 7 in Ft. Lauderdale, Florida.

The Seller was looking for a long-term sale-leaseback, however, the ultimate buyer is an end-user. The parties agreed to a one-year lease to allow the seller time to relocate his business.

The property is currently being utilized as a transmission shop.

Sperry – RJ Realty has represented both parties previously in unrelated transactions.

The buyer will ultimately use the property as an automotive repair business that will serve both the public as well as the vehicles from his own independent car dealership located on Oakland Park Blvd.

The property sold for $1,575,000. The buyer obtained a loan of approximately $1,100,000 from American National Bank, which was represented by loan officer Jeffrey Martin.

Osborne has been working the Broward County Market since 1978 and is a top producer in the Sperry Commercial Global Affiliates (SPERRY) network.

 

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Distress hit a new record for the third consecutive month according to a new report from CRED iQ. It was up 14 basis points in May and reached 8.49%.

“The CRED iQ team evaluated payment statuses reported for each loan, along with special servicing status as part of our monthly distress update,” they wrote. “CRED iQ’s special servicing rate now stands at 8.09% and the CRED iQ delinquency rate is at 5.8% for this month.”

The delinquency rating includes “all CMBS properties that are securitized in conduits and single-borrower large loan deal types” but not Freddie Mac, Fannie Mae, Ginnie Mae, and CRE CLO loan metrics, which are treated in separate analyses.

CRED iQ calculates distress levels by looking at both delinquency and specially serviced rates.

“The index includes any loan with a payment status of 30+ days or worse, any loan actively with the special servicer, and includes non-performing and performing loans that have failed to pay off at maturity,” they write.

Most property types are flashing red as distressed rates run from 7.1% in multifamily (improved by 10 basis points month over month), 11.1% in office (better by 60 basis points), 11.3% in retail (better by 60 basis points), and 9.4% in hotel (worse by 70 basis points). Industrial was at 0.5% (10 basis points worse) and self-storage, 0.1% (flat).

This being about CMBS, one single event can have an outsized effect on the whole picture.

“One example of a recent hotel default includes the Grand Wailea hotel, which is backed by a $510.5 million loan with an additional $289.5 million in mezzanine debt,” they wrote. “This was the primary driver of the increased distressed rates in hotels this month. The loan fell delinquent (performing matured) as it failed to pay off at its May 2024 maturity date. Commentary indicates there are five, one-year maturity extension options. The 776-room, oceanfront, luxury resort is located on the south shore of Wailea, Maui. The asset was performing with a below breakeven DSCR of 0.93 and 49.9% occupancy as of year-end 2023.”

Of the loans, 24.4% are currently, 2.0% are late but in the grace period, and 5.5% are late but less than 30 days.

Source:  GlobeSt.

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Ron Osborne, Managing Director/Broker of Sperry – RJ Realty, represented the Buyer, GCDC Orlando LLC, in the purchase of a medical office located at 4980 E Irlo Bronson Memorial Highway in St Cloud.

PD ST. CLOUD LLC sold the medical office building for $5.3 million.

The newly constructed build-to-suit property was built for Sanitas Medical Center, which currently occupies the property. The Tenant signed a 10-year lease with over 9 years remaining with an annual increase at the time of the sale.

Sanitas operates 6 other locations in greater Orlando and has 68 medical facilities throughout Florida, Texas, Tennessee, Connecticut, and New Jersey.

Osborne also arranged for the financing of the acquisition with FirstBank FloridaJeff Goldstein, Vice President, Business Relationship Officer, represented FirstBank Florida in the transaction, with 50% down at an attractive interest rate of about 7%.  Osborne has a long-standing relationship with FirstBank Florida along with other lenders.

Ronald Osborne 500x500“Obtaining financing for a nonresident buyer is extremely difficult without them having a permanent residence in the United States,” stated Osborne. “We have been very successful in helping our client obtain loans from different lenders.”

Osborne stated that the Buyer is still looking for great opportunities to acquire additional assets this year.

“They must be in a major MSA with a cap rate over 7.5%+ or approaching it with annual rent increases,” Osborne explained. “With the more normalized interest rates of 7 to 8%, both developers of STNL properties are adjusting their offerings prices to meet the buyer’s expectations of being able to purchase a property and obtain a reasonable amount of leverage,” he added. “The days of 4 to 5% cap rates are coming to end. Developers need to develop in order to stay in business and recognize that as their construction loans are coming due, they will need to meet the market demands.”

The property was represented by Jeffrey Cicurel with JLL’s Miami office.

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Pressure has been building over inflation expectations. When will the Federal Reserve cut interest rates? How long before CRE could return to, if not to a zero-rate policy, then closer to the pre-pandemic situation?

But another storm is on the horizon, one that some have been warning about although they’ve been largely ignored. The issue is the level of government debt, which is up to almost $34.6 trillion according to the non-partisan nonprofit Peter G. Peterson Foundation. The reason is structural factors, such as a large aging segment of the population, rising healthcare costs, and government spending that doesn’t bring in enough taxes to pay for what Congress authorizes.

Deficit spending requires more borrowing through government debt instruments as Reuters reports.

“Investors are bracing for a flood of U.S. government debt issuance that over time could dwarf an expected rally in bonds, as they see no end in sight for large fiscal deficits ahead of this year’s presidential election,” they wrote.

The mechanism that worries them is straightforward. There are three methods the U.S. government can use to obtain revenue to pay for its obligations. One is through taxes, but the amount brought in isn’t close to what is needed. The second is by printing money, which would eventually generate inflation. Third is borrowing, the approach the U.S. has used for generations.

Borrowing dynamics follow basic economics keeping one dynamic in mind — bond prices and bond yields move inversely. The more demand there is from those who want to lend the U.S. money by buying bonds, the lower the yield the government has to offer. The more debt the government wants to sell — that is, the more supply— the higher yields need to be to attract buyers. Also, the more the U.S. presents as a risky borrower, the greater the yield lenders/buyers will demand, and the more the government has to borrow, the riskier it seems.

Benchmark 10-year Treasury yields, now at around 4.4%, could go up to 8%-10% over the next several years, Ella Hoxha, head of fixed income at Newton Investment Management, who favors short-term maturities in Treasurys, told Reuters. “Longer term, it’s not sustainable.”

Meanwhile in some quarters concerns are reaching nightmare proportions. Jeffrey Gundlach, the CEO of investment management company DoubleLine Capital, is afraid the growing debt burden of the US government could eventually lead to a restructuring of US government debt, which would be unprecedented.

The world would likely see debt restructuring as an admission of problems and greater risk, increasing yields even more.

The bottom line for CRE: higher yields on the 10-year and SOFR — and both are strongly correlated and baselines of loan rates — would force real estate borrowing rates up.

 

Source:  GlobeSt.

 

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The U.S. is reported to lead the world in extreme weather catastrophes, and their damaging impact on commercial property is also clobbering insurance companies, leading to staggering rises in the cost of premiums in vulnerable states.

“For states with the greatest extreme weather risk, current costs of $3,077 could almost double to hit $6,062 per building per month, a 10.2% CAGR [Compound Annual Growth Rate] by 2030,” according to an analysis by the Deloitte Center for Financial Services.

Low-risk states will not be spared. Their premiums could shoot up from $,1,935 per building per month now to $3,299 by 2030 at a 7.9% CAGR. The average premium for commercial buildings outside these states is projected to rise from $2,726 in 2023 to $4,890 in 2030 at a CAGR of 8.7%.

In 2000, the average premium for commercial buildings in a high-risk state was around $1,000. However, exposure to natural hazards in the last five years has pushed premiums on structures in the 10 highest risk states up 108% and 31% year-over-year.

“By 2030, the cost premium of being in a higher-risk, extreme weather state could be 24.0% greater than the national average, compared to a 32.5% discount in lower-risk states,” Deloitte stated.

It’s perhaps not surprising that California emerged as the nation’s state at greatest risk with an annual expected loss score of 100 % thanks to its exposure to drought, earthquake, heat waves, landslides, riverine flooding, and wildfire. Florida came second, scoring 98.21% due to coastal flooding, cold waves, hurricanes, lightning, and tornados. Texas ranked third (96.43%), followed by North Carolina (91.07%), Washington (89.29), South Carolina (87.5), Illinois (85.71), New Jersey (83.93), Georgia (82.14) and Missouri (80.36).

In addition to current costs of natural disasters that insurers are expected to cover, insurers have been playing catch-up from increased losses in recent years, Deloitte noted. From 1Q 2021 through 4Q 2022, the rate of growth of premiums trailed the rate of inflation. But beginning in 2023 the situation reversed, and premium increases outran inflation for three out of four quarters.

“As inflation and rate uncertainty soften slightly, the lasting impacts of extreme weather will likely remain as a driver for continued pricing growth for the near future,” the report predicted.

 

“In 2023, there were 28 separate billion-dollar extreme weather events with estimated recovery costs totaling US$92.9 billion, exceeding the records for both count and cost from 2020.8 These included 19 severe storm events (tornadoes, high winds, and hailstorms), four flood events, two tropical cyclones, one wildfire event, one winter storm and cold wave, and one drought and heat wave. In total, these events accounted for a 56% increase from 2022, and up 180%, or a compound annual growth rate of 10.8% per year, from levels 10 years ago. Assuming a similar annual trajectory, there could be as many as 42 separate billion-dollar extreme weather events annually by 2030.”

 

Source:  GlobeSt.

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Flagstar Bank and Zion Bancorporation are chief among the 67 banks in the US that are at increased risk of failure due to their commercial real estate exposures, according to a data analysis from a finance expert at Florida Atlantic University.

Flagstar Bank reported $113 billion in assets with a total CRE of $51 billion. The bank, however, only had $9.3 billion in total equity, making its total CRE exposure 553% of its total equity.

Similarly, Zion Bancorp had a total CRE of 440% of its total equity; the bank reported $87 billion in assets and total CRE of $26 billion, but only $5.8 billion in total equity.

“These are the two largest banks with excessive exposure to commercial real estate,” said Rebel Cole, professor of Finance in FAU’s College of Business.”Both rely heavily on uninsured deposits, which makes them vulnerable to a bank run similar to what forced regulators to close three large banks during spring 2023. Those bank closures have led to concerns about the stability of the US banking system that persist to today.”

For comparison, the Q1 2024 industry-average benchmark for total CRE exposure was 139% of total equity.

All together there are 67 banks with exposure to commercial real estate greater than 300% of their total equity, as reported in their first quarter 2024 regulatory data.

“This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment,” Cole said. “With commercial properties selling at serious discounts in the current market, banks eventually are going to be forced by regulators to write down those exposures.”

FAU measures the risk to exposure from commercial real estate using publicly available data released quarterly from the Federal Financial Institutions Examination Council Central Data Repository. Bank regulators view any ratio over 300% as excess exposure to CRE, which puts the bank at greater risk of failure.

Banks with less than $10 billion in total assets are facing similar risks due to their commercial real estate exposure. Among banks of any size, 1,871 have total CRE exposures greater than 300%, 1,112 have exposures greater than 400%, 551 have exposures greater than 500% and 243 have exposures greater than 600%.

 

Source:  GlobeSt.

 

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In CRE lending, it has been depository banks mentioned as pulling back, worried about falling value of properties that would affect loan values that could undercut the bank’s assets and create regulatory danger.

According to Trepp, though, this is more than an issue for just banks. The major mortgage REITs saw their collective loan portfolios shrink by nearly 11% over the past year, as most had sharply curtailed lending and turned their sights to their problem loans, it found. The reason is that mortgage REITs typically fund relatively short-term loans with floating coupons that are designed to either improve or stabilize commercial properties, Trepp explained.

“They and, more specifically, their borrowers were walloped as interest rates spiked and commercial property markets turned against them.”

REITs aren’t regulated the way depository institutions are, but there seems to be a market equivalent of regulation. Trepp has tracked 14 different REITs that originate loans. In 2021, that group had made $49.83 billion in loans. By 2022, the total was down to $30.9 billion. The annual total fell to $4.69 billion in 2023.

The biggest seven drops in loan portfolios — that number because it captures all that saw double-digit declines — were TPG Real Estate Finance Trust (-35.83%); Ladder Capital (-18.80%); Blackstone Mortgage Trust (-18.12%); BrightSpire Capital (-16.52%); InPoint Commercial Real Estate Income (-13.30%); Granite Point Mortgage Trust (-12.60%); and ACRES Commercial Realty (-11.57%).

The second tier of cuts comprise CIM Real Estate Finance Trust (-8.38%); Ares Commercial Real Estate (-7.54%); Franklin BSP Realty Trust (-5.66%); Starwood Property Trust (-5.28%); Apollo Commercial Real Estate Finance (-3.71%); and KKR Real Estate Finance Trust (-1.87%).

The only REIT that saw growth from 2022 to 2023 was FS Credit Real Estate Income Trust, with 9.73%.

“That sharp reduction in originations, along with loan repayments, has led to a reduction in the REITs’ portfolios of mortgages, to $87.51 billion at the end of last year from $98.88 billion in 2022,” they wrote.

In terms of scale, the portfolios total at the end of 2023 is virtually unimportant in the entire commercial mortgage landscape of $5.6 trillion. It also isn’t representative. However, it is notable and “a solid indicator of the troubles property owners might have faced when looking for financing” that “helps explain the sharp reduction in property sales activity.” If investors can’t get financing, they’re not going to buy. And with the short end of Treasurys with yields around 5.5%, it’s a safe route to profit.

When conditions change, the companies will reenter the market. But for now, the REITs will concentrate on reducing troublesome loans and keep their cash for opportunistic investment.

 

Source:  GlobeSt.

 

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

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

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

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

 

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

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

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

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

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

 

Source:  GlobeSt.

 

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

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

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

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

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

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

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

The new law goes into effect immediately.

 

Source:  CoStar

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

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

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

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

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

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

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

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

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

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

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

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

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

Ripple effect on leasing decisions

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

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

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

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

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

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

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

Impact on new construction

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

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

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

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

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

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

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

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

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

 

Source:  SFBJ