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It’s Time For Investors To Get Off The Sidelines

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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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Sale Leaseback Cap Rates Continue To Attract Investors

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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.

“SLB rates remain well inside of many companies’ WACCs and today, in more cases than not inside companies’ current cost of debt financing, making the sale leaseback an incredibly attractive financing alternative,” it stated.

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.

 

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6 Things Investors Should Consider With CRE Market In Flux

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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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