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Our Sales Were Up In Q4. Let Us Help You.

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It was a rough fourth quarter for commercial real estate brokers in South Florida, as property sales plunged 55% compared to a year ago, according to property data firm Vizzda.

There were $5.2 billion in commercial real estate sales of at least $1 million each in the tri-county region, down from $11.6 billion in the same quarter a year ago. The number of transactions fell 40% to 631. The average price of each deal also fell.

The two main factors that led to a dramatic drop in sales were the reluctance of buyers and sellers to agree on a price and the lack of bank financing, said Paul Tanner, founding partner of Fort Lauderdale-based Las Olas Capital, which invests in commercial real estate. Lenders have started asking for much more equity in deals, often making them unfeasible, he said.

“We started feeling it [the slowdown] in late August and by Sept. 15 it was pencil’s down,” Tanner said. “The lending institutions wanted to see how interest rates would play out, how the recession would play out and no one was willing to be bold.”

Rising interest rates impact commercial real estate prices because they make debt more expensive, which reduces profit margins for buyers. It also increases the expenses for development, which was already impacted by rising construction costs. Tanner said many developers were slow-rolling their projects rather than moving forward aggressively to close on land and obtain a construction loan.

“Capital markets are currently in a period of price discovery largely driven by debt markets, not underlying fundamentals,” said CBRE Executive Managing Director Josh Bank, who oversees Florida. “And although U.S. commercial real estate investment volume fell from 2021’s record levels, 2022 was still the second-highest year on record with South Florida ranked in the top five markets for annual investment volume.”

Ryan Nee, senior VP for Marcus & Millichap in Fort Lauderdale, said there’s a price gap between buyers and sellers that has slowed transactions. Sellers want the prices of early 2022, but they’re largely no longer available. Buyers are seeking significant discounts, as not only have interest rates increased, but a dramatic spike in insurance costs for commercial real estate in recent months has eroded their profit margins, he said.

“The brakes have been put on and it’s hard to bridge the gap,” Nee said. “The Fed tapering rate hikes has added some calm to the market, but buyers want transparency on what the cost of debt is going to be.”

Multifamily

Vizzda broke down the transaction volume by category. The largest decline was in multifamily, plunging 72% to $1.2 billion. Despite the dramatic increase in rent in South Florida, fewer buyers were able to snag an apartment complex.

Nee said the fundamentals for multifamily in South Florida remain strong, with rising rents, a growing population and relatively low vacancy rates. Yet, the market is still impacted by interest rates and insurance costs, as well as higher property taxes.

Office

The second-largest decline was in the office market, with sales falling 65% to $455 million, according to Vizzda.

Tanner, of Las Olas Capital, said it’s virtually impossible to get a term sheet from a bank for an office acquisition. Many lenders feel the sector is too risky because many companies are permitting remote work and may downsize their office space.

Nee said Class A office space has been performing well in South Florida, because for every company that downsizes there’s another one moving into the market to occupy more space. Yet, buyers and lenders are still uncertain about the future of office and that has slowed transactions.

Retail

Sales of retail property dropped 31% to $1.1 billion. Nee said vacancy rates remain low for retail in South Florida and the population growth will continue to drive demand for space in that sector.

The retail market has done very well in South Florida, as sales are up for many stores and restaurants, said Barry M. Wolfe, senior managing director of retail in South Florida for Marcus & Millichap. However, rising interest rates still put a damper on the number of deals.

Industrial

The industrial market was the least impacted by the slowdown, as sales declined only 11% to $1.14 billion. Nee said vacancy rates are near record low for industrial in the region, there’s tremendous demand from tenants such as e-commerce firms and there’s a limited supply of new development. Those strong fundamentals kept industrial deals going, despite the economic headwinds.

Outlook for 2023

Nee said he expects the number of deals to pick up in the second half of 2023, but prices won’t return to the peaks from early 2022. The first wave of deals will probably be properties with maturing debt, as the owners may decide it makes more sense to sell than to refinance with a higher rate, he said.

“Debt maturing will be the number one catalyst for sales in the first half of this year,” Nee said.

Tanner, of Las Olas Capital, said more deals will take place once the Federal Reserve stops raising rates. After all, banks need to lend to make money.

“Everybody is sticking their head out of the cave and checking the weather out there and looking for a thaw,” Tanner said. “By the second half of this year, we will be back to fully ramped up.”

 

Source: SFBJ

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Smaller Banks Are Stepping Into The CRE Lending Void. For Now

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The commercial real estate debt market crumpled last year, weighed down by historically aggressive interest rate hikes, but one little-watched corner of the sector has stepped in to partially fill the void.

Regional and community banks have grabbed a larger market share of commercial real estate loans as banking giants like JPMorgan Chase, Bank of America and Wells Fargo have retreated from the market.

“The local and community banks have really stepped into that space that the debt funds were in before,” said JLL Executive Managing Director Gerard Sansosti, who co-leads the firm’s national debt practice. “I don’t think they’re under the same scrutiny that the money center banks are.”

But regional banks, with assets between $10B and $100B, and even smaller community banks can only fill so much of the vacuum, and if the Federal Reserve continues to raise rates, they will start to pull back themselves before too long, experts told Bisnow.

“Unless there is more clarity to the market and the capacity loosens up a little bit, I do believe [smaller banks] will get selective,” Sansosti said.

Banks overall have taken a larger market share in CRE as other lenders, such as debt funds, CMBS and insurance companies all saw activity plummet. Banks made up 46.4% of all nonagency commercial and multifamily lending in the U.S., up from 23.1% in the same period of 2021 and 30% in the second quarter, according to CBRE. Banks made up more than 30% of lending in the second quarter, according to a CBRE report.

Michael Riccio, CBRE senior managing director and author of the report, told Bisnow that community and regional banks were the main players during this period.

He said the volatile interest rate environment “essentially shut down” lending activity from major money centers. Overall loan closings dropped by 11% from the second quarter of 2022 and 4.7% year-over-year.

Truist Financial Corp., one of the country’s 10 largest banks with nearly $550B in assets, pulled back on commercial lending as its underwriting raised projected interest rates from 5.5% in the middle of 2022 to between 7% and 7.25% today, said Mark Hancock, senior vice president of Truist’s commercial real estate lending division.

“We’re taking care of our existing clients,” Hancock said. “We’re trying to get creative where we can without breaking our guidelines.”

As a result, Tony Marquez, the president of commercial banking at Bethesda, Maryland-based EagleBank, said he’s seen more traffic through his door among developers and real estate investors.

“There is a clear indication from my vantage point that we’re getting more looks at different deals because some of the larger banks have not been as active in the past year,” Marquez said, adding that loan growth for the regional bank was 2.2% in the third quarter compared to just 1% in Q2. 

Smaller banks are able to fill this void given they receive less scrutiny from banking regulators compared to money center institutions, Sansosti told Bisnow. Money centers are subject to annual federal stress tests and limits on how much commercial real estate lending they’re able to add to their balance sheets.

Michael Barr, the Federal Reserve’s vice chairman of supervision, warned last month that the central bank could tighten stress test requirements further, even though 33 of the largest banks passed those stress tests last summer, indicating they could weather a severe recession and continue to lend, Banking Dive reported.

Smaller banks see the vacuum left by money centers as a way to grab more market share, Commercial Real Estate Finance Council Executive Director Lisa Pendergast said.

“If you’re one of the few games in town, then you have more opportunity to ensure your loan is as creditworthy as it can possibly be,” Pendergast said.

There are limits to the size of loans these banks can make, however. Most regional banks don’t lend more than $40M to $60M on any deal, Riccio said, which means investors and developers have to go to multiple banks to cobble together enough debt for bigger projects.

“They’re not going to do a $200M loan,” Sansosti said. “They’re filling a need, but it’s more in that small to medium-sized loan.”

For now, Sansosti said the smaller banks have the upper hand, pushing potential clients to also open accounts and make deposits in exchange for loans while still tightening their own underwriting standards.

But unless the Fed ceases its interest rate hikes or reverses course in the event of a severe recession, smaller banks may soon have to pull back themselves, Sansosti said.

Some regional banks have slowed down already. Bridge Logistics Properties, industrial development and investment arm of Bridge Investment Group, has historically relied upon regional banks and debt funds for its projects, Eastern Region Managing Director Greg Boler said.

Boler said Bridge is getting construction loan quotes for a future project, but with higher interest rates pushing up borrowing costs, the quotes so far are “all pretty expensive.” It’s forcing Bridge this year to pivot toward acquiring warehouses instead of developing new ones.

“We killed a lot of deals. We did keep one deal that we were bullish on because of this location and the basis from a rental rate increase,” he said. “Nobody is going to be in a rush to catch the falling knife.”

 

Source:  Bisnow

 

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Why Sale-Leasebacks Are Especially Important Now

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The current economic climate has been difficult, with Federal Reserve interest rate hikes chasing inflation. Even as some of the pressures might be reaching a plateau, the Fed has made clear that further rate increases are still planned. That has led corporate lenders to become more cautious. They’ve been tightening their standards and lowering the amount of leverage available.

“Typically, a mortgage lender will provide 75% to 80% of the loan-to-value of the property,” says Gordon J. Whiting, managing director and head of net lease real estate at Angelo Gordon. “In today’s macroeconomic conditions, it’s much harder to get access to capital, it’s harder to get a loan, and you’re only getting 60%.”

Even as the corporate lending market has become less liquid and more expensive, capital remains available for sale-leasebacks at very attractive terms. Even as property values have been dropping — though they’re still largely at or above pre-pandemic valuations — the return to a company is still better. “They’re able to get 100% of the value today,” says Whiting.

The Advantage of Renting

There’s rent to pay, yes, but unlike interest on a loan, it’s completely deductible as an operating expense. The seller can also typically negotiate control for 20 years with options to extend.

“The rental will be lower than what they’d have to pay in financing,” Whiting adds.

And the longer the lease term, the better the value to both the buyer and the seller, making negotiation of that point easier.

With the future uncertain and rates potentially going higher, there is also value in locking down a strategy with certainty.

“You’re better off doing a sale-leaseback and paying off some of the more expensive or floating rate debt,” notes Whiting. “Cash is king.”

The more liquidity on hand, the easier it is to deal with unforeseen circumstances.

Why Working Capital Now Is King

Sale-leasebacks are also a great source of acquisition financing, particularly in the current market environment, where distress may drive opportunities for strategic add-on acquisitions. Companies can use sale-leaseback proceeds to help fund new acquisitions or expand upon existing platforms. A vertically integrated company might decide to buy a supplier. Sponsors can do the same, using proceeds of a sale-leaseback done at the time of an acquisition to lower their capital costs for the deal.

“Now sale-leasebacks are another arrow in a CFO’s quiver,” Whiting says.

From Whiting’s view, the market uncertainty and potential for ongoing rate increases are also a source of danger, with a sale-leaseback being an option to consider sooner, not later.

“Time is not your friend,” he says. “In our view, we’re headed into an environment where you’re going to be glad you did it the day before and not the day after.”

 

Source:  GlobeSt.

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Commercial Real Estate—Buy, Sell Or Hold?

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The commercial real estate market was beaten, broken and left for dead by Covid-19 in 2020.

It roared back to life in 2021 with record-breaking sales of $809 billion, but like cops pulling up to a rowdy frat house all-nighter, the arrival of unrestrained inflation and soaring interest rates may signal the party’s over. That has many real estate investors at a strategic crossroads wondering, “do I buy, sell or hold?”

Privately owned commercial real estate has historically offered a strong hedge against inflation. The owners of properties with short-term leases such as apartments, self-storage, and manufactured home communities can quickly raise rents to match inflation, as measured by the Consumer Price Index. That’s a significant advantage as the CPI topped 8% in March and April, reaching 8.6% in May, the highest rate since 1981. Then, like today, inflation was driven by a dramatic spike in oil and gas prices and an unrestrained Treasury flooding the economy with money.

In 1980, newly installed Federal Reserve Chairman Paul Volcker responded by strangling the flow of currency to such an extent that in December 1981, mortgage rates hit 20%. Inflation quickly declined, but at a cost of 10.8% unemployment, a decline of 3% in GDP, and not one but two recessions. While inflation is the friend of many landlords, recession is not, and the commercial real estate business began a decade-long decline.

A recession has followed every sharp increase in inflation over the past 75 years, and the current gravity-defying trend shows no sign of fading. The Producer Index – what manufacturers pay for raw materials – rose .08% in May, doubling the .04% increase in April, for an annual rate of 10.8%. Those costs will be passed on to the consumer, driving the CPI yet higher. Gas is over five dollars, and diesel is flirting with six. Given that sudden spikes in energy costs preceded six of the last seven recessions, and the Commerce Department reporting an unexpected decline in retail sales in May, another recession seems inevitable.

Investment real estate performance and GDP rise and fall together. A weak economy creates a decline in business and consumer spending, limiting the ability of landlords to raise rents. Pandemic resistant, “essential businesses” like Dollar General and Walgreens have been highly favored by investors. However, with leases holding their rents flat for 10-15 years, landlords will be losing money every year, as will big-box retail and office building owners with long-term leases not indexed to CPI. The Fed’s more aggressive monetary policy will create higher long-term interest rates, provoking a recession and stricter commercial lending requirements. Higher rates and loan equity requirements result in lower returns, causing investors to retreat and property values to fall. For investors with such assets who are alarmed by a disintegrating economy and contemplating a sale, it may be best to hold and wait for the inevitable recovery.

The cycle of decline and recovery often occurs over a decade or more. Property owners under 50 can afford to wait for the next upcycle if the market sees a significant correction. Commercial real estate always trends up over decades, and for 25 years has outperformed the S&P 500 Index, with average annualized returns of 10.3% and 9.6%, respectively. And, unlike stocks, bonds, and cryptocurrency, real estate has never been worth zero. For those younger investors, this may be the right time to buy.

“While rates are being managed higher as a deterrent to inflation, they are still historically low. Buyers who can lock in fixed rate debt on income property at current rates of 5.5% to 5.6% today will be winners as these rates are likely to be the lowest they may ever see,” said TowneBank Commercial Mortgage President, David Beatty.

Named a “Top Ten US Bank” by Forbes in 2022, TowneBank is a leading commercial real estate lender in Virginia and North Carolina.

What’s the case for selling in the current market? Few people doubt that commercial real estate values have reached a cyclical peak after a 12-year bull run. Secretary of the Treasury Janet Yellen recently expressed concern to the US Senate Banking committee that banks and non-bank lenders such as insurance companies and hedge funds maybe be overleveraged at a time of rising interest rates. Knowing cash is king, there is anecdotal evidence that portfolio owners are choosing to boost liquidity with strategic dispositions at apex pricing. In what may be a record-breaking sale for a single such property, an Arizona company paid $363 million for Jamaica Bay, a manufactured home community in Fort Myers, Florida.

Many investors anticipate a wave of defaults when acquisitions at aggressive pre-COVID prices can’t cover the debt service when their loans soon reset at higher rates. When real estate crashed in 1973, legendary investor Sam “Gravedancer” Zell, the father of the modern REIT, picked up dozens of high-quality apartment buildings at a fraction of replacement cost. Zell used the massive cash flow from those assets to buy office buildings at 50 cents on the dollar when the real estate market crashed again in the 1980s, becoming a billionaire. Today, the post-COVID “hybrid working” trend is driving tenants from center city office buildings to the more affordable suburbs. Those tenants who remain are demanding aggressive rent concessions to stay.

Foreshadowing a coming market correction are dozens of “distressed” real estate funds, amassing billions of dollars. Global investment firm Angelo, Gordon & Co. L.P. has in 36 months attracted $11billion in investment to its “distressed debt and special situations” platform. Investors are betting on a spike in real estate loan defaults, with banks forced to sell their debt at deep discounts to maintain FDIC liquidity requirements.

What about the smaller investor or owner/user? If you’re a doctor over 60 wanting to cash out the equity in your medical office building to facilitate a more comfortable retirement, now may be the time to sell and lease back. The demand for these properties is ceaseless due to their resilience during economic slumps. Montecito Medical is one of the nation’s largest privately held companies specializing in healthcare-related real estate acquisitions and a leader in sale and leaseback transactions. Since inception in 2004, Montecito has closed healthcare real estate transactions of over $5 billion.

“With the population of Americans over 65 projected to more than double by 2040, medical office real estate fundamentals are highly secure. That makes this category recession-resistant and a haven for capital at times when other commercial real estate sectors may be struggling. This was proven in both the Great Recession of 2008 and again during the Covid-19 pandemic,” said Chip Conk, chief executive officer of Montecito. “We built our entire business around medical office and the market has validated that strategy over and over. We remain as bullish as ever on this sector.”

Sale-leasebacks are increasingly common in other asset categories such as industrial real estate, perhaps the hottest commercial real estate category of all.

Owners with management-intensive assets like single-family rentals, manufactured home communities, and small apartment buildings may want to relax, travel, and otherwise enjoy the result of decades of hard work. They can use IRS Code Section 1031 to trade into management-free “absolute net,” single-tenant retail, enjoying historically low interest rates, avoiding capital gains and pocketing tax-free cash.

Being sensitive to economic cycles when buying, selling or hanging on is essential for success in commercial real estate.

 

Source: Forbes

 

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