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Recent U.S. economic news has shown nothing if not uncertainty about the future. Here are some examples that happened within a few weeks of each other:

  • The Federal Reserve Bank of New York warned that supply chain disruptions still negatively affect businesses.
  • Various sources have said the country is in a rolling recession with sectors taking turns.
  • The Federal Open Market Committee wonders if current rates will curtail inflation.
  • The Fed’s May Beige Book said economic activity expanded except for softening commercial real estate.
  • Unemployment inched up to 4.0% for the first time since January 2022.
  • June’s look at the consumer spending that drives almost 70% of GDP showed a slowdown.
  • Yields on the 10-year Treasury go up and down.

The June FOMC meeting’s economic projections showed current median sentiment that there might be only one rate cut in 2024. That isn’t policy and Federal Reserve Chair Jerome Powell said decisions are ultimately data dependent. There could be two cuts, or one, or, depending on new data, none until sometime in 2025.

More importantly, it doesn’t matter. Even two cuts would only represent be a drop of 50 basis points — hardly something to drive momentous new activity. Business was possible in much worse times. At its peak in January 1981, the effective federal funds rate hit 19.08%. The low in the ’80s was only 5.89% in October 1986. Remember the movie “Wall Street” and the phrase “greed is good?” It came out in 1987 when the low rate for the year was 6.10%, the high was 7.22% and actual CRE lending was much higher. Still, people made a lot of money.

We could discuss Elisabeth Kübler-Ross and her stages of grief. Many investors, owners, lenders and brokers have been upset for good reason. Valuations and transactions are down significantly. Past decisions to load up on cheap credit made refinancing a challenge now.

The first six stages of grief are past. Now is the time for acceptance. Don’t wait for future financial conditions to improve to look for deals. That invites serious opportunity costs. Not in the accounting sense for later analysis to see if your strategy was sensible, but in the true avoidable loss of future revenue and business relationships. In the ability to profit from investing capital rather than letting them lose value to inflation. Finding a stronger investment than parking cash in Treasurys and hoping that yield changes don’t undermine their value, so you have to hold to maturity or take a loss. Helping support the entire CRE ecosystem and your business partners for the future. And being ahead of the crowd when things improve, not trailing behind.

Your immediate past decisions might be painful to contemplate, but the right attitude and approach is to look and move forward. Assume, at least for now, that business conditions have changed, that there’s been a reversion to the long-standing mean. Recreate your strategy and deal-making to be effective under current conditions. It’s time to dust off and start moving once again. And if conditions do improve, you’ll be even better off.

 

Source:  CPE

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The United States is entering a new economic era as the Federal Reserve has been hiking its benchmark interest rate.

Interest rates today stand above 5% as the Fed tries to slow the economy down and fight inflation. As interest rates climb, economists say financial conditions are headed back to being more normal.

“Having interest rates at zero for such a long period of time is very unusual,” said Roger Ferguson, a former vice chair at the Federal Reserve. “Frankly, no one ever thought we’d get to that place.”

Back-to-back financial crises gave past Fed policymakers the conviction to take interest rates as low as they can go, and keep them there for extended periods of time. Along the way, they disrupted the basic math of personal finance and business in America.

For example, the Fed’s unconventional policies helped to sink the profits investors received from safe bets. Government bonds, Treasury securities and savings accounts all return very little yield when interest rates are low. At the same time, low interest rates increase the value of stocks, homes and Wall Street firms that make money by taking on debt.

As the Fed hikes interest rates, safer bets could end up paying off. But old bets could turn sour, particularly those financed with variable loans that increase alongside the interest rate. A wave of corporate bankruptcies is rippling through the U.S. as a result.

“You’re, to some extent, limiting nonproductive investments that would not necessarily generate revenue in this high interest rate environment,” said Gregory Daco, chief economist at EY-Parthenon. “It’s very different in a low interest rate environment where money is free and essentially any type of investment is really worth it because the cost of capital is close to zero.”

In recent years, economists have debated the merits of zero lower-bound policy. As the Fed lifts that federal funds rate, policymakers warn that rates may stay high for some time. That could even be the case if inflation continues to subside.

“Barring a catastrophe, I don’t think we’ll see lower interest rates any time soon,” said Mark Hamrick, Washington bureau chief at Bankrate.com.

To view CNBC‘s ‘How The Federal Reserve’s Interest Rate Hike Are Reshaping The U.S. Economy‘, click the arrow below:

 

Source: CNBC

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There’s no denying that uncertain financial times lie ahead. A recent poll by Bloomberg cited that 70% of economists predict a mild recession in 2023, following moderate growth the previous year. The U.S. economy faces the headwinds of increasing interest rates, stubborn inflation, a stagnant job market, and weak market exports abroad.

Despite these troubling signs, however, those in commercial real estate enjoy a unique position. There’s far less leverage in the consumer and financial sectors than during the Great Financial Crisis, and plenty of liquidity remains ready and able to deploy in long-term vehicles. The overall uncertainty will lessen demand and potentially unearth value-add opportunities, and different asset types will experience different momentary signs of distress while others will experience boosted demand.

Overall, prices and demand are shifting, and the time may be nigh for those looking to invest in real estate, whether for the first time or for those who make their livelihood. These seven ideas to keep in mind will keep the investor prepared to face 2023 with awareness and agility, well-positioned to strike opportunities when the iron is hot.

1. Trouble Unearths Opportunity

In times of distress, opportunities usually arise. Assets or markets facing headwinds today may eventually develop into solid, long-term holding investments. Good real estate fundamentals (location, location, location) remain essential even in challenging economic cycles. Those who can shore up their capital nicely will be best prepared to take advantage of opportunities as they arise. If you’re in a position to take advantage of low prices in well-positioned asset types or markets, next year may be the time to invest and many great investors often say the outcome is won at acquisition.

2. Capital Costs will Likely Stabilize Soon

This last year, the Fed’s continual interest rate hikes increased overall cost of capital, making debt and equity much more expensive. These hikes resulted in lower leverage, higher debt service, and greater discount rates, which lowered net present values or created higher yield requirements. Additionally, fixed income yields increased and, when adding in the risk premiums associated with CRE, added to required property yields (or cap rates).

Number shifts like these aren’t so bad when they’re infrequent, but the Fed’s aggressive measures to curb inflation have made deal-making much more expensive. However, the latest increase to between 4.25 and 4.5% in mid-December points to a deceleration (the last increase was 75 basis points), a trend that will hopefully continue into 2023.

The cost of capital will likely stabilize as rate hikes taper off – encouraging stakeholders to start investing again. Additionally, a massive supply of capital seeking placement means plenty of liquidity. We’re still seeing demand continue to bid up deals to healthy values, particularly for good buys in good markets. Now’s the time to get your ducks in a row and prepare for quick action if you want to access good deals ahead of the competition.

3. Real Estate Buffers Against Stubborn Inflation

Real estate, as an inherently longer-hold investment vehicle, remains a haven that better buffers against stubborn inflation than other capital markets, thanks to its predictable cash flow. Lease terms that allow for underlying rent increases connected with rising costs or annual/regular rate increases in both long-term and short-term leases (e.g., in offices and multifamily) allow landlords to adapt more quickly to rising costs and keep up with inflationary changes.

Even though inflation is finally (hopefully) tapering, commercial property represents an excellent long-term option. But don’t forget: operational expenditure also inflates, so lease structures where tenant covers all or a portion of expenses can be important.

4. Now’s the Time to Lean on Your Broker

Partnership and expertise are more important than ever. Your broker is your partner in deal-making and serves as an essential business partner as you navigate changing valuations and asset performance. Brokers provide detailed in-market knowledge and economic cycle experience and make it their business to know what’s happening in the sector – so why go it alone?

In an uncertain market, now is the crucial time to partner with someone who can find you the best comps, source the best data, and find the best buyers for your listing or next investment option. Additionally, in times like these, brokers often are better at finding off-market opportunities, which can be acquired at opportunistic pricing if buyer can navigate unique circumstances.

5. Assess Tech Stacks and Optimize for the Best Tools

In a lean market, businesses need to cut overhead spending to focus on managing costs and optimizing the best possible tools and headcount for task efficiency. Running your business affordably is essential before venturing into the market. A lean, efficient tech stack can empower you to manage business operations while minimizing spending successfully. Prioritize technology that saves time, determine what’s essential and what’s fluff, and if you can find one software that solves multiple business needs, all the better.

6. Solidify Relationships with Capital Sources and Financial Partners

Now’s the time to foster closer relationships with your capital sources, lenders, and financing partners. It’s essential to maintain these connections – they will allow you to collectively stay more agile and make smarter, faster decisions as the economic climate changes.

Open communication with these parties will position you to act fast when the time is right, ready to strike on value-add opportunities as soon as they emerge.

7. Back to Basics: Understand Your Brick-and-Mortar

This may seem like a no-brainer, but it’s even more essential to understand your tenants’ day-to-day realities. Get to know their business operations, keep a pulse on market happenings, and maintain a steady flow of communication with your operators.

A clear understanding of the present and fundamentals of your tenants’ businesses will open your eyes to potential changes and allow you to make strategic moves or adapt as needed. Additionally, clear communication is more likely to set your tenants at ease and make them more likely to renegotiate and continue their leases with you.

The Bottom Line

We’re long-term bullish on commercial real estate. With open eyes and an agile, ready-to-act team, we’re confident that the savvy investor will discover valuable ROI diamonds in the rough. These tenets are, at their core, essential elements of well-run commercial real estate operations, even in prosperous economic times. However, in turbulence, it’s all the more important to stick to your investment principles and – as always – consider the long-term while resisting short-term distractions.

 

Source:  Global Banking & Finance Review

 

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South Florida’s commercial real estate market is certainly in flux. Owners, buyers and sellers are adjusting to higher interest rates, continued supply chain challenges and an uncertain economic outlook.

Deals are still being done and space is still being leased. But in this inflationary environment, deals have to make sense, with a cushion to account for the unpredictability of 2023 and beyond.

With all this in mind, here are some points to consider for companies and individual investors who are involved in the commercial real estate market or are looking to get into it.

1. With more properties now getting less attractive cash flows, sellers are often grouping assets together for sales.

This can make sales transactions more complicated, and buyers need to work with their banking partner to make sure the overall risk-reward equation works for them.

2. The demise of the office market seems to be overstated. Office is still a good niche to consider.

Certainly, more people are working from home, and many companies are adjusting with new hybrid models involving employees coming in for one to two days a week instead of every day. Smart owners are adjusting by being more flexible and offering smaller floorplans. That said, leases and sales are still being done and there are some real bargains available for opportunistic buyers.

3. Higher interest rates are slowing the market, but there are still plenty of opportunities to find favorable deals.

Deals are now more expensive, and as rates have increased, a buyer’s margin for error has significantly shrunk. So smart planning is more important than ever. But there is still significant liquidity in the market and buyers and sellers are still making deals work, so we predict a healthy CRE market in South Florida for the coming year.

4. South Florida can be expected to fare better than much of the country as the economy faces an unpredictable 2023.

The reason is simple — population growth. That means more companies are looking for office space here. It means there’s more need for distribution centers and other industrial real estate. And it means people are continuing to buy houses and condos.

5. In an uncertain market, a long-term relationship with a CRE banker is more important than ever.

To get a favorable deal, owners and buyers alike need an advocate who takes the time to make sure a transaction will work for their client for the long term. This is best accomplished by having a long-term relationship with a banker who has significant commercial real estate experience. The more you can share about your business plan and the more you can talk about both opportunities and challenges, the more successful that relationship will be.

For the client, it’s important to take the time to build a relationship based on trust and consistency versus finding a different partner for every deal. And for the bank, finding ways to help the client in a wide variety of ways will make the relationship even more impactful.

 

Source:  SFBJ

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A recent investor survey by Marcus & Millichap reveals that while CRE transactions may level out this year, investor sentiment remains strong.

The mid-year survey’s headline index value of 159 is “somewhat reminiscent of the trend we saw in 2016,”in which sentiment declined a bit as higher interest rates bit into the market, says Marcus & Millichap’s John Chang.

”But they’re not down by as much as people might expect,” he says.

In 2016, the index declined 12 points and the number of CRE transactions flattened. This year, the index has declined 11 points and that could deliver relatively similar results, in what Chang calls a “relatively modest softening.”

“Yes, the market is going through a recalibration as investors rework numbers based on the rising costs of capital, but the survey respondents aren’t telegraphing a significant market change,” he says.

According to the survey, the top two investor concerns are interest rates and inflation. About two-thirds said interest rate increases aren’t affecting their investment plans, and almost 9% said they’d buy more commercial real estate because of rising interest rates. On the sell side, 77% said the rate increases haven’t caused them to change plans and 11% said they plan to sell more.

Respondents were even more dismissive of inflation, according to the survey. Twenty-four percent of respondents said they’d buy less CRE but almost 12% said they’d buy more. The buying intentions with respect to more inflation-resistant property types like apartments, hotels and self-storage indexed higher, with about 14.4% of investors overall saying they’d buy more of those assets because of elevated inflation.

Cap rates are expected to rise as a result of rising interest rates as well, with 14% of investors surveyed saying they think cap rates will rise by 50 basis points or more over the next year. About 35% think they’ll go up by less than that, and 27% expect no change. And Chang says  since there’s still a lot of capital coming into CRE, yields and stability look compelling.

“Consider that the last 12 months ending in the second quarter of 2022 was by far the most active commercial real estate investment transaction year on record,” Chang says. “Even if activity steps back a bit over the next 12 months, it will still likely rank as the second most active year.”

 

Source:  GlobeSt.

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For those investors searching for assets that can withstand the test of time, I believe real estate prevails. Whether through a market crash, health crisis (like a pandemic) or even an increase in interest rates, real estate can still work for you. While I admit it can be challenging to find new deals right now, if the price is right, who can stop you from investing?

Overall, downturns are inevitable, and as investors, we need to prepare for them. If you’re investing in equities, for example, you shouldn’t focus on one category alone. The same thing goes with real estate; you need to expand and diversify your real estate portfolio to lessen the impact of any downturn. It has been shown time and time again that being prepared helps beat future recessions.

Real Estate Portfolios

A real estate portfolio is simply a collection of investment properties that are cash flowing and appreciating. As income-producing properties, they are assets. They include short-term rentals, rent-to-own properties, commercial properties and home leases.

As investors, when we start accumulating properties and get into the process of building our portfolios, we want to expand those portfolios as much as we can. Therefore, a few properties will generally not be enough. It is essential for you to always be prepared whenever you enter a deal. To do this, you need to diversify your property portfolio as much as you can to mitigate the risk that comes with it. Once an investor, always an investor.

What To Consider In a Property Portfolio

Investing in properties is broad, and you can be as creative as you want to be. For example, who would have thought that Airbnb would cause a decline in hotel check-in rates? Innovation can rock any industry. You need to bulletproof what you have and adapt to changing times. On that note, the following are some options you may want to consider adding to your portfolio in 2022.

Single-Family Rental

Investors never veered their eye from single-family rentals (SFR) as these captivate renters who seek a spacious area—especially since working from home is the new normal. Millennials are eyeing these types of properties to have more breathing spaces, and more retirees are starting to prefer to settle in a single-family setup than in retirement facilities. The single-family rental has always been an investment, but it gained more attention over the years after the global financial crisis.

Moreover, regional migration plays a role in this booming single-family rental (SFR) scenario, and metros in the south like Miami and Phoenix exceed other regions in terms of rent growth. As shifting demographics and generational needs intensify single-family rental (SFR) demands, it’s only rational to add this to your portfolio.

Hotel To Apartment Conversions

Many hotels have become less lucrative with fewer check-ins, yet they still have to maintain high operational costs. Unfortunately, continuously cutting down hotel prices will not necessarily increase patrons.

It should be noted that the conversion of a hotel to an apartment comes with costly renovations. But even if investors have to shell out costs for renovations and hotel conversions may seem to be the lower-end option for the real estate market, investors/developers can still expect a higher return. The reason? Generally, renovation costs are lower than building new developments from the ground up. Plus, it’s easier to market units from hotel conversions.

Industrial Projects

Industrial projects, such as warehouses and logistics, are often not as popular when compared to multifamily rentals. Most investors like multifamily rentals since people will always need somewhere to live. Still, with the booming e-commerce industry and the recent disruption in office space, these types of properties can be a relevant addition to your portfolio.

Conclusion

In conclusion, innovation is not confined to the tech industry. Even real estate, an industry traditionally adverse to major changes, needs to adapt and develop.

There are great opportunities in the market today for you to expand your portfolio. A winning combination of a secure environment for investments and a robust and diversified economy can help tremendously but also prepare for downturns. Be sure to monitor your investments and portfolio closely (or hire someone you can trust to manage them for you) and take advantage of the tax benefits.

 

Source:  Forbes