One observer of the commercial real estate market claims that the most recent rate increase by the Fed has increased the “expectations gap” between purchasers and sellers of commercial real estate.
According to a recent research video by Marcus & Millichap’s John Chang, “Sellers tend to be reluctant to respond to a cooling market.” Many sellers still aim for the highest possible price when they sell, which frequently leads to price chasing. However, purchasers are drastically altering their underwriting assumptions, which has led to a wider buyer-seller disconnect and a slowdown in commercial real estate activity.
Chang advises motivated sellers to adjust pricing to the market, and buyers to take advantage of the opportunity to focus on strategic acquisitions to position themselves for the next growth cycle.
According to a USA Today story, Fannie Mae has a new strategy to assist landlords in paying for rent reporting to credit agencies in order to assist tenants in raising their credit scores.
GlobeSt.com requested a comment from Fannie Mae but did not hear back.
Fannie Mae will collaborate with Esusu Financial Inc., Jetty Credit, and Rent Dynamics, three New York-based third-party services that Fannie Mae will work with to offer information for landlords and property management firms.
Rental payment data, which can impact credit scores, is accepted by the major credit reporting companies. When made on time, timely payments can raise them, whereas late rents can have the opposite impact. Many operators and landlords have already reported late payments, according to Credit.com. While timely payments are “growing more common to be reported,” smaller property owners are still less likely to do so. Reports can be generated by third-party providers, but they do so at a cost.
According to Michele Evans, executive vice president and director of multifamily at Fannie Mae, “We’re attempting to be a catalyst to speed this adoption given the reach that we have across the country.” “We’re rewarding borrowers [landlords] so it benefits historically underserved communities that just have disproportionately low credit ratings,” the statement reads.
Tenants who pay their rent on time may see their credit score rise, which may be helpful in the future when applying for items like a mortgage.
According to a report from the Consumer Finance Protection Bureau in 2015, “26 million Americans are “credit invisible,” which means they have no history with any of the three main credit reporting companies. 19 million more people are classified as “unscored,” meaning they don’t have enough recent credit history to receive a score from a rating agency.
Esusu states that utilizing their system, “the average resident’s credit score grew by +51 points in 18 months” and that “[reporting] rent payments to major credit agencies helps renters boost their credit ratings, all while helping owners and property managers maximize returns.”
In their marketing materials, Esusu, Jetty, and Rent Dynamics all state that they assist landlords in developing ESG efforts by collaborating with tenants (the “S” stands for social).
According to Marcus & Millichap statistics, sales activity for net-leased retail increased between 24% and 27% over the 12-month period ending in June as record rents approached historic highs and vacancy stayed below pre-pandemic levels.
In recent research, business analysts make the following observation: Going forward, investors wanting long-term cash flow may leverage on high pricing in other sectors and shift equity via 1031 exchanges into less management-heavy single-tenant properties. Buyers that are yield-focused will likely continue to target Midwest regions where 30 to 80 basis points higher than the national average.
Marcus & Millichap analysts claim that midsize markets have room for growth, with vacancy rates at record lows and transaction flow gains of over 25% year over year in 11 locations, mostly in the Mountain region and Florida. Tampa had the most closings among Florida cities, and Phoenix had one of the largest single-tenant transaction totals across all U.S. retail areas.
Secondary markets in cities such as St. Louis, Cleveland, Charlotte, Nashville, and San Diego have seen the biggest increases in prices year over year.
With shop openings more than tripling the number of closures in the first seven months of this year, retailers are also expanding their reach as core spending rises. Research further states that historically low number of single-tenant spaces constructed during this span obligated many of these merchants to occupy existing assets which continues to aid single-tenant vacancies and marketing rent advances.
Jimmy Goodman of The Boulder Group stated earlier this spring that when interest rates rise, cap rates for institutional quality net lease assets are anticipated to spread.
While Goodman believes this to be fact, the author writes, “On the other hand, a significant amount of cash from funds and 1031 exchange investors that buy single-tenant assets will counteract that upward trend.” He adds, “It’s just a matter of buyers and sellers determining agreeable pricing.”
Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.
(AIMI) for Q2 dropped nationally on both a quarterly and an annual basis, driven mostly by record mortgage rate growth, which resulted in historic results.
The country and 11 markets saw the biggest annual fall in the index’s history. The AIMI index declined 17.9% from the second quarter of 2021 to the second quarter of 2018, or 11.7% overall.
The AIMI index considers employment, multifamily permits, net operating income, and property price to help investors assess the relative worth of investing in multifamily buildings in a few key metro areas.
The greatest annual increase in mortgage rates in AIMI’s history, which began in 2000, was 131 basis points. The 30-year fixed rate reached 6% last week.
Property values climbed significantly over the past year, rising by 21.8%, while net operational income (NOI) jumped by 17.7% and mortgage rates increased by 1.31 percentage points, the highest increase in AIMI history.
Every metro saw growth, and the national NOI increased by 3%. Phoenix had the weakest growth rate with a 4.5% increase, while Miami had the best performance with a 4.7% increase.
This won’t seem normal or enjoyable.
From the start of Q1 2022 until the middle of September 2022, US Treasury rates increased, high-yield loan funding has all but disappeared, and agency spreads have varied between 160bps and 200bps, according to David Fletcher, Managing Director, Head of Acquisitions at Excelsa Properties.
According to Fletcher, the remarkable rent rise experienced in the majority of the United States has kept cap rates from rising as much as they otherwise might have, according to Fletcher.
The option value of purchasing a 4% cap rate in an economy with a 3.4% 10-Year Treasury Rate (2.97% SOFR) will be drastically reduced if the unprecedented rent increase is removed, he claimed.
Fletcher continued, “The enormous rent growth won’t last for much longer.” “Multifamily investors will be compelled to return to a world where producing current yield and working hard to grow and improve properties are the only ways to make money.” While it is typical for anyone who has been in the industry for more than three years, the move away from ultra-low cap rates and loans with 80% LTV at 4% interest rates won’t feel “typical or enjoyable.”
The best deals are made when markets are disconnected.
According to GlobeSt.com’s interview with Neil Schimmel, CEO of Investors Management Group (IMG), “Investors can take advantage of good value by disciplined buying in down or stalling markets.”
IMG is currently engaged in three purchases, a refinance, and three disposals, according to Schimmel, making it the busiest it has ever been. “Market disconnects are when the best transactions happen, therefore I anticipate there will be more alluring entry points in the future.”
In cities like Atlanta or Greenville, South Carolina, where tenant demand is driving up property values, Schimmel said he buys.
He claimed that “our Class B apartment assets are prudently positioned to perform through cycles.”
Prior to 2008, subprime markets grew at an alarming rate, but today’s stronger credit standards have restored stability to the housing market and longer-term fixed-rate mortgages.
Fewer People Can Get Home Loans.
The Freddie Mac Multifamily Apartment Investment Market Index Fewer purchasers are now able to qualify for mortgages as a result of the quick increase in interest rates and subsequent rapid rise in mortgage rates, according to Doug McKnight, President and Chief Investment Officer at RREAF Holdings.
According to McKnight, “this has encouraged more families to stay in, or resort to, rental properties, both single-family and multifamily.”
The consequent increase in NOI and the ongoing decline in vacancy rates have increased rental market values as market rents continue to rise.
According to McKnight, as leverage eventually falls into the negative zone, cap rates will rise, which would probably cause markets to respond by driving down the value of rental assets.
According to him, RREAF “continues to be net buyers of multifamily buildings with a careful focus primarily on locations where migration and economic growth continue to show signs of strength, allowing us to retain returns to investors.”
Shrinking current buyer base
P.B.’s chief financial officer, Jeff Thompson Bell, tells GlobeSt.com that because home ownership is becoming less feasible in the current market due to rising mortgage rates, the number of renters has remained high.
According to Thompson, as interest rates rise, the number of investors in multifamily acquisitions has decreased. “People are still buying and selling even if the available buyer pool is getting smaller and the number of bids in the market is declining. Among other real estate investment options, multifamily is still a desirable option.
Ground-up development hasn’t been greatly hampered on the development side. Strong population and job growth in the Phoenix metro area continue to be favorable for the multifamily market.
Freddie Thinks Investment Choices Are “Moderating”
In prepared remarks, Steve Guggenmos, vice president of research and modeling at Freddie Mac Multifamily, stated, “NOI growth is strong even though higher rates and property prices have caused the index to decline.”
The decline in AIMI this quarter is a result of weakening investment conditions brought on by shifting economic trends. Vacancy rates are still low and rents are high because of the overall housing crisis.
We are ready to assist investors with Santa Ana multifamily properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.
Many economists experienced a bad shock last week when the official consumer price index (CPI) was released. In reality, there was only one, and it suggested that the Fed would probably increase its benchmark interest rate by at least 75 basis points, if not more.
According to Charlie Ripley, senior investment strategist for Allianz Investment Management, “it’s becoming more evident to market players that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation.”
These are the immediate repercussions. However, the company also took note of some additional repercussions through the potential implications that certain parts of inflation could have on the firms that have rent obligations. Groceries and dining are “one area where consumers’ wallets have taken a big hit,” they noted, because despite the fact that food price inflation “slowed by nearly a third last month,” it is still up 11.4% annually.
Value-oriented meal alternatives are popular in both grocery stores and restaurants. Nevertheless, people are once again spending more on dining out than on groceries. According to Marcus & Millichap, “although food prices are rising, eating out offers a convenience and social experience that may offset the higher checks in consumers’ perceptions.”
It’s safe to claim we can respond to the question, “Does history repeat itself? after experiencing a number of recessions and identifying important trends. The answer is a loud “yes,” but we can use what we have learned from the past to lessen the risk by planning ahead more effectively.
The news stories of today make it clear that a recession is either coming or has already begun. In any case, the commercial real estate industry has historically been affected by market downturns, and this situation is no exception.
Although past recessions have had both beneficial and negative effects on companies, from credit restrictions to changes in sales volume, the legal issues that arise are probably the most expensive and long-lasting. Understanding the risks that arose during previous recessions and how they were handled may help lenders and developers stay safe during these trying times.Additionally, being aware of the past might help both parties take the appropriate safety measures to prevent a repeat of the same events.
According to statistics, there are statistically more construction-related litigation cases than any other loan litigation claims in any given year, and these numbers are even higher during a recession. Recessions have caused and are expected to continue to cause a variety of legal problems with building financing. Without market changes, these loans are already risky, but during a recession, cash-strapped contractors or those who underbid a project may end up doing shoddy repairs. As a result, there may be more faults as a result of hurried work, supply chain delays, labor shortages, cost-cutting measures, and/or manufacturing issues.
Construction-related issues can become more common and more expensive to handle during a recession, in addition to a rise in construction-related issues. Government shutdowns can affect the timing of permits and even necessitate the suspension of project work amid a recession and pandemic, in addition to the more usual weather delays, workmanship concerns, and supply chain delays. Events of default under the terms of the loan, fines, or extension costs may be triggered by delays. They may also have an effect on long-term funding sources and result in higher carrying costs. Delays may also result in guarantor responsibility for some loans, making it harder for the project to sustain in the long run.
Of course, variable interest rates are sometimes a sign of a volatile market. Early interest rate locking, however, can have benefits and drawbacks. Variations in interest rates can have a significant impact on the expenses of completion for those uncommon construction-to-permanent loans. Numerous lenders had to make difficult decisions regarding the feasibility of loan commitments during previous recessions in the face of claims from borrowers, which led to many borrowers with forward commitments having loan approvals revoked as a result of shifting interest rates.
Broken promises may lead to protracted legal proceedings and, in rare cases, punitive damages. Additionally, the impact and delays that follow might virtually ruin a project’s feasibility. There may also be personal liability if there are guarantors on the loan and the borrower defaults. Numerous lawsuits involving loan commitment termination were filed during previous recessions, and many courts carefully considered whether the reasons for the termination were valid.
Finally, a less reliable renter pool can result from recessions. Borrowers are more likely to default on their mortgage payments when tenants are unable to uphold their rental responsibilities. It should come as no surprise that during a recession, there are more foreclosures, deeds in lieu of foreclosure, and collection attempts. Due to the financial uncertainty, there are more bankruptcies.
Contrary to what many commercial lenders and developers may believe, a recession can really present opportunities. With appropriate planning, some risks may even be reduced. I genuinely believe it comes down to these ten suggestions after decades of risk management and litigation in the aftermath and with the benefit of hindsight:
To completely comprehend all of your contract provisions, have a new set of eyes look over your loan documentation, building contracts, and land purchase agreements. Make sure to carefully review your notice requirements and force majeure clauses and to adhere to them. Throughout the course of the project, review your documentation frequently, especially if construction loans are involved.
Ensure that your deadlines are consistent across all of your documents. Give yourself plenty of time to account for conceivable delays that might be unavoidable.
Make sure you start off by keeping precise, thorough records and notes. Follow up on the performance of the contract, noting any deviations or delays.
Inspect the area on a regular basis. Lenders should personally verify that deadlines are being followed while owners and developers should be monitoring their contractors and the project’s progress.
The key is communication. Although it sounds cliche, effective communication can save a relationship and raise the likelihood that a loan or contract can be modified when necessary.
Examine and keep your insurance.
Limit your promises. Although managing expectations may seem easy, it can sometimes make a difference in a project’s success.
Maintain your lane. In a recent ruling, a judge stated that “[i]f a lender exercises excessive control over a borrower, Although there is no fiduciary responsibility, “if a lender takes a particularly active role in the business decisions of the borrower,” it “may become liable for tortious interference,” even in the absence of one., a lender can take on the role of fiduciary rather than creditor.
Make use of specialists who have the expertise and knowledge to handle any issue that may arise, such as construction managers, inspectors, supervising architects, lawyers, and/or accountants.
Request document revisions as needed, secure the relevant approvals, and record any alterations to agreements.
Following these ten procedures will reduce legal risk, if not completely eliminate it, even during a recession.
We are ready to assist investors with Santa Ana Commercial Real Estate properties. For questions about Commercial Real Estate Investments, contact your Orange County commercial real estate advisors at SVN Vanguard.
The good news is that REITs as a group have recently performed well. They were up 4.2% as of last Friday, per BTIG Research. Comparatively, the S&P 500 and Russell 2000 stock indexes saw returns of 3.6% and 4.0%, respectively.
But then there was this line: “Rates are expected to be in focus again for REIT with strong inflation measures on tap for this week’s economic calendar (CPI prints on Tuesday, PPI prints on Wednesday).”
Additionally, Tuesday’s CPI prints, sometimes known as inflation data, fell far short of forecasts. Almost everything else was up, even if oil was down. Core inflation, which excludes food and energy, reached 6.3%, exceeding experts’ expectations by a factor of 2. Consumers suffered from the basics. Monthly growth in food was 0.8%. Shelter increased by 0.7% from month to month. August to July had a 0.5% increase in transportation.
When the Fed meets next week, the benchmark interest rate will likely rise by 75 basis points, with a potential increase of 1 percentage point.
According to a Nareit piece from early 2022, inflation is often advantageous for REITs. The company stated that “REITs have traditionally offered protection against inflation and outperformed the broader stock market during periods of moderate and high inflation,” where it defined moderate inflation as occurring between 2.5% and 7.0% and high inflation as occurring beyond 7.0%.
But there are also interest rates, which the Fed has aggressively raised in an effort to restrict economic growth and bring inflation back to about 2%.
According to BTIG’s analysis, “REITs as a sector have significantly cleaned up their balance sheets since the GFC.” However, in 2022, both the weighted average rate on REIT debt and the ratio of interest expense to NOI will be at historic lows. If rates continue to rise, which they will, this creates a danger to projections and results.
As a result of rates being so low for so long and seeing so many false starts, the company added, “We think there is a danger that interest expense has been rooted in consensus projections.” To put things in perspective, the current SOFR forward curve indicates an average rate of 3.84% in 2023, before taking into consideration any credit spreads. As a result, the weighted average rate for total REIT debt throughout the industry in 2023 will be higher than the average 1-month rate at present. Unhedged variable-rate balances will be impacted by this, and there may be volatility for external growth if buyers are compelled to reevaluate their financing assumptions.
Experts predicted that inflation would decline as a result of the decline in oil prices, which moderated the strong impact energy has had on the economy. Not at all. It became worse.
In one sense, it wasn’t by much—the rise was 0.1 percentage points. But given the expectations, it came as enough of a shock for the markets to tremble. As of 10:15 a.m., the S&P 500 was down around 2.6%, the Dow was down 2.3%, and the Nasdaq was down 3.2%, according to S&P Global Market Intelligence.
As this episode of inflation shows to be anything but “transitory,” Cliff Hodge, chief investment officer at Cornerstone Wealth, said in a statement sent by email, “Misses on both the headline and core are disappointing.”
There are two things it means for CRE. First, it is unlikely that the Federal Reserve will stop raising interest rates. Consider that in its scheduled meeting next week, a minimum 75-basis point increase is a given. It’s possible that it would increase by a full percentage point in response to the shift, which would result in significantly higher financing costs for all real estate projects. If you previously borrowed at significantly lower rates and are getting ready to refinance, this is bad news for you.
According to Charlie Ripley, senior investment strategist at Allianz Investment Management, core inflation, which excludes food and energy, increased “twice as quickly” as predicted by experts, reaching 6.3%. Market investors are starting to realize that the Fed’s current level of tightening is insufficient to slow the economy and lower inflation, according to Ripley. The Bureau of Labor Statistics emphasizes the second aspect of the impact, which is more indirect and has to do with the specifics of inflation.Since the beginning of the year, the main causes of inflation have been energy and related commodities. The biggest declines are now visible, but inflation is still rising. Even still, the annual increase in energy is still 23.8%. Hodge stated that “price hikes were prevalent,” with more than 70% of the CPI basket increasing by at least 4% annually.
Monthly growth in food was 0.8%. Even though it’s the slowest expansion since February, the unadjusted 12-month growth rate of 11.4 percent is still impressive.
Rent and similar housing costs for homeowners increased by 6.2% annually and 0.7% month-over-month. The core services sector continues to see housing prices lead the way, rising 0.7%, the fastest monthly gain since January 1991, according to Oxford Economics.
Transportation increased by 0.5% from July to August and has increased by 11.3% annually.
Consumer confidence will undoubtedly decline as they experience a tighter strain on necessities, which will also affect their capacity to spend money on other things. The pressure on retail and hospitality might possibly increase, posing a bigger risk to owners and operators from tenants. Casual travel and hospitality could suffer as a result. Because forcing people back into the office would increase costs for the employees, the office, which is already under pressure, might discover that tenants don’t feel they can do it as easily.
Overall, there is no positive news.
We are ready to assist investors with Santa Ana Commercial Real Estate properties. For questions about Commercial Real Estate Investments, contact your Orange County commercial real estate advisors at SVN Vanguard.
According to a recent study from Trepp, CMBS delinquency rates in August 2022 were 2.98%, finally dropping under 3% for the first time since the pandemic. They had hardly decreased below 6% the previous year. Six months have passed since they fell below 4%.
Delinquency for CMBS peaked at 10.34% in July 2012, marking its all-time high. 10.32% was the pandemic’s peak in June 2020.
The percentage of loans that were at least 60 days past due, in foreclosure, REO, or non-performing balloons was 2.89%, which does indicate that the majority of delinquent loans face significant issues. Following that, foreclosure properties accounted for 100 basis points of the total. According to Trepp, “If defeased loans were taken out of the equation, the overall 30-day delinquency rate would be 3.14%.”
Commercial mortgage-backed securities are a significant component of CRE. The CMBS structure enabled lenders to free up capital for additional investments by bundling commercial mortgages into financial instruments that resembled bonds and offering fixed-income to investors in exchange for upfront payments.
According to the Trepp analysis, the decline in delinquency rates is not unexpected. As loans in those categories “continue to see steady improvement each month as loans in those categories cure and/or pay off.”
Lodging delinquency was 5.18%, down from 12.05% a year before. Retail is down from 10.43% last year to 6.45% this year.
Due to continuous pressures around work-from-home, including many employees’ want to continue working from home, office still confronts difficulties. The firm warned that because most businesses are bound by five- and 10-year leases, the effect “will take years to play out.” The office delinquency rate is 1.50% currently, compared to 2.12% last year.
Gerard Sansofti, an executive managing director and the head of JLL’s debt and loan sales platform, claimed in an interview with GlobeSt.com in February 2022 that the general financial meltdown in 2008 resulted in major improvements to the structures of CMBS issuances.
The structures are likewise less important to the projects. Over 50% of the market used to be CMBS. “Today, 10% to 15% of the market is affected. There is substantially more capacity at banks. Additionally, insurance firms have a lot more money. I don’t see the liquidity problem we experienced previously.
Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.
As output boosted the US economy in July, volume at The Port of Los Angeles reached its sixth all-time high in seven months, raising concerns about the area’s infrastructure, warehousing demand, and rate structures.
A total of 935,345 Twenty-Foot Equivalent Units (TEUs) were processed in July, breaking the previous record from 2019 by 2.5%.
At a news conference on Wednesday, Port of Los Angeles Executive Director Gene Seroka stated, “Remarkably, we continue to move record amounts of cargo while working down the backlog of ships by almost 90%, a remarkable accomplishment by all of our partners.
Observing that ships are now waiting for space at numerous other ports across the US, Seroka claimed that the supply chain environment in Southern California has improved.
Regarding the biggest port in the world, Seroka remarked, “Our terminals have capacity. For cargo owners looking to re-chart their course, come to Los Angeles. We’re ready to help.”
“We are also seeing many third-party logistics (3PLs) and warehouse users over-order their supply, as it has been hard to get goods from overseas since the pandemic started.
“The record volume has caused rental rates for industrial to rise dramatically. There is not enough warehousing supply to meet the influx of containers and product flooding the Southern California industrial market. With a sub 1% vacancy rate and a scarcity of industrial land, tenants are having a difficult time securing the space needed to store these goods.”
“We predict that tenants will be forced to be searching for warehousing in more peripheral markets where there is more supply of industrial land.”
Highest Rent Gains in Boston, New Jersey, and the Inland Empire
Supply-chain issues, according to Doug Ressler of Yardi CommercialEdge and GlobeSt.com, are making it more important than ever to be strategically situated and pay a premium for space in port areas, which have had the biggest increases in in-place rents in the past year.
According to Ressler, the areas with the highest rent increases are the Inland Empire (8.7%), Boston (8%), New Jersey (7.8%), Los Angeles (7%) and Orange County (6.8%). Additionally, port markets have the lowest vacancy rates. The Inland Empire is at 0.8%, Los Angeles is at 1.9%, and Orange County is at 3.1% in Southern California, which has the narrowest region.
According to Ressler, “The United States is a consumption-driven economy, and most goods come into the country from elsewhere, Estimates peg transportation as accounting for at least half of companies’ supply-chain costs. Although energy prices have fallen of late, those costs are still elevated compared to historical averages.
“Recent supply-chain stresses have illuminated exactly how dependent the U.S. is on other countries for both raw materials and finished products. As a result, firms are now exploring reshoring and nearshoring of manufacturing, which would reshape supply chains but also lead to new challenges.”
