The Port of Los Angeles is suffering as a result of record-breaking volume.

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.

“Even with the current rail challenges, our marine terminals are more fluid than last year. That’s due in part to our data portal that allows our stakeholders to see around corners and tackle problems before they arise.”

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.”

Ordering of goods won’t slow down “anytime soon”
According to Brad Yates, Senior Vice President at Stream Realty Partners, as e-commerce grows, so does the demand for additional warehouse space, which has a significant influence on Southern California’s ports and roadways.

“With so much demand for warehouse space here, we will continue to see an increase in port activity,” Yates said. “As COVID-19 fueled this demand in early 2020, and now more people are ordering goods online, it will not slow anytime soon.

“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.”

Roads in Los Angeles are not expanding at the same rate as the need for warehouse space, according to Yates, so the situation will only get worse as warehouse space becomes more in demand.

Additionally, he added, “It is also harder for trucking companies to hire and retain workers, If the imbalance between supply and demand continues, the lease rates will continue to rise. That imbalance coupled with many cities implementing moratoriums on new industrial development, especially in the Inland Empire, it is hard to forecast the supply of warehousing easing over the near future.

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.”

He claimed that although more items would be produced domestically, port markets may see some alleviation.

According to Ressler, “U.S. rail and highway infrastructure will need to be upgraded to handle the increased domestic and cross-border movement of goods, In the near and medium term, current issues will be here to stay, as supply chains are massive, complex systems that take a long time to fundamentally change.”

Many states around the US, including Florida, California, Minnesota, New York, and Nevada, continue to discuss and implement rent control.

According to a study released this week by the National Multifamily Housing Council, a number of proposals have either been passed, rejected, or put on the ballot in November (NMHC).

According to Ric Campo, the company’s chief executive, apartment operators like Camden recently said in The Wall Street Journal that “it will not build in a rent-control market.”

According to Sean Rawson, co-founder of the California-based Waterford Property Company,“From a public policy perspective, rent control is an extremely short-sighted way to provide housing affordability.”  As a developer and investor in affordable housing, Waterford is a strong supporter of income-restricted housing; yet, imposing rent control unfairly burdens private investors, deters new investment in communities, and costs the long-term rental advantages.

“In my opinion, the long-term negative effects far outweigh any short-term political benefits for elected leaders.”

Building permits in Florida often take two years to obtain

These administrations keep citing a lack of homes and rising demand. The recent declaration of a housing state of emergency in Lake Worth, Florida, was considered as the first step toward attempting to enact rent control.
Governments continue to use regulation to stall the building of new homes. According to a recent survey by NMHC and the National Association of Home Builders, the average cost of developing a multifamily property is 40% accounted for by regulations at all levels of government.

According to the Florida Apartment Association, some Florida developers have to wait up to two years to get their building permits.

A review of the status in each state

A resolution to put rent control on the ballot was approved by Orange County’s County Commissioners in Florida. If adopted by voters, the resolution would set a one-year limit of 9.8 percent on rent increases in Orange County.

The city councils of Tampa and Saint Petersburg both voted down initiatives to place rent regulation on their November ballots.

The influential Culinary Workers Union Local 226 in Nevada committed to keep working for passage, and according to NMHC, “we expect a fight at the state level in 2023.”

Kingston, New York, became the first upstate city to establish rent control in the state of New York. 90 miles north of New York City is Kingston.

According to local reporting, the legislation applies to structures with six or more units constructed before 1974, which corresponds to around 1,200 units.

In California, Richmond’s city council decided to put a rent control issue on the November ballot. Richmond is located immediately north of Oakland.

According to NMHC, “if passed, rent increases would be capped at 3 percent of a tenant’s existing rent or at 60 percent of the Consumer Price Index, whichever is lower.”

In November, a rent control referendum will also be held in Pasadena.

St. Paul, Minnesota, is thinking about making adjustments to the rent control ordinance it passed last year. A member of the municipal council is proposing to provide new development a 20-year exemption. According to the NMHC, certain federally funded housing would also be exempt from the regulation.

The commercial real estate sector had a jolt when the Federal Reserve increased interest rates by 75 basis points in June and again 75 basis points in July. Fortunately, there are ways around and fixes for these possible obstacles. Investors in the five to 150 unit small balance lending (SBL) segment of the multifamily housing market have a number of choices to accomplish their goals of financing multifamily portfolios. View the timeline above in larger resolution by clicking here.

A recent webinar entitled “Financing Amid Rising Rates: Best Approaches for $1M-$15M Multifamily Loans” featured market professionals from Walker & Dunlop who discussed how to successfully navigate the current financing environment. Tim Cotter, director of capital markets, Allison Herrera, senior director of SBL, and Allison Williams, senior vice president and chief production officer, made up the expert panel.

In a range of finance contexts, these seasoned experts have discovered strategies to close agreements and have shared their insights and advice. The following advice will assist you in navigating the current financial landscape and gaining momentum if you are an owner of five to 150 unit properties in need of loans ranging from $1 million to $15 million.

Step 1: Take into Account All Available Capital Sources
Walker & Dunlop asked viewers about their current sources of capital during the webcast. With 70% of respondents saying they had recently worked with a bank or credit union, bank and credit union funding was the most common.This source of funding is appropriate for a variety of uses, including conventional and construction financing that cannot be covered by interest-bearing debt. However, taking out a loan from one of these highly regulated institutions may have certain drawbacks, including recourse for all or part of the loan, tougher underwriting standards, and possibly limited capital availability in the coming months.

Due to these factors, buyers in the multifamily market’s $1 million–$15 million segment should look outside of banks and credit unions for their financing options. The Department of Housing and Urban Development (HUD), life insurance companies, Freddie Mac and Fannie Mae, as well as commercial mortgage-backed securities, make up the whole spectrum of funding sources (CMBS).

Here is a quick summary:

Agency finance: The US government founded Fannie Mae and Freddie Mac with the goal of financing affordable homes in both good and bad economic times. Their programs are less susceptible to market volatility as a result.

If you are aware with the nuances and requirements of the program, agency financing can be executed more quickly because it is non-recourse, which gives it an advantage over many bank options.

Additional benefits for multifamily SBL borrowers include:

80% maximum loan-to-value (LTV)
a low ratio of debt service to total debt (DSCR)
Early interest rate locks and interest rate holds
a more accommodating pre-payment framework with cash-out options than other government funding packages
HUD financing: This option may be appropriate for SBL borrowers who have the time and resources for a more drawn-out execution procedure as well as for comprehensive reporting and documentation following closure. HUD programs are renowned for offering competitive borrowing rates and leverage that can be greater than that provided by Freddie Mac and Fannie Mae. Longer terms, up to 30 years, complete amortization, and a reduced debt service coverage ratio are all options for borrowers.

HUD offers programs available for development as well as financing market-rate homes as well as affordable and rent-restricted housing.

Don’t let your thoughts be constrained by the idea that life insurance firms only invest in low-leverage, institutional-quality deals involving fully leased properties in significant metropolitan centers. There are options for loans of different sizes, ranging from $1 million to $15 million, and some life companies are willing to finance older assets that require renovations. Additionally, life insurance firms provide many of the benefits of agency financing, including non-recourse terms and relatively quicker and more efficient execution.

CMBS: Despite being frequently seen as “financing of last resort” and with spreads now expanding, CMBS can be an excellent choice for:

Deals that don’t mesh well with agencies or life firms
Sponsor with a negative credit history
A contract having a distinctive quality
The last thing to keep in mind is that not all financing needs to be long-term or permanent. Bridge loans with terms of 2 to 5 years are an excellent choice for:

Objects that need further stabilization
After-purchase property rehabilitation
Purchasing a house that hasn’t been stabilized because of a recent occurrence, such as damage to some of the units
Changing to a permanent loan transaction, a refinance, or a sale
These loans frequently feature fluctuating interest rates, but they may also include a ceiling on those rates for your safety. For additional loan funds for uses like rehab work, such loans might be underwritten to pro forma operating income, which is the predicted cash flow once the property is stabilized and occupied versus where it is now.

Step 2: Control What You Can

There are several factors that an SBL borrower can influence as long as interest rate volatility persists, despite the fact that you cannot control inflation, the Fed, or geopolitical events.

You should start with your current portfolio. Have you got a loan with a pre-payment penalty or one that you weren’t quite ready to restructure a few years ago? It could be wise to go over these scenarios once more and look into refinancing possibilities.

Look at your net operating income to acquire the best leverage and highest LTV:

Are your operating costs as minimal as possible?
Can you cut any fees that aren’t necessary?
Are you performing maintenance in the most efficient manner possible?
Finally, organize your paperwork. Having the required documentation on hand expedites the process because you want to lock in an interest rate as soon as feasible.

Think about cap rates at every stage. These are still still moving independently from the Treasury rate and at historic lows. However, the strong rent growth of today is probably going to change things. Continued rent growth will influence cap rates because it will contribute one of the biggest increases to operational revenue. As a result, you could conclude a loan at a cap rate that is far lower now than it would be at year’s end.

As a result,
Work with an expert on your future steps, whatever they may be. They’ll have an up-to-date understanding of who is financing in the $1 million to $15 million range, how much they are loan, and under what terms and conditions as the market changes. You can download the Walker & Dunlop financing guide to learn more about your possibilities.There is never a bad time to begin. An experienced partner can monitor the market, assess potential lenders, and even assist you in locking in a rate early that is based on your cash flow or anticipated stabilization even if your property is just in the planning stages.

You can be sure that your multifamily ambitions won’t need to be put on hold by having a complete understanding of your funding alternatives, taking preemptive measures, and receiving expert advice. Regardless of what happens with interest rates in the next months, a professional will be able to ensure that 2022 is a year of progress rather than pauses.

Many people had begun to think that the Federal Reserve might start to scale down the interest rate rises as a result of some easing in the producer price index and inflation. That news would be welcomed by the CRE sector. However, it’s unlikely to arrive. Certainly not this year.

The minutes from the Fed’s July meeting were made public. Although it is a two-week in the past mirror, it is close enough to show how the Central Bank is viewing the economy and its goals. It appears that a small improvement in some areas of the economy is insufficient for a significant shift.

They stated that “recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

“In assessing the appropriate stance of monetary policy, the [Federal Open Market] Committee will continue to monitor the implications of incoming information for the economic outlook,” they continued. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

It’s a lengthy way of cautioning markets against getting their hopes up too fast.

Quincy Krosby, chief global strategist for LPL Finance, noted in an email that, “The Fed minutes stressed that the campaign to curtail inflation [will continue] until the Fed believes inflation has fallen enough to reach levels commensurate with price stability, This suggests that the market’s optimistic reaction to Chairman Powell’s July press conference was premature. That a parade of Fed speakers came out with a nearly orchestrated response following the July Fed meeting warning market participants that the Fed is by no means close to easing its campaign was dismissed by the market.”

Bill Adams, chief economist at Comerica Bank, added in a separate note, “It’s a no-brainer to expect rate hikes to continue in the near term. As the Fed’s July monetary policy statement said, the FOMC “anticipates that ongoing increases in the target range will be appropriate,” and that still holds, even with WTI back under $90 a barrel. Comerica forecasts a half percentage point increase in the fed funds rate at the Fed’s next meeting in September, but it’s a close call between that and another hike of three-quarters of a percent.”

While nobody wants a recession, they are at times a natural result of the business cycle. Although the pandemic recession was an exception in that regard, there is a good probability that the United States could go through another one in the near- to mid-term.

In a recession, the strongest companies will probably profit first, albeit at the expense of weaker ones. According to Jahn Brodwin, co-leader of the real estate solutions business and senior managing director at FTI Consulting, “patience and working capital are typically the two ingredients that insure a successful real estate investment. When an investor lacks one or both of these during a recession, it can lead to forced sales at inopportune times at less-than-optimal prices or worse, lead to foreclosures. The corollary to that, of course, is that those with the funds available today will likely have some excellent buying opportunities.” The CEO of the Klotz Group of Companies, Jeff Klotz, contends that the typical ebb and flow is “healthy.”

According to Klotz, “A recession in today’s economy will slow inflation and generally level out the economy which is good for everyone… It will also ease up on the challenges created from the current ‘boom economy’ and make the availability of reasonably priced goods, materials, and labor much more accessible which is something that is extremely beneficial for commercial real estate.”

While wood prices have decreased and are now at 2018 levels rather than the absurd heights of last summer, there are still significant supply chain issues for many other building products and materials. Eddie Lorin, founder and CEO of Alliant Strategic Development, concurs that removing pricing pressure off materials, combined with greater stabilization of construction labor and increased rents, is “really not that bad for developers of market rate apartments.” A general slowdown could provide some breathing room for the whole supply chain.

Naturally, with all these factors in consideration, it is assumed that a recession is imminent. Not everybody is confident.  Palladius Capital Management CEO, Nitin Chexal asks, “What recession?… Unemployment is sitting at 3.5% with several million job openings. We are seeing supply chain issues begin to moderate. Rental demand from multifamily to student housing to industrial remains robust. The overall health of the economy continues to be favorable for commercial real estate.”

Given the end of widespread financial assistance to people who needed it—and frequently did not receive it—a backlog from the moratorium, the challenge of obtaining court statistics, and other factors, it is difficult to estimate the current eviction rates. The Eviction Lab at Princeton University estimates that landlords file 3.6 million eviction proceedings annually.

A summit on long-lasting eviction prevention reform was held by the White House and the Department of the Treasury. The summit focused on the use of remaining American Rescue Plan (ARP) funds from ERA and State and Local Fiscal Recovery Fund (SLFRF) assistance,” both of which, by definition, won’t last for very long.

While the Eviction Lab did report that since mid-March 2020, landlords have filed for 1,103,236 evictions in the six states and 31 cities it tracks, it is unknown what proportion of rental homes in the nation that includes. The pandemic eviction moratorium was also in effect during this time; it was only lifted in August after the Supreme Court determined that the CDC lacked the power to continue the activity.

As a result, it’s hard to say where things stand right now, how much difficulties tenants are having due to inflation while also experiencing a robust job market, and whether or not landlords are experiencing exceptionally high levels of difficulty.

Inflation, rising interest rates, and fluctuating cap rates are important factors within the asset class, but like everything else with net lease, moderation and stability remain its distinguishing traits.

Although the current state of net lease is a little “off,” its risk-adjusted returns are still quite attractive, according to Will Pike, vice chairman and managing director of CBRE’s Corporate Capital Markets group and the Net Lease Property Group. “It is still active even if pricing is changing.”

Take for example, a property may have traded with a cap rate in the low to mid 3s at the beginning of the year. Now, that same property might sell for a cap rate in the low to mid-4s, especially for larger-sized deals.

 

After Senators Chuck Schumer and Joe Manchin announced that they would eliminate the carried interest clause late on Thursday night,  Democratic Senator, Kyrsten Sinema subsequently decided to support the legislation.

Sinema also included a provision for an excise tax of 1%, which is expected to generate around $74 billion. She and three other western colleagues added $4 billion for drought resilience.

While the carried interest loophole is protected, real estate leaders are focusing their attention on other aspects in the bill that might impact the CRE market.

Also included in the bill is an increase to the corporate tax minimum, which is expected to generate 40% of the additional income needed to pay for the package as it moves on to the House. In order to enable property owners to deduct the costs of purchasing and developing rental property from their taxes, Sinema also fought for the addition of a depreciation tax deduction exemption.

Abraham Leitner, a tax attorney with Goulston & Storrs, adds that while the new exemption might be another significant gain for real estate investors, certain real estate entities might not be so fortunate.

The Inflation Reduction Act, which intends to fund organizations working toward the nation’s target of reducing carbon emissions by 40% by 2030, is being hailed as the largest expenditure package yet to address global warming challenges.

Investors won’t be concerned about the carried interest tax increase in the near future, but some experts think the discussion is far from over. Every few years, killing carried interest resurfaces as a contentious issue, most notably when it was proposed in 2017 under the Tax Cuts and Jobs Act.

Money doesn’t have as much value anymore, but it also isn’t getting any cheaper for companies looking to expand. The Federal Reserve has increased interest rates from 25 to 50 to 75 bp in response to inflation that is at a 40-year high. For businesses short on cash, loans might no longer make sense. However, Tyler Swann, managing director at W.P. Carey, believes that if inflation persists, a sale-leaseback could become a compelling alternative.

According to Swann, “A sale-leaseback allows you to lock in your cost of capital for a very long term,If you take the view that interest rates are going to continue to rise, locking in that cost of capital today could be very valuable for you.”

A sale-leaseback occurs when a company sells its real estate for cash and then leases it back from the seller for an extended period of time. A REIT or other institutional investor that is able to get the most out of a real estate asset is frequently the buyer-landlord. The seller-lessee business gains from being able to reinvest the asset’s value into the enterprise.

Swann states the general justification for sale-leasebacks more succinctly: If you’re not in the business of real estate, why be in the business of real estate?

According to Swann, “It is almost always the case that an owner of a business can earn more on reinvesting money in their business than they can on having that money locked up in real estate, It’s more capital-efficient to have that building owned by investors who want to take that risk specifically.”

The fact that a business’ needs differ from an investor’s on this two-way street of capital efficiency in an inflationary environment.

“Because of the Fed’s aggressive stance on raising rates, short-term rates are probably going to rise pretty meaningfully in the next six to 12 months,” says Swann. “But because the investments that we’re making are such long-term investments, we’re locking in our returns and borrowing costs for a very long period of time. So we’re most focused on what long-term interest rates look like.”

Swann advises would-be seller-lessees to weigh the capitalization rate of the property against the projected lease term and timetable of rental increases, as well as against the market as a whole, while thinking about a sale-leaseback. This latter juxtaposition can be startling in an inflationary economy.

“If you look at the broader debt markets, particularly high-yield debt markets, they’re in very bad shape right now. Interest rates for high-yield debt have skyrocketed recently,” according to Swann. “And that has made sale-leaseback financing, [where cap rates have] not risen nearly as much, a much more attractive option on a relative basis.”