Archives for May 2024

There’s a growing need for property-wide Wi-Fi in multifamily complexes. Tenants want Internet access in their units, but also when they’re in a gym, on a dog walk, sitting in a conference room, checking their laundry, or using any other amenity that comes with the rent.

Property staff also need ready access no matter where they are — checking on a tenant complaint, showing a unit to a prospect, working at the desk, or attending to property needs. Even building systems based on Internet of Things and tying sensors to data reporting and analysis applications.

“You have these properties, modern buildings with smart locks, smart TVs, sensors for the HVAC, EV chargers — They need real-time data,” Jameson Hartman, vice president at proptech investment firm RET Ventures that invests in related tech companies, tells GlobeSt.com.

When connections aren’t available, problems arise. ““How do we know there’s a leak? The IoT [water monitoring] device is disconnected,” Hartman says. “There’s technology that needs to be enabled. Not every property today is like that, but every year we get closer to IoT [in all applications]. We’ll continue to step function forward in terms of devices, maintenance. So far, this is the cheapest in terms of upfront costs and ongoing costs.”

Thoroughly outfitting new construction is relatively straightforward. The bigger and more expensive challenges come with the need to retrofit older buildings. “Prior to 2000, network infrastructure was an afterthought,” he says.

“A lot of new developments are doing ubiquitous Wi-Fi,” Hartman says. “Instant gratification is real. In terms of customer experience of the overall apartment moving process, the Wi-Fi experience has not been a headache, but hasn’t been spectacular.” It might take one to several days to get in installed, which irritates tenants.

“It’s been a tough space,” he admits. “The project management component of this is [difficult]. There’s a lot of complexity there.”

As for installation and maintenance vendors, Hartman says, “You want them to have resources and have a track record. All of the issues are realized in the first 30 days. It’s all on that up front side of things.” Once they have moved past the initial installation and configuration, things should work fairly smoothly, but only if the whole project has been done right. Vetting companies and finding other multifamily operations that have used them and were satisfied — meaning find other operators through your own network, not reference accounts a vendor hands you — is a must.

Source: “The Case for Property-Wide Wi-Fi at Apartments“

Multi-tenant retail investment sales activity in Q1 was up 7.8% over the previous quarter but is down nearly 18% year-over-year, according to a new report from Northmarq.

The market, however, continues to outperform the days of the pandemic when activity nearly ground to a halt, Northmarq said.

Average cap rates for shopping centers have risen over the last several quarters, and at the current average of 7.14 – the highest it has been since mid-year 2014.

Northmarq reported that supply remains constrained, with low vacancy in existing properties and slow levels of new shopping center development.

“This dynamic is keeping rents elevated, but with interest rates also high, we’re seeing overall value erode in some cases, especially for larger retail properties including power centers and shopping malls,” the firm said.

Obtaining financing, however, for these two multi-tenant retail asset subtypes can be the most difficult for buyers to obtain.

Average cap rates for shopping centers have risen 42 basis points compared to one year ago. However, deals are still getting done.

The last year has seen a return of foreign capital to the sector, with international buyers making up 10% of the market’s activity in the first quarter.

Institutional investors captured just 3% market share to begin the year, a sign they have pulled back even further.

Private investors remain the most active buyer group for multi-tenant retail, driving more than half of the first quarter’s activity.

Public REITs are becoming more active as several key acquisitions exceeding $25 million each helped the investor group reach their highest level in 10 years, gaining 27% market share in the first quarter of 2024.

 

Source: “Multi-Tenant Retail Investment Sales Up 7.8%“

Commercial real estate investors, owners and occupiers all have been monitoring whether the Federal Reserve will impose interest-rate cuts in 2024 after rapidly rising rates have substantially increased the cost of doing business.

Earlier this month, the Fed signaled it needed to see more progress toward its inflation target of 2% and decided to maintain its key lending rate. At that meeting, Fed Chairman Jerome Powell said gaining greater confidence around inflation “will take longer than previously expected,” although he also said he felt inflation would move back down in 2024.

For executives in commercial real estate, waiting for those rate cuts may prolong the uncertainty being felt in the market today.

Mark Roberts, managing director of research at Dallas-based real estate investment and development firm Crow Holdings, said the underpinnings of why the Fed hasn’t cut interest rates — a strong economy and labor market — are actually good fundamentals for commercial real estate.

He added that for many buyers and sellers of real estate, a reset to the new rate environment has already begun, noting that values are down on average 22% in the past seven quarters. That’s unlocked some deal momentum, but cumulative transaction volume in the first quarter of this year was still at its lowest level since 2013, according to Altus Group. It estimated $31.6 billion transacted across major property types in the U.S. in the first three months of the year, down 28% compared to the same quarter last year.

“The other side of the coin is, what does it mean for those who utilize a lot of leverage in their investments?” Roberts said. “For leveraged buyers, it’s not necessarily the best time, and that’s why a lot of dry powder is stacking up.”

Others in commercial real estate echoed that sentiment, saying there’s a lot of capital sitting on the sidelines that hasn’t yet been deployed — waiting, in large part, for more certainty in the broader U.S. economy.

At the end of 2023, when the 10-year Treasury rate had dropped to below 4% and borrowing rates began to stabilize, there was a greater sense of optimism that that capital raised would be put to work sometime this year, said Andrew Alperstein, partner at PricewaterhouseCoopers LLP’s financial markets and real estate group. But a stronger-than-expected economy this spring has dampened some of the optimism around any forthcoming rate cuts.

Still, even if cuts were to occur later or are more modest than previously expected, Alperstein said most real estate principals have accepted that a sub-3% environment isn’t coming back anytime soon and have begun re-pricing within the new market conditions.

“There’s a reality that has set in that rates are going to be at least moderately higher for a period of time, and investors will hopefully move forward on that premise,” Alperstein said. “What we’ve also seen is that sellers have not really been wanting to sell unless they had to. Folks have been watching closely for evidence of distress sales and forced sales — and yes, we’ve seen some, but not as many as people probably thought. We’ve got an interesting couple of quarters ahead.”

Buyers right now are generally motivated because of equity that’s available, Alperstein said. And more borrowers may be forced to make decisions on their CRE-backed loans if a higher-than-longer rate environment persists.

But more deals in general will mean broader confidence in the market on what the new norm is in returns and values, Alperstein said.

“That will hopefully be a positive thing,” he said. “I think we hoped we’d get this sooner, but some of the uncertainty around rate cuts and the increase in the 10-year [Treasury rate] has slowed that progress.”

Ripple effect on leasing decisions

Although a delay in interest-rate cuts arguably has the most direct impact on commercial real estate buying and selling, it’s also factoring into how companies think about their real estate leasing decisions.

Rob Kane, senior executive vice president and co-leader of Dallas-based Lincoln Property Co.’s corporate advisory and solutions group, said the cost of capital and interest rates ripple through most every significant decision among the occupiers with which his firm works.

“If rates are higher for longer, it means continued uncertainty around decision making,” Kane said. “Internally, it means their business is more expensive to run, and I think we’re seeing, in certain cases, a lot of focus on capital containment and preservation. It’s very difficult for a [chief financial officer] to make a long-term decision when they have uncertainty around long-term rates.”

The past four years have been marked by uncertainty around real estate decisions by companies large and small, with many opting to sign short-term renewals as they figure out how much space they need in a post-pandemic world that embraces hybrid work. Some of that uncertainty has begun to ease, with a greater number of office tenants signing longer deals and relocating to newer towers, but a higher-for-longer rate environment may mean other companies will continue to prolong more-permanent space decisions.

It’s become common for companies to take less square footage in higher-quality office buildings, Kane said. He added that while some tenants will opt to delay their decision-making in an effort to cull spending during a higher-for-longer market, others will try to seize opportunity now.

“There are a significant number of companies … that will be able to make decisions and are going through the process to take advantage of the volatility to trade into higher-quality assets,” Kane said. “I think you’re going to continue to see that playing out across the country.”

That, in turn, will have wide-ranging effects on lenders and owners, Kane said, including accelerating the amount of distress facing lower-quality properties, which tenants are leaving in favor of newer buildings.

Impact on new construction

Since the Fed began increasing interest rates in 2022, new construction across major commercial real estate sectors has slowed.

Industrial construction starts dropped for the sixth consecutive quarter, to less than 40 million square feet breaking ground in Q1. For 2024, CBRE Group Inc. (NYSE: CBRE) previously forecast that multifamily starts would fall by 45% this year from their pre-pandemic average and by 70% from their 2022 peak.

Office, the most challenged commercial real estate sector, has seen new-construction groundbreakings decline for five consecutive quarters, according to Jones Lang LaSalle Inc. (NYSE: JLL). In Q1, JLL recorded less than 300,000 square feet of office construction starts, the lowest total in nearly 40 years of data.

As the cost of financing remains higher than where it’s been recently, and traditional CRE lenders remain more tepid in their lending to the sector, that’ll continue to dampen the future pipeline for most property types, including traditionally hot ones like multifamily and industrial.

“The returns that developers need to target are just not going to be achievable with the cost of financing and the cost of construction and the availability of financing,” Alperstein said. “As we look out 24 months, there’s going to be a window of time there where there will be very little new supply hitting the market, and that will most likely be positive for the fundamentals of multifamily, industrial and even some retail.”

Roberts said persistently higher interest rates will mean the next real estate cycle will shift into a new equilibrium in supply and demand, where structural occupancy rates will be higher than where they’ve been in recent years,

In industrial real estate, for example, the long-term occupancy rate in the past last 20 years has hovered about 93%, but the long-term average will start to move higher, closer to 97%, Roberts said. That overall is a good thing, to sustain the warehouse market’s investment environment, he added.

Some owners and developers will continue to turn to new or alternative financing mechanisms to get deals done — including new construction, experts say.

“There is capital out there for creative financing,” said Brent Maier, real estate advisory leader at Baker Tilly. “It comes down to relationships and the appetite for cost. If you go to a nontraditional lender, sometimes that money can be more expensive, but if you have a good asset or a good deal, it generally pencils out if it is attractive.”

 

Source: “What a Higher-for-longer interest-rate environment means for commercial real estate“

Conversion of old buildings into apartments is now a real “thing.” Hotels, offices, factories, warehouses, all are fair game if they meet the necessary conditions. In 2023, 12,713 new apartments emerged into new life from dormant structures, and 151,000 new ones are in the process of conversion – up 24% from the 122,000 projected in 2022.

“While office conversions are the darlings of future adaptive reuse projects, it was hotel conversions that stole the show in 2023,” RentCafe reported in a new study. Repurposed hotels gave rise to 4,556 new apartment units – an all-time high and up 38.8% from the previous year. Class B hotels accounted for 60% of these conversions, followed by Class A (21%) and Class C (18%).

The pandemic, which caused a flight to quality, placed a financial burden on outdated hotels that not only lost customers but also faced high debt service costs. However, they still had assets that developers seized on. “Because hotels already come equipped with essential infrastructure (such as plumbing and electrical systems), these adaptive reuse projects offer a faster and often more cost-effective method to create housing units, particularly in dense, urban areas where space for new construction is scarce or pricey,” the report noted.

New York City became a prime example. With 733 apartments carved out of old hotels, Manhattan holds 5.8% of all converted apartments in the U.S. However, a single building at 525 Lexington Ave. yielded 655 of them, providing housing for students. Albuquerque was another hot spot, converting hotels into 300 apartments, as part of the city’s broader adaptive reuse initiative.

Hotel conversions were also active in two Florida cities, Hialeah and Ruskin, as well as in Richmond, VA, Overland Park, KS, Sterling Heights, MI, Richland, WA, Las Vegas, and Salt Lake City.

In 2023, 3,587 apartments emerged from office buildings, making up 28% of all conversions. Thirteen of them involved Class A and 12 Class B offices. The 2023 conversion of 5672 Peachtree Parkway in Peachtree Corners, a suburb of Atlanta, offers an example. Thoroughly modernized and updated, the project consists of 295 apartments with a fitness center, saltwater pool, and clubroom, as well as a second floor offering private offices, conference rooms, a co-working space, and the latest technology. Milwaukee and Indianapolis also made “significant strides” in office to apartment conversions, as did Alexandria, VA, Cleveland, Rochester, NY, Birmingham, Chicago, Lansing, and Richmond.

“Get ready for more than 58,000 future apartments from former office buildings — a whopping 38.5% of all upcoming conversions, reflecting a growing trend,” the report urged.

Outdated factories were also turned into 1,954 apartments, 15% of the total rental conversions nationwide, while warehouses – including one outside Oakland, CA that was carved into 372 new apartments — accounted for 9% with a 129% surge in conversions.

Conversions of all types have not reached the peaks seen in 2016 and 2017. But that could be about to change. The top 10 cities of the future, according to RentCafe, are Los Angeles, Manhattan, Chicago, Philadelphia, Washington, DC, Dallas, Cleveland, Baltimore, Detroit, and Kansas City, MO.

Source: “Hotel Conversions Reach All-Time High“