Archives for May 2024

2024 could be the third-highest year for industrial big-box leasing, CBRE projects. Even though a spate of new construction in 2023 brought a record 413 million SF to market, it expects that abundant supply to be short-lived.

“Investor sentiment has significantly improved from last year as industrial operating fundamentals remain solid and the credit market has stabilized,” said Chris Riley, president, U.S. Industrial & Logistics, Capital Markets. “The increased demand is evident from purchase bid sheets that are three times deeper than those in Q4 2023.”

Industrial facilities in the U.S., Mexico and Canada had higher taking rents in 2023 than in years past. Rent growth was sturdy at 15.9%, though below the 25.1% growth rate in 2022, CBRE reported in its 2024 North American Industrial Big-Box Review and Outlook. Rent grew despite a direct vacancy rate of 6.6% — double that of 2022 – and a 15.8% slump in leasing activity in 2023. North America’s lowest vacancy rate (0.3%) was recorded in Mexico City, down from 1% in 2022.

Strong leasing resulted in 1.9 million SF of positive absorption, with food and beverage companies taking up more than half of available space. “Despite record low vacancies, only 3.3 million SF is under construction, with 57% preleased,” the report noted.

The most active occupiers of U.S. industrial space were general retailers and wholesalers, which accounted for 36% of all lease transactions – squeaking past third-party logistics (3PL) providers with 35%. There was also increased demand from automobile, tires and parts, and building materials and construction companies. In 2024, CBRE predicts that food and beverage and online fulfilment companies will step up their leasing activity. The survey focused on big-box warehouses of 200,000 SF or more, which CBRE considers crucial for extensive national and international product distribution.

“Leasing demand was driven by a desire to boost supply chain resilience, increase access to growing population centers, modernize space to accommodate increased automation and support continued e-commerce growth,” the report found.

The trend is expected to continue this year, shifting the focus from the need for safety stock to a stronger emphasis on storing inventory closer to the point of sale, said John Morris, president, America’s Industrial & Logistics. This should benefit both mid-size and big-box facilities as hub-and-spoke fulfillment models expand, he added.

Demand was also helped by the fact that this year cap rates for value-add and core+ offerings have compressed below debt neutrality, Riley noted. As demand for investment offerings exceeds current supply, “bid/ask spreads have disappeared as pricing for many deals is exceeding projections.”

After the boom in big-box construction in 2023 that brought a record 413 million SF to market, building contracted to just 208.4 million SF later in the year. Despite the cutback, higher vacancies are expected in 2024, leading landlords to offer concessions while supply exceeds demand. However, CBRE projects lease transaction volume to increase by 5% this year. “The current development slowdown offers opportunities for occupiers to secure available space, leading to a gradual decrease in vacancies over time,” it noted, with more “landlord friendly” conditions predicted for 2025.

By lease transaction volume in 2023, Southern New Jersey/Eastern Pennsylvania led the nation with 33.4 million SF taken up. Other regions in the top 10 were Dallas-Fort Worth (32.4 MSF), Inland Empire (31.2 MSF), Chicago (29.5 MSF). Atlanta (16.9 MSF), Indianapolis (15.3 MSF), Savannah (13 MSF and the nation’s top growth market), Central Valley (11.7 MSF), Memphis (11.6 MSF), and Louisville (11.5 MSF).

Source: “Industrial Big Box Leasing Is On a Tear“

Multifamily rental marketplace Apartment List announced that it would provide its advanced GenAI leasing agent Lea Pro to property management partners at no cost.

The move has some potentially disruptive implications. If it works as described, that could mean less need for employees to perform leasing activities. A cost savings, but also a loss of training opportunity for inexperienced people to learn the business.

The company describes Lea Pro as an “AI sales consultant,” capable of communications through email, text, chat, or phone. Apartment List claims that the software “nurtures leads and handles objections like a top salesperson, with smarter, scalable outreach” and “handles objections and knows how to persuade,” reading “emotional cues for more human-like conversations” with support in English and Spanish.

Although described as a generative AI system, the company has said that “Lea Pro has led over 7 million conversations and keeps getting smarter every day.” That would suggest at least some degree of machine learning in addition to a gen AI communications interface.

Apartment List claims that the software supports more than four million apartment units, has 68% more lead-to-tour conversions (although what the comparison is to isn’t clear), and saves 42 hours of work per property per week. Also, Lea Pro is available 24 hours a day. The focus is on contacting leads so employees “can focus on residents.”

“In today’s competitive rental market, leasing teams face unprecedented challenges, including record numbers of new apartments coming online and increasing vacancy rates,” the company said. “Lea Pro is designed to augment leasing efforts by being available 24/7 to answer questions and schedule tours, effectively moving prospective renters through the decision-making process.”

Two major questions arise. One comes from the technical end. An ongoing problem with generative AI systems is the inclination for them to “hallucinate,” making up answers, supposed facts, and references. This isn’t some bug that can be fixed so much as a feature of the unbridled use. Generative AI creates complex statistical representations of, within the bounds of the materials used in its training, how words commonly follow one another in particular contexts. But it doesn’t reason or store facts. The software can’t typically tell if something makes logical sense, as they aren’t designed to be logic engines. There are ways around the problem. BrainBox AI uses a generative query assistant to help building engineers. However, the software is restricted to using data only from the BrainBox system, effectively its ability to be “creative” in its answers.

It’s unclear how a system like Lea Pro would act with such restrictions, as persuasion, not just data delivery, is a goal.

A more subtle but concerning issue is how to train future property management personnel as software is designed, directed, and intended to as much as possible keep them out of an entire aspect of the business. Someone might have to step into a leasing process, and that means a need to gain experience over time to learn.

Source: “What Happens When An Advanced Leasing Agent Becomes Free“

The total amount of distressed CRE reached more than $88.6 billion by the end of 2024’s first quarter through the addition of net $2.7 billion, according to a new MSCI capital trends report.

The net addition was the result of $9.9 billion new property distress offset by $7.2 billion worked out during the quarter.

For current distress, office is far and away the largest property type example, with almost $38.2 billion. That’s followed by retail’s nearly $21.9 billion, roughly $14.2 billion in hotels, about $10 billion in multifamily, $1.6 billion in retail, and $2.8 billion in other types.

More than half of the new distress was office. Retail was the only category in which there was a net reduction in distress, with $1.5 billion in additional properties and $1.9 billion in workouts during the quarter. One deal — Kerring’s $963 million purchase of the retail space at 717 Fifth Ave. — brought the “share of troubled asset sales to 8.9% for the retail sector,” MSCI wrote

“While the net addition of distress has tapered over the past three quarters, sales out of distress have increased,” the firm said. “Troubled asset sales accounted for 3.9% of all deal volume in the first quarter of 2024. The last time distressed sales constituted this large a share of the total market was in late 2015, with the sale of Stuyvesant Town/Peter Cooper Village in New York.”

While distressed sales have spiked, a similar amount was seen in 2018. As a share of total sales, the last time they reached this point was in 2016.

More concerning is potential distress, which MSCI defines as indicating “possible future property-level financial trouble due to events such as delinquent loan payments, forbearance and slow lease up/sell out, among others. This also includes CMBS loans placed on master servicer watchlists.”

Total potential distress at this point is $205 billion. Multifamily leaps ahead of even office ($50.3 billion) in this category with $56.1 billion. Hotel sits at $28.6 billion; retail is $28.4 billion; industrial is $27.1 billion; and other types come to $15.3 billion.

It’s important to remember that potential distress isn’t the same as a projection of what will happen. Instead, it’s a calculation of what might happen, with a lot of time and space for that to change for the better or worse.

Total current distress is highest in the Northeast at $29.0 billion. Second highest is the West, with $16.3 billion. Then, in volume order, come the Midwest ($13.2 billion), Mid-Atlantic ($10.9 billion), Southwest ($9.8 billion), and Southeast ($9.4 billion).

Source: “Troubled CRE Is Tapering While Sales Out of Distress Increase“

The multifamily fall from grace over the last couple of years was unexpected by most at the market’s pandemic highs. The increase in interest rates have hit hard, as have some other factors.

But according to Ralph Rosenberg, partner and global head of real estate at global investment firm KKR, problematic conditions should start tapering off after 2025, leaving strong possibilities for rent growth and opportunities to “buy high-quality properties below replacement cost while achieving attractive long-term yields.”

The factors confounding multifamily certainly start with interest rates. “Debt levels relative to equity are higher in multifamily than in some other segments, a loan maturity wall looms, and interest rate caps are expiring, putting many owners in the position of refinancing at a time when their properties are worth less than their acquisition basis and interest rates are much higher,” Rosenberg wrote.

He notes that multifamily is one of the most leveraged of CRE investments. That makes refinancing challenging. There is a loan maturity wall, reduced availability of financing, and high debt loads.

That’s only one part. As GlobeSt.com has previously reported, 2023 saw a record number of apartment unit deliveries added to inventory and 2024 is expected to top that by half again. These aren’t evenly distributed across the country, but the concentration in places even with high increases in population is still enough to depress prices, occupancy rates, and rent growth.

In addition, operational costs have increased. “Floating-rate interest payments rose faster than income from rent and fees,” the firm said. Falling valuations aided in negatively affecting debt service coverage ratios, making many properties fiscally unsustainable to the lender. Also, utilities and property taxes have continued to climb, adding to multifamily difficulties.

“Over $250 billion in multifamily loan debt matures in 2024 alone, and some owners will face a gap upon refinancing,” they wrote. “Likewise, as interest rate caps typically last for three years, many owners are looking at a sharp increase in the cost of debt.”

KKR expects a tough couple of years in a deleveraging cycle. Owners and investors who can hold on during this period face different conditions coming out. There is the chance of lower interest rates, although the degree and pace of any reductions are up in the air now. Demand for units will grow as the rising expenses and difficulty of continuation of building make it virtually impossible to keep pace with additional units. Currently, supply growth forecasts for many metropolitan areas are below the 2018-to-2022 five-year average, and that wasn’t adequate to satisfy market needs.

Buyers with sufficient resources will find many opportunities. “Consider what would happen to a multifamily property purchased in February 2024 at a 5.5% cap rate (a measure of the one-year yield on a property calculated by dividing NOI by asset value) with 50% leverage,” they wrote. “Assume that NOI grows at a 3% CAGR. As interest rates come down, it might be possible to sell at a cap rate of 5.0% five years later, in 2029. That equates to an internal rate of return of roughly 14.5% over five years, which is attractive for a historically stable, in-demand asset class.”

Source: “Multifamily’s Tough Times Will Be a Boon for Bargain Buyers“