Running a commercial real estate asset on a day-to-day basis can be expensive. As such, it is important for operators to manage costs relative to rental income to ensure that the given property is profitable. From a management standpoint, costs can be grouped into two buckets: Operating Expenses (or “OpEx”) and Capital Expenses (or “CapEx”). While they are both categories of expenses, there are material differences between capital expenses and operating expenses.
In this article, we define capital expenses and operating expenses and explain the difference between CapEx and OpEx in real estate.
Capital expenses in real estate are large costs that are incurred outside of the normal day-to-day operations of the property. In many cases, CapEx includes things like:
Capital expenditures and the assets that are purchased with them are recorded on the property’s balance sheet. For example, replacing a commercial grade HVAC system is incredibly expensive. The cost is recorded as a line item on the income statement, but the value of the fixed asset is recorded on the balance sheet.
Because capital expenses are infrequent, their cost can occasionally catch the property owner by surprise. For example, a major storm can cause significant water damage, and the cost to repair it may not have been anticipated within the budgeted.
To avoid any major impact to operational cash flow, it is important that property owners set aside operational funds at regular intervals as part of the capital budgeting process for each accounting period. This way, capital expenses can be paid for from a separate “bucket” of funds without creating “lumpiness” in Net Operating Income.
The easiest way to think about Operating Expenses is as the day-to-day costs associated with running the property. For a commercial real estate asset, operating expenditures include things like:
Each of these expenses is listed as a separate line item on the property’s income statement. A property’s Gross Income less its Operational Expenses results in a metric called Net Operating Income or “NOI,” which is a primary driver of a property’s value.
From an accounting standpoint, there are important differences between operational expenditures and capital expenditures.
OpEx are expenses that are short-term in nature, and they are used up in the accounting period in which they are purchased. In many cases, this means that they are used up monthly, quarterly, or annually. For example, property taxes are an operational expense and they cover a period of one year.
CapEx are longer term investments. They are expenses that are incurred with the intent to earn a return on the cost. For accounting purposes, the cost is spread out over several years of the asset’s useful life. For example, it may cost $100,000 to install a new roof on a property. The entire cost is incurred up front, but an accounting concept known as “depreciation” allows it to be spread out over the life of the asset with a little bit of the cost incurred each year.
At First National Realty Partners, we are value-add investors. This means that we intentionally seek out properties that need a little bit of work. If we can acquire them at a price that is below its replacement value, we will invest a certain amount of capital (capital expenses) to improve the property’s condition. With an upgraded property, we are able to leverage our extensive tenant relationships to lease space at higher rates than would have been possible without the renovations.
There is a specific relationship between the amount of the initial capital investment and the amount of rent that the market will support. As a result, we invest a significant amount of time and resources to understand what level of rents the market will bear and use those as a guide for informing the amount of CapEx that we are willing to deploy.
While the bulk of this article discusses how capital expenses and operating expenses are used in a real estate context, they are also used in regular business operations. Consider the case of a company that manufactures shoes.
Operational Expenses are the normal day-to-day business expenses that are needed to fund the company. These would include things like salaries, insurance, raw materials, and other items that make up the cost of goods sold.
Capital Expenses would be associated with longer term assets, the purchase of which will provide some level of future benefit. For example, the company could purchase a new piece of machinery that would allow them to manufacture more shoes in the same period of time. The cost of the asset is recorded up front, but IRS rules allow the company to “depreciate” the value over the estimated useful life of the machinery. For tax purposes, the amount of depreciation can be taken as a tax deduction in the sense that it reduces net operating income and the company’s overall tax burden.
Source: Capital Expense vs. Operating Expense in Real Estate
https://www.creconsult.net/market-trends/capital-expense-vs-operating-expense-in-real-estate/
As the Federal Reserve nears the end of its tightening cycle, a small but growing share of National Multifamily Housing Council survey respondents are starting to report a pickup in apartment deal flow.
That is the one positive from NMHC’s Quarterly Survey of Apartment Market Conditions for July 2023. But it is reflected by a group of dealmakers in the space that were surveyed by GlobeSt.com.
Survey Results
Otherwise, survey results in all metrics were below the breakeven level (50), extending lengthy consecutive monthly results in that direction.
Market tightness was 26, sales volume 40, equity financing 22, and debt financing 18.
“Both debt and equity capital continue to pull back from the apartment market amidst an environment of rising interest rates and slowing rent growth,” NMHC’s Vice President of Research, Caitlin Sugrue Walter said.
As a result, transaction volume fell for the fifth consecutive quarter, with current apartment owners unwilling to offer the lower prices buyers deem necessary to compensate for this diminished economic outlook, Sugrue Walter said.
The Market Tightness Index indicated looser market conditions for the fourth consecutive quarter. More than half of respondents (57%) reported markets to be looser than three months ago, while only 9% thought markets have become tighter.
About one-third said that they thought market conditions were unchanged over the past three months.
The Sales Volume Index reading of 40 marked the fifth consecutive quarter of decreasing deal flow, albeit with considerably less consensus among respondents than in preceding quarters.
Just over one-third reported lower sales volume, down from 56% of respondents who reported lower sales volume in April and 82% of respondents in January.
Meanwhile, 14% of respondents in July thought that volume was higher than three months ago, while nearly half of respondents (47%) reported no change in volume.
The Equity Financing Index showed considerably lower than the breakeven level (50). It was the sixth consecutive quarter in which equity financing became less available.
Fifty-seven percent of respondents reported equity financing to be less available than three months ago, while 40% of respondents believed availability to be unchanged. No respondents reported an increase in the availability of equity financing.
The Debt Financing Index reading of 18 indicated the eighth consecutive quarter in which debt financing became less available. Two-thirds of respondents reported that conditions have worsened for debt financing, 26% thought that conditions were unchanged, while just 3% reported that now is a better time to borrow than three months ago.
More Activity is Being Reported
Outside of the NMHC survey, apartment professionals say they are seeing some deals.
Roberto Casas, co-lead of the multi-housing group with JLL Capital Markets, tells GlobeSt.com that deal activity is picking up compared to the first half of the year as asset valuation activity increases due to loan maturities and fund level redemptions.
“There remains a dearth of available product in the market, leading to amplified buyer activity in the multihousing sector, and today, private buyers are proving to be the most active,” Casas said. “Additionally, we continue to see capital pivot to the multi-housing sector and new entrants to the market.”
Kevin Crook, Investors Management Group Director of Acquisitions & Dispositions, tells GlobeSt.com, that the recent uptick in activity is a positive sign. “I’d compare the transaction market this year to a middle school dance, with everyone hesitant to engage. If feels like buyers and sellers are finally moving to the center, ready to negotiate deals again.
“These periods of disconnect have delivered some of our best buying opportunities. We’ve negotiated price discounts, moved forward on the strength of the fundamentals, and capitalized on a great basis as the market recovered. We’re looking to duplicate that kind of success again in the coming months of the market correction.”
Scott Larson, Managing Principal of Pangea Mortgage Capital, tells GlobeSt.com he expects that the modest increase in overall multifamily transaction volume he is seeing will continue in the fourth quarter “as some transactions can only be extended for so long. We have seen a decrease in volume in the Southeast, but this is offset but increased volumes in the Midwest and West.”
Henry Manoucheri, CEO of Universe Holdings, tells GlobeSt.com that this is a great time to buy since there is limited availability and no competition like before.
“Even though Universe Holdings has remained active since the Fed started raising interest rates last year, we have recently noticed a modest uptick in deal flow and competition,” he said.
“The property fundamentals remain strong and as rates increase at a slower rate, people can buy homes. They will be forced to rent putting increasing pressure on rising rents. However, in the coming months, the larger institutions who have been on the sidelines will need to become more active since they will need to deploy all the capital (dry powder) prior to year’s end.”
‘Second Half Will be Explosive’ Narrative Revised
Jay Remillard, Managing Director at CP Capital US, tells GlobeSt.com, “A lot of people I’ve spoken with recently are actively buying and selling, though not yet to the levels they had hoped to hit by this point in the year. Outliers are core funds, who are still largely on the sidelines.”
Remillard said the “second half of 2023 will be explosive” narrative has been revised due to the Fed not yet officially slamming the brakes on rate hikes, but hopefully it will soon.
“The fourth quarter could see a wave of deals trying to get done before year-end, but most people aren’t expecting a healthy, ‘fully functioning’ market until next year.”
Brennen Degner, Managing Partner and CEO, DB Capital Management, tells GlobeSt.com he is starting to see sellers test the market with more realistic pricing.
“While there is still a significant bid/ask spread, it does seem to be narrowing a bit which bodes well for both the immediate and long-term future,” Degner said.
“As a result, we believe the pipeline for deals will continue to open over the next 12 months. We are already seeing more opportunities in Denver, Phoenix, and Las Vegas, which had all but shut over the past months.”
Peter Margolin, Commercial Loan Originator at Alliant Credit Union, tells GlobeSt.com that he is seeing a “fair amount” of multifamily transactions.
“Within multifamily more broadly, we are also seeing a decent amount of student housing opportunities,” Margolin said.
Littell added that while multifamily transaction activity has been on a clear downward trend, it is expected to level off over the coming quarters and not materially improve across all markets until there is more certainty around pricing.
CoStar: YoY Transaction Volume Down 58%
This uptick in activity, though, is climbing up from a deep trough.
Chad Littell, national director of US capital markets analytics at CoStar Group, tells GlobeSt.com that nationwide, year-over-year transaction activity is down 58% during the 12 months that ended in June 2023.
“The markets experiencing the largest decelerations in rent growth have taken the bulk of these transaction declines,” Littell said. “In contrast, markets with relative strength in maintaining rent growth and moderate supply deliveries have seen more stable transaction activity.”
By way of illustration, Littell said cities throughout the West, Sun Belt, and Southeast that were enjoying between 15% and 30% year-over-year rent growth 18 months ago have decelerated to just a few percent and, in many cases, are now showing negative annualized rent growth.
“As a result, the number of transactions in Atlanta, Austin, Dallas, Phoenix, Las Vegas, Miami, Nashville, and Tampa is down between 30% and 70% compared to the 12 months ending in the second quarter of 2022,” he said.
“The total consideration that changed hands during this period is no better. In most of these markets, sales activity is down between 50% and 80% compared to the 12 months ending in the second quarter of 2022. Seeing dollar volumes decline more sharply than transaction counts tell us that the average transaction size is also falling as large players take a more cautious approach.
Littell said markets faring better are generally secondary and tertiary markets, with Chicago being the notable primary market exception.
“Its transaction counts are up despite a 24% decline in dollar volume,” Littell said. “Its commonality shared with other relative winners may result from its Midwest location.”
Other notable secondary markets showing relative strength in activity, according to CoStar, include Canton, OH; Green Bay, WI; Fort Collins, CO; New Haven, CT; and Springfield, IL, all showing increased transaction counts and higher total dollar volumes trading hands than a year ago.
Source: Multifamily Dealmakers Report More Activity
https://www.creconsult.net/market-trends/multifamily-dealmakers-report-more-activity/
Average of the top competitive rates from eXp Commercial's National Capital Markets Partner CommLoan from a database of 700+ commercial lenders as of 7/24/23
*Rates are provided for comparison purposes only. Actual rates are dependent on property and sponsor.
https://www.creconsult.net/market-trends/commercial-real-estate-financing-rate-snapshot-july-24th-2023/
Commercial real estate can be a complex and highly competitive market, and finding the right representation is essential for a successful transaction. While some may think that listing their commercial property for sale independently may be a good idea, the value of representation by an experienced broker with a national commercial real estate firm cannot be overstated. In this blog post, we will explore the benefits of listing exclusively with a broker from a firm like Exp Commercial.
Expertise and Experience
One of the primary advantages of working with an experienced broker from a national commercial real estate firm is their expertise and experience in the industry. These brokers have an in-depth knowledge of the commercial real estate market, including current trends, regulations, and best practices. They also have access to a vast network of industry professionals, including appraisers, inspectors, attorneys, and financiers, which can be invaluable during the selling process.
Professional Marketing and Promotion
Another significant benefit of listing exclusively with a broker from a national commercial real estate firm is their professional marketing and promotion capabilities. These brokers have the resources and expertise to create and implement effective marketing strategies that can help your property stand out from the competition. This includes listing your property on relevant commercial real estate websites, creating high-quality marketing materials such as brochures and flyers, and leveraging their professional networks to reach potential buyers.
Targeted and Qualified Buyer Pool
A reputable commercial real estate firm like Exp Commercial also has a broad and qualified buyer pool that is actively seeking commercial properties. When you list exclusively with a broker from such a firm, your property will be marketed to this pool of qualified buyers, increasing the chances of finding the right buyer quickly. Additionally, these brokers have the skills and knowledge to qualify potential buyers, ensuring that only serious buyers who meet specific criteria are presented to you.
Negotiation Skills
Finally, listing exclusively with a broker from a national commercial real estate firm can be beneficial during the negotiation phase of the transaction. These brokers have honed their negotiation skills over years of experience in the industry, and they can help ensure that you receive the best possible deal. They also have the expertise to navigate complex legal and financial issues that can arise during the negotiation process.
In conclusion, the value of representation by an experienced broker from a national commercial real estate firm like Exp Commercial cannot be overstated. From their expertise and experience to their professional marketing and promotion capabilities, these brokers offer a range of benefits that can help ensure a successful transaction. If you are considering listing your commercial property for sale, it is worth considering the advantages of working with a reputable commercial real estate firm.
https://www.creconsult.net/market-trends/value-of-representation-exclusively-listing-your-property-for-sale/
Off-Market Multifamily Sellers Are Leaving A Ton Of Money On The Table
Marketing a property can increase the sale price by up to 23%, which runs counter to the idea that off-market deals can achieve higher values because a buyer will be more aggressive to seal a trade.
The perception is when a seller has one buyer vying for an asset, that buyer is more aggressive and willing to pay a premium because they don’t want the seller to get into a bidding war for the property. Our research found the opposite.
This is a sign it is in the best interests of owners to undergo a marketing campaign for their properties. Growing allocations from institutional investors toward real estate are still driving a sizable pool of investors into bidding for multifamily assets, and a full campaign is what drives the premiums.
The job of a broker to create a competitive environment on behalf of the seller. Putting a building on the market determines the strongest buyer.
That may not be necessarily based on price alone. If one buyer has a higher-priced offer but weak financial backing, versus a buyer with a stronger track record, taking a lower offer is the way to go. It’s our job to give the seller those options and we do that by marketing properties and generating the highest number of qualified offers possible.
There are numerous case studies where a seller received an off-market bid, put it on the market, and the off-market buyer still bought the asset but at a higher price.
eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.
We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.
https://www.creconsult.net/market-trends/off-market-multifamily-sellers-are-leaving-a-ton-of-money-on-the-table/
There are several ways to increase the value of a multifamily investment property:
Renovations and upgrades: Improving the units and common areas, such as adding new appliances, updating kitchens and bathrooms, and making energy-efficient upgrades can attract higher-paying tenants and increase the value of the property.
Increase rental income: Consider raising rent prices, implementing rent control measures, and filling vacancies promptly to maximize rental income.
Amenities: Adding amenities such as a fitness center, laundry facilities, and a pool can attract tenants and increase the value of the property.
Good property management: Hiring a professional property management company can help keep the property well-maintained and attract and retain high-quality tenants.
Location: Consider the location of the property and make improvements to the surrounding area to attract tenants, such as adding walkways, landscaping, and community events.
It's important to note that increasing the value of your property takes time and effort, and it's advisable to consult with a real estate professional to determine the best strategy for your specific property and market conditions.
https://www.creconsult.net/market-trends/how-can-i-increase-the-value-of-my-multifamily-investment-property/
