Archives for January 2021

From acquiring distressed loans to providing capital as a shadow lender, here are seven CRE asset types that will pay off this year.

Below are my seven strategies to make big profits in CRE in 2021.
Acquire Distressed Hotel Assets
The hotel market in 2020 was decimated by Covid and state lockdowns with falling demand, occupancy, and RevPAR. Per CBRE through Q3-20, room demand was down 36.8%, national occupancy was down 37.9% and RevPAR down 54.5%. These are horrible statistics, however, where there is great distress in CRE, there is also a great opportunity. The economy is expected to recover substantially in 2021 with increased business and leisure travel. This will be exceptionally good for the hotel industry and many hotels today can be purchased at exceptionally low values or the debt can be acquired at a substantial discount to eventually obtain the hotel asset or get repaid at par value.
Acquire Distressed Retail Assets
Many shopping center and mall real estate assets are selling at 8.0% to 10.0%+ cap rates and some of these assets should be bought. Retail assets have been out of favor for the last few years and Covid has accelerated the demise of the weaker retail chains in the industry. Although there are still tenant risks, with bankruptcies and store closures, they can still provide higher risk-adjusted returns than other CRE assets. A number of the public retail mall REITs are also selling at deep 50%+ discounts to net asset value and are also ripe for a buyout or being taken private. Some of these distressed retail deals are opportunistic investments and need significant renovation, releasing or a change in highest and best use.
Invest in Data Analytics Businesses
One of the key growth areas of CRE is in data analytics. Data analytics encompasses all aspects of big data for CRE including demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and Real Capital Analytics and many smaller local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities or sell them to the larger firms. The large CRE software firms are also prime buyers for data analytics companies as they seek to diversify their software business and cross-sell the data analytics products.

Sell Overpriced Core Assets and Reinvest in Opportunistic/Distressed Assets
A chart on institutional CRE investment strategies show the risk and return for various strategies from the lowest risk, core investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage, to value-added strategies which are higher risk strategies that involve some property redevelopment, tenant adjustment or leasing or with operational problems to opportunistic strategies, which are the highest risk category that involve a high degree of redevelopment, leasing, tenant relocation or change or are in financial distress. Many core properties are still trading at 3.0% to 4.5% cap rates and should be sold, especially in blue cities. The proceeds should be reinvested in higher return opportunistic strategies, as discussed in #1 and #2 above.
Provide CRE Loans as a Shadow Lender
Although the regulated lending market for CRE assets saw loan volumes decline by 50% in 2020, the health of the industry has held up very well. Due to a booming economy and pent-up demand in 2021, the lending market will see increased loan activity from banks, insurance companies, the GSEs and savings institutions. There will also be an insatiable demand for loans that do not fit into the loan box from these regulated lenders and the shadow lenders will be available to meet this demand. 2021 will be a great market to start a debt fund to service this untapped loan market niche.
Acquire Public REIT Stocks
The FTSE-NAREIT All Equity REIT Index will be down in 2020 by about -12%, with many sectors down by double digits. Through October 2020, these REIT sectors were down as follows; office -35.97%, retail -42.12%, apartments -28.08% and hotels -50.33%. These large stock price declines will turn around substantially in 2021 and I am predicting that the FTSE-NAREIT All Equity Index will be up by 10%. Many REIT stocks are trading at historically low values and should be purchased. I have stated many times that individual investors should allocate 15%-20% of their total portfolio into a diversified equity REIT fund. During the Financial Crash that lasted from 2007 to 2012, the average REIT stock was down about 50% and they came roaring back after 2012 with double-digit annual returns through 2019.
15 CRE Risks to Watch For 
As always when investing it is crucial to understand the accompanying risks. Here are 15 that investors should watch in particular.

• Cash Flow Risk-volatility in the property’s net operating income or cash flow.
• Property Value Risk-a reduction in a property’s value.
• Tenant Risk-loss or bankruptcy of a major tenant.
• Market Risk-negative changes in the local real estate market or metropolitan statistical area.
• Economic Risk-negative changes in the macroeconomy.
• Interest Rate Risk-an increase in interest rates.
• Inflation Risk-an increase in inflation.
• Leasing Risk-inability to lease vacant space or a drop in lease rates.
• Management Risk-poor management policy and operations.
• Ownership Risk-loss of critical personnel of owner or sponsor.
• Legal, Title, Tax and Political Risk-averse legal, tax and political issues and claims on title.
• Construction Risk-development delays, cessation of construction, financial distress of general contractor or sub-contractors and payment defaults.
• Entitlement Risk-inability or delay in obtaining project entitlements.
• Liquidity Risk-inability to sell the property or convert equity value into cash.
• Refinancing Risk-inability to refinance the property.

Joseph J. Ori is executive managing director of Paramount Capital Corp., a Commercial Real Estate Advisory Firm
Source: “Six CRE Assets to Buy This Year“

At the January 2021 Virtual LIN Meeting held on January 20, 17 excellent properties were presented.
Thank you for presenting properties and attending the meeting!

View the January 2021 LIN properties here.

View the January 2021 LIN Thank Yous here.

While in-person shopping should increase, demand for modern facilities will also rise.

Once there are widespread vaccinations and people begin shopping in physical retail locations, will that  make a dent in e-commerce sales and warehouse demand?
One analyst group says no.
While BTIG sees more in-person shopping on the horizon, it does not expect a material shift in e-commerce demand. In fact, it sees more need for modern warehouse facilities in 2021.
BTIG predicts the drivers of this warehouse demand will be retailers rushing to restock inventory, household formation increasing and Coastal-to-Sunbelt relocations bringing swift online fulfillment expectations to new markets.
As people migrate to the Sunbelt, demand will shift. BTIG says population growth and household formation in Tier II industrial markets materially outpaced Tier I markets in 2020. It expects this trend to accelerate in 2021. Of the 29 Tier I and II markets BTIG tracks, 16 experienced above-average growth. Thirteen of those 16 were in the Sunbelt States. Seattle, Denver and Indianapolis were the three exceptions.
This is not to discount the influence online shopping has on the industrial market and will continue to have even as physical retail stores return to pre-pandemic operations. In a recent survey, BTIG found that 75% of respondents indicated they would shop online as much or more next year, even after a vaccine is available.
As this happens, retailers have to restock their inventory. BTIG says the pandemic-driven shift to online retail effectively “broke the supply chain.” BTIG cites the ISM Service PMI report where respondents noted that inventory levels were too low only three times in the last 23 years: March, November and December 2020.
While BTIG is bullish about e-commerce growth this year, not everyone believes it will continue to flourish at these strong rates after the pandemic.
“We saw the growth in e-commerce go through the roof with the pandemic started,” Jonathan Needell, the president and chief investment officer at KIMC, told GlobeSt.com in an earlier interview. “I think that we can expect the growth rate to decline fairly dramatically just because the denominator is so much greater and there will be pent-up demand. That could mean that the growth declines, flattens or it goes to a lower growth rate. It is hard to say—and it could re-accelerate.”
Source: “It’s Not Just About E-Commerce. Physical Retail Will Also Drive Warehouse Demand This Year“

US commercial property prices grew 7.3% year-over-year in December, according to the latest RCA CPPI: US summary report.
But if you dig a little deeper, you’ll see that apartment and industrial drove the gains. The industrial sector, which posted the largest annual increase of any property type, grew 0.6% in December and rose 8.8% year-over-year. The pace of growth in the sector declined modestly from previous months. Prices increased 0.9% for apartments in December, while annual gains hit 8.3%.
Despite strong industrial sales, cap rates remained flat at 6.0% from Q4 1029 to Q4 2020, according to The RCA Hedonic Series. Apartment cap rates fell 20 basis points year-over-year to 5.1%. Warehouse cap rates were 5.9%, which was lower than the 6.0% reached in Q1’20. The retail sector, which underperformed other property types in 2020, was the only index to post a negative annual return in December, dropping 4.3%. Despite uncertainty about return-to-work trends, office prices increased into year-end, up 1.5% from a year ago. RCA noted that this marked “a petering out of the price growth seen before Covid-19 struck.”
Unlike The Global Financial Crisis, prices have not yet turned negative during the COVID recession—except for retail. However, transaction activity tumbled in 2020, though there were signs of a recovery in Q4, according to RCA.
Overall, US sales volumes fell 32% versus 2019. However, Q4 sales only dropped 19%, according to the latest edition of US Capital Trends shows.
Industrial, which held up better than other property types through the pandemic, was the second most active sector in 2020 with $98.8 billion. Apartments had the most sales at $183.7 billion.
Some markets, such as the Southeast, have seen a healthy influx of people during the pandemic. And, demand for multifamily in those regions has picked up.
“We have found as a result of the pandemic, there is a demand for the Sun Belt strategy,” Joe Lubeck, CEO, American Landmark, told GlobeSt.com. “Apartments are strong, and more and more people are moving here from the North to the South and from the coasts to the Sun Belt.”
The office sector, which used to rank at the top of the transaction list, was third with $86.1 billion. The three sectors hardest hit by the pandemic, retail, hospitality and seniors housing, followed with transactions $37.7 billion, $12.2 billion, and $9.6 billion, respectively.
Dallas, which had strong apartment and industrial sales, saw the most transactions in 2020, though they still fell by a quarter, according to RCA. Los Angeles, Boston and Atlanta followed. Sales activity in Manhattan, which has been hard hit by COVID, was slashed in half. The city fell to the #5 spot of RCA’s list of top markets, which was its lowest position recorded.
Source: “Industrial, Apartments Drive December Price Gains“