Category: Commercial

The Opportunities and Challenges of Sourcing Deals in Today’s Environment

CRE pros talk about how they are sourcing deals and investors as in-person meetings remain largely on hold.

Less than two weeks before Thanksgiving, commercial real estate investment professionals James Simmons and Sonya Rocvil spoke as part of a six-person panel on investing, acquisitions and development during the Diversity in Commercial Real Estate Virtual Summit, organized by the Avant-Garde Network on Nov. 14.

Rocvil, founder and principal of New York City-based Bedrock Real Estate Investors LLLC, which focuses on workforce housing, says the 10 virtual events where she’s spoken this year haven’t led to any deals yet. But she hopes they have set the table for possible acquisition and capital deals in 2021. At the moment, her firm’s portfolio comprises two multifamily properties in Georgia.

Rocvil notes that the absence of face-to-face networking since the pandemic started has been challenging, but it hasn’t halted networking by phone and through electronic means. Speaking at virtual events has been effective in broadening Rocvil’s circle from her home turf of New York City to the rest of the country, she says. In addition, she’s been able to rekindle connections that may have been somewhat dormant prior to the pandemic.

“We’re in an environment now where your level of exposure can be even more than it was in an in-person environment,” Rocvil says. “I’m definitely stepping outside my comfort zone, I have to say, but that’s how you grow.”

Bedrock Real Estate Investors currently syndicates deals for multifamily properties, mainly through family and friends. But Rocvil hopes to attract family offices and high-net-worth individuals (HNWI) as investors.

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    All Hail Amazon: Why E-Commerce is All Powerful in CRE

    One hundred new warehouses. One thousand new delivery hubs. One hundred thousand jobs.

    Amazon likes its numbers round, and it likes them in headlines. The e-commerce behemoth has been on a tear over the last several months, leasing, outfitting, and opening hundreds of millions of square feet across the country, in stark contrast to the general economic gloom.

    Amazon opened 100 warehouses in September alone, in addition to the 100 distribution facilities and 1,000 neighborhood delivery hubs it leased, or plans to lease, in the near future.

    It has more than 100 million square feet of planned space underway, and has ramped up its activity across the United States. These include at least six new warehouses in Georgia, four in the Atlanta area; at least seven distribution centers in Texas, near Dallas, Houston, Austin and El Paso; five scheduled to open in Arizona by December, doubling the number of its facilities in that state; and 12 in California.

    Online sales have skyrocketed during the pandemic, so it’s no surprise that the
    e-commerce king is a pandemic winner. In the process, Amazon is taking a lot of industrial real estate with it.

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      Trump Tax Saga Shines Spotlight on Benefits of CRE Ownership

      Depreciation, debt write-offs, tax credits and other measures are among the tax avoidance benefits inherent in the sector.

      It may seem like a lifetime ago, but before news of the ongoing COVID-19 outbreak involving President Trump, White House staffers, Republican politicians and others, the New York Times stirred up a political firestorm surrounding President Trump’s personal finances with a new investigation revealing a staggering amount of business losses over the past two decades. The headline grabber was that he paid just $750 in personal federal income taxes in 2016 and 2017 and nothing in 11 of the 18 previous years. Additionally, the article said he claimed a total of $1.4 billion in losses from his core businesses for 2008 and 2009 and collected a $72.9 million refund for the 2010 tax year.

      The article is just another chapter in the ongoing saga of President Trump’s personal tax returns, which he has chosen not to release to the public as most political candidates have done in recent decades. The New York Times piece amplified earlier reporting it had done in 2019 alleging that President Trump had reported $1.17 billion in losses from 1985 to 1994. As with those findings, the new revelations have put the tax benefits of commercial real estate ownership firmly in the spotlight.

      President Trump has said publicly that he has paid millions in taxes, including property and payroll taxes. At the same time, he also has been candid in admitting he has utilized tax credits, deductions and real estate depreciation to offset income. For example, the Trump Organization received $40 million in Federal Historic Tax credits for its 2014, $200 million renovation of the Old Post Office just blocks from the White House into the 272-room Trump International Hotel on Pennsylvania Avenue.

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        U.S. Commercial-Property Prices Fall with Worst Yet to Come

        Year-to-date through July, hotel prices fell 4.4 percent, retail prices 2.8 percent office prices 0.9 percent, according to Real Capital Analytics.

        (Bloomberg)—U.S. commercial real estate prices are falling as the economic toll of the Covid-19 pandemic worsens — and the decline is just getting started.

        Indexes for office, retail and lodging properties all slipped year-over-year in July, data from industry tracker Real Capital Analytics Inc. show. Transaction volume plummeted to $14 billion across all sectors, down 69% from July 2019.

        “The worst is yet to come,” Real Capital Senior Vice President Jim Costello said in a telephone interview. “We’re not seeing the fallout yet of owners selling properties and taking a loss.”

        Commercial real estate deals have been in a deep freeze as lenders give borrowers slack to defer payments and landlords are reluctant to drop asking prices. That may change in the next few months as debts mount and the outlook dims for retail, hotel, office and even apartment properties that already suffered from oversupply before the pandemic hammered the U.S. economy.

        “I wouldn’t be surprised if we start to see some of it start to break in September or October,” Costello said.

        Hotel prices dropped 4.4% in the year through July, while retail declined 2.8% and offices fell 0.9%, according to Real Capital. Apartment building prices climbed 6.9%, and industrial values rose 8.3%, leading to a 1.5% gain for all property types in the period.

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          Credit Unions are Making a Bigger Play for CRE Loans

          Credit unions are an attractive option for borrowers who are seeing fewer lender bids, particularly from banks and debt funds.

          Credit unions that have been working to grow market share in the commercial real estate lending space in recent years are taking advantage of open runway as other capital sources have pulled back in recent months. In fact, these institutions are willing to offer competitive terms and creative solutions.

          “What we have seen from credit unions is that they are willing to finance property types that others aren’t doing,” says Pat Minea, executive vice president, debt and equity at NorthMarq. NorthMarq estimates that its financing activity with credit unions is about 50 percent higher this year compared to last year. Since March, the firm has closed more than two dozen financing transactions with credit unions as the lender for borrowers across the board involving multifamily, industrial, retail and office projects.

          There are plenty of capital sources still willing to finance multifamily and industrial assets. Interest drops off, however, for office and retail properties with financing that has become tougher because of COVID-19.

          “We are having to dig a little deeper to find the terms that borrowers want in the current climate, and credit unions are a great example of that alternative,” says Minea. “They are more receptive, for whatever reason, to doing these deals that, in today’s world, are a little more on the edge.”

          For example, credit unions are still willing to finance single-tenant retail and unanchored retail properties. That may be because credit unions don’t have as large of a loan portfolio and potential concentration risk to that sector as other lenders might have, notes Minea.

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            Distress Mounts in U.S. Property Market Frozen by Pandemic

            Investment sales of U.S. commercial properties fell by 68 percent year-over-year in the second quarter, according to RCA.

            (Bloomberg)—The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had.

            Transactions fell 68% in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics.

            The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors.

            “The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.”

            Industrial Strength

            Second-quarter sales plunged 70% for apartments, 71% for offices, 73% for retail and 91% for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50% in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions.

            For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.

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              Wave of Rescue Capital Moves on Ahead of Opportunistic Buyers

              Rescue capital could make a dent in the amount of distressed real estate deals in the market.

              Rescue capital is hoping to beat opportunistic investors to the punch when it comes to providing needed liquidity to distressed commercial real estate. Although both groups are hoping to generate alpha returns, rescue capital aims to provide a shorter term solution with preferred equity, mezzanine debt or fresh joint venture money to help owners hold onto troubled assets.

              “We have had an extreme and rapid shock to the real estate market. There are a lot of operators out there with good projects who have had what were good, sustainable business plans just upended,” says Doug Wells, CEO of Denver-based Broe Real Estate Group (BREG), an affiliate of The Broe Group. “What rescue capital can be is an early stage structure around which to resolve some of these situations,” he adds.

              BREG launched its $250 million rescue capital platform in June. The BREG Strategic Investments Program will provide “expedited capital solutions” for liquidity strained commercial real estate properties and ventures that are experiencing distress specifically related to COVID-19 market disruptions. The platform is focused primarily on preferred equity and joint venture investments in growth markets throughout the Southeast, Southwest and Western U.S. “I do believe these things will take some time. Our expectation is that our holds will be three to five years,” adds Wells.

              Denver-based Hospitality Real Estate Counselors (HREC) also is gearing up to launch a new platform to broker rescue or “runway” capital for hotel operators. A common number being thrown out is that the average hotel is worth about 30 percent less now compared to what it was worth pre-COVID, notes Michael Cahill, CEO and founder of HREC and co-founder and principal of HREC Investment Advisors. What that means is that owners are not necessarily upside down, but it does mean they have lost all of their equity. So, they are motivated to hang onto assets long enough to ride out the recovery and rebound in values, he says.

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                Seven CRE Economists Offer Their Advice and Predictions for the Sector

                While there are still a lot of unknowns about how the pandemic will play out, we talked to seven commercial real estate economists about their views on the future of the industry.
                As we move into the summer months, there are still a lot of unknowns around how the COVID-19 pandemic will play out, including how much worse the first wave of infections is going to get, whether there will be a second wave in the fall and how soon we might expect some type of vaccine or effective treatment. But with the full understanding that predictions about the future are not an exact science, especially in times of crisis, we asked seven commercial real estate executives with backgrounds in research and economics to offer their outlooks on what the current situation might mean for real estate investors.

                In the following slides, they share their predictions and advice for commercial real estate insiders.

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                  10 CRE Deals That Had Fallen Through Due to the Pandemic

                  The disruption from the pandemic and the subsequent liquidity pullback have spelled the end for a number of planned acquisitions.

                  Two months into the lockdown, the pandemic has disrupted a number of high-profile real estate deals, including stand-alone building sales, portfolio transactions and entity-level equity infusions. Some had fallen apart because the buyer couldn’t secure financing in a market that had become less liquid. In others, the acquisition just no longer made sense, given the economic outlook. A number of these disrupted deals have even led to legal disputes, with the seller insisting the buyer uphold its end of the contract.

                  In March, the most recent month for which data is available, 1.1 percent of real estate investment sales under contract had fallen through, according to New York City-based research firm Real Capital Analytics (RCA). From 2016 through 2019, the average for such transactions was 0.4 percent. But the fallout had not been spread evenly across sectors. Looking at collapsed sales in the first quarter of 2020, RCA found that they skewed toward office deals (37 percent of total), retail and hotels (21 percent each). The industrial sector contributed just 5 percent to the total of fallen transactions.

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                    What CRE Will Look Like As America Reopens

                    Even after the worst stage of the COVID-19 pandemic ends, how we use physical spaces will be transformed for the foreseeable future.

                    The United States has had more than 1 million confirmed COVID-19 cases, with a death count approaching 70,000, as of Monday. And new reporting from the New York Times revealed that the Trump administration is “privately projecting a steady rise in the number of cases and deaths from the coronavirus over the next several weeks, reaching about 3,000 daily deaths on June 1 […] nearly double from the current level of about 1,750.”

                    The Federal Emergency Management Agency, meanwhile, is forecasting “about 200,000 new cases each day by the end of the month, up from about 25,000 cases now,” according to the Times.

                    So while some cities and states have begun to relax “stay at home” orders in recent days, those numbers shed doubt on whether the U.S. as a whole is on a steady path toward reopening yet.

                    Still, at some point the worst of the pandemic will subside. When it does, we will not be returning to the same world. That has sparked many discussions in the commercial real estate industry as to what a post-COVID-19 landscape will look like and what that will mean for the various sub-sectors in the industry. How we use buildings will change. That means layouts, density and uses will have to evolve in order to allow for people to safely come back. As just one example, restaurants will not be able to squeeze tables as tightly together as they did previously. Not many people will be willing to eat meals while rubbing elbows with fellow diners as we used to.

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