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In CRE lending, it has been depository banks mentioned as pulling back, worried about falling value of properties that would affect loan values that could undercut the bank’s assets and create regulatory danger.

According to Trepp, though, this is more than an issue for just banks. The major mortgage REITs saw their collective loan portfolios shrink by nearly 11% over the past year, as most had sharply curtailed lending and turned their sights to their problem loans, it found. The reason is that mortgage REITs typically fund relatively short-term loans with floating coupons that are designed to either improve or stabilize commercial properties, Trepp explained.

“They and, more specifically, their borrowers were walloped as interest rates spiked and commercial property markets turned against them.”

REITs aren’t regulated the way depository institutions are, but there seems to be a market equivalent of regulation. Trepp has tracked 14 different REITs that originate loans. In 2021, that group had made $49.83 billion in loans. By 2022, the total was down to $30.9 billion. The annual total fell to $4.69 billion in 2023.

The biggest seven drops in loan portfolios — that number because it captures all that saw double-digit declines — were TPG Real Estate Finance Trust (-35.83%); Ladder Capital (-18.80%); Blackstone Mortgage Trust (-18.12%); BrightSpire Capital (-16.52%); InPoint Commercial Real Estate Income (-13.30%); Granite Point Mortgage Trust (-12.60%); and ACRES Commercial Realty (-11.57%).

The second tier of cuts comprise CIM Real Estate Finance Trust (-8.38%); Ares Commercial Real Estate (-7.54%); Franklin BSP Realty Trust (-5.66%); Starwood Property Trust (-5.28%); Apollo Commercial Real Estate Finance (-3.71%); and KKR Real Estate Finance Trust (-1.87%).

The only REIT that saw growth from 2022 to 2023 was FS Credit Real Estate Income Trust, with 9.73%.

“That sharp reduction in originations, along with loan repayments, has led to a reduction in the REITs’ portfolios of mortgages, to $87.51 billion at the end of last year from $98.88 billion in 2022,” they wrote.

In terms of scale, the portfolios total at the end of 2023 is virtually unimportant in the entire commercial mortgage landscape of $5.6 trillion. It also isn’t representative. However, it is notable and “a solid indicator of the troubles property owners might have faced when looking for financing” that “helps explain the sharp reduction in property sales activity.” If investors can’t get financing, they’re not going to buy. And with the short end of Treasurys with yields around 5.5%, it’s a safe route to profit.

When conditions change, the companies will reenter the market. But for now, the REITs will concentrate on reducing troublesome loans and keep their cash for opportunistic investment.


Source:  GlobeSt.


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Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.

Powell said the banks that are in trouble with falling office space and retail assets are not the big banks, which were designated as “systemically important” in the aftermath of the 2008 financial crisis. That episode, which resulted in a taxpayer bailout of the financial sector, was also triggered by unsound real estate assets.

Rather, the banks at risk of failure now Powell identified as smaller and medium-sized.

“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” he said during a Thursday hearing on the Fed’s monetary policy in the Senate Banking Committee.

“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” he said.

Powell didn’t go into detail about the specific regulatory actions regarding commercial real estate exposure that are now being undertaken by the Fed, which is both the federal currency issuer and one of the primary bank supervising agencies, though he did say he had identified the banks most at risk.

“We are in dialogue with them: Do you have your arms around this problem? Do you have enough capital? Do you have enough liquidity? Do you have a plan? You’re going to take losses here — are you being truthful with yourself and with your owners?” he said.

Commercial real estate investment trusts, known as REITs, have taken a hit over the past few months. Alexandria Real Estate Equities, Boston Properties, Kilroy Realty Corp., and Vornado Realty trust are all in negative territory since the beginning of the year.

Powell described the decline in value of commercial real estate as a result of remote work following the economic shutdowns of the pandemic as a “secular change” in the economy.

“In many cities, the downtown office district is very underpopulated. There are empty buildings in many major and minor cities. It also means that all the retail that was there to serve those thousands and thousands of people who work in those buildings, they’re under pressure, too,” he said. 

While the decline of commercial real estate values could put some banks out of business, Powell expressed confidence that the Fed and financial regulators would be able to contain the fallout and prevent a broader crisis. Thirty-four U.S. banks have failed since 2015, according to the Federal Deposit Insurance Corp. (FDIC), which insures deposits at regulated banks.


Source:  The Hill

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As the stock market continues to show volatility, many people are looking into other types of investment opportunities.

Compared to stock investing, commercial real estate has the potential to provide tax advantages and serve as a safeguard against inflation and market fluctuations.

Fortunately, there are many ways to invest in commercial real estate, and you can tailor your approach to fit your comfort level, budget and lifestyle—all while creating a dynamic portfolio.

Let’s look at 10 of the most commonly overlooked investment opportunities in commercial real estate.

1. Flex Warehouses

Industrial commercial real estate currently offers some of the best returns on the market. As organizations continue to work out complex supply chain issues, flex warehouses are becoming a crucial tool.

This type of warehousing offers a combination of storage and office space. It’s a way to deliver versatility for companies that need to store inventory and have a customer-facing area.

2. Parking Lots

With more than 282 million cars on U.S. roads, finding a parking spot is often a challenge. Parking lots are a low-maintenance commercial investment, and you can choose to operate the lot or lease it to a third-party operator. Dynamic pricing can capture the ebb and flow of demand to increase the return on investment.

3. Real Estate Investment Trusts

Real estate investment trusts, or REITs, are a great way to start off in commercial real estate investing. They allow you to skip the hands-on approach of dealing with a property.

Investing in a real estate investment trust (REIT) can offer a reliable source of income. Similar to real estate stocks, investors can buy and sell REITs on the market.

4. Self-Storage

Self-storage has outperformed other commercial real estate sectors for many years. Yet I see many people still overlooking self-storage. These properties can offer consistent, good returns even during downturns and recessions.

Remember to think strategically about the location, for this is critical when opting for this type of investment. In some areas, investors have seen some retraction due to oversaturation.

5. Cell Towers

Many people, especially those new to commercial investing, don’t realize that cell towers are a prime opportunity. They can become a source of steady income over time. As cell service expands into rural areas, investors can provide a much-needed service and a long-term return to their portfolios.

6. Senior Living Facilities

Senior living facilities are another commonly overlooked commercial property. As the number of U.S. adults 65 and older increases, more people are looking for long-term living in senior-specific residences. This creates a great investment opportunity for senior living facilities.

7. Mobile Home Parks

A growing number of homeowners are turning to flexible and budget-friendly mobile homes. And mobile homeowners have to park them somewhere. These areas can become a reliable source of passive income for investors. Lot rates have also increased in many markets recently, so now may be the perfect time to invest.

8. Commercial Multifamily Units

While residential multifamily properties only include two to four units, commercial multifamily properties include five or more. The increase in units can provide a larger stream of income, which could make this real estate opportunity a star performer in your portfolio.

Before investing in a commercial multifamily property, remember to do your due diligence. For instance, check the financial audit and property market reports, determine how the property will be managed and review service contracts, such as trash removal and lawn care.

9. Coin-Operated Laundry Shops

Getting into commercial real estate doesn’t always mean financing six-figure properties immediately. I find that coin-operated laundries are a simple way of investing in real estate for beginners.

One option is to convert an unused or overlooked space into an existing property. With this option, you can start small and even finance or lease equipment to avoid high out-of-pocket costs.

10. Undeveloped Land

All commercial real estate properties involve land. But sometimes, the investment opportunity is undeveloped land.

Investing in undeveloped land can be a little daunting if you’re unsure what your next step will be. Many commercial brokerages offer consulting or development partnerships to help you get the most out of your commercial land investment.

Adding Depth To Your Investment Portfolio

Investing in one or more forms of commercial real estate is an excellent way to improve your portfolio, and it can provide you with the versatility to withstand market and economic volatility.

A good tip is to explore commonly overlooked investment prospects, as they can offer entry points and create the right mix for your portfolio. One of the best ways to help you connect with these types of opportunities is by partnering with a brokerage.


Source:  Forbes

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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.