Archives for 2022

CBRE forecasts a 15% year-over-year drop in U.S. commercial real estate investment volume in 2023, although it will exceed the pre-pandemic record annual total in 2019.

Investment activity likely will bottom out in the first quarter and then gradually improve, it said. Then, by Q2 2023, a clearer picture should emerge about the terminal (max) federal funds rate and the overall economic outlook.

“Long-term yields and spreads should help reduce capital cost and allow for more sound underwriting. As a result, we expect quarter-over-quarter improvements in capital markets activity starting in Q2,” according to its report.

An informal survey of CRE pros by GlobeSt.com finds that, much like CBRE, while many are expecting a downturn in deals there still will be activity, whether it is from distress or maturing debt. Here are some of their views with more coming tomorrow.

Capital Remains Available

Patrick Nutt, Executive Vice President, NNLG/Market Leader South Florida, SRS Real Estate Partners, tells GlobeSt.com that capital remains readily available.

“However, investors are hoping to be patient and not ‘catch a falling knife’ by making acquisition decisions before reaching peak terminal rates.

“Volatility will continue as we read every Fed note with granular detail and observe how the economy adjusts as growth slows, inflation cools and labor markets ease. The fundamentals thus far have remained exceptionally strong (tenant demand, consumer behavior, etc.) but we anticipate some secular softness but likely not a widespread pull back across all retail.”

An Increase in Recapitalization Requests

Brian Murphy, managing partner, CEO, Veleta Capital, Los Angeles, tells GlobeSt.com that following the recent rate hike, he is more confident in his firm’s near-term projections and anticipates an increase in regular-way transaction volume in Q2.

“We have observed an increase in recapitalization requests and have proactively provided rescue capital to some apartment sponsors,” Murphy said.

“We expect this trend to continue throughout the next year. Overall, we remain optimistic about the market opportunities in 2023 and will continue to closely monitor and adapt to market trends.”

Good Signs for a ‘Healthy’ Real Estate Market

Tomas Sulichin, President of Commercial Division at RelatedISG Realty tells GlobeSt.com that buyers and sellers will encounter a more stable market prone to give buyers more options such as through a slight increase in inventory.

In the past years, he said, “buyers and tenants have been at the hands of owners and landlords, and we will soon see a market stabilization. These are all good signs of a healthy real estate market, which is cyclical.”

$1 Trillion in Loans Coming Due in Next Two Years

Eric Brody, managing partner, ANAX Real Estate Partners, tells GlobeSt.com that, especially come Q1, expect to see a plethora of investment opportunities in commercial real estate due to the unprecedented amount of senior debt that will be maturing.

“Newmark recently reported that over $1 trillion in loans are coming due in the next two years, and due to rising interest rates, it is expected that repayment conditions will become more challenging, with bridge financing, office, and retail loans being the most at risk,” Brody said.

“In addition to the rising rates because of increased construction costs, rent growth, and political headwinds, real estate (particularly in NYC) will need an infusion of capital to either refinance assets at a lower rate, pay down existing debt, or complete current projects.”

Some Having ‘Uncomfortable Conversations’

Sean Rawson, co-founder, co-founder, Waterford Property Company, tells GlobeSt.com that by the end of Q1 “we will begin to see price discovery in the market. Right now, we are in a period where there is a significant delta between the bid/ask spread between buyers and sellers.

“But due to the distress that is building in the market, it will begin to correct itself by the end of the first quarter.

“There are owners with high-leverage, short-term floating rate debt that are currently having uncomfortable conversations with their lenders going into 2023. Furthermore, we are concerned about the leasing demand for office properties and the supply picture for both multifamily and industrial assets in many markets which could impact property fundamentals in the short term. We believe that will have a large impact on Investment volume in 2023.”

“By Q2, a clearer picture should emerge about the terminal (max) federal funds rate and the overall economic outlook. Long-term yields and spreads should help reduce capital cost and allow for more sound underwriting. As a result, we expect quarter-over-quarter improvements in capital markets activity starting in Q2.”

Needing ‘Clearer Picture’ on Trajectory of Rates

Matthew Mousavi, managing principal, National Net Lease Group, SRS Real Estate Partners, tells GlobeSt.com that he expects a bottom by around Q2 when “we will have a clearer picture on the trajectory of rates and the capital markets environment going forward.

“However, the inverted yield curve of investment grade bonds and treasuries exceeding certain cap rate yields, along with the negatively leveraged environment based on lending rates relative to seller pricing expectations, has resulted in a marked activity drop in the current environment.”

Waiting for Fed to Stop Raising

Uma Moriarity, Global ESG Lead & Senior investment strategist at CenterSquare Investment Management, tells GlobeSt.com that more clarity and stability in the debt markets will occur once the Fed Funds rate stops rising.

“But at that point, we’re basically going to be in a recession,” Moriarity said. “So the price discovery will be not only from a value perspective, but also from a growth perspective.”

We’re tracking this more real-time in the public markets that had priced in the impact of higher rates earlier in the year and are now looking at recession impacts on cash flow growth.

Net, we’re expecting real estate values to fall in the mid-high single digits by the end of all this but likely we don’t see that really settle out until 2024 in the private markets.

Construction Financing Demand Expected to Rebound

Stephen D. Stein, co-founder/president, Tauro Capital Advisors, Los Angeles, tells GlobeSt.com that he expects sale activity to rebound in early 2023 as sellers, investors and developers grasp the “new normal” of interest rates and cap rates.

“Our forecast of an expected drop in the financial markets is not as severe as the forecast for investment sales,” Stein said. “Pending loan maturities, refinances for cash-out utilized for maintenance obligations and needed repairs or partnership buy-outs, and sale activity to name a few, will all contribute to the continued demand for capital.

“Equity is sitting on the sidelines until the end of Q1 or Q2, demand for construction financing is expected to rebound next year as lenders consider limited new construction projects that will be shovel-ready mid-2023, pricing will remain in flux, loan-to-cost is expected to max out between 50% to 65% and sponsor experience will be paramount.”

Some Loans Need to Be Off Balance Sheets

Stephen Bittel, CEO of Terranova Corporation, tells GlobeSt.com that the lending market will continue to tighten with only banks and life insurance companies lending off their balance sheets.

“Loan sales from existing lenders will accelerate and non- and under-performing loans will need to be moved off balance sheets,” he said. “It will be a tale of two cities with Miami and Austin continuing to outperform the nation, while NYC, Chicago and San Francisco will continue to suffer population and business out flows.”

Bittel also said that unemployment will jump higher and corporate earnings reported in January will be down.

Source: “Will Investment Sales Recover in 2023?“

At first glance, the advance monthly sales for retail and food services numbers released by the Census Bureau (part of the Commerce Department) were disappointing, down 0.6%, plus or minus 0.5%, from October to November. But if you own, operate, or invest in retail, take heart, or at least a quick breather, because things are more nuanced than a single percentage might seem.

The numbers were bad in particular because they exceeded what the consensus of economic experts expected. “The first two big activity indicators for November, retail sales and industrial production, fell on the month and were worse than expected,” said Bill Adams, chief economist for Comerica Bank, in an emailed note. “Retail sales rose slower than inflation in November from last year meaning sales volumes are down this holiday season. November’s monthly decline was broad-based, affecting most categories of retail spending. The retail sales control group, which excludes several volatile categories and goes into the calculation of nominal GDP, fell 0.2% after a 0.5% increase in October, which was revised down from 0.7% in the prior release. Retail sales rose 1.3% in October, though, so the change from September to November is equivalent to a 0.3% monthly increase.”

Unlike many economic releases from the Census, this is not a case where the confidence interval around the result crosses 0, so there is clear statistical evidence that sales were down somewhere between 0.1% and 1.1%. But this was calculated on numbers adjusted for “seasonal variation and for holiday and trading day differences.”

In times and under conditions as turbulent as these, it seems more prudent to judge the year-over-year, non-adjusted figures for a longer read on trends. From that vantage, retail and food services sales were up 9.6%. A significant portion of that will be inflation, and in November, the year-over-year number was 7.1%, leaving 2.5% actual growth.

But there are some volatile parts of the overall retail number, gas stations in particular, but also auto sales and parts. Take those out and the year-over-year growth was 8.8%, or 1.7% after inflation.

Furniture and home stores took it on the chin, 1.0% before inflation, -6.1% after. Some other downers: sporting goods, hobbies, musical instruments, and books stores, down 2.8% (-4.3% after inflation); general merchandise, down 3.1% (-4.0%, after inflation); health and personal care, 4.1% (-3.0%, after inflation); and electronics and appliances, -6.4% (-13.5%, after inflation).

The bright spot was food services and drinking places, up 17.2% year over year, or 10.1% subtracting the effect of inflation. So, if the news makes you feel like taking up drink, maybe you should as an investment.

Source: “The ‘Bad’ Retail Sales Report Is More Complicated Than It Sounds“

Municipalities and school systems that depend on property taxes to fund their budgets may face shortfalls due to the plunge in office values—especially in cities that do annual property assessments—as more and more building owners appeal their assessments.

In jurisdictions that reassess property values annually, owner appeals of tax assessments are up by as much as 40% compared to pre-pandemic levels, Bryan Frey, a managing director in CBRE’s valuation consulting business, told the Wall Street Journal this week.

Carr Properties, which owns a large portfolio of office buildings in Washington DC, told the Journal it would be appealing this year’s assessment from DC, which cut large office building assessed values by 11% in 2021, but raised them 3.6% in 2022.

“We’re definitely appealing. We have higher interest rates. We have less demand for space. The math just doesn’t work,” CEO Oliver Car told the WSJ.

Carr was among a dozen major DC owners and operators of office buildings who signed an urgent letter to city officials last month warning them that cratering office values in Washington are a threat to the fiscal health of the city.

The letter suggested that city officials, who included a tax increase on commercial property in their latest budget, may be underestimating the number of distressed office properties in DC. The CRE firms asked to be part of a process reviewing how the city calculates its assessments of office buildings.

“Our interest in this matter is not about being overtaxed. We are primarily concerned about the future fiscal health of the city. For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million,” said the letter, which was cc’d to Washington’s mayor and city council.

“It is vitally important for city officials to fully comprehend the difficult environment commercial office buildings are operating under and the risks to future tax revenue,“ the letter said. “With the dramatic and persistent decline in commuter activity, and flight out of high-cost employment centers precipitated by remote work, the office market in downtown DC is experiencing significant setbacks,”

The letter was signed by a bevy of CRE firms with significant DC office assets, including JBG SMITH, Boston Properties, Trammell Crow, Hines, Brookfield, Carr Properties, and Hoffman & Associates.

A spokesperson for the DC Office of Tax and Revenue told the newspaper that the city continues to evaluate the impact of remote and hybrid work and will “make any adjustments [to office valuations] as warranted.

The Journal report noted that many jurisdictions automatically increase taxes on residential properties to compensate for falling commercial values, a process the report said would accelerate in 2023.

According to Merritt Research, a municipal bond research firm, cities that are more vulnerable to plunging office valuations—because more than 8% of their tax base is concentrated in their 10 largest commercial property owners—include Boston, Detroit and Denver.

According to Green Street, average quality office buildings have lost about a quarter of their value since the beginning of the pandemic.

CBRE’s Frey says municipalities that are factoring the impact of the pandemic into new assessments are reducing valuations by an average of 10%. Up to 15% of US states are still basing commercial property taxes on pre-pandemic assessments.

Earlier this year, an NYU study projected that office valuations may drop by as much as $500B by the end of this decade, GlobeSt. reported.

CBRE’s Q3 office market report for DC cited “dismal market fundamentals,” including 351K SF of occupancy loss, bringing YTD negative net absorption to 976K SF. Vacancies increased 40 bps in Q3 in DC—they’ve surged 580 bps above pre-pandemic levels—surpassing the 20% threshold for the first time, at 20.3%.

Source: “As Office Values Plunge, Owners Appeal Tax Assessments“

2022 will be recalled as one of the most interesting and contradictory years in history.

The stock market dropped precipitously, and inflation peaked at its highest in decades. Yet, through it all, advisors thrived in ways like never before—with the benefit of a robust seller’s market, and transition deals and M&A multiples off the charts.

As we forecasted in this annual review a year ago, 2022 would become the year of “more” in which all constituents would have greater expectations than ever before. That is, clients wanted more from their advisors; advisors wanted more from their firms; and the firms, too, wanted more from their advisors.

It was a wave of fulfilling each of these requests that bred a year of abundance. The growing desires among each group created a proliferation of choice—with an expansion of models, opportunities and aggressive deals to match—that resulted in an active stream of movement.

In fact, an average of 708 advisors with a length of service greater than three years moved each month through June 2022, according to the Diamond Consultants Advisor Transition Report. And based on our own experience (as hard numbers are not yet available), that activity continued throughout the second half of the year, despite volatile market head winds.

Where advisors went was more disparate than ever before—and instead of domination by a single major player, we saw several leaders in each category of the industry landscape.

For instance, while Rockefeller Capital Management and First Republic Private Wealth Management led the headlines by landing some of the industry’s most elite teams, the real news was actually in the wirehouse world. The diaspora toward independence continued, albeit at a slower pace than in previous years, shifting the tides of movement back toward the wirehouses. With recruiting particularly active at Morgan Stanley and UBS, advisors demonstrated that it’s still the right model for many of them. And Wells Fargo, with bad publicity from previous years finally in its rearview mirror, made a strong comeback.

The regionals, like Raymond James, RBC and others, also captured a large share of advisors—moving their average producer level well over the sub-million-dollar range it once was—proving that culture and control are attractive value propositions even among the industry’s top teams.

Independence remained appealing, even if in smaller numbers than years past, with freedom, control and the potential for long-term monetization as potent drivers. Record valuations and sophisticated buyers, like private equity firms with deep pockets and healthy appetites to acquire high-quality businesses, caused many employee teams to reconsider independence. That is, they are placing greater focus on building a business with the end in mind, even if it meant eschewing a significant recruitment package.

But while “do-it-yourself” independence was once the most popular option in the space, supported independence dominated 2022—with firms like Sanctuary Wealth, NewEdge Advisors, LPL Strategic Wealth Services and Dynasty Financial Partners leading the way for advisors who wanted their own businesses without the hassle of building from scratch. And this year, we saw more of these platform firms offer upfront capital or minority investments to derisk the move and offset lost deferred compensation—a tactic that paid off for both parties.

All that said, it was the W-2 firms that led the field, capturing the majority of advisor movement (with wirehouses leading the pack). The attractive recruiting deals certainly proved to be a powerful tool in their arsenal.

Speaking of recruiting deals, we’ve been saying they were at a high-water mark every year for almost a decade. And just when we thought deals couldn’t go any higher, we were proved wrong. We saw a handful of firms—UBS and RBC, in particular—go beyond their peers with uber-aggressive offers attached to a drop-dead join date as they bid for the industry’s best talent, and, so far, it’s a strategy that’s paid off. Even outside these short-lived offers, boutique firms like First Republic, Rockefeller and Steward Partners recast their deal structures to remain destinations of choice for top teams.

With the tail winds of increased interest rates and hence more profits from net interest margin, several independent broker/dealers stepped up their recruitment packages and scope of services. This led to an increased blurring of the lines between the independent broker/dealer model and supported independence. That is, to compete for top advisors, these b/ds realized they must provide more white-glove support to help advisors establish their practices, as well as robust outsourcing services. The cherry on top was the expansion of affiliation models to include the ability to become an RIA, drop FINRA licenses or gain more independence without the need to repaper.

All that said, how will the activity of 2022 impact 2023 and beyond? Here’s what we foresee …

The 10 Emerging Trends for 2023

1. Big firms will push harder to “incent” senior advisors to opt in to retire-in-place programs by increasing the deals and more aggressively pushing them to sign on earlier in their careers. But many won’t bite for fear of being locked into the firm and the potential negative impact on next-gen inheritors.
2. The recruiting pendulum will shift further away from DIY independence and toward supported versions and the traditional brokerage world. Advisors will continue to crave the opportunity to become business owners, with the support they’ve grown accustomed to. As for the big firms, they’ll continue to work hard to show that they are not all the same, amping up technology, growth opportunities and support, plus transition deals. UBS will continue to up its game with a strong guaranteed transition deal; this will have the effect of making advisors demand similar deals from other firms. And Merrill will make its way back to become a real competitor in the recruiting game.
3. As big firms look to standardize practices and eliminate risk where possible, they’ll become more heavy-handed with compliance and oversight. This comes at the expense of advisor control, as well as an expected uptick in heightened supervision and terminations.
4. Private bankers and advisors from other nontraditional firms will be a hot commodity in the talent pool—satisfying the industry’s hunger for sophisticated talent. 2022 was a boom year for private bankers, with many firms focusing on this community after ignoring it for many years. We expect this trend to continue as more firms expand their addressable market and realize that bankers are attractive hires, bringing along well-run teams and ultra-high-net-worth clients who are major consumers of bank products.
5. Inspired by the knockdown success of the multifamily office model (like Rockefeller), more well-capitalized high-end RIA firms will make a play for advisors with creative deal structures that are competitive to those found in the traditional space. It’s a trend driven by private equity firms that have their sights set on investing in quality RIAs—providing the financial firepower to attract breakaways that would prefer to join an established team-based model over starting their own practice.
6. The breakaway movement from RIAs will continue to accelerate and hit an all-time high. Nonowner employee advisors at the firms, who are also looking to take advantage of this abundance concept, will set out for greener pastures. Driven by industry consolidation, it will create a whole generation of advisors feeling more captive than ever and with a deep desire to reap the same financial rewards that their firms’ owners realized.
7. The “affiliation slide” will grow in popularity as firms with multiple-affiliation models—like Wells Fargo, Ameriprise, LPL Financial, Raymond James and Stifel—continue to provide more pathways for those looking to change models. This ability to “slide” from one channel to another will prove valuable in staving off attrition while making transitions easier for advisors and their clients.
8. IBDs and supported independent platform firms will become the new built-in “buyers”—in response to advisors’ desire for M&A and succession planning options. The heightened popularity of minority noncontrolling investors provides an opportunity for these firms to create liquidity and solve for succession.
9. The days of the “Big Bad Bank” will fade—and bank-owned firms like Merrill, Wells Fargo and First Republic will increase in appeal among advisors drawn to the one-stop-shop capabilities, compelling brands and growth opportunities.
10. Despite a slower-than-anticipated rollout, Goldman will find its stride and give custodians like Schwab, Fidelity and Pershing a real run for their money—particularly with high-net-worth-focused advisors. Those waiting for the next “big thing” will see this as an opportunity to have the Goldman imprimatur backing their independent businesses.

We’ve written much about how advisor mindset has changed over the years—shifting from placing value on upfront transition money to obtaining more freedom and control. Advisors are also looking more introspectively at their career enterprise value—regardless of whether they are independent business owners, employees at one of the big brokerage firms or somewhere in between.

This will be the year that advisors take a step back and conceptualize not just how to maximize the value of their business and annual compensation, but also how that translates into achieving their best business lives.

Source: “The Contradictions of 2022 and Emerging Trends for 2023“