Everyone Looks Good When CRE Is Doing Well. But What Happens When Things Get Ugly?

Where do smart investors put their money when the commercial real estate market is “pretty ugly”?

Walker & Dunlop CEO Willy Walker put that question to his three guests on this week’s Walker Webcast: Walker & Dunlop’s Ivy Zelman, executive vice president of research and securities; Kris Mikkelsen, executive vice president of investment sales; and Aaron Appel, senior managing director and co-head of New York capital markets.

Walker started the conversation by asking Zelman, co-founder of residential market analysts Zelman & Associates, to comment on her recent transaction survey that contained “some pretty depressing numbers” on the multifamily market and showed overall negative investor sentiment.

Zelman said the situation may change somewhat by the time she releases her November study this month but confirmed: “the October numbers were, no question, pretty ugly.”

“The metrics were across 12 years of data and were probably some of the worst metric results that we've seen,” Zelman said.

She noted that in the current economic maelstrom, underwriting has become much more stringent and rent assumptions more conservative, and the cost of capital has risen.

As a result, “It feels like the transaction market has come to a bit of a halt,” Zelman said.

Walker’s two other colleagues also painted a not very pretty picture of the state of CRE.

“It’s been an exceedingly challenging six months, as I think everyone that's listening to this call knows,” Mikkelsen said. “I would agree with some of the findings from Ivy’s report, particularly that the seller supply index is very, very low right now.”

He noted that transactions continue to get done, but that any optimism that may have blossomed in August around improving job numbers and other positive benchmarks ended the following month when it became clear that the Federal Reserve was maintaining its hawkish stance on inflation.

Appel noted that while the current environment is painful, not all CRE players are experiencing it in the same way.

“I think it depends on what you're doing,” he said. “For core, core-plus and value-add multifamily assets, there's plenty of liquidity, it just costs more. I think it's a cost of funds issue relative to what value is or what people are willing to pay. If their borrowing costs have increased substantially, then they need to pay less for the asset unless the revenues are going up, and clearly, revenues seem to have frozen in most markets.”

In light of this turmoil, Walker asked the panel what smart money is doing today.

Mikkelsen discussed a recent transaction involving “one of the savvier opportunistic investors in the market,” who was able to pay a good price for a multifamily asset that sits in a great neighborhood.

“They bought a phenomenal basis in the right location, and they've got the ability to hold that asset for the next five to 10 years,” Mikkelsen said. “This group has been doing 10-year floating rate debt and then hedging out or swapping the rate for the first five years to get them on the other side of the turbulence in the rate environment. So I think that's a pretty smart play.”

Zelman noted some CRE players see opportunities to acquire other businesses.

“I think that the smart money right now is taking advantage of the weaker players in the market that are not well-capitalized,” she said. “D.R. Horton announced an acquisition this week, and I imagine they got this builder at a pretty attractive price. I think that there's no question that to capitalize on those companies that are not well-positioned and have too much leverage, and to take advantage of good locations would be what the smart money will do.”

Appel noted that multifamily represents a greater share of the CRE market today, and going forward, “it’s going to be 50% of the market permanently.” At the moment, multifamily and industrial are the CRE asset classes that hold the most promise, he said.

“I would say that the smart money should be looking to buy multifamily at break-even leverage based on where today's rates are and to lock in what I would deem to be seven-year financing, with the ability to get out after five,” he said.

Appel said the Fed cannot keep interest rates elevated for an extended period. This bodes well for CRE investors who are willing to play the long game, he said.

“If you can buy break-even leverage in good rental markets where there's gonna be demand drivers and eventual employment drivers back on the horizon, and some level of supply constraint, I think you're gonna be a huge winner five, six years from now,” Appel said. “I think there's tremendous opportunity there.”

 

Source: Everyone Looks Good When CRE Is Doing Well. But What Happens When Things Get Ugly?

https://www.creconsult.net/market-trends/everyone-looks-good-when-cre-is-doing-well-but-what-happens-when-things-get-ugly/

Falling Housing Prices Signal Inflation Retreat Won't Be Far Behind

After over a year of unprecedented rent growth and soaring inflation, housing costs have been in retreat for three months.

Inflation measures, thanks to a lagging dataset, have yet to follow suit. But that could soon change.

In October, shelter made up the vast majority of the core consumer price index inflation measure, or more than 10 times what all other nonfood and energy sectors contributed, The Wall Street Journal reports. Yet when shelter costs were excluded, inflation all but vanished in the core consumer price index for October, mirroring what private sector research from entities like Zillow have observed in the housing market over the same period.

The Bureau of Labor Statistics bases its rent and estimated homeowner equivalent measures on what is actually being paid, while private estimates incorporate asking rents and newly signed leases, the WSJ reports.

As BLS data catches up to easing housing prices, inflation measures could retreat to near the Federal Reserve's target rate of 2% in the next few months, Piper Sandler Senior Economist Jake Oubina told the WSJ.

Though wage growth and employment rates are also focused of Fed policy, a retreat in inflation could give the financial regulator a signal that the aggressive interest rate hikes it pursued this year are no longer necessary.

If the Fed backs off on interest rates, it could in turn thaw the capital markets that have all but frozen for commercial real estate in the past few months.

Should inflation retreat along a friendly timeline and the Fed respond promptly, a significant recession may not happen, despite seeming like a near certainty to some in October.

Steep drops in value for several property sectors may represent the deflating of bubbles, as banks held to tighter underwriting and balance sheet standards implemented in the wake of the Great Financial Crisis, Bloomberg reports.

 

 

Source: Falling Housing Prices Signal Inflation Retreat Won’t Be Far Behind

https://www.creconsult.net/market-trends/falling-housing-prices-signal-inflation-retreat-wont-be-far-behind/

Multifamily sellers: How to qualify a buyer before going under contract

Multifamily sellers: How to qualify a buyer before going under contract

Don’t waste time and opportunities: learn how to select the right buyer every time

As the seller of a multifamily asset, it’s crucial that the buyer you select is the best possible prospect for your property. Don’t waste time, money, and opportunities: you must ensure they’re qualified and can close and execute the contract as signed.

Keep reading to learn why it’s essential to qualify a buyer before going under contract on your multifamily property and how to do it.

Why do I need to qualify a buyer?

It’s important to close with the first buyer you select. If you don’t, each buyer after that will ask themselves, “What did that other buyer discover about this property that I am missing?”.

When you enter into a contract with a refundable deposit, you’re basically giving your chosen buyer a free option on your property for a period of time, typically 30–60 days. Before you proceed, you must be confident that they can close and execute the contract as signed.

What’s more, your tenants and staff will be disturbed throughout the contract process. To minimize the period of disruption, you should do all you can to ensure the transaction will close successfully at the end of the contract process.

As a seller, you’re required to provide due diligence information to the prospective buyer. When you qualify your buyer, you’ll greatly reduce the risk of wasting a lot of time and doing a lot of work only to not close on the property.

How do I qualify a buyer?

Before you sign the contract, make sure that your prospective buyer can provide certain items. Always ask them for the following:

– Proof of funds

– Lender pre-qualification

– A list of the other properties they own

– A list of the sellers and agents that they have worked with

For added reassurance, it’s recommended that you call the buyer’s lender to confirm their pre-qualified status. You can also call the agents, sellers, and buyers they’ve closed with in the past to enquire about how the transactions went.

Has the buyer toured the property in person before making an offer? Have they reviewed the due diligence information beforehand? If they have, this is a great sign. It’s proof that they have seen and have taken into account any issues with your property, and this greatly reduces the chances that they may later want to back out of the sale, saying they were unaware of the building’s condition. Be very wary of a buyer who doesn’t tour your property in person.

A prospective buyer who shows they’re motivated and wants to move quickly is also a great sign for a successful closing. The shorter the due diligence period, the better, and the larger the deposit, the better.

When you spend the time making sure your prospective buyer fulfills these criteria, you’ll put yourself in a great position to close successfully and ensure a quick and smooth transaction.

If you need help selling your multifamily property, eXp Commercial is here. Our objective as your multifamily advisor is to help you achieve your investment goals: from determining the listing price to selecting the best buyer and handling the sale process through to the closing, we’ll facilitate a smooth transaction for you.

 

Source: Multifamily sellers: How to qualify a buyer before going under contract

https://www.creconsult.net/market-trends/multifamily-sellers-how-to-qualify-a-buyer-before-going-under-contract/

Happy Holidays

HAPPY HOLIDAYS FROM EXP COMMERCIAL! Wishing everyone a wonderful Holiday Season and a Happy, Healthy, and Prosperous 2023! For any Multifmaly Buying, Selling, and Financing needs, please keep us in mind all year long. Randolph Taylor, Chicago Area Multifamily Brokerage (630) 474-6441 | rtaylor@creconsult.net https://www.creconsult.net/ #chicagomultifamilybrokerage #multifamilybroker #apartmentbroker #multifamilyagent #apartmentagent

Do I need an attorney for my commercial real estate deal or is my broker enough protection?

Does a seller or a buyer of commercial real estate really have to hire an attorney? The unmistakable answer is, "Yes!"

A broker is a licensed professional who you hire to negotiate the sale or purchase of a real estate for a fee or a commission. However, they are typically not attorneys. Many of them will clearly state that real estate brokers are not providing legal advice. Real estate brokers don’t usually get paid unless they close the deal (or unless you are somehow obligated to pay a commission, for example, by withdrawing from a deal). Therefore, brokers are usually not going to take care of the legal details and may even try to push a deal to close as fast as possible.

Be sure that separate legal advice from a good real estate lawyer is usually worth the additional cost. It's much more cost-effective to hire an attorney to get the deal done right than to get involved in an expensive lawsuit.

A good attorney can also be crucial to getting a beneficial purchase. Also, keep in mind that it’s best to hire an actual commercial attorney who deals with this kind of transaction daily. It may cost a bit more than a general lawyer, but it’s well worth it.

What does a real estate attorney actually do?

The job of a real estate lawyer is to negotiate and make a transaction happen in a peaceful way that's amenable and fair to all parties.

A real estate lawyer takes over after the selling terms and price have been determined by the real estate brokers in the contract, and the parties have signed. At that point, a real estate lawyer reviews the contract and negotiates any necessary adjustments to deal with terms. In case any last-minute issues come up, the lawyer will be at your closing, together with your real estate agent.

Experts believe you should always hire a real estate lawyer, no matter your circumstances, because it’s an added layer of protection for both sides, which covers the buyer and seller for all of the contract items. It’s simply a necessary level of protection for large purchases or sales.

Some brokerages even offer the services of a real estate lawyer and broker in one at no additional cost.

A commercial real estate transaction includes many complicated steps, and if the seller hires an attorney early in the process, the lawyer can help the seller to both protect their benefits from the sale and avoid liability if unexpected issues come up.

Many sellers, even the ones that hire an attorney later to prepare the closing documents, don't hire a lawyer during the listing stage, which is also a mistake. Even though Listing Agreements seem to be "standard," many agents are willing to negotiate the terms and conditions.

Either way, both commercial real estate sellers and buyers should engage their own lawyer as early in the process as they can to ensure their best interests are being met throughout the whole real estate transaction.

 

Source: Do I need an attorney for my commercial real estate deal or is my broker enough protection?

https://www.creconsult.net/market-trends/do-i-need-an-attorney-for-my-commercial-real-estate-deal-or-is-my-broker-enough-protection/

How Will Rising Costs (CPI) Affect Real Estate Investments

The Consumer Price Index (CPI) measures the year-over-year percentage change in the average retail price of products and services that are typically purchased by households. The Bureau of Labor Services collects about 94,000 prices from 23,000 establishments monthly to calculate CPI. CPI is one of the main measures of inflation. A survey on the rental prices for 43,000 units also occurs, making up a third of the overall CPI, which is then used to calculate the increases in rental prices.

Because there is a correlation between inflation and goods with a limited supply, CPI also impacts real estate investments and housing costs. Here’s how rising costs affect real estate investments and why making smart real estate purchases can benefit you in periods of high inflation:

Rising construction costs

Inflation leads to the increase in prices of many aspects of the construction process, including building materials, machinery hiring rates, and consultant fees. With the costs of labor and construction materials increasing, real estate developers aren’t too keen to invest in any new developments. They will likely wait for inflation to ease and for prices to go down. Projects that are under development may also be delayed as construction costs become too expensive and investors worry about their profit margins.

Higher mortgage rates

In high-inflation environments, interest rates increase, and consequently, so do mortgage rates. When interest rates are low, more people are likely to borrow money. But as inflation moves higher, banks and other financial institutions raise interest rates to make borrowing less appealing. The goal is to lessen consumer consumption, which will help ease inflation. Overall this should slow transactional volume for real estate purchases, as many may people may be priced out of purchasing due to higher mortgage payments. Typically, as demand wanes, sellers will adjust pricing downwards to compensate.

Rising asset prices

When inflation rises, so does the cost of living and with it comes increasing real estate prices. Rising construction costs lead to fewer new developments, which leads to limited supply. Higher interest and mortgage rates also mean fewer people borrowing money to invest in real estate. All these factors lead to low supply, resulting in increased demand for an existing property. And with amplified demand in those properties comes an increase in their asset value.

Better performance for residential properties

During inflationary periods, residential properties such as condominiums, single-family, and multi-family properties tend to perform better. With higher building costs and more difficulty borrowing money, people will turn to renting more than buying. Commercial real estate also tends to perform better during periods of high inflation, especially those properties that have long-term leases in place, with set rental increases, allowing for the investor to “park” their money and still receive their anticipated returns until the economy improves.

Increase in rent prices

Historically, high periods of inflation have resulted in increases in rent prices. Investors use real estate to hedge inflation by taking advantage of the limited supply and leases that include annual rental increase clauses. Low inventory makes existing properties more in demand. Property owners can also justify the rental increase due to higher maintenance costs as a result of inflation and increased prices on consumer goods and services. Therefore, people with existing residential and commercial real estate tend to reap significant benefits during inflationary environments.

 

Source: How Will Rising Costs (CPI) Affect Real Estate Investments

https://www.creconsult.net/market-trends/how-will-rising-costs-cpi-affect-real-estate-investments/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/