Archives for October 2021

No easy answers other than “It depends.”

Values are up. Rents are rising, Cap values are at historical lows in some markets. It’s a strengthening economy. Then there are the prospects of higher interest rates, ongoing inflation, and increased taxes with new regulations perhaps around 1031 exchanges. Growth may be slowing some already.

Is now the time to sell and take profits? Or is there a case for the buy-and-hold investor?

It’s a tricky question that doesn’t have a single answer.

“The current environment of historically low interest rates and the opportunity to still utilize 1031 exchange rules favors sellers seeking to realize gains in such assets as multifamily or industrial real estate,” Michael Silver, chairman of Vestian, tells GlobeSt.com. “The consideration for sellers who can hold certain assets such as multifamily apartments addresses the longer-term investor who can realize rents that will appreciate during an inflationary period.”

The decision primarily comes down largely to strategy and time horizons.

“Speaking from the multifamily perspective, I think any owner contemplating a sale in the next couple of years should consider a sale now,” Danny Mantis, director at Kiser Group, tells GlobeSt.com. “What we’re seeing is buyer demand is higher than available inventory, which has created a market that is very favorable to sellers.

And yet, there are “many reasons for the buy and hold investor to be bullish on commercial real estate,” says Aaron Jodka, research director for U.S. capital markets at Colliers. “Rent growth, particularly in industrial, life science, and multifamily, has been robust. These rent increases are driving higher valuations on properties and imply value creation with a mark-to-market investment strategy. While interest rates are likely to rise, they are still at historic lows. There is a record amount of capital earmarked for commercial real estate waiting to be deployed.

But vigilance is necessary.

“Given changing market dynamics, investors must remain consistently tuned in to the market on both a macro and micro level to best understand how current factors impact their investments,” says Nelson Stabile, principal at Integra Investments. “Additionally, understanding key performance indicators at the asset level and relative to the competitive set is critical. Typically, selling creates liquidity, which allows for capital to be reinvested into new opportunities. On the other hand, timing the market for a perfect exit is never easy. The approach would differ based on the asset class and the geographic location, as each market has varying macro and micro short-term and long-term influences.”

Source: “Is the Time Ripe for a Sale?“

CBRE cap rate report release indicates investor interest largely in multifamily and industrial.

CBRE welcomed an esteemed panel to discuss cap rates and CRE investing in a recent podcast.

Among them was Rod Vogel, Senior Managing Director and Head, Private Equity, Production, Principal Real Estate Investors, who has his finger on the pulse of 40 US markets.

“When you’re in 40 different markets, you’ve got a good lens on what’s going on in the US commercial real estate marketplace specifically. Our clients love multifamily and they love industrial, for obvious reasons, the space market fundamentals are tremendous.”

That said, “almost everyone universally loves the two property types,” Vogel said. “That’s the positive. The challenge, however, is yields, and those two property types are at the lowest I’ve ever seen in my 33 years with cap rates (both in the 3s).”

He said this reminds him of a song from the 90s’ band, No Mercy, ‘Where Do You Go.’ “And where we’ve chosen to go with our clients is into development of industrial and multifamily,” Vogel said.

Vogel said what this climate has also done is force Principal Real Estate Investors to broaden its array of property types that it is investing in and moving into some what it calls niche property sectors, single-family rental, manufactured housing, data centers and life sciences, to name a few, he said.

“And those are four that we’re actively investing in today,” Vogel said. “We’re looking to underweight retail and office. We’re selling there where we can and again, primarily focusing on the niche property types and industrial multifamily for our growth going forward.

“Markets like Boston, San Francisco, Seattle, Raleigh, (these) life science markets have a lot of room to run and we think will offer some real compelling long-term investment returns.”

Co-panelist, Paige Morgan Executive Vice President, CBRE, based in Portland, said she is seeing more of the private buyers come to play “and they’re more yield-driven, so they’re willing to accept more of that risk in exchange for a higher yield where we really haven’t seen the institutional capital move into that space.”

Need to See Where the Puck is Going

Morgan said, “At first blush, it’s sort of surprising that the office sector was sort of flat. But I think when you really dig down, what was probably leading to a lot of that is that the kind of liquidity we did see was more in that long-term net leased assets for the office space.”

Morgan said one of the real valuable lessons for brokers lately – and what her clients are constantly enforcing to her – is that “we need you guys to see where the puck is going, not where it’s been. We really need to look forward to see the trends and see where things are heading; if we’re looking in the rearview mirror, we’re missing value in perspective.”

The cap rate report is important, “but I want to reflect on the fact that cap rates are just one measure of return,” she said. “When you’re looking at these low rates in industrial and multifamily, people are getting kind of fixated on these low cap rates.

“But given the rent growth that we’re seeing in some of those markets—particularly industrial, just driven by this unprecedented level of demand—that isn’t always captured in the cap rate. So that all-in return is probably on par—and even maybe a little bit tighter—with where the principal was pre pandemic.”

Source: “Where Do You Go in a Low Cap Rate Environment“

Cyber exposures anticipated over the next few years will challenge the industry’s ability to cope with rapidly increasing risks.

So far the US property insurance market has not been incorporating the price of cyber risks in commercial policies—even though dangers are accumulating in this area. That may change if carriers follow the recommendations in a report issued this week from CyberCube, along with AM Best and Aonl.

It stated that cyber exposures accumulating in the United States’ property insurance market could result in $12.5 billion in non-physical damage losses and could cause certain carriers’ capital adequacy ratios to deteriorate.

The report concluded that, “while current levels of cyber exposure within US commercial property are manageable by the property industry as a whole, the exposure could have ratings impacts for a section of the property market. The large growth in cyber exposures anticipated over the next few years will challenge the industry’s ability to cope with rapidly increasing risks.”

The research notes a mixture of regulatory pressure and good portfolio management practice is driving carriers to explicitly exclude (or affirm) cyber coverage from non-standalone policies, “where ‘silent’ cyber exposure may exist. However, it is becoming apparent that insurance carriers, while starting to offer explicit cyber coverage in US commercial property policies, may not typically be underwriting or pricing the risk, accordingly.”

Furthermore, “sufficient cyber risk is accumulating in the US property market to trigger a one-in-100-year loss” of the magnitude that would be enough to cause a downward transition of the Best’s Capital Adequacy Ratio (BCAR) for 18 US property carriers.

BCAR is a rating that assesses the strength of an insurance company’s balance sheet.

For the study, CyberCube created a sample portfolio based on the US small business property industry and subjected it to modeled cyber loss scenarios, quantifying non-physical damage losses.

The results of this analysis were then used by financial ratings agency AM Best to assess the impact on the balance sheets of 579 US  property insurers. Aon assisted with quantifying the risks and exposures written back into property policies and highlighting some best practices for managing these risks.

The Dreaded Drop in BCAR Level

The analysis revealed that of the 579 property insurers analyzed, 12 carriers fell one level in the BCAR, four dropped two levels, and two insurers each fell three levels and four levels respectively. It is important to note that BCAR assessments are not the sole determinant of a company’s financial strength rating. Other factors such as reinsurance, diversification, and liquidity are considered to evaluate balance sheet strength. However, a significant deterioration in the BCAR assessment may lead to a downgrade of an insurer’s financial strength rating.

The report warns that cyber exposures in the US property market may be unaccounted for in carriers’ enterprise risk management strategies.

Rebecca Bole, CyberCube’s head of industry engagement, said in prepared remarks that “the modeled loss figure of $12.5 billion suggests that the US property market is exposed to $9.5 billion of attritional losses and $3 billion of catastrophic losses in the return period. It is apparent that the property market is already paying attritional losses for non-affirmative cyber coverage.”

Losses of $12.5 billion are relatively low when placed in the context of natural catastrophes, Sridhar Manyem, AM Best’s director, industry research noted, but “considering these exposures are often unpriced or unaccounted for in enterprise risk management, the impact on carriers can be significant and more importantly, unexpected.”

Cyber scenarios used by CyberCube to analyze the impact on the US property industry were large-scale data losses, large-scale ransomware attacks and a targeted ransomware attack on a medical devices manufacturer.

Source: “Hidden Cyber Risk Could Cause US Property Insurance to Rise“

How to mitigate risk and safeguard properties from a property management perspective

Intelligent building solutions or “smart buildings” are increasingly becoming the norm across many property types. Tenants and building owners are drawn to the ease and convenience of scheduling and programming elevator arrivals, conference room bookings, HVAC systems, and more, all through their smartphones. However, as buildings become more and more programmable from multiple users, the cybersecurity risk has also increased in lockstep.

According to a recent whitepaper between JLL’s Property Management group, Red Bison Technology Group and Fortinet, intelligent building solutions offer tremendous benefits but only if risk can be appropriately managed.

“Owners are always concerned with risk to their assets whether it be through natural disasters, or human-driven risk and rightly so,” said Jason Lund, Managing Director of JLL’s Property Management Technology Division. “Cyber risk is increasing yearly. As we technologically enable our buildings, we are also making them more hackable. We can’t leave behind the tremendous benefits of technology in buildings for the environment, cost efficiencies, safety and other uses so we must actively pursue a parallel strategy of ensuring cyber security even as we enable our buildings.”

“Many commercial buildings currently operate with disparate systems and separate networks for every in-building technology, which increases deployment costs and limits visibility into vulnerability,” added Lynn Martin, CEO Red Bison. “A move toward a centralized or converged network as a ‘backbone’ for technology infrastructure within buildings allows building owners to monitor all systems at once with end-to-end visibility and allows for quicker identification and resolution of cybersecurity breaches.”

Cybersecurity should be placed at the forefront of building owners’ minds as we move towards a “smarter” built-world. With proper safeguards in place, the benefits of smart technology will long outweigh any negatives.

Source: “As Smart Buildings Increase, So Does Cybersecurity Risk“