Category: Commercial

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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Seven CRE Professionals Offer Their Takes on Work and Life While Sheltering in Place

We spoke to industry insiders in locations with shelter-in-place orders. Here’s how they are staying sane and productive.

Over the past few weeks, an increasing number of states and municipalities have issued shelter-in-place orders, hoping to contain the COVID-19 outbreak from spreading further. This has led to large-scale temporary closures of commercial properties, including the offices of many real estate firms, forcing industry professionals to work (and largely stay) at home. This has happened at the same time as children and spouses are back at home too, with schools, colleges, non-essential shops and entertainment venues closed for business. So how are commercial real estate professionals staying productive and staying sane while adjusting to the country’s new lifestyle?

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Some Initial Takeaways on How the $2T Stimulus Helps CRE

Industry pros are continuing to unpack what’s in the massive $2 trillion stimulus package, but already some items stand out that should provide relief to the CRE sector.

After days of rancorous negotiations, the U.S. Senate unanimously approved a $2 trillion+ economic stimulus bill aimed at helping the American economy navigate an unprecedented shock. The House appeared poised to pass the legislation on Friday and President Trump has promised to sign the bill as soon as it reaches his desk.

It could not come at a more pressing time. On Thursday morning the Department of Labor reported that initial jobless claims soared to a seasonally adjusted 3.28 million in the week ended March 21.

The bill is broken into several parts, with hundreds of billions allocated towards direct cash payments to most Americans and to vastly expanding unemployment benefits to be more generous and cover more classifications of workers. That alone will be beneficial, for example, by helping apartment tenants pay their rents.

And within the bill are specific measures that will provide some benefits to the commercial real estate sector.

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Commercial Real Estate Industry Coronavirus Resource Center

A page centralizing commercial real estate association responses, guides and resources in dealing with the ongoing coronavirus outbreak.

Many of the major North American commercial real estate industries have stepped up to deliver guidance and resources to the industry on how to handle the continuing coronavirus outbreak.

Here is a centralized list with links to the resource pages and statements provided by those groups.

If you have links to additional resources to add to this page, please contact [email protected]

Alternative and Direct Investment Securities Association

Statement on its upcoming 2020 Spring Conference, “The health and safety of our members and attendees is our top priority, and we are monitoring the COVID-19 (coronavirus) situation and guidelines set by the U.S. Centers for Disease Control and Prevention and the World Health Organization. We are working closely with the Rosen Shingle Creek resort to ensure that all appropriate measures are being taken to safeguard the well-being of our attendees, including the aggressive use of disinfectant cleaning procedures throughout the hotel, including the exhibit hall and meeting rooms, and the addition of more hand sanitizing dispensers readily available to all attendees.” (March 10)

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