Loan To Value (LTV) Ratio Overview & Formula

Loan to value ratio is a standard metric that lenders use to assess default risk and qualify commercial real estate loans. While it’s far from the only data point lenders consider, it’s one of the most basic and often checked early on during the loan application process.

What is a Loan to Value Ratio?

Loan to value (LTV) ratio is a straightforward way to measure a commercial real estate loan’s size against the value of the financed property. The ratio is simple, yet considered one of the accurate ways to assess the risk that individual loans present.

Loan to Value Ratio = Loan Balance / Property Value For example: a $400,000 loan on a $500,000 commercial property would have an LTV of 80% ($400,000 / $500,000 = 0.80).

What Does LTV Tell You?

Lenders use loan to value ratios as a measure of the risk that different loans present. Higher LTVs are considered riskier than lower LTVs for a couple of reasons.

First, borrowers have less equity in their commercial property when the associated loan has a high LTV. Should a property become unprofitable, borrowers who have less equity may be more apt to walk away and default on their loan.

Second, properties are more likely to become underwater when their associated loan has a high LTV. Should the local real estate market crash, properties with high LTV ratios will more quickly become underwater. This not only increases the risk of default, but also may force lenders to take a loss if they foreclose and auction off a property.

In order to ensure that loans fall within their risk parameters, lenders have maximum LTVs that they’ll allow. If borrowers know a loan program’s maximum allowed ratio, the LTV formula can be inverted to determine the maximum property value allowed or down-payment required.

What is a Combined Loan to Value Ratio?

When borrowers secure financing through multiple loan programs, lenders often consider the combined loan to value ratio (CLTV) in addition to the loan to value ratio. CLTV measures all of the outstanding balances on a commercial property’s loans against the property’s value. Whereas LTV considers only one loan against the property, CLTV considers all loans that are secured with the property. Combined Loan to Value Ratio = Σ All Loan Balances / Property Value

The combined ratio provides a more comprehensive measure when multiple loans and/or lines of credit are being used. It’s unnecessary when using only one loan.

How LTV Applies to Commercial Real Estate

Lenders appreciate how loan to value measures what portion of an investment property is financed. No other calculation considers loan balance and property value in such direct relation to each other.

Loan to Value vs. Debt Yield

Debt yield measures net operating income against loan balance, and thus shows the annual return on the amount borrowed. The metric doesn’t directly capture any property value change that results from building improvements or general market trends. Because loan to value includes a property’s value within its calculation, LTV will capture any changes in property value that result from improvements or market trends.

Loan to Value vs. Debt Service Coverage

Debt service coverage ratio (DSCR) focuses on interest rates and amortization schedules. This metric is almost entirely insulated from changes in property value.

Loan to value doesn’t assess the financials of a loan itself in the same way that DSCR does, but instead examines the loan’s amount as it relates to the property.

Loan to Value vs. Cap Rate

Cap rate measures a property’s net operating income against the property’s value. While this is needed to assess how profitable a property is, it doesn’t say anything about the property’s financing.

Loan to value uses the same property value data point, but examines the property’s financing rather than its income.

What is an Acceptable Loan to Value Ratio?

Most commercial real estate loan programs allow a maximum loan to value ratio of 75-80%, but some programs differ from this range. Special federal loan programs (e.g. HUD/FHA 223(f)) allow ratios of 83.3-90%. Some private loans will only permit 65-70%.

Additionally, a few specialized programs (e.g. Freddie Mac Green Advantage) may amend the maximum LTV slightly. Any such amendments are usually specifically so that investors can install environmentally friendly or similar improvements.

While qualified investors can take advantage of a program’s maximum allowed LTV, sometimes it’s advantageous to reduce the LTV in order to get a lower interest rate. Certain programs minorly reduce the interest rate when a borrower has more equity in their property. Even if such reductions are minor, the cumulative savings can be substantial considering the time and duration of commercial real estate loans.

How to Calculate LTV

The borrowed amount and property value are needed to calculate the loan to value ratio. A property’s appraised value is most often used, which is one reason why lenders typically require a recent appraisal during underwriting.

The formula to calculate LTV is: Loan to Value Ratio = Loan Balance / Property Value As another example, consider a $1.2 million property that’s being financed with a $1 million loan. The LTV would be 83.3%, and a specialize loan program that allows 80+% LTVs would likely be needed (1,000,000 / 1,200,000 = 83.3%). The formula can be inverted to determine the maximum permitted loan balance or property value: Property Value = Loan Balance / LTV ratio Consider a borrower who knows they can qualify for a $350,000 loan through a program that allows a maximum LTV ratio of 75%. The borrower would be able to purchase a property worth up to about $467,000 ($350,000 / 0.75% = $466,667).

How to Use LTV for Commercial Real Estate

Loan-to-value ratios must be met in order to qualify for commercial real estate loans. After checking a loan program’s maximum LTV, the formula can be used to determine:

• Whether a loan application will be denied based on this criterion
• What the maximum property value that an investor can purchase is
• What down-payment will be required for the purchase of a property

The maximum allowed LTV should be checked early on in the loan application process, so the borrower can check other loan programs if necessary and can determine what their purchasing parameters are.

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Source: Loan To Value (LTV) Ratio Overview & Formula

https://www.creconsult.net/market-trends/loan-to-value-ltv-ratio-overview-formula/

Multifamily Rent Growth Continues to Outpace Inflation

 

JLL adds that inflation is also showing signs of slowing.

Real estate has long enjoyed the reputation as an inflation hedge. According to data and analysis from JLL, even with the spikes in CPI the US has been experiencing, that statement remains true, at least for multifamily. And as pressure builds on the ability to increase rents and allow continued profitable expansion, there’s evidence that the inflation rate has begun to slow.

“The national average rent growth for Class A multi-housing properties has surpassed inflationary growth by 198 basis points from 2010 to the first quarter of 2022,” according to JLL. “In fact, in the first quarter of 2022, national multi-housing rents increased 15 percent year-over-year, as rising inflation translated to significantly higher rents.”

Multifamily housing does have an ability to mark rents to market, increasing them both on an annual basis at renewal time and when there is turnover in units. According to Yardi Matrix, multifamily asking rents hit an all-time high in April of $1,659, with rents up 8.8% in all but one of the top 30 metropolitan areas.

That pricing strength has also enabled growing property values and cap rate compression. Walker & Dunlop’s latest multifamily outlook stated that nearly $290 billion in transactions were logged in 2021, more than double the total from 2020. “Part of the rebound in the multifamily market reflected a return by many renters who had vacated their urban apartments during the height of the pandemic, but vacancy levels were also flattened by the lack of new multifamily completions,” the report noted.

However, JLL’s framing does suggest that there might be limitations. Class A housing may be able to command continued rent growth from consumers with higher incomes. Whether that might be true for Class B or C housing, where consumers are likely to have more constrained financial resources, is far from clear.

Even for Class A, though, there are eventually limits. “The convergence of several trends over the pandemic, namely home buyer affordability issues, rapidly rising wages, population migration trends and a supply and demand imbalance have resulted in a level of rent growth that is unsustainable,” the JLL release quoted Geraldine Guichardo, JLL head of Americas living research and global head of research, hotels, as saying.

And negative leverage has emerged in multifamily, with shrinking returns for buyers despite rent hikes.

JLL is predicting that both inflation and rental growth will start moderating this year and through 2024, with rates eventually dropping below 5%.

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Source: Multifamily Rent Growth Continues to Outpace Inflation

https://www.creconsult.net/market-trends/multifamily-rent-growth-continues-to-outpace-inflation/

Consistent Rent Growth Continues in June | National Apartment Association

Slower than 2021, rent growth in 2022 still tops pre-pandemic years.

Rents continue their steady rise across the nation. According to the July 2022 Apartment List National Rent Report, the national index increased 1.3% during June. This consistent month-over-month (MoM) growth puts rent growth ahead by 14.1% year-over-year (YoY).

During the first half of 2022, rents are up 5.4%, yet that is considerably lower than the 8.8% increase during the first half of 2021. In the years leading up to the pandemic, rent growth during the first six months of the year averaged roughly 3.4%.

While the June increase this year was similar to last month’s growth, it is nearly half the increase seen in June 2021 but almost double what was typically seen in June prior to the pandemic.

Rents are also up in 97 of the 100 largest U.S. metros. During the past six months, San Jose, Calif., and Rochester, N.Y., have each seen 11% growth. Meanwhile, Miami, Orlando, Fla., Tucson, Ariz., Tampa, Fla., and San Diego have rent increases of at least 20% during the past year. Tampa, Rochester, and Tucson each have seen rent growth of at least 40% since March 2020.

Despite an 8% increase during the past 12 months, San Francisco is the only city with rent declines since March 2020. San Jose rents are up 3% since March 2020. Other slow-growing markets during the past six months include Phoenix, Las Vegas, and Sacramento, Calif.

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Source: Consistent Rent Growth Continues in June | National Apartment Association

https://www.creconsult.net/market-trends/consistent-rent-growth-continues-in-june-national-apartment-association/

What’s Up With the Crazy Housing Market?

 

Rising mortgage rates. Faltering home sales. Skyrocketing rents. Here’s how to make sense of a baffling real estate market.

After a two-year boom, the United States housing market finds itself at a pivotal moment — but pivoting to what, exactly?

This spring should have been a busy time for home sellers. Instead, the season was a dud, stalled by a dramatic spike in mortgage rates that stunned even industry experts with its chilling effect on the market.

The frenzied environment we had become accustomed to — with its eye-popping price increases and bidding wars that left buyers dejected and sellers giddy — suddenly seemed to be a thing of the past. While buyers stood on the sidelines, recalculating their much larger mortgage payments, sellers began to realize that offers of $100,000 or more over asking might not be forthcoming.

And over in the rental market, it’s “The Hunger Games,” as rents skyrocket and would-be renters in cities across the country compete with dozens of other applicants.

“Right now, we’re in this cauldron of uncertainty,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “Housing hates uncertainty. The biggest enemy of the housing market is uncertainty, and we have buckets full of uncertainty.”

We asked analysts, economists, and brokers to offer some clarity in this confusing time. Did they see this moment coming — and if so, what’s ahead for us in the near future? What would they do if they had to buy, sell or rent right now?

Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants, said he is “thrilled” to see interest rates rise. “I’ve been saying for years that rates should be in the fives, because this is not sustainable,” he said.Credit...Jane Beiles for The New York Times

What’s Going on with Interest Rates?

Unless you’re paying in cash, buying a home just got a lot more expensive.

Since December, mortgage rates have nearly doubled — rising to around 6 percent, the highest they’ve been since 2008 — in response to moves by the Federal Reserve to control inflation. In January, a buyer would have paid around $2,100 a month in principal and interest for a $500,000 home loan. Today, that same loan would cost about $2,900 a month.

Many buyers simply cannot absorb that kind of increase, particularly when it’s combined with current home prices, which rose more than 20 percent from May 2021 to May 2022, according to Zillow.

“That’s a one-two punch that a lot of buyers can’t overcome,” said Rick Sharga, an executive vice president of market intelligence at ATTOM, a real estate data company.

Experts aren’t anticipating that rates will return to the elevated levels of the 1970s and 1980s — they peaked at 18.4 percent in 1981 — but until inflation recedes, they will keep rising.

“When inflation peaks, mortgage rates will have peaked, and that’s really the key ingredient,” said Greg McBride, the chief financial analyst at Bankrate.com. “If we get more inflation numbers as we did a couple of weeks ago, there is no telling how high mortgage rates could go.”

Buyers weren’t the only ones caught off-guard by the rapid change. Many industry experts have had to recalibrate their predictions for the months ahead.

“I don’t think anybody on the planet expected them to double in six months,” Mr. Miller said. “That’s thrown a monkey wrench, another calculation, into the mix.”

“We all had rose-colored glasses when the vaccine was rolling out and it seemed like everything was going to get better,” said Daryl Fairweather, the chief economist at Redfin. “It turns out it’s a bit of a rougher ride reopening the economy and getting things back to normal.”

Daryl Fairweather, the chief economist at Redfin, anticipates a bumpy road for the next two or three years. “I think a whole lot of buyers have been priced out of the market,” she said.Credit...Kevin Miyazaki for The New York Times

Can We Expect Home Prices to Fall?

Prices are unlikely to take a nosedive, but cracks are showing. In the four-week period ending June 26, the median asking price for newly listed homes was down 1.5 percent from its all-time high this spring, and, on average, 6.5 percent of listings dropped their prices each week, according to a Redfin report.

Demand is down, too. The same Redfin report found that fewer people were searching Google for homes and asking to tour properties. Mortgage applications were down 24 percent, and pending sales fell 13 percent from the same time a year earlier, the largest drop since May 2020, according to Redfin.

“The long-term outlook is still quite strong,” Dr. Fairweather said. “But in the short-term, because of all the volatility in the economy, home prices might fall between now and next spring.”

At least for now, however, the days of double-digit percentage price increases are likely over. Markets like Tampa and Phoenix, which saw some of the biggest price increases, may take a hit, dropping by margins of 5 to 10 percent. Others may stay flat or see modest increases, like the 6.6 percent Realtor.com is projecting for 2022.

But prices are unlikely to collapse — in part, because inventory is still low, and there are more people who want homes than there are homes to buy. Although the inventory of active listings increased by almost 19 percent in June from a year ago, it is still down by 53.2 percent from 2019, according to Realtor.com.

“People waiting for home prices to fall are probably going to be disappointed,” Mr. Sharga said. “This is not 2008 all over again — we’re not looking at a housing bubble.”

Leonard Steinberg, a corporate broker at Compass, hopes the market will soon be a saner one for buyers. “The last 24 months have been buyer torture,” he said.Credit...Jane Beiles for The New York Times

To Buy or Not to Buy?

It’s still a seller’s market, whether it feels that way or not.

In May, the median price of a home in the United States passed $400,000 for the first time, according to the National Association of Realtors. And bidding wars accounted for 55 percent of home sales in the four-week period ending June 19, up from 53 a year earlier, according to Redfin.

But with so many mixed signals, buyers may want to wait out the summer or even the spring of next year.

“Most likely, prices aren’t going to be going up between now and then, and there is a chance that they’ll fall,” said Dr. Fairweather, who described the current moment as a hibernation. “It’s not good for Redfin’s business, but that is what’s happening.”

But if you need a home now — and you can stomach the roller coaster — the world is looking a little brighter when you squint. Yes, your monthly payments will be higher than they would have been had you bought a few months ago. But the low rates of 2020 and 2021 weren’t entirely your friend: They fueled a runaway train of spiraling home prices, pushing the boundaries of affordability. Soon, buyers may be in a better position than they have been in a long time.

Mr. Miller, who said he was “thrilled” to see rates rise, pointed out that “5 percent mortgage rates are not a bad thing in terms of sustainable housing markets.”

And remember: Rates fluctuate. Unlike the price you pay for a home, which is permanent, the mortgage rate is not. Or, as Mr. Sharga put it, you “date the rate, but marry the home.”

Not surprisingly, real estate agents, who earn their income from home sales, are bullish about buying now, arguing that for the first time in a long time, buyers could get a deal.

“You have to be a little bit of a cowgirl,” said Bess Freedman, the chief executive of Brown Harris Stevens, which predicted in its second-quarter market report that Manhattan was shifting to a buyer’s market. While one buyer may be scared off by the volatility, another “may come in and say, ‘You know what, there’s a hell of an opportunity right now. I have the money, I’m going to go in, I’m going to negotiate, I’m going to get a great price.’”

As the market cools, it could return to one that resembles a prepandemic normal, with homes that take a few months to sell and prices that increase gradually. Buyers may be able to start making a few reasonable demands — for appraisals, inspections and mortgage contingencies. And as inventory increases, they may even be able to compare a few options before making a decision.

“I’m hopeful we’re in a point right now where we’re in a return to sanity,” said Leonard Steinberg, a corporate broker at Compass. “Getting things to a normal pace — or a more sane-paced balance — is good for everyone.”

“Only when mortgage rates stabilize will prices stabilize,” said Lawrence Yun, the chief economist for the National Association of Realtors.Credit...Jared Soares for The New York Times

If You’re Thinking of Selling …

The time has come for sellers to reset their expectations. List your house today, and it is unlikely that 24 hours from now you will get to pluck an all-cash bid that’s $150,000 over list price from a sea of contingency-free offers.

“Those days are over,” said Lawrence Yun, the chief economist for the National Association of Realtors. “Don’t expect multiple offers.”

Your home may sit on the market for a few weeks and, if priced well, sell for around the asking price — which will be more than you would have gotten a year ago.

Those planning to sell in the next year would be better off doing it sooner rather than later. But if you can wait until the market settles into a new rhythm, you may have a better sense of what to expect two or three years from now.

“If you can wait, keep waiting until the weirdness that’s happening in the economy goes away,” Dr. Fairweather said. “The long-term outlook is rosier than the short-term outlook.”

And there’s another reason to wait: If you sell now and plan to buy, you may be trading a low mortgage rate for a higher one, and shopping in an unpredictable environment.

“We’re not talking about selling a stock where there is a desire to pick the absolute top. This is the place you live,” Mr. McBride said. “Worthy of at least equal consideration is where are you going to go?”

Igor Popov, the chief economist for Apartment List, thinks the rental market will remain competitive. “Whether a restaurant has a waitlist of 10 people or 30 people, you’re still not getting in for dinner,” he said.Credit...Jason Henry for The New York Times

What if You Want to Rent?

Pick nearly any city across the country — Austin, Nashville, Seattle, New York — and the story is one of rents rising by double-digit percentages amid scant inventory.

Nationally, the vacancy rate is below 5 percent, with more than a dozen renters competing for any given vacant apartment, according to RentCafe. That translates to extraordinarily high rents. In Manhattan, the median rent reached a record $4,000 a month in May, according to data from Douglas Elliman. The same month, the typical U.S. asking rent passed $2,000 for the first time, according to Redfin.

The rental market has been on a wild ride since the spring of 2020, with no end in sight. Early in the pandemic, markets in cities like New York saw rents plunge, as residents left and vacancies soared. Concessions, including months of free rent, became the norm. But those discounts soon vanished, and rents in New York now eclipse 2019 levels. Other markets, like that in Miami, never experienced a sharp decline, as renters from other cities who were able to work remotely moved in.

“Everyone wanted more space, and a lot of people wanted their own space,” said Igor Popov, the chief economist for Apartment List. “Those renters all gobbled up the inventory at a time when it was really hard to build” and to buy.

As he put it, “It was this perfect storm of raging demand and tight inventory.”

With few good alternatives, renters who might have moved this year have decided to stay put: Almost 62 percent have renewed their leases, according to RentCafe. That means there is less available inventory in a market that has long suffered from a lack of new housing.

“A lot of renters feel like they’re on a very crowded subway car,” Mr. Popov said. “If you have a seat, you might be uncomfortable, but you’re not getting up.”

Joshua Clark, a senior economist at Zillow, said he is stunned by how fast rents have climbed: “There was a heating up, but the fact that we are at these numbers — I would have laughed at myself if I predicted that.”

The forecast does not look good for renters, in the short-term or the long-term. Rising mortgage rates will push some buyers out of the sales market, putting more pressure on the rental market. And as rents climb, even fewer people will move. With no relief in sight for the inventory shortage, renters have few options.

In New York City, Mr. Steinberg said, “I don’t see enough cranes. The best gauge for a city with rentals is: Are they building tall buildings with lots of apartments? I don’t see too many — it’s not enough.”

Economists predict that rents will continue climbing for the next two or three years, but not at the same clip. Push enough renters to the edge of affordability and they will double and triple up, or leave one market in search of a cheaper one.

“The breakneck pace that we were on in 2021 is just not sustainable,” Mr. Popov said. “We’re already starting to see renters respond to that in terms of more searches with roommates.”

So what should renters do? If you can renew your lease, even at a higher rent, the odds are that will be cheaper than moving. You could consider taking on roommates or looking at cheaper neighborhoods. But none of the options are pleasant, and no one has a crystal ball to predict what the future holds.

“The major X factor is going to be what is happening in the rest of the economy,” Mr. Popov said. “If we start to see major shifts in the economy, then all bets are off and we’re in a new world.”

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Source: What’s Up With the Crazy Housing Market?

https://www.creconsult.net/market-trends/whats-up-with-the-crazy-housing-market/

Multifamily Developers Prefer Suburbs Over Chicago City Center

 

Demand is on the rise for homes outside Chicago’s city center.

About 13,600 units were absorbed in 2021, even though just 4,250 rentals were completed, the Chicago Business Journal reported, citing Marcus & Millichap’s latest Chicago Multifamily Market Report.

Schaumburg and Arlington Heights-Palatine were the two best-performing suburbs. Vacancy rates in Schaumburg dropped 550 points from the previous year to 1.9 percent and rents rose 15 percent. In Arlington Heights-Palatine, vacancies rates fell 410 points and rents jumped 17 percent.

The shifts underscore ripple effects from the pandemic, as workers explore remote work models that crimp the need for downtown offices and seek more room in suburban settings.

“Multifamily is doing good and will only do better as the year goes on,” Toney Morton, chief financial officer at Independence, Ohio-based Redwood Living Inc., told the outlet. “Residential living is the alternative to buying a home, and even homeowners, especially seniors, are transitioning more to multifamily complexes as their lifestyles change.”

Morton said Redwood, which owns and develops multifamily properties, tends to prefer suburban areas for new projects as more land is usually available for construction.

“Our focus is suburban areas where there’s enough land for us to build our single-story apartment homes,” he said. “While we are new to the Chicago market, we are underway with new projects in Lockport, Oswego [to the southwest], and Crystal Lake [to the northwest].” Chicago-based Waterton plans to invest up to $150 million in building new multifamily properties across the Chicago area. The firm will focus on affordable, mid-rise developments in suburban neighborhoods. “The suburbs have been attractive in general, and there’s more demand for it now since Covid,”

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Source: Multifamily Developers Prefer Suburbs Over Chicago City Center

https://www.creconsult.net/market-trends/multifamily-developers-prefer-suburbs-over-chicago-city-center/

9 Things to Watch in the Commercial Real Estate Market

 

In eXp Commercial’s Real Estate Symposium held earlier in 2022, respected economist and eXp Commercial advisor KC Conway gave an insightful speech on a slew of conditions that are impacting commercial and industrial real estate today and in the future.

Conway is the CRE Chief Economist for the Certified Commercial Investment Member (CCIM) Institute, which specializes in ports, logistics, industrial real estate, adaptive reuse, and property tax. As the founder of Red Shoe Economics, he’s one of America’s most respected futurists and forecasters.

When eXp Commercial named Conway their economic advisor in February 2022, eXp Commercial and its growing division of brokers and ancillary partners benefited from his insight into trends and ability to connect the dots between the complex dynamics that affect industrial and commercial real estate.

“We are at the forefront of the fast-changing commercial real estate landscape and are committed to providing the best resources and training to our agents so they can deliver strong results to clients.” — eXp Commercial President James Huang

Here are 9 takeaways by Conway that are the key issues facing the commercial and industrial real estate market:

“Forget 8.9 Percent, Real Inflation Is Over 25%”

“The Flexible CPI is not the one that you do when you’re doing Zumba and yoga. This is one produced by the St. Louis Fed that looks at the repricing of those things that are repriced pretty quickly in our daily lives: Gasoline, energy, food, and groceries. What the current Flexible CPI is telling us is that we have already passed the record that was achieved in the 1980s. We’re over 25 percent … and the reason that’s important to look at is then look at what’s happening with interest rates.’’

“The Federal Reserve Doesn’t Understand That This Inflation Is Supply-Side Driven.”

“We’re not building more homes than we did in 2018 and 2019. We’re not consuming more than we did in 2018 and 2019. We’re paying more. And so it’s a supply issue that there’s not enough of it. The same demand means that the prices go up. This is not an excess demand where suddenly we have 3 million homes being built. We’re still in that 1.2, 1.3 million range of homes being built. The tools the Fed is using essentially demand inflation tools, not supply. That’s raising interest rates and cutting out the balance sheet … which affects demand. It doesn’t solve our supply problem. And the supply problems are only going to get worse, especially when you think about China with 45 of its largest cities that do manufacturing completely locked down because of another outbreak of COVID. And they manufacture about half of what we consume.’’

Accelerating the Supply Chain Is How to Correct This Economy

“The tools that the Fed is using are the wrong tools. Raising rates and pulling back on the balance sheet are inflationary. They are not deflationary. So what’s going to be deflationary is really addressing the supply chain. If we move quickly with Congress and leaders to accelerate that movement of our supply chain, getting more north/south (routes) and using more efficient rail and all that kind of stuff, we could pull ourselves out of this thing much quicker.‘’

Even With Volatility, There’s Plenty of Capital Coming to the U.S. CRE Market  

“I think this (inflation/recession) is probably a 2-year event, not a 4-to-6 year event. But it’s going to be a lot more volatile, so that’s why I say you don’t want to get scared. You want to get prepared. You want your clients to understand there’s a ton of capital out there. In fact, more than half the mortgages out there today are not done by the traditional mortgage platforms, they’re done by non-FDIC insured or Fed-regulated entities. “In commercial real estate, we have even more capital. We have international capital coming here. The whole Russia/Ukraine thing is accelerating foreign capital from places like Vietnam and South Korea coming here. So we have a lot of equity capital that can come into our deals. We have a lot of institutional capital that needs a return and think about why commercial real estate is an inflation hedge.”

Focus on Population Growth Centers & Commercial Activity

• Look at I-95 from North Carolina to Florida: “The most amount of commercial real estate activity, warehouse logistics, relocation, site selection is along the I-95 corridor from basically just North Carolina, Florida.”

• Look at I-85 from North Carolina to Alabama: “We’ve had announcements from Vietnamese automobile manufacturers, Toyota, Hyundai, Remington Firearms. It’s incredible what’s happening along the I-85 corridor from Greensboro, North Carolina, all the way down to Montgomery, Alabama.”

• Look at the I-10 and I-20 corridors between Arizona and Texas: “These big active interstate corridors are where we’re seeing population, workforce, and commercial real estate activity go. If you’re along those, great. If you’re not, work with your clients to help maybe focus them (because) that’s where the buying or investment opportunity may be.”

Electric Vehicle Charging Stations Bring Value to Your Commercial Real Estate 

“We have about 150,000 charging outlets, but we have 275 million cars. And next year we’ll be producing over two million EV cars. Where are they all going to recharge? I go through the Atlanta airport every week. There are about 50,000 parked cars at the airport on any day and all the parking lots and decks. There are only 100 EV Recharging Stations. We have a tremendous mismatch. So when you’re looking at your office buildings and your retail and all those things, look at how you bring in EV Charging, because if we don’t do it, it could be a detriment to your value and your asset.“

High Cost of Materials Will Determine Your Client’s Ability to Move or Build New

“A year ago, we saw construction materials moving up just below 4% year over year. And labor is up 6%. Well, look what happened last fall when we went to 8 to 14%, and now we’re over 16%. Atlanta (25%) and Dallas (22%) have the two highest year-over-year construction cost numbers. So forget San Francisco and New York as the expensive places to build. It’s places like Dallas and Atlanta where Amazon has bought up all the structural steel in America, so nobody else can build anything.’’

Be Prepared to Advise Your Clients on Cost Benefits of Lease vs. New Build 

“You’re going to see a need for a lot of advisory work between you and your broker as more tenants ask: ‘I want to move into a new space or should I stay put and absorb a bit of a rent increase and just stay put?’ With the cost of moving and rebuilding new space, you might find you (have to tell clients) they can’t even get it done in the timeframe that you have to leave your existing building, and you might find that the costs are greater than a 10 or 20% increase in your rent. So doing that cost benefit analysis for those of you that do property management, leasing is going to be just as important as new construction.

eXp Is In a Position of Growth Despite Inflation 

“So when consumer confidence goes, when energy costs are up 50% when everything in Flexible CPI is up, these are the warning signs, these are the bellwethers before the Fed moves and before all this other stuff happens that really tell us, we’ve got to get ready, do things like eXp has done. (eXp) is debt-free and is in a position for survivability, a position for growth, and in a position to execute where eXp can outrun inflation.”

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Source: 9 Things to Watch in the Commercial Real Estate Market

https://www.creconsult.net/market-trends/9-things-to-watch-in-the-commercial-real-estate-market/

New Listing! Fully Occupied 23-Unit Multifamily Portfolio Kankakee IL

Listing Broker: Randolph Taylor
630.474.6441 | rtaylor@creconsult.net
Price: $995,000
Cap Rate: 7.35%