Southwest Region: 2023 Q4 Perspective

 



 

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1. INFLATION

2. FOMC MINUTES

3. RACIAL INEQUITIES IN US HOUSING

4. CRE DELINQUENCIES OUTPACE RESERVES

5. PENSION INVESTMENTS IN CRE FALL

6. HOMEBUILDER SENTIMENT

7. “AGING IN PLACE” AND THE US HOUSING SHORTAGE

8. BUSINESS OPTIMISM

9. COMMERCIAL PROPERTY PRICES

10. RETAIL SALES & INVENTORIES

 

SUMMARY OF SOURCES

Along with all other loan kinds, lenders anticipate a rise in demand for CRE loans as well.

In order to have a deeper understanding of banks’ lending practices, the Federal Reserve conducts frequent checks with them through the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). The most current survey’s short summary for commercial real estate is that increasingly stricter underwriting requirements should be anticipated in the future.

Furthermore, although relatively modest demand from borrowers is eventually anticipated to be supported by softening interest rates, that is unlikely to occur until May or June.

The research stated that during the fourth quarter, a considerable number of banks reported tightening their rules for all kinds of CRE loans. Tightening requirements, particularly by the “other banks” group, were also true for multifamily loans. “Such tightening was more widely reported by other banks [or those with less than $50 billion in assets] than by large banks.”

A substantial net share of banks reported weaker demand for construction and land development loans, and major net shares of banks reported weaker demand for loans secured by nonfarm, nonresidential, and multifamily residential properties, they continued. Over the course of the fourth quarter, notable net shares of foreign banks reported tighter standards and a decline in the demand for CRE loans.

The percentage of respondents who are tightening conditions for CRE loans is close to the 2009 peak of the global financial crisis and just below the peak of the 2020 pandemic. Furthermore, the percentage of domestic respondents who reported a higher demand for CRE loans is significantly lower than it was during the GFC.

Banks expect demand for loans to increase as interest rates decrease, but with Fed messaging, this is unlikely to happen until May or June at the earliest. Dave Sloan, a senior economist at Continuum Economics, told Reuters that the results are “unlikely to generate any urgency for easing.”

An expected decline in collateral values, a less favorable economic outlook, an expected decline in the credit quality of the bank’s loan portfolio, an expected reduction in risk tolerance, an expected decline in the bank’s liquidity position, and increased concerns about funding costs and the effects of legislative or regulatory changes were the most commonly cited reasons for expecting to tighten lending standards over 2024, according to major net shares of banks, the Federal Reserve stated.

In layman’s words, the problem is bank anxiety, which has persisted since the early 2023 closures of First Republic Bank, Silicon Valley Bank, and Signature Bank. The shares of New York City Bancorp, which acquired the majority of Signature’s assets, including its CRE loan portfolio, have continued to tumble for almost a week now. At the closing on February 6, shares had dropped about 60%, from roughly $10.30 to $4.20.

There were other issues plaguing the New York community than just Signature. Though they were all tied to commercial real estate, there was also an additional charge-off on an office loan that went non-accrual during the third quarter, based on an updated valuation, and a New York cooperative loan that wasn’t in default but is now up for sale due to a unique feature that pre-financed capital expenditures. Furthermore, if one bank trembles, so do many more.

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.

1. GDP

2. COMMERCIAL PROPERTY PRICE INDEX

3. INDUSTRIAL REAL ESTATE TRENDS

4. REIT PERFORMANCE IMPROVES

5. RED SEA CRISIS & CRE

6. INTEREST RATE FORECASTS

7. CPI

8. WHO IS MOVING INTO SFR?

9. OFFICE TO APARTMENT CONVERSIONS

10. CONSUMER SENTIMENT

 

SUMMARY OF SOURCES

Spreads continue to rise: large for retail, moderate for offices, and low for industrial.

The Boulder Group reports that cap rates on single-tenant net lease buildings increased once more in the final quarter of 2023. Increases were seen in all three major groups—office, retail, and industrial—though not equally. For retail, they increased by eight basis points to 6.35%, for industrial by four basis points to 7.00%, and for office by fourteen basis points to 7.55%.
They stated, As asset pricing has not kept up with the massive increase in borrowing costs over the past year, cap rates continued to rise in the fourth quarter. In addition, a deficiency of 1031 purchasers is driving up the supply of real estate. In Q3 and Q4, the total number of properties increased by 11.6% to 4,085. The retail industry increased by 12.7%, from 2,753 to 3,103. Industrial, 9.2%, from 382 to 417. Office saw a 7.2% increase, from 527 to 565.
From 30 to 31 basis points in retail (1 point), 25 to 32 for industrial (7 points), and 55 to 67 for office (12 points), the asking versus closed cap rate spread expanded. In contrast to the recent market shrinkage that JLL reported it had observed, the gaps between buyers and sellers widened.
The drugstore and dollar store sectors are the ones in the net lease retail category that most clearly show the trend toward higher supply, according to the business. “Lease problems at the corporate level and ballooning supply are impeding both sectors, resulting in higher cap rate hikes than the retail industry as a whole. Moody’s downgraded Walgreens from investment grade to “junk” bond classification in the fourth quarter of 2023.
There is currently a large range for the 6.46% in Q4 of 2023 for the drug store industry. At 6.12%, CVS has the lowest rate. Walmart’s score was 6.33. Rite Aid’s percentage was 8.80%.
In the dollar store industry, Dollar Tree has been impacted by the Family Dollar brand, leading the company to reevaluate the Family Dollar assortment, stated Bolder Group. The pressure on Family Dollar is seen in the median requested cap rates by remaining lease term: In the fourth quarter, cap rates for Family Dollar and Walgreens increased by 25 and 15 basis points respectively. Over the course of nine to eleven years, Family Dollar saw 7.25%, Dollar Tree saw 7.00%, and Dollar General saw 6.85%. With Dollar General and Family Dollar at 8.5% and Dollar Tree at 8.40%, things were more evenly distributed at the upper end of the term left, or less than three years.
We are ready to assist investors with Santa Ana multifamily properties. For questions about multifamily properties, contact your Orange County commercial real estate advisors at SVN Vanguard.

In 2023, 440,000 completions brought supply to its greatest levels since 1987.

A recent RealPage analysis states that the number of rental apartments in the United States hasn’t been this high in 36 years. The outcome has been predictable: despite a comeback in demand, rents have decreased in markets with the highest increase.

In fact, 58,000 flats were absorbed in the fourth quarter of 2023, which is typically a quiet quarter. It was the highest fourth quarter in 25 years, excluding 2020 and 2021. Nevertheless, it was 11,000 less than the mean since 2000.

The research claimed that 234,000 units were absorbed for the entire year 2023, which is a number that is closer to pre-Covid norms. Total completions came to 440,000. As a result, supply increased to levels not seen since 1987, while apartment occupancy decreased by 80 basis points annually to 94.1%, which is still within the long-term average range.

The research stated that rising consumer confidence and slowing inflation, which includes falling rents, were the main drivers of demand. Chief economist Jay Parsons stated that rent growth is being pressured downward since renters now have a lot more options than they did in recent years.

Effective rents went up just 0.3% in 2023. Thankfully for investors, a bearish trend seems to have ended at that level. Nonetheless, the research raised the following significant question: would rents nationwide maintain steady as completions pick up speed in 2024? After another 671,000 are expected to be completed in 2024, supply should drastically decrease. If that occurs, occupancy and rentals should rise in 2025 and 2026.
RealPage discovered, as in earlier studies, a strong correlation between the quantity of flats offered for rent and rental prices. Rents decreased in about 40% of US metro regions, especially in locations where supply increased. This was particularly true in the Sun Belt and Mountains, which combined accounted for 62% of newly constructed flats nationwide and 70% of the demand for apartments. Seattle was the only city on the West Coast with a high demand for apartments. New demand increased by just 4% for the region as a whole, where 10% of the country’s new units were constructed in 2023.
Carl Whitaker, senior director of research and analysis at RealPage, stated, We’re seeing the impact to rents even in the Class B and Class C space in these ultra-high supply areas. In 2023, six Florida metropolises made it into the top 10 nationally for rent reductions. There were further significant declines ranging from four to six percent in Austin, Boise, Atlanta, and Phoenix.
On the other hand, a third of metro areas—mostly in the Midwest or Northeast—saw minimal construction and experienced rent increases of three percent or higher. Only two metros in these areas saw a decrease in rent.
We are ready to assist investors with Santa Ana multifamily properties. For questions about multifamily properties, contact your Orange County commercial real estate advisors at SVN Vanguard.

1. 2024 US MULTIFAMILY OUTLOOK

2. FOMC ECONOMIC PROJECTIONS

3. MARKET INTEREST RATE PROJECTIONS

4. 2024 BUSINESS TRAVEL TRENDS FORECAST

5. 2024 RETAIL TRENDS FORECAST

6. 2023 POPULATION GROWTH

7. Q3 2023 BANK CRE LOAN PERFORMANCE

8. COMMERCIAL REAL ESTATE PRICES

9. CONFIDENCE BOOSTS APARTMENT DEMAND

10. HOUSING STARTS

 

SUMMARY OF SOURCES

Corporate real estate owners are forced to devise innovative plans for the upcoming year due to rising cap rates and interest rate volatility.

Owners of corporate real estate are navigating uncharted territory. With interest rates and borrowing costs rising due to the Federal Reserve, many are turning to unconventional means of funding their deficits. Additionally, as 2024 approaches, these businesses are curious about what lies ahead.Two major themes will continue to have an impact on the net lease market in 2024, according to Gordon Whiting, managing director and head of net lease real estate at TPG Angelo Gordon.

First, there are high cap rates, which are seen as the “new normal.” Second, he anticipates a rise in the innovative capital raising option, particularly sale-leasebacks, as long as corporate borrowing costs are high.

Raising cap rates is the “new normal.”
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Since cap rates are at a 15-year high, Whiting does not see a notable decline in 2024. According to Real Capital Analytics, US single-tenant cap rates increased to an average of 6.24% in the third quarter of 2023 as a result of cap rate expansion in the industrial and office sectors. Cap rates for sale-leasebacks have been reported to range from 7% to 8%, which is also higher than historical averages.

He goes on to say that the market is beginning to realize that high interest rates are here to stay after a decade of falling cap rates and cheap interest rates. This approval might lead to a rise in sale-leaseback volumes in 2024, enabling building owners to raise money by selling a building to an investor and leasing it back over an extended period of time.

According to Whiting, transaction volume will naturally increase as buyers and sellers feel more certainty about pricing as the markets get clarity around Fed tightening.

Increase in the Volume of Sale-Leaseback Transactions

Mr. Whiting points out that, based on statistics from Real Capital Analytics, the number of single-tenant net lease transactions is expected to reach over $45 billion by 2023. In 2024, he anticipates that figure to approach the historical five-year average of $80 billion. The need to generate funds in an era of costly finance will contribute to the growth.

According to Whiting, sale-leasebacks are a desirable type of funding that lets business owners keep operational control and are typically less expensive than corporate debt.

Sale-leasebacks are an appealing alternative to traditional financing choices because they don’t have as many financial covenants as they used to.

It’s crucial to keep in mind that, according to JP Morgan, high-yield bonds with maturities within the next three to five years make up around one-third of all leverage loans that are now in existence, adds Whiting. As we enter the new year, there will be strong tailwinds for an increase in sale-leasebacks due to the need for creative corporate finance options for firms.

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.

1. CPI INFLATION

2. THANKSGIVING INFLATION

3. COMMERCIAL PROPERTY PRICES

4. GOVERNMENT SHUTDOWN AVERTED

5. FHFA CUTS GSE LENDING CAPS

6. EMERGING TRENDS IN REAL ESTATE: 2024 ISSUES TO WATCH

7. EMERGING TRENDS IN REAL ESTATE: 2024 PROPERTY TYPE OUTLOOK

8. HOUSEHOLD DEBT TRENDS

9. SMALL BUSINESS OPTIMISM

10. NAHB HOUSING MARKET INDEX

 

SUMMARY OF SOURCES

 



 

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