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February’s CRE Sales Volume Up Nearly 34% From January

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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.

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Hotels Are ‘Hottest’ Asset Class So Far In 2023

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It’s been a tremendous start to 2023 for hotel investors who are enjoying record sales for quality assets in highly desirable and growing markets, according to a report from JLL.

The $850 million sale of the Diplomat Beach Resort (pictured above) in Hollywood, Florida, was the third-largest single-asset sale in US history.

The recent closing of the AC Hotel Phoenix Biltmore set a record price-per-key for upscale select-service assets in the Phoenix market.

Kevin Davis, Americas CEO, JLL Hotels & Hospitality Group, said in prepared remarks that investors are buying into the thesis that long-term growth trends in certain markets will outweigh near-term capital markets dislocation.

“As a result, these investors are willing to buy at cap rates that are lower than the cost of debt because the growth story is so compelling.”

 

The ‘Hottest Asset Class’

Brandon Lewe, vice president of Sales at Ten-X, tells GlobeSt.com that overall, hotels are currently the “hottest” asset class on Ten-X, with momentum building year over year, further highlighting a strong hotel sales outlook.

“Buyers love the category,” Lewe said. “Last year hotels had the highest trade rate (62%) of any asset class and this year, even more investors want to buy.”

Hotel properties had twice the number of bidders per property as the next most popular asset class, he said. “And the trade rate has climbed 10 percentage points – to 72% – for properties that have gone to auction this year.

“We see more inventory coming online and that inventory is high quality, coming from institutional investors. Two of the largest U.S. institutional investors are bringing an influx of new inventory to our platform. ‘SMILE’ states, especially Texas, are hot locations for sellers.”

 

Extended Stay Cap Rates Approaching Multifamily

Matt McElhare, senior director, Extended Stay Brands at Choice Hotels International, tells GlobeSt.com that generally, “everyone is looking to add exposure to the segment given industry performance and profitability relative to traditional hotels.”

Extended stay at a lower price point provides a different return and risk profile than a traditional hotel or upscale hotel.

“We’ve seen cap rates approaching multifamily levels of the last two years,” McElhare said.

“The demand picture (2x supply, emerging trends providing tailwinds e.g. relocations, reshoring of supply chains, infrastructure, etc.) is really strong, which, combined with the difficulty adding supply in the near/medium term due to higher cost of capital and construction costs, is creating a favorable picture for high performance continuing in the extended stay segment.”

He said the performance outlook is bolstering demand for the acquisition of existing extended-stay hotels despite low cap rates and high valuations, particularly in areas of growth such as the Carolinas, Florida, and Texas.

“Lenders have historically treated hospitality financing as one big bucket but we’re seeing encouraging changes there as lenders recognize the different risk/return profile and think about the segment differently,” McElhare said.

McElhare tells GlobeSt.com that activity for large institutional capital in the space has remained elevated despite the higher costs of capital and construction hard costs as well as evaluations for existing extended-stay product.

Higher Occupancy Means Hiring Challenges

The American Hotel & Lodging Association (AHLA) and Oxford Economics recently reported that it expects hotel-generated state and local tax revenue to set a record at $46.71 billion this year.

Additionally, it sees average U.S. hotel occupancy reaching 63.8% in 2023 – just shy of 2019’s level of 65.9%.

“Staffing is expected to remain a challenge for many U.S. hotels in 2023, as the industry continues to grow its workforce back to pre-pandemic levels,” AHLA said in a release.

Nearly 100,000 hotel jobs are currently open across the nation as of Q4 2022, according to Indeed, even as “national average hotel wages were at historic highs of over $23/hour and hotel benefits and flexibility are better than ever,” according to AHLA.

 

Source:  GlobeSt.

 

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‘Near Record’ Amounts Of Idle Capital Could Boost Sales This Year

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‘Near record’ amounts of capital are sitting idly on the sidelines amid economic uncertainty, and how (and how quickly) it’s deployed this year will be “major factors” in overall sales volume, according to new research from Colliers.

In a new report, the firm says that value-add, opportunistic, and debt capital look to be the most active, with debt plays yielding “equity-like returns.”

“Liquidity can be found, but from different sources,” the report notes.

Investors are turning to defensive strategies, with multifamily and industrial garnering the most activity as “safe harbors” due to strong fundamentals and durable cash flows. Among alternative assets in Colliers’ survey, life science, data centers, and student housing ranked first, second, and third  due to “demographically driven upside and strong fundamentals,” which analysts predict will continue to draw investor interest.

Grocery-anchored retail is also expected to remain resilient while luxury hotels have posted “incredible” fundamentals.

And as for office, “trophy properties are vastly outperforming all others, demonstrating the need for upgrading and occupiers’ focus on ESG-compliant assets,” the report notes. “This need for new product will be difficult to meet, with capital investment preferring to upgrade existing assets. Conversions, repositioning, and recapitalizations will all be common themes throughout the year as the office sector evolves. Distress will emerge.”

 

Source:  GlobeSt.

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Seven CRE Investment Strategies For 2023

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With the year starting out amid uncertainty and no small amount of pessimism, there are certain strategies that promise to play well amid the environment. Read on to find out what will work in 2023.

1. Sell Industrial Assets in Overpriced Markets 

Industrial assets in some of the “hot” markets like the Inland Empire, Orange County, Miami, Phoenix, San Francisco and San Jose, during the last few years, have seen rents increase at least 50% and cap rates compress to 3.0%-4.0%. With supply chains back to normal and less demand for products due to raging inflation, rents may decline in these markets by 20% or more. Industrial assets in these markets should be sold and the proceeds reinvested in more stable and value-priced industrial markets in the Midwest, Texas, Tennessee, and the Carolinas.

2. Sell Net Lease Properties

The net lease industry has been very robust during the last few years courtesy of the Fed’s zero interest rate policy and abundance of capital. However, with the Federal Funds rate at 4.25% and increasing to 5.0% or more by the first quarter of 2023, net lease assets will decline in value substantially as cap rates increase. The net lease investment business is really a bond spread game, by buying long-term leases at cap rates of 6.0%-8.0% and financing these assets at mortgage rates of 5.0%-7.0%. These investments tend to have long durations of twelve to fifteen years, which may cause large price decreases when rates rise. As with corporate bonds, when rates rise, the value of the net lease assets falls.

3. Increase Allocation to Public REITs and Reduce Allocation to Private CRE

The 2022 total return for public equity REITs as shown by the FTSE NAREIT All Equity REITs Index has declined by 24.95%. Many REITs are trading at or below NAV value and less than comparable private CRE values and should be purchased.

4. Sell CRE Assets in Overpriced Gateway Markets and Reinvest in Suburban and Sunbelt Markets

The majority of CRE investment and development activity pre-covid had been concentrated in the 24-hour Gateway cities that include New York, San Francisco, Chicago, Portland, Atlanta, Oakland, Seattle and Los Angeles. Many properties in these markets are suffering with large vacancies, low utilization and discounted values due to high crime and homelessness policies in these markets. Investors should sell assets in these markets and reinvest in suburban areas surrounding these Gateway cities and the higher growth and lower tax Sunbelt markets.

5. Sell Overpriced Core Assets and Reinvest in Opportunistic Assets

Institutional investors typically focus on the risk and return characteristics for various CRE investment strategies. The lowest risks are core and core plus investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage. The next riskiest investment strategies are value-added strategies which are higher risk and involve some property redevelopment, tenant adjustment or leasing, or with operational problems. The riskiest sectors are opportunistic strategies that involve a high degree of redevelopment, leasing, tenant relocation or change or may be in financial distress. Many core properties are still trading at sub-5 % cap rates and should be old. The proceeds should be reinvested in higher-return opportunistic strategies.

6. Invest in Hotel Assets with Expected Higher Inflation  

According to Smith Travel Research, the major lodging markets are forecast to achieve solid gains in RevPAR during 2023. These gains include 8.6% for the 65 largest markets and 9.3% for the 25 largest markets. Driving these returns are robust leisure travel, increasing business travel with a return to normal for the convention business and higher occupancy and average daily rate. Both occupancy and ADR are expected to increase 4.2% to produce the higher RevPAR. By year-end 2023, 53 of the 65 top markets in the STR forecast are expected to have reached, or surpassed, their 2019 RevPAR levels. Leisure-centric markets which are expected to see their 2019 RevPAR levels exceeded by 20% include Savannah, GA, Miami, FL, St. Petersburg, FL and Coachella Valley, CA.

7. Invest in CRE Proptech Businesses

One of the key growth areas of CRE is in data analytics. This business has low capital costs and high returns on equity by selling data to the CRE industry. Data analytics encompasses all aspects of big data for CRE including demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and Real Capital Analytics and many smaller local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities or sell them to larger firms. The large CRE software firms are also prime buyers for data analytics companies as they seek to diversify their software business and cross-sell the data analytics products.

 

Source:  GlobeSt.

 

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Commercial Real Estate Predictions For 2022

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The commercial real estate industry has undergone a rocky road over the past two years, as pre-Covid-19 predictions have been upended due to the unforeseen nature of the pandemic. But as the world begins its shift toward post-pandemic life, I believe that commercial real estate is on track for a serious rebound this year. While not every area of commercial real estate is set to see an upswing, there are a few predictions that are safe to make based on trends in the market.

Here are a few of my commercial real estate predictions for 2022:

Commercial Real Estate Will Bounce Back

First and foremost, the biggest prediction for 2022 is the recovery of the commercial real estate industry. While it has taken a beating during Covid-19 (and the Omicron variant does present a hurdle toward full recovery), sound fiscal policy could help the industry recover. Monetary policy could also ease some of the long-term inflation pressures as commercial real estate values rise. The demand for real estate will be high, though the areas in which people are investing might look a little different than in previous years.

Industrial Real Estate Will Keep Growing

Industrial real estate has blown up over the past year thanks to the rise of e-commerce. Online retailers such as Amazon are driving the construction of warehouses to house their products, while retailers like Walmart and Kroger are snatching up distribution facilities left and right. Manufacturers are also going to keep investing in commercial real estate as they increase the amount of inventory they keep onsite.

Office Real Estate Won’t Be Out Of The Woods Yet

The one part of commercial real estate that still has some trouble ahead is office real estate. While it won’t be terrible, demand won’t be nearly what it was in previous years as companies continue to hold off on returning to the office. As working from home both full-time and part-time becomes more of the norm, office space utilization will most likely be on a downward trend.

Hospitality Will Rebound

It will be good news for hospitality, as business and leisure travel seem inclined to grow this year. The travel boom will drive luxury hotels to continue to embark on renovation projects that may have stalled during the pandemic. These projects will likely be driven by both city centers and the hotels themselves as the demand for more hospitality spaces continues its upswing.

The Supply Chain Will Be Retooled

The supply chain has suffered quite a blow during the Covid-19 pandemic, which will require some retooling over the next year. Because the space near seaports is not widely available, many developers will have to invest in commercial real estate inland. In order to account for rising transportation costs, manufacturers will most likely have to add distribution facilities in closer proximity to manufacturing facilities.

Although nothing is set in stone for the future of commercial real estate, it’s safe to say that the economy behind commercial real estate is here to stay and that these predictions are well on their way to becoming reality.

 

Source:  Forbes

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