As the stock market continues to show volatility, many people are looking into other types of investment opportunities.
Compared to stock investing, commercial real estate has the potential to provide tax advantages and serve as a safeguard against inflation and market fluctuations.
Fortunately, there are many ways to invest in commercial real estate, and you can tailor your approach to fit your comfort level, budget and lifestyle—all while creating a dynamic portfolio.
Let’s look at 10 of the most commonly overlooked investment opportunities in commercial real estate.
1. Flex Warehouses
Industrial commercial real estate currently offers some of the best returns on the market. As organizations continue to work out complex supply chain issues, flex warehouses are becoming a crucial tool.
This type of warehousing offers a combination of storage and office space. It’s a way to deliver versatility for companies that need to store inventory and have a customer-facing area.
2. Parking Lots
With more than 282 million cars on U.S. roads, finding a parking spot is often a challenge. Parking lots are a low-maintenance commercial investment, and you can choose to operate the lot or lease it to a third-party operator. Dynamic pricing can capture the ebb and flow of demand to increase the return on investment.
3. Real Estate Investment Trusts
Real estate investment trusts, or REITs, are a great way to start off in commercial real estate investing. They allow you to skip the hands-on approach of dealing with a property.
Investing in a real estate investment trust (REIT) can offer a reliable source of income. Similar to real estate stocks, investors can buy and sell REITs on the market.
4. Self-Storage
Self-storage has outperformed other commercial real estate sectors for many years. Yet I see many people still overlooking self-storage. These properties can offer consistent, good returns even during downturns and recessions.
Remember to think strategically about the location, for this is critical when opting for this type of investment. In some areas, investors have seen some retraction due to oversaturation.
5. Cell Towers
Many people, especially those new to commercial investing, don’t realize that cell towers are a prime opportunity. They can become a source of steady income over time. As cell service expands into rural areas, investors can provide a much-needed service and a long-term return to their portfolios.
6. Senior Living Facilities
Senior living facilities are another commonly overlooked commercial property. As the number of U.S. adults 65 and older increases, more people are looking for long-term living in senior-specific residences. This creates a great investment opportunity for senior living facilities.
7. Mobile Home Parks
A growing number of homeowners are turning to flexible and budget-friendly mobile homes. And mobile homeowners have to park them somewhere. These areas can become a reliable source of passive income for investors. Lot rates have also increased in many markets recently, so now may be the perfect time to invest.
8. Commercial Multifamily Units
While residential multifamily properties only include two to four units, commercial multifamily properties include five or more. The increase in units can provide a larger stream of income, which could make this real estate opportunity a star performer in your portfolio.
Before investing in a commercial multifamily property, remember to do your due diligence. For instance, check the financial audit and property market reports, determine how the property will be managed and review service contracts, such as trash removal and lawn care.
9. Coin-Operated Laundry Shops
Getting into commercial real estate doesn’t always mean financing six-figure properties immediately. I find that coin-operated laundries are a simple way of investing in real estate for beginners.
One option is to convert an unused or overlooked space into an existing property. With this option, you can start small and even finance or lease equipment to avoid high out-of-pocket costs.
10. Undeveloped Land
All commercial real estate properties involve land. But sometimes, the investment opportunity is undeveloped land.
Investing in undeveloped land can be a little daunting if you’re unsure what your next step will be. Many commercial brokerages offer consulting or development partnerships to help you get the most out of your commercial land investment.
Adding Depth To Your Investment Portfolio
Investing in one or more forms of commercial real estate is an excellent way to improve your portfolio, and it can provide you with the versatility to withstand market and economic volatility.
A good tip is to explore commonly overlooked investment prospects, as they can offer entry points and create the right mix for your portfolio. One of the best ways to help you connect with these types of opportunities is by partnering with a brokerage.
Source: Forbes
Ten Commonly Overlooked Investment Opportunities In Commercial Real Estate
As the stock market continues to show volatility, many people are looking into other types of investment opportunities.
Compared to stock investing, commercial real estate has the potential to provide tax advantages and serve as a safeguard against inflation and market fluctuations.
Fortunately, there are many ways to invest in commercial real estate, and you can tailor your approach to fit your comfort level, budget and lifestyle—all while creating a dynamic portfolio.
Let’s look at 10 of the most commonly overlooked investment opportunities in commercial real estate.
1. Flex Warehouses
Industrial commercial real estate currently offers some of the best returns on the market. As organizations continue to work out complex supply chain issues, flex warehouses are becoming a crucial tool.
This type of warehousing offers a combination of storage and office space. It’s a way to deliver versatility for companies that need to store inventory and have a customer-facing area.
2. Parking Lots
With more than 282 million cars on U.S. roads, finding a parking spot is often a challenge. Parking lots are a low-maintenance commercial investment, and you can choose to operate the lot or lease it to a third-party operator. Dynamic pricing can capture the ebb and flow of demand to increase the return on investment.
3. Real Estate Investment Trusts
Real estate investment trusts, or REITs, are a great way to start off in commercial real estate investing. They allow you to skip the hands-on approach of dealing with a property.
Investing in a real estate investment trust (REIT) can offer a reliable source of income. Similar to real estate stocks, investors can buy and sell REITs on the market.
4. Self-Storage
Self-storage has outperformed other commercial real estate sectors for many years. Yet I see many people still overlooking self-storage. These properties can offer consistent, good returns even during downturns and recessions.
Remember to think strategically about the location, for this is critical when opting for this type of investment. In some areas, investors have seen some retraction due to oversaturation.
5. Cell Towers
Many people, especially those new to commercial investing, don’t realize that cell towers are a prime opportunity. They can become a source of steady income over time. As cell service expands into rural areas, investors can provide a much-needed service and a long-term return to their portfolios.
6. Senior Living Facilities
Senior living facilities are another commonly overlooked commercial property. As the number of U.S. adults 65 and older increases, more people are looking for long-term living in senior-specific residences. This creates a great investment opportunity for senior living facilities.
7. Mobile Home Parks
A growing number of homeowners are turning to flexible and budget-friendly mobile homes. And mobile homeowners have to park them somewhere. These areas can become a reliable source of passive income for investors. Lot rates have also increased in many markets recently, so now may be the perfect time to invest.
8. Commercial Multifamily Units
While residential multifamily properties only include two to four units, commercial multifamily properties include five or more. The increase in units can provide a larger stream of income, which could make this real estate opportunity a star performer in your portfolio.
Before investing in a commercial multifamily property, remember to do your due diligence. For instance, check the financial audit and property market reports, determine how the property will be managed and review service contracts, such as trash removal and lawn care.
9. Coin-Operated Laundry Shops
Getting into commercial real estate doesn’t always mean financing six-figure properties immediately. I find that coin-operated laundries are a simple way of investing in real estate for beginners.
One option is to convert an unused or overlooked space into an existing property. With this option, you can start small and even finance or lease equipment to avoid high out-of-pocket costs.
10. Undeveloped Land
All commercial real estate properties involve land. But sometimes, the investment opportunity is undeveloped land.
Investing in undeveloped land can be a little daunting if you’re unsure what your next step will be. Many commercial brokerages offer consulting or development partnerships to help you get the most out of your commercial land investment.
Adding Depth To Your Investment Portfolio
Investing in one or more forms of commercial real estate is an excellent way to improve your portfolio, and it can provide you with the versatility to withstand market and economic volatility.
A good tip is to explore commonly overlooked investment prospects, as they can offer entry points and create the right mix for your portfolio. One of the best ways to help you connect with these types of opportunities is by partnering with a brokerage.
Source: Forbes
Sperry Commercial Global Affiliates | RJ Realty’s Ron Osborne Closes Two Property Sales Totaling $7.55 Million
Ron Osborne, Managing Director/Broker of SperryCGA | RJ Realty, negotiated the sales of two properties – an office property and a boat/auto dealership – totaling $7,550,000
The first transaction included the sale of the 911 Building (pictured above), a 25,000-square-foot office building located at 911 E Atlantic Blvd in Pompano Beach. The property was in contract numerous times with potential owner/users and investors, but the ultimate buyer was JSA 911 POMPANO LLC, a group affiliated with Architect Yuri Gurfel who is well known for his multifamily projects in Pompano Beach. The new owners’ 2–3-year plan is to build approximately 60 multifamily units on the site. JSA 911 POMPANO LLC paid $3.6 million for the property. The seller, 911 Atlantic LLC, or an affiliated company held a short-term 50% mortgage. The transaction closed March 30.
Osborne also commented that properties that have loans coming due in the next 12 to 18 months will have a harder time refinancing as interest rates have increased dramatically since March of 2022 and lenders are being more conservative with higher debt coverage ratios and lower loan-to-value ratios.
Live Local Act: Top 3 Zoning and Land Use Benefits
More Density, More Height and Less Bureaucracy
The Live Local Act (“Live Local” or the “Act”) makes unprecedented changes to zoning law that impact and limit local government power. The Act requires counties and municipalities (“Local Government”) to administratively approve multifamily and mixed-use residential projects as permitted uses in any area zoned commercial, industrial, or mixed-use so long as 40% of the residential units are restricted as “affordable” for at least 30 years (a “Preemption Project”). In mixed-use projects, at least 65% of the total square footage of the project must be used for residential purposes to qualify as a Preemption Project.
Not only does the Act expand the areas where affordable multifamily and mixed use developments are statutorily permitted by right without a public hearing, but it also provides unit density and building height benefits for Preemption Projects as summarized below:
Preemption Project Maximum Unit Density: Preemption Project unit density is permitted to the maximum currently allowed unit density for residential development within the Local Government’s jurisdiction. For example, if the maximum unit density in the applicable jurisdiction is 500 units per acre, then the Preemption Project is allowed that same unit density regardless of the maximum unit density that would otherwise apply to that location.
Preemption Project Maximum Height: Local Government cannot restrict the height of a Preemption Project below the highest currently allowed height for a commercial or residential development located in its jurisdiction and within one mile of the Preemption Project, or three stories, whichever is higher.
Preemption Project Approval Process: Critically important, a Local Government cannot require a proposed Preemption Project to obtain a zoning or land use change, special exception, conditional use approval, variance or comprehensive plan amendment for building height, zoning, or densities permitted by Live Local. Further, Live Local also requires that Preemption Projects be approved administratively, without any further action by the Local Government, so long as the development (1) satisfies the Local Government’s land development regulations for multifamily developments in areas zoned for such multifamily use and (2) is otherwise consistent with the comprehensive plan, except of course for the preempted items of unit density, height, and land use.
Other Considerations:
• Beyond the unit density and height as per the Act, in order to obtain administrative approval, Preemption Projects must still comply with Local Government regulations, including but not limited to parking requirements, setbacks, and floor area limitations. Notwithstanding, the Act also requires a Local Government to consider reducing parking requirements for Preemption Projects located within one-half mile of a major transit stop, so long as such major transit stop is accessible from the development.
• While a Local Government is not required to follow the Live Local Act if a project contains less than 40% affordable units, a Local Government may still elect to use the Live Local Act to approve the development of affordable housing, on any parcel zoned for commercial or industrial use so long as 10% of the units in the project are affordable. This provision also applies to mixed-use residential projects that meet the 10% affordable requirement. Importantly, the 10% affordable project language of the Live Local Act is self-executing and does not require a Local Government to adopt any ordinance or regulation before approving a 10% project under the Act.
How to Qualify as “Affordable” Under the Act
Live Local preemptions are mandated only for those projects with at least 40% of the project’s residential units as “affordable” for a minimum of 30 years. “Affordable” is defined in Section 420.0004(3), Florida Statutes, as monthly rents or monthly mortgage payments including taxes, insurance, and utilities that do not exceed 30% of that amount which represents the percentage of the median adjusted gross annual income for the households defined as: (1) extremely-low-income; (2) low-income; (3) moderate-income; or (4) very-low-income.
These “affordable” housing categories, are defined as:
“Extremely-low-income persons” means a household with a total annual household income that does not exceed 30% of the median annual adjusted gross income (“AMI”) for households within the state. It should be noted that the Act provides that the Florida Housing Finance Corporation may adjust this amount annually by rule to provide that in lower income counties, extremely low income may exceed 30% of AMI and that in higher income counties, extremely low income may be less than 30% of AMI.
“Very-low-income persons” means households with a total adjusted gross annual household income that does not exceed 50% of the AMI for households within the state, or 50% of the AMI for households within the metropolitan statistical area (“MSA”) or, if not within an MSA, within the county in which the person or family resides, whichever is greater.
“Low-income persons” means a household with total adjusted gross annual income that does not exceed 80% of the AMI for households within the state, or 80% of the AMI for households within the MSA or, if not within an MSA, within the county in which the person or family resides, whichever is greater.
“Moderate-income persons” means a household with a total adjusted gross annual income not exceeding 120% of the AMI for households within the state, or 120% of the AMI for households within the MSA or, if not within an MSA, within the county in which the person or family resides, whichever is greater.
The Act’s changes aim to significantly reduce the time (and related expense) associated with the entitlement process of qualifying projects. Allowing Preemption Projects in commercial and industrial areas has the potential for creative utilization of these properties in ways previously not possible.
Source: Bilzin Sumberg
Development In Every CRE Sector Is Slowing Except Multifamily
Looking out to 2024, a recent Marcus & Millichap report expects commercial real estate development to slow, based on “elevated” interest rates.
Additionally, construction materials costs remain elevated on a historical basis (up 33.5% above pre-pandemic levels), despite a retreat in shipping costs and the average prices of steel and gasoline in recent quarters. Wage growth was up 5.8 percent in 2022.
Projects that have already broken ground or locked in financing are moving forward, but banks have been executing fewer construction loans relative to previous years. Lenders are tightening their underwriting in response to increased risk exposure. Loans that are secured loans are at rates well-above measures recorded prior to the health crisis.
Industrial sector development is needed, but it slowed in Q4 by 40% compared to the first three quarters and further slowing is likely. Amazon’s decision to halt its ambitious warehouse starts for the next three years is another indication.
The total amount of square footage set to be delivered for both office and retail properties is projected to increase year-over-year in 2023, but new proposals in these sectors are showing signs of deceleration.
The apartment sector is an outlier, as it continues to see record inventory growth, according to the report – completions in 2023 are expected to reach the 400,000-unit mark for the first time in over 30 years.
Marcus & Millichap finds that multifamily project starts during February of this year reached the second-highest monthly measure in three decades.
Source: GlobeSt.
Sale-Leaseback Is Quickest Path to Debt Restructuring, Panel Says
Sale-leaseback deals are offering property owners a stable, long-term solution to restructuring their debt when the lending window for refinancing mortgages has been slammed shut.
Increasingly, sellers are flocking to long-term net lease deals as the first step to cure their balance sheets, using the proceeds from the sale-leaseback to jump-start their debt restructuring, according to a panel of experts at the GlobeSt. Net Lease Spring 2023 conference in NYC this week.
For companies that still want to do deals but find the current cost of debt prohibitive, sale-leasebacks offer a less expensive, alternative form of borrowing that can close faster, the experts said. Sale-leasebacks deals also don’t require back-end balloon payments that often come with traditional financing.
Ross Prindle, global head of Kroll’s Real Estate Advisory Group, said buyers are using their resources, including financing and cash deals, to make sale-leaseback transactions more attractive to sellers by making it less expensive to execute the deals.
According to Grazioli, an increasing number of sellers are opting for sale-leaseback deals because they have an urgent need to rehabilitate their cash flow and can’t wait for cap rates to compress again.
However, several experts on our panel warned that buyers must take care to make sure sellers actually are creditworthy before they ink sale-leaseback deals, which are extending to terms as long as 25 years in the current environment.
During Tuesday morning’s State of the Industry roundup session, Gary Baumann, CEO of NJ-based ARCTRUST Properties said the current credit climate is creating opportunities for sale-leaseback transactions.
On the opening night of our annual Spring Net Lease conference, W. P. Carey announced the largest sale-leaseback transaction in the NYC-based company’s 50-year history, a $468M sale-leaseback of a portfolio of four pharmaceutical R&D and manufacturing campuses in the Greater Toronto Area (GTA).
The portfolio represents the lion’s share of the global operations of Apotex Pharmaceutical Holdings, the largest generic drug manufacturer in Canada.
According to Zachary Pasanen, managing director, investments at W. P. Carey, sellers are flocking to sale-leaseback for a less-expensive cost of capital and extra liquidity during tough times. A sale-leaseback offers a “naturally accretive” alternative funding source, Pasanen told GlobeSt. last month.
Holders of fungible, mission-critical real estate that are willing to sign a long-term lease with market or better rental increases built in can establish an underlying rate that lets them monetize those assets and is inside the going long-term borrowing rate, Pasanen said.
Source: GlobeSt.
February’s CRE Sales Volume Up Nearly 34% From January
Retail led an unbalanced sales volume month in February for commercial real estate’s asset classes, according to a report last week from Colliers.
Overall, February’s volume totaling $25.1 billion was up nearly 34% from January sales levels, an above-average month-to-month increase.
Retail was the most heavily traded asset class in February, with $9.1 billion of activity, buoyed by the take-private deal of STORES Capital REIT. (Without it, the volume would have been $2 billion, and it would have fallen to a similar extent as other asset classes).
Office volume in commercial and business centers (CBD) was short of the $1 billion mark for the second month in a row – and the first time since 2010.
CBD office cap rates are up 70 basis points over the past year, and MSCI notes pricing is down 2.2%, though “recent cap rate movement would suggest a far more rapid price adjustment.”
Industrial volume got back to where it was in 2015-18 by increasing 63% from January. The STORE Capital REIT deal was the main reason why.
MSCI reported a 4.4% annual drop based on January to February pricing.
Multifamily sales volume is moving downward at a faster pace, with February’s $4.8 billion traded was the lowest monthly total since February 2012. A darling for so long, it is now the third-least-traded asset class for the first time since January 2015.
MSCI’s repeat sale index shows an 8.7% annual price decline, the sharpest of any asset class.
Hospitality sales volume was volatile as it was down 53% compared to last year but up month-over-month.
MSCI reports the strongest price appreciation of any asset class over the past year at 5.4%, and unlike other asset classes, when annualizing monthly statistics, hospitality shows a 2.1% gain on $2 billion in trades for the month.
Source: GlobeSt.
Bill Blocking China From Buying Land In Florida Coasts Through Last Senate Panel Stop
Less than three weeks after being filed, a bill blocking China and six other “countries of concern” from buying or holding interest in land within range of strategic sites in Florida is heading to the Senate floor.
The Senate Rules Committee voted unanimously to advance the measure (SB 264), a priority of Agriculture Commissioner Wilton Simpson intended to safeguard state security against foreign threats.
Countries named in the legislation — which also includes provisions to protect Floridians’ health information — include China, Cuba, Iran, North Korea, Russia, Syria and Venezuela.
If passed, the bill would ban the governments of those nations and businesses based there from owning real property within 20 miles of “critical infrastructure.” That includes military bases, water treatment facilities, power plants, emergency operation centers, seaports, telecommunication facilities, police stations and other such structures.
Tampa Republican Sen. Jay Collins, a decorated Army Special Forces veteran and the bill’s sponsor, said the measure “does a very good job of protecting our strategic-level interests.”
As an added layer of protection, Collins’ bill — as well as a House version (HB 1355) by Republican Rep. David Borrero and Democratic Rep. Katherine Waldron — would require documentation from potential buyers attesting their good intent. Any entity purchasing agricultural or real property within 20 miles of a military base or critical infrastructure must provide an affidavit affirming compliance with the proposed law, which would go into effect July 1.
The bill also bars government agencies in Florida from entering into contracts with those seven countries for services that include access to personal information.
Similarly, it would also require health care providers to ensure that the repositories for their patients’ digitally kept records are located within the United States. An amendment the panel approved Wednesday expanded that proviso to also allow storage of that data in U.S. territories and Canada.
Beginning Jan. 1, 2024, any company bidding on government contracts involving access to Floridians’ personal information would have to provide a signed affidavit asserting a foreign country of concern does not own the company or hold a controlling interest in it.
Miami Springs Republican Sen. Bryan Ávila, a lieutenant in the Florida Army National Guard, co-introduced the bill.
According to the U.S. Department of Agriculture, 6.3% of nearly 22 million acres of privately held agricultural land in Florida was foreign-owned in 2021. Senate staff wrote in an analysis that while it is “unclear” how much of that land — roughly 1.4 million acres — belongs to China, “the (federal) department does report that (China) owns 96,975 acres in the ‘South Region,’ which includes Florida.”
SB 264, HB 1355 and a similar but more limited measure (SB 924) Boynton Beach Democratic Sen. Lori Berman filed last month — more than two months after Collins and Borrero announced their legislation — complement an executive order from President Joe Biden. The executive order, which Biden signed Sept. 15, defines additional national security factors the Committee on Foreign Investment in the U.S. must consider when evaluating transactions.
Biden acted in response to growing, bipartisan concern among government officials over protecting Americans’ data, enhancing U.S. supply chain resilience and safeguarding the country’s position as a tech leader.
Isabelle Garbarino, director of legislative affairs for the Florida Department of Agriculture and Consumer Services, signaled support for Collins’ bill Wednesday.
HB 1355 and SB 924 both await a committee hearing.
Source: Florida Politics
Sale Leaseback Cap Rates Continue To Attract Investors
While pricing has widened, early indications in 2023 point to a growing return to confidence for the sale leaseback market, according to a market update report from SLB Capital Advisors.
The report cites “strong credits and robust business models achieving successful processes with large interest from investors”, even in non-core markets, particularly industrial.
Due to the current interest rate environment and companies’ overall cost of capital, the SLB cap rates offer a more attractive cost-of-capital solution than ever, according to the report.
There continues to be an attractive value arbitrage across various industry sectors driven by the delta between business and real estate multiples. The multiple implied by average SLB cap rates (i.e., 6.25% to 8.25%) implies a multiple of over 12x to 16x.
This compares favorably to general middle market transactions which averaged 6.9x LTM EBITDA for 2022. Attractive arbitrage opportunities are generally prevalent across many middle-market sub-sectors, the report said.
Source: GlobeSt.
Multifamily Keeps Benefiting From Hurting Housing Supply
In the 2022 US housing report from the National Association of Realtors and Move.com, which operates Realtor.com for the NAR, the big news is more of the same. The market is now, by their count, 6.5 million new single-family homes short of population and household formation growth. For multifamily, that turns into good economic news.
It’s impossible to look at multifamily independent of single-family homes because the two markets are intertwined with household formation. Between 2012 and 2022, there were 15.6 million household formations in the US, according to NAR, with nearly 2.1 million last year.
As formations happen, they need to live someplace, but there aren’t enough traditional single-family homes. During those 10 years between 2012 and 2022, 9.03 million single-family homes were started, with 8.5 million completed. That would be a 7.1-million-unit gap. There were also 4.2 million multifamily unit starts and 3.4 million completions.
The home ownership rate oscillates between about 63% and, at its high point in the fourth quarter of 2004, 69.2%. The current level is 65.9%. That should have meant more like 10.3 million completed single-family homes.
However, there weren’t enough multifamily units created to accommodate 34.1% of the housing volume, which would be 5.4 million, far more than the 3.4 million delivered.
This is where the market turns interesting. In 2022, multifamily unit construction increased, “reaching 35.1% of all housing starts by the end of the year, a level not seen since 2015.” That is a rate at which the housing market could begin to catch up and hit a sustainable stride.
Looking at the NAR analysis, over the 10-year period, 340,000 multifamily units were delivered per year on average. A recent research brief from CBRE projected that 716,000 multifamily units will reach the market within the next 24 months, or 358,000 a year, or a roughly 5.2% increase over the baseline. That’s an improvement, but not enough to catch up in the short run.
One lesson for the multifamily industry to take — supported by the fuller CBRE analysis — is that the housing need is so great, worries about an oversupply overwhelming demand and leading to an undercutting of the market are probably unfounded.
Source: GlobeSt.
Are Multifamily Prices Coming Down Soon?
What a ride! For the past five years, apartment building owners hit the jackpot with their property values going up nationally by 37%, according to Marcus and Millichap. This was fueled by record rental increases of 13.5% in 2021 and 6.2% in 2022 and mortgage rates hitting their lowest ever in January 2021. But this trend is seemingly slowing. According to CBRE, the average multifamily cap rate went up by 38 basis points to 4.49% in the last quarter of 2022, which means prices are starting to come down. And thank goodness!
As a commercial mortgage banker specializing in multifamily financing nationally, 2022 was an extremely difficult year. It was a head-on collision between property values going up and mortgage rates going up. This produced smaller loan sizes, killing many of our deals. It wasn’t pleasant telling my client, “Sorry, 40% down is no longer going to cut it. Can you come up with 50%?” He replied, “Really? I was only getting a 4% cash-on-cash return, and now you want me to be happy with 2%.” I told him to negotiate the price down with the seller, who opted to take the property off the market instead.
Why Both Buyers And Sellers Have Their Brakes On
Although multifamily is the most sought-after asset class in the commercial real estate market today, prices remain high. This is a result of low supply and demand. In fact, the 4th quarter of 2022 hit the lowest level for both since 2009, according to Moody Analytics.
So, it’s no wonder that both buyers and sellers have their brakes on. Why? Because many buyers can’t figure out what a property is really worth today. Worse yet, they are afraid they are buying at the top of the market with a recession around the corner. And many sellers are in love with those high prices. They know that this is not a good time to sell with rates being so high. I’ve found that most are financially strong and don’t have to sell. They can just wait for rates to come down—snug in the comfort of the very low long-term rates they have on the property.
Why Multifamily Sales Prices Could Come Down Slowly In 2023
The good news for sellers is that the economy seems to be getting stronger, with wages climbing 6.3% for jobs posted on Indeed and 4.8 million jobs created in 2022. Even better, in January 2023, 517,000 new jobs were created, and unemployment hit a 53-year low at 3.4%. Many sellers, real estate brokers and property managers I talk with are arguing that this should justify today’s high multifamily prices and support more rental increases in 2023 as wages have gone up too.
But I think the data from the last quarter of 2022 supports a different argument—that multifamily prices must come down. According to CBRE, new investment in multifamily property fell by 70% (download required). Why? Because investors couldn’t make the numbers work, and the future did not look bright. According to Fannie Mae, there was a negative demand for multifamily units of -103,485 at the end of 2022. Now if we add to this the 783,000 new apartment units they report coming online in 2023, this is a recipe for rents remaining flat and rental concessions on the rise.
Savvy property investors know that if they are going to buy high, they have to raise rents to achieve the return they need in the future. This goes right to their bottom line, raising the net operating income in the income approach of a commercial appraisal and raising property value. But as noted in the report above, Fannie Mae is expecting rents to only achieve a 1.5% increase in 2023.
Today’s high prices just don’t seem sustainable, or I should say, they are not based in reality. The reality is that too many units are available for rent, too many units are coming online and too many renters are already paying more than they can afford with inflation. The reality is what an investor is willing to put down on a loan with today’s high mortgage rates. The reality is that those rates are likely to go higher as the Fed struggles to lower inflation to their benchmark of 2%. It’s at 6.3% now. And the reality is what an investor needs to earn.
A client of mine recently summed it up perfectly: “If I buy at today’s prices, I will be paying what the property will be worth in two years. And that’s if I can raise rents enough. Why would I do that?”
What does all this mean? If you are a multifamily investor, you might be better off waiting until prices come down. I think they will by the last quarter of 2023, as appraisal valuations come down and more sellers must sell due to divorce, partnership breakup, loan maturity or death. Of course, those who have the time may want to make lowball offers on properties with under-market rents in good neighborhoods where renters can afford future rent increases and wait for one to stick.
If you are a seller or listing real estate broker, unless you want to wait for a cash buyer, it’s important to not only sell the property’s upsides and value adds but also think about the buyers’ expectations for earnings. Based on actual net operating income, current interest rates and down payment requirement, what sale price will bring the deal to the closing table?
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Source: Forbes