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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 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 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.

Ridge Plaza Tire & Auto Center

Ron Osborne, Managing Director/Broker of SperryCGA | RJ Realty, represented the Buyer, GCDC LLC, a foreign Investor, in the purchase of a 5,300-square-foot retail automotive repair facility located at 9190 W. State Road 84 in Davie Florida.

The deal closed October 28.

GCDC, LLC purchased the property from CR Ridge Plaza LLC for $2,967,9335, representing a 6.2% cap rate.

The property is currently occupied by Ridge Plaza Auto & Tire Center. The operator has occupied the property for 38 years and has 8+ years remaining on the lease with an annual 2% rent increase.

This is the fourth transaction in which Mr. Osborne has represented this investor in the last 12 months and the first transaction in which the buyer secured financing. Osborne has a fifth purchase under contract and is scheduled to close before the end of the year on an all cash abasis with a cap rat of 6.2%.

Ronald Osborne“As a foreign investor without a US residence, it was extremely difficult to find a lender willing to make the loan even with 50% down,” explained Osborne. “Ultimately, we were able to obtain a first mortgage with the assistance of Manuel Huerta of Interamerican Bank.”

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.

“With the current cap rates lower than in other parts of the country, we believe market will see higher cap rates in the near future, especially here in South Florida, as interest rates increase and the additional cost of Windstorm Insurance,” Osborne added. “Buyers that can pay all cash or have a good relationship with the lender that will waive the windstorm insurance will be critical in the sale of property within the coming year. We looked at several STNL properties over the last 4 months and could not find one in the South Florida market that would offer a reasonable return and future upside. This property offers both and we hope to purchase another property from the same group shortly.”

The property was listed by Stan Johnson Company.

 

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The current economic headwinds have been a cause for alarm in certain sectors. Not so for industrial and multifamily, however. With US industrial vacancy at 4% and multifamily’s pipeline tightening, the data from Lee & Associates’ Q3 2022 Market Report shows both sectors have room for rent growth.

It’s a story about fundamentals that point to continued strength, according to Jeff Rinkov, CEO of the broker-owned real estate services firm.

Industrial Strength Continues Beyond Amazon

“The industrial leasing story continues to be the strongest theme maybe in all of commercial real estate with demand remaining robust,” Rinkov said. “We see pre-leasing of Class-A buildings and a rising tide of rental rate growth for B and C buildings that are well-located. Historic rate increases and rental growth are supporting the development and have been supportive of higher land prices for the last several years.”

Industrial vacancy at end of the third quarter settled at that 4% number, up 10 basis points from Q2, according to the market report. Approximately 850 million square feet of industrial space are under development in the US with about 38% pre-leased.

“How the other 62% of that product gets leased and how quickly I think will tell the story for the next 18 months,” said Rinkov, adding that there is space coming back to the market, led by Amazon shedding millions of square feet of warehouse capacity, but it is getting absorbed very quickly and at “higher and higher rates.”

Stout industrial rent growth has been quite evident in US port-adjacent markets, but Rinkov highlighted a 1.194 million-square-foot industrial leasing assignment by Lee & Associates in Columbus, OH, as a strong testament to sector strength. The fact that a distribution center in a secondary market was quickly absorbed by a large logistics use shows the depth of demand, both for developers searching for land and tenants looking for logistics space.

Multifamily Moves

Although apartment rent growth of 5.7% through Q3 was down considerably year over year, it’s still more than twice the annual average rate of 2.5% over the past decade, Lee & Associates reported.

“The multifamily sector has seen a very compelling story for rental increases and rent growth,” Rinkov said. “As a general economy, we’re underhoused so housing development that is happening is being well received. We do see an interest in people returning to CBD and metropolitan submarkets.”

Lee & Associates reported a 29% year-over-year increase in the average per-unit sale price to $233,974 at the end of the third quarter.

“Multifamily seems to be the asset class where there’s historically been the greatest amount of liquidity, cap rate compression, and the most voluminous trading because of the differentiation in the types of ownership, from the institutional to regional and all the way down to mom & pop owners,” Rinkov said. “Well-located product is going to continue to be developed and absorbed at very significant rental rates.”

Economic Uncertainty Still Lurks

Much economically is yet to be determined as we approach 2023. Risk is always present, with the cost of development capital being a real concern, Rinkov asserted, but industrial and multifamily asset classes have proven to be resilient.

“Monetary policy and the increased cost of funds along with the inflationary environment obviously present risks, but I believe the strengths of these two asset classes will win the day,” he said.

 

Source:  GlobeSt.

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The office building, once the pinnacle of commercial real estate, now feels more like a liability.

Inflation, rising interest rates and remote work have left the asset class uniquely exposed to declines in valuation. Vultures are starting to circle for distress.

But Michael Shvo still sees opportunities. The developer bought the Transamerica Pyramid in San Francisco and, according to sources, has emerged as a potential suitor for the Solow Building on 57th Street in Manhattan, which could command a record sum for a New York City office.

Shvo, who is backed by the German pension fund BVK, said Thursday at The Real Deal’s South Florida Showcase + Forum that he is only buying the top-of-the-line product, where demand remains strong, he said, and there is no slowdown.

“There is an enormous flight to quality,” Shvo told the audience. “Covid did something great for the office world. It made people care where they worked.”

In South Florida, Shvo is solely focused on Miami Beach, a city with few Class A office buildings and where historic preservation limits new development.

“You go down Brickell there is building after building after building,” he said. “We are developing a small, small island called Miami Beach, everything is regulated and half is historic.”

Jeff Greene, who is developing the two-tower One West Palm project in West Palm Beach, had a less optimistic take. He’s only including offices in the project, he said, because he was required to do so in order to get approvals from the city. Unlike Miami Beach, where development is restricted, West Palm has the opposite problem: near unbridled building, according to Greene.

Stephen Ross’ New York-based Related Companies has a number of new office projects, including a 20-story office one in West Palm’s Rosemary Square and the planned 25-story One Flagler office building, dubbed the “hedge fund tower.” But demand for Class A space in the city remains more uncertain.

“I am not super bullish on office buildings at all,” said Greene. “I think we are going to have a major, major correction happen.”

Greene said he expects more distress to come to the commercial real estate sector “in the next two and five years.”

“Get as liquid as you can,” he added.

Greene said any coming downturn won’t look like the financial crisis of 15 years ago, when he made a fortune shorting subprime mortgages. But there will be challenges in commercial real estate, in part, because of rising interest rates, which make it difficult to refinance. He also noted that higher rates could force buyers to sell at lower prices.

 

Source:  The Real Deal

 

Mark Hinkins

By Mark Hinkins, CCIM, FRICS | President-SperryCGA 

 

Recessions always seem to catch people by surprise — even though lots of supporting evidence indicates they’re forming and proves they’re cyclical. This time around, with the pandemic’s work-from-home routine adopted by many companies, commercial real estate is being deeply tested.

The post-COVID-19 recession may already be here, though it may only become more clearly visible by the middle of next year. Commercial real estate values will start falling as liquidity goes out of the market. In preparation, brokers and agents must adapt their business today, so they can stay profitable during the next 18 to 36 months. Here are seven time-tested approaches for recession-proofing your real estate business and a glimpse into the future of our industry.

Pick a Winning Side

Any real estate market contains these four pillars: sellers, buyers, tenants, and landlords. You’re trained to think how to represent one of these factions as best you can, but during economic downturns, it’s a matter of who you represent, because knowing which side to represent amid changing market conditions is how the agile brokerage adapts, follows the money, survives, and flourishes.

If you represent sellers, show them how commercial real estate values historically dropped following stock market corrections. If it’s buyers, shift their mindset to see a recession as a friend — an opportunity, as growth happens, paradoxically, when buying and not selling. If it’s tenants, assess the impact of the lease based on your clients’ expenses and work policies. Finally, if it’s landlords, take stock of their expenses and exposure to lease defaults.

If you’re a real estate investor, stock up on cash and be prepared to buy. It’s true that prime rates aren’t favorable right now, due to the federal government’s desire to combat a 40-year high in inflation. But remember that you can always renegotiate and refinance down the road. Having something to refinance is better than having nothing — and it’s better to have a tenant to renegotiate with later than having empty space.

Finally, lenders must avoid dealing with empty spaces. Some buyers see this as an opportunity, others as a problem. Look at the reserve budget because the costs of services, construction, and material go down during recessions — and it might just be the best time for the borrower to fix the building. Shifting your perspective on repairs in the dip — when labor and materials are cheap and selling or refinancing at peaks is a game-changer — because you’ll ultimately enjoy better-term refinancing or high-profit sales.

Having something to refinance is better than having nothing — and it’s better to have a tenant to renegotiate with later than having empty space.

Accountability, Ethics, and Community Outreach

We live in a deeply divided nation. During this time, take responsibility for your actions; define your approach to ethics, honesty, and transparency; and seek to foster a culture where it’s safe to share and voice opinions. Providing knowledge or income isn’t enough in today’s market because clients pick those whose values align the most with their own. This also means staying connected and giving back to your community during hardships, not only in monetary ways, but also with empathy and education.

Discipline and Education

Professional agents adapt and lead in times of change, and entrepreneurial agents excel at this, especially those who own and operate their own brokerage firms. Slowing markets require commitment and perseverance, and it’s in times of foggy terrain when people look for seasoned navigators. Helm your vessel by demonstrating that your agents are the most trained, educated, and knowledgeable in the industry. Help them brand themselves, because client relationships endure throughout all market cycles.

Fiscal Accountability

Be nimble and control your operating cost — but never cut your services or marketing spend during recessions. Ensure your company structure leverages the value of investment and technology, while providing your affiliates access to tools, training, education, and technology. A value-based affiliation allows agents to operate with higher profit margins, keep more money in their pocket, and access more capital to invest in their businesses and household.

Collaboration and Affiliations

The 1991 and 2008 recessions proved that agents stranded without affiliations are by themselves as lone rangers with low chances of survival, let alone success. Clients are unlikely to go with generic brokerages when compared to recognized and trusted names. It’s imperative to them, when market conditions are challenging, that they’re following someone who can successfully liquidate their assets at a fair price, if need be. Often, it’s not even a question of dollars and cents — they’re looking for peace of mind and certainty, two priceless commodities in uncertain times.

During recessions, when the buy-side goes away, is when you’ll need to be affiliated to win listings. When choosing a branded name, seek a regional or national platform providing a collaborative environment that fosters goodwill, a cooperative spirit, and strong alliances, yielding more recognition, increased leads, and more income. As the proverb says, “If you want to go fast, go alone; if you want to go far, go together.”

Diversification of Services

Putting all your eggs in one basket is like building your own guillotine with a recession being the executioner. It’s important to expose your client’s portfolio to all asset classes, including to Class A properties in prime areas. Additionally, you can diversify your income by offering specialty products like consulting services on debt restructuring, exit strategies, and acquisition formulas.

Technology

Commercial real estate has gone through a catching-up period after lagging behind other industries more open to tech adoption. But, if a decade ago, you bent your ear to the ground, you might’ve heard the train of digital innovation coming toward CRE. Today, even with earplugs in, you can feel the gravel beneath your feet vibrating and see the smoke coming out of the prop-tech locomotive.

A decade ago, approximately 75 proptech startups raised $220 million in venture capital. Fast forward to 1Q2022, and VC poured $4 billion into the sector. In 1H2022, VC investments in private real estate tech companies topped $13.1 billion, outperforming the global venture capital market, according to GlobeSt.

Putting all your eggs in one basket is like building your own guillotine with a recession being the executioner.

Looking forward, the quality and ease of 3D scanning and augmented reality in the sector will skyrocket, while attaining such services will cost drastically less. These trends will enable medium-sized brokerages to pierce the veil of exclusivity and reach clients from outside their limited ZIP code. Proptech will also greatly enhance an agent’s ability to represent a client’s best interests in marketing the property, while also giving the buyer or the tenant unique insight into the property, allowing them to make an informed decision before ever stepping through the front door.

But proptech will extend beyond photos and aerial videos for marketing and sales teams. It’ll rectify the construction, property management, and insurance sub-sectors, with its advantages mostly felt in the property inspections sector. It’ll allow property managers and owners to seamlessly track, record, and weave the condition of the property into stats readily available and accessible for limited partners, bankers, and insurance agencies.

Recessions aren’t easy. Learning how to leverage such times will be crucial for you and your team. Pick the winning side, be ethical when you do so, give back to your community, and educate your agents. Diversify your services, portfolio, and technology offerings. And remember: While technology changes the world, the commercial real estate market is, and always will be, about developing personal relationships across the board.

Source:  CCIM

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Converting student housing properties to traditional multifamily has become a more noticeable trend as ever-compressing cap rates pressure conventional multifamily investors to seek higher yields. And as many markets seek more affordable and market-rate rental housing, converting non-performing student housing properties to conventional multifamily has become popular among a subset of traditional multifamily owners. 

Berkadia Senior Managing Director of Student Housing Kevin Larimer points to a National Multifamily Housing Council/National Apartment Association study released in July that supports why conversions are on the upswing. The study shows that the United States needs approximately 4.3 million new apartment units by 2035. The study also points to a deficit — underbuilding — of 600,000 units caused by the 2008 financial crisis.

“Additionally, there has been a decline of 4.7 million affordable units between 2015 and 2020,” says Larimer, citing the study. “All of these factors have led conventional multifamily capital to look for creative ways to fill the supply gap. Conversion of student housing properties has been a very effective and efficient way.”

Added Yield

The draw to conversion developed as investors sought more yield in new acquisitions and flips.

“This trend largely started due to the significantly compressed cap rates and yields in the multifamily space that we have seen over the past few years,” says Sean Lyons, partner with Triad Real Estate Partners. “In certain growth markets, multifamily cap rates were trading below 3 percent for a period of time while interest rates remained at historic lows. The market demand was being fueled by this low-cost debt and higher projected long-term rent growth. Student housing has historically been more consistent and has offered a significant yield margin over multifamily in the recent run up.”

Smart investors — often with experience in value-add properties — looked at non-performing student housing assets in growing markets as a strategy to success in the conventional multifamily sector.

“We originally saw a lot of groups looking for yields, and who were looking at alternate strategy to gain those yields,” says Jaclyn Fitts, executive vice president with CBRE Capital Markets. “While cap rates and interest rates have risen, investors are still seeking higher internal rates of return (IRRs). In some instances, with these conversions, investors can still achieve a higher IRR than they can with a standard value-add multifamily property.”

According to Yardi, this trend has been around for some time. The real estate information services firm tracks the number of student housing to traditional multifamily conversions. Over the past seven years, Yardi has counted more than 100 student housing properties that have been converted to traditional multifamily. The trend has been steady since 2019, with about 10 to 12 properties per year being converted nationwide. So far in 2022, however, Yardi has tracked 13 properties that have been converted.

“The best assets that work for this are those that are not operating well as a student housing property,” says Fitts. “It is more difficult to get a conversion to make sense financially if the asset is fully leased and operating well as a student property. We’ve seen more success with conversions when the asset is distressed as a student housing property.” 

 

Sean Baird, managing director of Colliers’ National Student Housing Group, provides the following example: “A student buyer may cap a deal out at $30,000 per bed or $90,000 per unit in value, whereas a multifamily buyer sees the value at $120,000 per unit because the market is 95 percent occupied for multifamily and stabilized assets are selling for $200,000 per unit. That leaves plenty of margin to renovate and sell for a profit.”

When seeking these assets for conversion, conventional buyers also tend to know what they are in for, says Douglas Sitt, co-head of student housing at Philadelphia-based Rittenhouse Realty Advisors. 

“Conventional buyers are getting a little better pricing because they are getting a higher cap rate by acquiring a student property than they would with a traditional multifamily deal,” says Sitt.

 

“There are fewer bidders going after student assets as well,” adds Ken Wellar, managing partner at Rittenhouse. “In student housing, we know the usual suspects to go to; with conventional, there are a lot more players. It’s easier for a conventional player to compete for these properties.”

Market Fit

Conversions tend to do best in major markets or secondary markets where there is a lack of conventional multifamily product. Some markets that saw student housing built for a secondary or tertiary university are now seeing that product converted to traditional multifamily to satisfy housing demand. A number of sources pointed to the markets of Clarksville and Murfreesboro, Tennessee, two markets on opposite sides of the Nashville MSA that have small colleges, but have seen their overall population grow faster than their university enrollment. 

“Both of these markets are 30 minutes from Nashville and both are tertiary student housing markets: Austin Peay State University in Clarksville and Middle Tennessee State University (MTSU) in Murfreesboro,” says Chris Epp, managing director with Walker & Dunlop. “Both of these are sleeper student housing markets with rents that are $500 less per unit than Nashville. We have a winner for conversion.”

Conventional renters are attracted to these exurban markets because of their affordability and proximity to Nashville. Fitts and her team recently sold a property in Bowling Green, Kentucky, that has similar characteristics, one of seven student housing assets the CBRE team has sold in the past 18 months that have been converted to conventional multifamily properties after the transactions closed.

Markets that have a strong need for multifamily inventory are most in demand for investors to convert a student housing asset.

“Especially at Tier 2 universities in markets that are strong for conventional multifamily assets, we are seeing acquisitions for conversions,” says Sitt.

Rittenhouse recently sold a student housing property near MTSU in Murfreesboro that was quickly converted to a conventional multifamily property. 

Sitt has also seen this trend take place in markets where student housing remains strong, including near the University of South Florida (USF) in Tampa.

“While the USF market is one of the strongest for student housing in the country, Tampa is also one of the best markets for conventional multifamily in the country,” he says. “Cap rates are lower for conventional properties, creating an arbitrage.”

Risk is most apparent in college towns, where demand may lag for conventional product.

“Investors need to make sure the demand is there outside the student population when looking at a conversion in a college town,” says Fitts. 

There has been an unexpected benefit in many college markets where off-campus student housing properties have been converted to traditional multifamily assets — higher occupancy in dedicated student housing properties. In more than a few markets this improved the performance of the remaining student housing properties.

“There are many owners in secondary and tertiary markets that were absolutely saved by this conversion trend,” says Epp. “A few markets that come to mind are San Marcos, Texas; Tampa, Florida; Edwardsville, Illinois; Clarksville, Tennessee; San Antonio, Texas; and Murfreesboro, Tennessee.”

 Another notoriously overbuilt student housing market that has benefitted is Tallahassee, Florida.

“You saw older, non-competitive student product being converted and doing very well as multifamily in a market that was starved for conventional assets,” says Baird. “Any time we can remove supply from a market — whether demand is flat or growing — the remaining student housing assets will benefit.”

Physical and Financial Transformation 

But converting a student housing property to conventional is not an easy task. Most student housing properties were designed with a mix of two-, three- and four-bedroom units with bed-bath parity. Most conventional units max out at two or three bedrooms, many without bed-bath parity. 

Investors who convert properties generally have a background with properties that need heavy renovation, such as value-add properties. 

“They have to understand the nuances related to large renovations or construction,” says Fitts.

The majority of properties that are being converted from student to conventional are garden-style because they are the easiest to convert. Student housing units tend to have more bedrooms and less common area space. Conventional units need more common area unit space, like a dining area and larger living rooms. As such, walls are generally removed and relocated, creating more common space. Large student four-bedroom units can even be converted to create a one-bedroom unit and a two-bedroom unit. 

“Properties that offer smaller, more conventional unit mixes are the easiest to convert to conventional housing,” says Lyons. “Heavy four-bedroom floorplan properties can be more challenging, creating two units is possible but often awkward and expensive. Projects that have bed-bath parity are also more challenging to convert as that is not an amenity you typically see in conventional multifamily product.”

Another issue that can come with conversion is parking. With more units, parking requirements can change depending on the municipality. However, garden-style complexes tend to have larger parking lots that can usually accommodate additional requirements. 

Cottage-style student housing properties are also being considered by single family rental (SFR) owners for conversion. CBRE’s student housing team is marketing a cottage-style asset in San Antonio as a student property, while the firm’s multifamily team is marketing the project as an SFR asset.

“We put both scenarios out there,” says Fitts. “Ultimately, what we are seeing is the highest offers are coming from the potential converters to SFR.”

In addition to the physical transformation that usually has to take place in a conversion, there is also a change that takes place in operations. Aside from changing the leasing strategy and pricing model from by the bed to by the unit, there are other potential benefits to an investor who converts. For one, there are savings with fewer amenities. Cable and internet are usually no longer provided, nor is furniture. With SFR properties, all utilities are transferred to the tenant. If a shuttle service to campus is operated, that is generally halted. 

Murky Future

There are a number of investment groups who are actively acquiring student housing properties and converting them to traditional multifamily as a business model. Some sell the assets into the conventional market after conversion, effectively flipping them for a tidy profit.

“Investors have to make sure operationally the net operating income from a conversion makes sense, and also the return on investment on the conversion is worthwhile,” says Baird. “If student rates are $1.50 per square foot and conventional rent is only $1.10 per square foot, there is most likely not an opportunity to convert if heavy renovations are needed, no matter what the occupancy bump will look like. Conversion is a heavy underwriting endeavor that requires a buyer to understand the full cost of conversion before making the jump.”

While conversions have been on the rise, many in the industry expect to see the trend slow down. Rising interest rates are causing many multifamily deals — conventional, student and otherwise — to be re-priced or held from the market. As well, the student housing sector is extremely healthy for the 2022-2023 academic year in most markets.

“The operating fundamentals for the 2022-2023 academic year are historically strong, and the industry has recovered from the impact of the pandemic,” says Larimer. “Pre-leasing velocity is 6.5 percent ahead of the 2019-2020 cycle (the last cycle pre-pandemic) and rents have increased on average 5.7 percent. Colleges have experienced record applications so we expect to see very strong enrollment numbers in fall 2022.”

While the old industry adage used to be that a great exit strategy for student housing assets would be to convert properties to traditional multifamily, investment sales professionals warn against that.

“I would not use conversion as an exit strategy, but more of an emergency parachute,” says Baird. “Not every deal will work for a conversion, nor will it pencil. You have to keep your pulse on the conversion costs and market rates, or you can end up in a bad position with a strategy that won’t pencil.”

Converting student housing properties to traditional multifamily has become a more noticeable trend as ever compressing cap rates pressure conventional multifamily investors to seek higher yields. And as many markets seek more affordable and market rate rental housing, converting non-performing student housing properties to conventional multifamily has become popular among a subset of traditional multifamily owners. 

Berkadia Senior Managing Director of Student Housing Kevin Larimer points to a National Multifamily Housing Council/National Apartment Association study released in July that supports why conversions are on the upswing. The study shows that the United States needs approximately 4.3 million new apartment units by 2035. The study also points to a deficit — underbuilding — of 600,000 units caused by the 2008 financial crisis.

“Additionally, there has been a decline of 4.7 million affordable units between 2015 and 2020,” says Larimer, citing the study. “All of these factors have led conventional multifamily capital to look for creative ways to fill the supply gap. Conversion of student housing properties has been a very effective and efficient way.”

Added Yield

The draw to conversion developed as investors sought more yield in new acquisitions and flips.

“This trend largely started due to the significantly compressed cap rates and yields in the multifamily space that we have seen over the past few years,” says Sean Lyons, partner with Triad Real Estate Partners. “In certain growth markets, multifamily cap rates were trading below 3 percent for a period of time while interest rates remained at historic lows. The market demand was being fueled by this low-cost debt and higher projected long-term rent growth. Student housing has historically been more consistent and has offered a significant yield margin over multifamily in the recent run up.”

Smart investors — often with experience in value-add properties — looked at non-performing student housing assets in growing markets as a strategy to success in the conventional multifamily sector.

“We originally saw a lot of groups looking for yields, and who were looking at alternate strategy to gain those yields,” says Jaclyn Fitts, executive vice president with CBRE Capital Markets. “While cap rates and interest rates have risen, investors are still seeking higher internal rates of return (IRRs). In some instances, with these conversions, investors can still achieve a higher IRR than they can with a standard value-add multifamily property.”

According to Yardi, this trend has been around for some time. The real estate information services firm tracks the number of student housing to traditional multifamily conversions. Over the past seven years, Yardi has counted more than 100 student housing properties that have been converted to traditional multifamily. The trend has been steady since 2019, with about 10 to 12 properties per year being converted nationwide. So far in 2022, however, Yardi has tracked 13 properties that have been converted.

“The best assets that work for this are those that are not operating well as a student housing property,” says Fitts. “It is more difficult to get a conversion to make sense financially if the asset is fully leased and operating well as a student property. We’ve seen more success with conversions when the asset is distressed as a student housing property.” 

Sean Baird, managing director of Colliers’ National Student Housing Group, provides the following example: “A student buyer may cap a deal out at $30,000 per bed or $90,000 per unit in value, whereas a multifamily buyer sees the value at $120,000 per unit because the market is 95 percent occupied for multifamily and stabilized assets are selling for $200,000 per unit. That leaves plenty of margin to renovate and sell for a profit.”

When seeking these assets for conversion, conventional buyers also tend to know what they are in for, says Douglas Sitt, co-head of student housing at Philadelphia-based Rittenhouse Realty Advisors. 

“Conventional buyers are getting a little better pricing because they are getting a higher cap rate by acquiring a student property than they would with a traditional multifamily deal,” says Sitt.

 

“There are fewer bidders going after student assets as well,” adds Ken Wellar, managing partner at Rittenhouse. “In student housing, we know the usual suspects to go to; with conventional, there are a lot more players. It’s easier for a conventional player to compete for these properties.”

Market Fit

Conversions tend to do best in major markets or secondary markets where there is a lack of conventional multifamily product. Some markets that saw student housing built for a secondary or tertiary university are now seeing that product converted to traditional multifamily to satisfy housing demand. A number of sources pointed to the markets of Clarksville and Murfreesboro, Tennessee, two markets on opposite sides of the Nashville MSA that have small colleges, but have seen their overall population grow faster than their university enrollment. 

“Both of these markets are 30 minutes from Nashville and both are tertiary student housing markets: Austin Peay State University in Clarksville and Middle Tennessee State University (MTSU) in Murfreesboro,” says Chris Epp, managing director with Walker & Dunlop. “Both of these are sleeper student housing markets with rents that are $500 less per unit than Nashville. We have a winner for conversion.”

Conventional renters are attracted to these exurban markets because of their affordability and proximity to Nashville. Fitts and her team recently sold a property in Bowling Green, Kentucky, that has similar characteristics, one of seven student housing assets the CBRE team has sold in the past 18 months that have been converted to conventional multifamily properties after the transactions closed.

Markets that have a strong need for multifamily inventory are most in demand for investors to convert a student housing asset.

“Especially at Tier 2 universities in markets that are strong for conventional multifamily assets, we are seeing acquisitions for conversions,” says Sitt.

Rittenhouse recently sold a student housing property near MTSU in Murfreesboro that was quickly converted to a conventional multifamily property. 

Sitt has also seen this trend take place in markets where student housing remains strong, including near the University of South Florida (USF) in Tampa.

“While the USF market is one of the strongest for student housing in the country, Tampa is also one of the best markets for conventional multifamily in the country,” he says. “Cap rates are lower for conventional properties, creating an arbitrage.”

Risk is most apparent in college towns, where demand may lag for conventional product.

“Investors need to make sure the demand is there outside the student population when looking at a conversion in a college town,” says Fitts. 

There has been an unexpected benefit in many college markets where off-campus student housing properties have been converted to traditional multifamily assets — higher occupancy in dedicated student housing properties. In more than a few markets this improved the performance of the remaining student housing properties.

“There are many owners in secondary and tertiary markets that were absolutely saved by this conversion trend,” says Epp. “A few markets that come to mind are San Marcos, Texas; Tampa, Florida; Edwardsville, Illinois; Clarksville, Tennessee; San Antonio, Texas; and Murfreesboro, Tennessee.”

 Another notoriously overbuilt student housing market that has benefitted is Tallahassee, Florida.

“You saw older, non-competitive student product being converted and doing very well as multifamily in a market that was starved for conventional assets,” says Baird. “Any time we can remove supply from a market — whether demand is flat or growing — the remaining student housing assets will benefit.”

Physical and Financial Transformation 

But converting a student housing property to conventional is not an easy task. Most student housing properties were designed with a mix of two-, three- and four-bedroom units with bed-bath parity. Most conventional units max out at two or three bedrooms, many without bed-bath parity. 

Investors who convert properties generally have a background with properties that need heavy renovation, such as value-add properties. 

“They have to understand the nuances related to large renovations or construction,” says Fitts.

The majority of properties that are being converted from student to conventional are garden-style because they are the easiest to convert. Student housing units tend to have more bedrooms and less common area space. Conventional units need more common area unit space, like a dining area and larger living rooms. As such, walls are generally removed and relocated, creating more common space. Large student four-bedroom units can even be converted to create a one-bedroom unit and a two-bedroom unit. 

“Properties that offer smaller, more conventional unit mixes are the easiest to convert to conventional housing,” says Lyons. “Heavy four-bedroom floorplan properties can be more challenging, creating two units is possible but often awkward and expensive. Projects that have bed-bath parity are also more challenging to convert as that is not an amenity you typically see in conventional multifamily product.”

Another issue that can come with conversion is parking. With more units, parking requirements can change depending on the municipality. However, garden-style complexes tend to have larger parking lots that can usually accommodate additional requirements. 

Cottage-style student housing properties are also being considered by single family rental (SFR) owners for conversion. CBRE’s student housing team is marketing a cottage-style asset in San Antonio as a student property, while the firm’s multifamily team is marketing the project as an SFR asset.

“We put both scenarios out there,” says Fitts. “Ultimately, what we are seeing is the highest offers are coming from the potential converters to SFR.”

In addition to the physical transformation that usually has to take place in a conversion, there is also a change that takes place in operations. Aside from changing the leasing strategy and pricing model from by the bed to by the unit, there are other potential benefits to an investor who converts. For one, there are savings with fewer amenities. Cable and internet are usually no longer provided, nor is furniture. With SFR properties, all utilities are transferred to the tenant. If a shuttle service to campus is operated, that is generally halted. 

Murky Future

There are a number of investment groups who are actively acquiring student housing properties and converting them to traditional multifamily as a business model. Some sell the assets into the conventional market after conversion, effectively flipping them for a tidy profit.

“Investors have to make sure operationally the net operating income from a conversion makes sense, and also the return on investment on the conversion is worthwhile,” says Baird. “If student rates are $1.50 per square foot and conventional rent is only $1.10 per square foot, there is most likely not an opportunity to convert if heavy renovations are needed, no matter what the occupancy bump will look like. Conversion is a heavy underwriting endeavor that requires a buyer to understand the full cost of conversion before making the jump.”

While conversions have been on the rise, many in the industry expect to see the trend slow down. Rising interest rates are causing many multifamily deals — conventional, student and otherwise — to be re-priced or held from the market. As well, the student housing sector is extremely healthy for the 2022-2023 academic year in most markets.

“The operating fundamentals for the 2022-2023 academic year are historically strong, and the industry has recovered from the impact of the pandemic,” says Larimer. “Pre-leasing velocity is 6.5 percent ahead of the 2019-2020 cycle (the last cycle pre-pandemic) and rents have increased on average 5.7 percent. Colleges have experienced record applications so we expect to see very strong enrollment numbers in fall 2022.”

While the old industry adage used to be that a great exit strategy for student housing assets would be to convert properties to traditional multifamily, investment sales professionals warn against that.

“I would not use conversion as an exit strategy, but more of an emergency parachute,” says Baird. “Not every deal will work for a conversion, nor will it pencil. You have to keep your pulse on the conversion costs and market rates, or you can end up in a bad position with a strategy that won’t pencil.”

 

Source:  RE Business

increasing graph_canstockphoto56135097

The September CPI Report illustrated a 0.6% monthly increase in core CPI (net of food and gas prices), which came in above expectations. The annual core CPI of 6.6% is the largest jump in 40 years. If you include food and gas, the inflation is over 8.7%!

The Federal Reserve is expected to raise the Fed Funds Rate in the next meeting on November 2nd by another 0.75%. This would set the Prime Rate at 7%.  If your loan is coming due or up for a rate increase, you may have to buy down the rate or add additional equity.

If this is the case, you may want to consider selling your property at this time while the returns that Investors are willing to accept are still at the peak of the market.  We believe that the Capitalization rates will be increasing over the next several months on all property classifications – prices will adjust due to the capital market.

Sperry Commercial Global Affiliates/RJ Realty is equipped with the skills, expertise, and relationships to solve your needs. Please reach out with any inquiries!

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hurricane ian damage

While local housing sales are hitting headwinds, the rental markets in Palm Beach and Broward Counties are expected to surge as Hurricane Ian exiles look for temporary homes while theirs are rebuilt. And in some price points and locations, those seeking new homes may end up relocating completely to South Florida — preventing the housing market from completely crashing.

Zev Freidus, founder of ZFC Real Estate in Boca Raton, told BocaNewsNow.com that Ian’s impact on South Florida real estate will be wide-ranging.

“The impacts that hurricane Ian will have on the real estate market are numerous. For one, the construction industry which was already backlogged, is going to be further impacted by the immediate need to divert those resources to deal with the aftermath of hurricane Ian,” said Freidus. “Then, unfortunately, you now have thousands of residents who have been displaced by hurricane Ian who need a new place to live. Although South Florida was not hit, the areas on the west coast that were are going to take years to rebuild, leading to many residents relocating to the east coast.”

 

Source:  Boca News Now