Archives for 2023

MBA: Commercial Real Estate Falls in Q3

November 13, 2023 by CARNM

The Mortgage Bankers Association said third-quarter commercial loan production fell again in the third quarter, approaching levels not seen since the start of the COVID-19 pandemic.

The MBA’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations released Tuesday showed volume for all lenders in the three months ending Sept. 30 was 49% lower than a year earlier and 6% lower than the second quarter.

Production has generally been falling since hitting a peak in 2021’s fourth quarter.

Jamie Woodwell, the MBA’s head of commercial real estate research, said lending fell for every property type and capital source from one year ago.

“However, compared to this year’s second quarter, volumes were more stable, and some sectors – including industrial properties and life company lenders – showed an uptick in volume,” he said.

Third-quarter data for all credit unions won’t be available from the NCUA until early December. But a CU Times analysis of NCUA Call Reports for the 10 largest credit unions showed commercial loan production has been diminishing for the past year. Top 10 production was $445.7 million in the third quarter, down 82% from a year earlier and down 50% from the second quarter.

Data for the first half for all credit unions showed commercial real estate production was down 43% from the first half of 2022.

Woodwell said commercial real estate for all lenders for the first nine months of the year was down by a similar amount from a year earlier: 44% “driven by questions about some properties’ fundamentals, uncertainty about property values, and higher and volatile interest rates. Greater certainty around those conditions is a key prerequisite to breaking the logjam of transaction activity.”

The MBA’s survey showed multi-family production also began dropping after a fourth-quarter 2021 peak, and this year has been running below 2020 levels. Third-quarter originations were down 50% from a year earlier and down 18% from the second quarter.

The pattern through June has been similar at credit unions. First-half originations were 50% lower than a year earlier for multi-family and 40% lower all other real-estate-backed commercial loans.

The MBA’s quarterly originations report is based on an index; it also publishes a forecast each quarter for full-year production that uses dollar values.

The MBA’s Oct. 19 forecast said it expects total commercial real estate loan production to fall 46% to $442 billion this year, and rise 27% to $559 billion in 2024.

Source: “MBA: Commercial Real Estate Falls in Q3“

How Commercial Real Estate Brokerages Are Leveraging Technology

November 13, 2023 by CARNM

Driven by technological advancements, the world of commercial real estate has undergone significant transformation in recent years, which has become very evident in investment sales. Specializing in multifamily investment sales in Texas, I’ve seen firsthand how technology is changing our day-to-day business for the better. Here are five ways brokerages are using technology.

1. Underwriting

Underwriting has always been a key component to any investment sales brokerage team. Clients turn to us to provide insight and guidance as to what their properties are worth on the market. In turn, that requires an understanding of the numbers and various return metrics (e.g., internal rate of return, cash-on-cash, debt service coverage ratio). But no one’s calculating these figures pen-to-paper anymore. They’re using technology to do many of the advanced calculations.

Up until recently, both brokers and investment groups have typically used their own proprietary Excel models. Today, programs like RedIQ, Archer and Clik.ai have become increasingly popular. Some will perform 50% to 95% of the work, providing a centralized web-based platform that automatically pulls financial data from operating statements, categorizes it and then populates it within its own institutional-grade model.

With AI, underwriting continues to evolve. Make no mistake—brokers and investors alike still must critically review a property’s financials and use their market knowledge to assess various assumptions. But AI is now providing a first pass, doing 95% of the initial work that would historically take hours. Some programs go so far as to pull comparable properties and market analytics.

2. Databases

Historically, brokers have relied on their own spreadsheets to keep track of relationships, properties, sales and more. Today, customer relationship management systems (CRMs) help brokers manage these tasks more effectively. These systems track interactions, investor preferences and transaction history, allowing for personalized and targeted communication with clients.

While databases are only as good as the information put in them, some popular CRMs include Salesforce, HubSpot and Apto, just to name a few.

3. Analytics

There’s never been a time in history where data is more accessible. And there’s now a countless number of third-party providers for various CRE analytics (e.g., average median incomes, number of units under construction, average cap rates, average prices).

CoStar, Trepp and Yardi Matrix all provide this type of data and more. If used correctly, this data can also help with underwriting as AI is beginning to do automatically. Using a CRM is also helping brokerages to better track internal data points when it comes to underwriting and sales.

4. Offering Packages

Today, properties are generally marketed through brokerage firm websites. These websites require interested buyers to request access to material so that brokers can track who is looking at their listings, among other things.

Some brokerages also enlist the help of third-party marketing websites. In fact, I’ve noticed most institutional properties on the market in Texas are listed on the same third-party website via the listing broker.

Technology is changing the way packages and offering memorandums themselves are made. While many brokerages have their own in-house designers, some take advantage of websites like Buildout that help put together packages or BetterPitch, a software designed for sponsors, but has numerous applications.

5. Social Media

Not surprisingly, commercial real estate is one of the last adopters of social media. In today’s environment, everything and everyone is fighting for your attention. The same goes for CRE properties.

If you’re not posting valuable content, whether in the form of property offerings or helpful information, you’re losing the battle. Nowadays, I’m seeing more and more buyer traffic through Instagram, Facebook, X (formerly known as Twitter) and LinkedIn than ever before. The more eyes on a property, the better.

Getting Started With Technology

Before fully transitioning to new software, it’s important to get everyone from your team to test it out. Many of these technologies, whether it’s a CRM or an underwriting software, allow for trial periods. Putting them to the test with real world data and deal flow is especially helpful.

Adopting new practices is always difficult, especially in CRE. While it may take time to get used to, I’ve found that adopting new technology saves tremendous time in the long run, and provides a leg up against the competition. The early adopters can get a head start and help to drive the technological evolution of a CRE brokerage.

Source: “How Commercial Real Estate Brokerages Are Leveraging Technology“

Office Asking Rents Hold Firm as Vacancies Increase

November 13, 2023 by CARNM

The record high vacancy rate established during the Global Financial Crisis is “being comfortably put in the rearview mirror,” according to Colliers’ Steig Seaward in his firm’s Q3 US Office report.

The vacancy rate increased by 30 basis points for the second consecutive quarter and sits at 16.7%, putting it 40 bps higher than the previous mark.

The national vacancy rate rose 140 basis points year-over-year and Q3 also marked the fourth consecutive quarter of negative absorption totaling over 70 million square feet.

South Florida has the lowest metro vacancy rate outside of the tertiary markets at 10.1%, followed by Jacksonville (10.4%) and Las Vegas (11.3%).

Austin has the highest metro vacancy rate at 23%. Houston (22.3%) and St. Louis (21.8%) follow closely behind.

The Central Business District (CBD) and suburban vacancy rates rose by 30 basis points in Q3 2023 to 17.6% and 16.3%, respectively.

Dallas (just under 500,000 square feet) and Detroit (389,000 square feet) were tops in absorption. Raleigh-Durham (379,000 square feet) and South Florida (347,000 square feet) ranked just after them.

Atlanta, Greater Los Angeles, Greater New York City, Phoenix, and Minneapolis-St. Paul were the greatest absorption laggards.

Despite the raging vacancy rate, there’s been minimal impact on asking rents, Seaward said.

“Most landlords have held firm, and more expensive new construction is delivered,” he said. “Effective rents, which consider landlord concessions, have behaved more in line with softening market fundamentals.”

The abundance of sublease space will add to this pressure, posing significant challenges for landlords when leases expire, he added.

Source: “Office Asking Rents Hold Firm as Vacancies Increase“

The Clearest Sign Yet That Commercial Real Estate Is in Trouble

November 13, 2023 by CARNM

Foreclosures are surging in an opaque and risky corner of commercial real-estate finance, offering one of the starkest signs yet that turmoil in the property market is worsening.

Lenders this year have issued a record number of foreclosure notices for high-risk property loans, according to a Wall Street Journal analysis. Many of these loans are similar to second mortgages and commonly known as mezzanine loans.

Mezzanine loans have high interest rates and offer a faster and easier path to foreclose than mortgages. The Journal analysis found notices for 62 mezzanine loans and other high-risk loans this year through October. That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector.

The increase in mezzanine-loan foreclosure announcements—while not large in absolute numbers—matters because it offers a more immediate measure of commercial real-estate distress than mortgage foreclosure rates.

The number of commercial mortgage foreclosures tracked by data companies is still low. It can take many months or even years between default and a traditional mortgage foreclosure, as cases inch through courts. Banks are also often reluctant to take over buildings.

In contrast, foreclosing on mezzanine loans is often quick and easy because they aren’t technically mortgages. Because the loans don’t appear in property records, the Journal was unable to determine the dollar value of the announced foreclosures.

These loans took off in the decade following the 2008-09 financial crisis as regulators cracked down on big banks and they became more conservative lenders. Many property owners made up the financing shortfall by borrowing from smaller banks, or by taking out these second loans from debt funds and other nonbank lenders, often on top of bank mortgages.

Lenders liked providing mezzanine debt because these loans generated higher yields, often more than 10% during years when interest rates on long-term government bonds hovered around 2%.

Mezzanine lending became big business for companies such as Blackstone,

KKR

and Starwood Capital, which collectively lent billions. South Korean asset managers also became big mezzanine lenders, lending against hotels and office towers in cities such as New York and Los Angeles. Finance companies pooled billions from thousands of would-be immigrants in the EB-5 cash-for-visa program, turning them into mezzanine loans to developers.

That debt allowed investors to bid up prices while putting in little of their own money, inflating the commercial real-estate market leading up to 2022.

Now, real-estate prices are falling and many of these loans are in default, the latest sign that regulators’ efforts to shore up big banks after the 2008-09 crisis have created new trouble spots in property finance.

“A lot of borrowers have basically said ‘I can’t hold this asset any longer, I can’t keep putting money in,’” said Terri Adler, managing partner at law firm Adler & Stachenfeld. “And the lenders have said ‘OK, we’ll take it back.’”

Mezzanine loans are notoriously opaque. Unlike mortgages, they don’t appear in property records, so real-estate data companies can’t track many of them. No one knows how much of this debt is out there.

To measure distress, The Wall Street Journal counted so-called uniform-commercial-code foreclosure-sale notices for commercial-property loans published in the print editions of dozens of national and regional newspapers going back 15 years. These notices are typically for mezzanine loans, although sometimes mortgage lenders also use them, brokers say.

Mezzanine loans are secured by the limited-liability company owning the building, not by the real estate itself. That means lenders can often take over the building in a matter of weeks, though not all announced foreclosure sales actually happen.

One of the buildings caught in the mezzanine meltdown is the Margaritaville Resort in Times Square, a 32-story tower with an outdoor swimming pool that opened to great fanfare in July 2021.

Two months later, with interest rates near record lows, developer Sharif El-Gamal took out a $57 million mezzanine loan against the building, on top of a $167 million mortgage, according to court records.

In March of this year, El-Gamal defaulted on the loan. In an email to his lenders, he blamed higher interest rates, tight capital markets and the tower’s vacant retail space, among other challenges, according to court records. Last month the mezzanine lender, Arden Group, won a foreclosure auction for the skyscraper.

Source: “The Clearest Sign Yet That Commercial Real Estate Is in Trouble“