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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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The Office Market May Be Turning a Corner

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There’s some good news for the office market, according to Transwestern. In the company’s 2021 Q4 review, there was quarterly office absorption of 644,000 square feet, which the company described as “turning a corner,” as “33 out of 51 tracked markets registered positive net absorption as market correction is underway.”

The five areas with the biggest increases in net absorption were in Boston, San Jose-Silicon Valley, Dallas-Fort Worth, Seattle, and Charlotte. When looking at trailing four-quarter net absorption, the top five were Austin, Raleigh-Durham, San Jose-Silicon Valley, Oklahoma City, and Nashville. About 30% of the markets that Transwestern tracks showed positive net absorption over the previous 12 months.

Seattle, San Jose-Silicon Valley, Charlotte, Austin, Salt Lake City and Raleigh-Durham had all been experiencing an expansionary trend, meaning positive net absorption percentage of office space before the pandemic.

The December job numbers were up 199,000, with about a quarter of them being office-using jobs. That segment of employment was up 1% to 46.8 million, so the number of people potentially needing someplace to work is on the rise.

But there are still strains evident on office space. For one, there’s still an ongoing recovery that has taken wind out of the sails of the market from both the ongoing pandemic with new variants, people and businesses still adjusting to broader working from home, and macroeconomic factors like inflation and supply chain issues pushing up property values but also imposing greater costs on companies.

The Q4 national average vacancy rate crept up 10 basis points to hit 12.6%. That includes demographic shifts from north to south, which means that there is likely some duplication in office space as new units are built to house the shifting companies without necessarily having someone to backfill the old space.

There were 152.7 million sq. ft. under construction in the quarter, which was up 3.1% quarter over quarter, but down 9.1% year over year. That would seem likely due to uncertainty about the market and the large amount of space already available. Why build more when so much could be had?

The asking base rent saw 2.1% annual growth to $25.72 per sq. ft., below the five-year average of 3.3%. Some traditional powerhouses were hit. “The largest, densest and most developed markets have historically commanded significantly higher rental rates, yet pandemic-related trends have diminished these markets’ lead,” the report read. “Since the beginning of the pandemic, the two most expensive markets, San Francisco and New York, have experienced the largest declines in rental rates at -19% and -9% respectively.”

According to Transwestern, “Markets with strong tailwinds prior to the pandemic may be better positioned coming out of the downturn” when looking at three-year net absorption percentage of stock.

 

Source:  GlobeSt.

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