Archives for 2024

The International Longshoremen’s Association, which went out on strike on Tuesday, and the operators of ports on the East Coast and Gulf Coast agreed to a temporary settlement until January 15, 2024. Port employers offered 62% over six years, according to the Wall Street Journal.

The union had wanted a 77% increase and the port operators had offered 50%. But other issues have to be negotiated and this includes the use of automation on heavy machinery on the docks.

“This is not just about money; this is about future automation replacing a large majority of jobs within the ports and that reality is valid, it will eventually happen,” Tracey Ortiz, director of product management at SPS Commerce, told GlobeSt.com. Right now, there isn’t enough automation to keep the ports running “even for a day or two,” according to Ortiz.

The strike shut down 36 ports that handle about half of the cargo volume that travels by ship in and out of the U.S. Union members wanted more money and also an end to heavy equipment automation that they saw as a threat to their jobs. The White House pushed shipping lines and terminal operators to make a new offer to the union.

The three days of striking could require three weeks to catch up, according to Everstream Analytics data. A longer strike would have affected many retailers who wanted to get products in for the holiday season.

There were also potential impacts on commercial real estate. Lynn McKee, commercial real estate director at Georgia State University’s Robinson College of Business, told GlobeSt.com at the start of the strike that it could hurt CRE. Impacts from stopped shipments would have left logistics operations at risk of significant disruption because they use just-in-time scheduling that leaves little to no slack that can act as a buffer.

According to the Journal, many dockworkers currently make six-figure salaries. Others make far less because actual pay is an issue of skill level, seniority, and the amount of work at a given port. A longshoreman from Suffolk, Virginia told the Journal that he struggled to make $70,000 a year although he must be available to work seven days a week if asked.

Source: “Dock Workers and Ports Come to Temporary Settlement”

A new report from the National Multifamily Housing Council presents a mixed report on the state of multifamily construction in the U.S. On the one hand, fewer delays are being experienced on the projects that are underway. On the other hand, fewer projects are being undertaken, with 37% fewer starts between 2Q 2023 and 2Q 2024, according to the Census Bureau.

The NMHC’s just released quarterly survey of construction and development activity for 3Q 2024 was conducted from September 3-17 and received responses from 29 leading companies.

Of these, 52% reported construction delays during the quarter – a figure well below the 84% reported in December, the 81% reported in March, and the 70% reported in June. The worst affected regions were the Rockies, Texas, and the Southeast. Delays in permitting caused 87% of the holdups, and 80% were due to late starts.

For 92% of respondents, compared to 73% in 2Q 2024, economic uncertainty was the reason for the delayed starts – “the highest value recorded for any option in any quarter for this question since the survey’s inception,” the report stated. Of respondents, two-thirds cited economic feasibility as the cause – down from 77% the previous quarter. Half the respondents blamed permitting, entitlement, and professional services for the delays.

Complaints about the availability of construction financing fell for the third time to 42%. Staffing shortages and materials sourcing did not cause delays in starts. However, 10% of respondents said labor was less available and 28% said it was more available, while 21% experienced materials delays, especially for electrical switchgear. Increases in contractor defaults were also noted.

The time it took to receive a building permit within six months fell from the second to the third quarter. However, permit issuance took seven to eight months in 14% of cases and nine months or longer in 21% of cases – both increases from 2Q 2024.

In 55% of cases – down from 70% in the prior quarter – respondents noted added project requirements like offsite improvements and additional infrastructure.

More respondents – 86% — reported that deals were repriced in 3Q 2024 compared to the second quarter. Of these, 28% were repriced up and 59% repriced down. The average change either way was 4%. Fewer respondents – just 7% — reported that no deals were repriced.

Looking ahead to the next quarter, 68% of respondents expected market conditions to remain stable. However, 18% thought conditions would improve to make it easier to build, and 14% thought they would worsen. Longer term, more than three out of four expected conditions to improve over the next six-12 months. There was disagreement about whether construction costs would rise in the next year.

A large majority of respondents did not expect the availability of debt and equity financing to change soon, but most anticipated improvement in the medium to long term for equity financing (74%) and debt financing (67%).

“The September findings make it clear that while we are witnessing slow improvements, rental housing providers continue to face real challenges when it comes to the construction of new communities,” said NMHC President Sharon Wilson Géno. “Lawmakers should implement housing solutions that will work, including removing barriers to building and incentivizing needed construction, and reject regulatory proposals that will increase housing costs.”

Source: “Permitting and Economic Factors Continue to Impact Multifamily Project Timelines”

The long-awaited cut in interest rates that came last week was largely celebrated by commercial real estate investors and developers, with many saying the news signals a much-needed turning of the tide for the industry.

The Federal Reserve on Sept. 18 said it was lowering the target range for the federal funds rate by half a percentage point, a more aggressive cut than many industry watchers were expecting for the Fed’s September meeting. The cut is widely expected to unlock liquidity in commercial real estate financing and, in some cases, spur deals that were unable to pencil even just a week ago.

The aggressive rate hikes the Fed imposed beginning in 2022 in response to high inflation and a hot labor market have had a crippling effect across CRE dealmaking — whether buying and selling properties, refinancing a loan, obtaining new debt, or moving forward on new development.

“When we’re talking about interest rates, it’s only as good as lenders willing to lend, and the banks’ willingness to lend to investors and developers other than their best clients,” said Mark Rose, CEO of commercial real estate firm Avison Young. “That’s really what’s been holding us up.”

Based on the Fed’s action last week and the potential for another rate cut before the end of the year, Rose said it sets commercial real estate up for a recovery from the current economic cycle by mid-2025. It’s a cycle that has been beset by high interest rates, muted office attendance and saturation of multifamily supply.

That said, recoveries take a little bit of time, Rose said, and commercial real estate is an industry that tends to have a little bit of lag time.

“There’s nothing but goodness in what happened [last week],” he said. “There’s a chance that pent-up demand at all levels, including traditional lending sources, could come about in the fourth quarter. Incrementally, we’re moving to a recovery that probably looks like mid-year next year.”

Across commercial real estate, last week’s rate cut is a huge windfall for anyone who needs to refinance any asset, Rose said.

Barry Lapides, a partner at Berger Singerman LLP who specializes in commercial real estate law, said when rates go down, it’s a positive thing overall for developers, investors and syndicators.

“The interest-rate cut is Christmas for real estate investors and borrowers,” Lapides said. “For people who have existing loans that are either coming due or rate caps that are expiring and they need to purchase new rate caps, this is … a gift.”

Richard Barkham, global chief economist and head of Americas research at CBRE Group Inc. (NYSE: CBRE), said during a media briefing last week the rate cut will be welcomed by the real estate community. CBRE expects the Fed to reduce the federal funds rate by an additional 25 basis points in both November and December, followed by 125 basis points in cuts in 2025.

In particular, last week’s rate cut and the expectation of further cuts in the coming months will impact the CRE capital markets, which have been largely locked up since 2022. In the second quarter, $40.1 billion transacted across major property types in the U.S., down 9.4% from the same quarter the prior year, although up 13.9% from Q1 2024, according to Altus Group data.

Property values in some sectors have fallen between 20% and 30% in the past 36 months, Barkham said. But even before last week’s Fed meeting, there’s been a marked change in sentiment, he said.

“I would say rents are holding steady, real estate values have stabilized and, in some sectors, are probably firming,” Barkham said. “2025 looks set for a good rebound in capital-markets activity, which, of course, means [capitalization] rates have peaked and are likely to fall over the course of the next 12 months.”

What happens to all of that CRE distress?

While the interest-rate cut and further actions by the Fed in the coming quarters are largely positive news for commercial real estate, rate reductions won’t solve all of the industry’s problems.

Commercial real estate loan delinquencies among industry lenders continue to pile up, and the loan-delinquency or distress rate of assets like office and multifamily have risen in the past several quarters.

S&P Global Intelligence recently found the average interest rate on commercial real estate loans that originated this year is 6.2%, compared to an average 4.3% on mortgages that are about to mature. That’s nearly a 200 basis-point difference, a gap that obviously won’t be covered by a 50 basis-point rate cut.

Some industry insiders are skeptical about how much last week’s rate cut will broadly impact the sector.

Laura Swihart, co-chair of Dechert LLP’s global finance and real estate practice groups, said in a statement borrowers and investors have become more accustomed to the current interest-rate climate and adjusted valuations over the last month or so. That’s resulted in more deal flow and investor interest.

“The additional dip in rates will, of course, help to continue this trend, but I don’t believe it will be enough to have a significant impact on certain highly impacted asset classes, such as B and C class office space in troubled geographical areas,” she said.

Darin Mellott, vice president and head of U.S. capital-markets research at CBRE, similarly said during last week’s media briefing that lower interest rates will minimize but won’t fully eliminate distress in the industry.

“It’s important to look at the long end of the yield curve,” Mellott said. “As we get closer to that 3.5% range in the 10-year [Treasury rate], those lower interest rates will solve a lot of problems with a lot of assets. We are absolutely going to continue to see some distress, particularly in the office sector.”

Lapides of Berger Singerman said the impact of the rate cut on each asset class will be different — and for office properties in particular, it’s not certain the cut will do much at all.

“It’s helpful, but a 50 basis-point drop is not all of a sudden going to swing an investment from doubtful to doable, simply because of the rate drop,” he said. “The developers need to see a home run in order to move forward with an office deal as opposed to multifamily.”

On the other hand, for a sector like multifamily, which has more recently begun to see more distress creep in, the rate cut has a bigger impact, Lapides and others said.

Rose of Avison Young said there will be the “haves and have nots” in commercial real estate beyond interest rates. For example, the cost of insurance and real estate taxes have created additional stress for properties already suffering from rising costs, less cash flow, occupancy issues and — before Wednesday — higher interest rates.

Investors that have access to more money to pay down debt or take out slightly lower balances will generally be fine, Rose said. But if, for example, a Class B building hasn’t been renovated or retrofitted, has an occupancy rate of 60% or 70%, is facing higher insurance and tax costs, and has debt coming due, a 50 basis-point rate cut will not solve those challenges.

“[The impact] will continue to be product by product, country by country, city by city,” Rose said.

Cuts impact multiple lines of business

For BEB Capital, a Port Washington, New York-based commercial real estate investor and lender, last week’s rate cut is meaningful for both sides of its business.

“As it relates to our equity portfolio and acquisitions and growth strategy there, I think this starts to unlock the inertia and difficulty within the capital markets, which will allow more transactions to be done,” said BEB Capital CEO Lee Brodsky. “We see this as a once-in-a-generation buying opportunity. This starts that process.”

He said the property types BEB Capital will look to capitalize on include two of its core investments — multifamily and industrial. But, Brodsky said, there’s also an opportunity to be part of “a real healing story” in the office market.

Keyvan Ghaytanchi, chief investment officer at BEB Capital, said the rate cut helps provide stability for alternative lenders like BEB, especially as banks have been hesitant to lend to commercial real estate not only because of high interest rates, but also because of the regulatory scrutiny being placed on CRE lenders.

Still, rate cuts will help longer-term assets match short-term liabilities on returns, making takeouts easier and more probable.

“This will allow us to originate more loans and be more confident in those takeouts,” Ghaytanchi said.

The Fed’s move to a rate-reduction campaign also will allow the firm to more easily evaluate assets and the underlying collateral, he said.

Despite last week’s activity, many still wonder whether the soft landing the Fed has been hoping to achieve with its interest-rate strategy will actually be achieved. While the outlook has become more optimistic after last week’s meeting, there are other levers in the broader economy that could mean a recession or downturn is imminent.

Commercial real estate executives largely say those concerns are overblown, although broader economic patterns and trajectories are still being closely watched.

“It looks like we’re heading toward a soft landing,” Ghaytanchi said. “I think industrial will be fine, and we will have continued demand from businesses as they grow, especially given near-shoring. The rate cuts will probably benefit multifamily the most, as a lot of those loans were floating-rate loans. I don’t know if it’s enough to completely rescue some of the lenders or sponsors who had a lot of issues. Much deeper cuts will be needed to rescue the heavily levered assets.”

Source: “‘Christmas for real estate:’ Which CRE Sectors will benefit most from interest-rate cuts”

More office leases are being signed today than before the pandemic, and leasing activity is expected to increase later this year and into 2025 as occupiers gain confidence in making real estate decisions amid a resilient economy.

Occupiers signed 3,166 office leases during the first half of this year, which compares with an average of 3,136 during the first half of 2018 and 2019, according to CBRE’s first-half office leasing data. However, the average lease size dropped 27% compared with pre-pandemic lease sizes, a trend CBRE attributed to economic uncertainty and structurally lower demand due to hybrid work.

As office leases tick up, driven by the legal, technology and finance sectors, occupiers are favoring renewals over relocations. Renewals accounted for 42% of office lease transactions during the first half compared with 31% before the pandemic. The average lease size for renewals fell by 21%, said CBRE.

For occupiers that are moving, 59% are considering relocating to a higher-quality space. Prime buildings have drawn 12% of total leasing volume since 2021 despite only making up 8% of total U.S. office inventory. While the average lease size on new deals has decreased 32% compared with pre-pandemic averages, occupiers in prime buildings are signing leases with longer terms, averaging 107 months between 2021 and 2024 compared with 86 months for non-prime buildings.

In gateway markets, where leasing activity has been sluggish, prime buildings accounted for a relatively high share of total volume since 2021, particularly in Philadelphia (26%), San Francisco (23%), Dallas-Ft. Worth (20%), Seattle (19%) and Atlanta (18%), according to CBRE.

The higher share of lease renewals coupled with less downsizing signals that occupiers are cautiously leveraging existing landlord relationships while adapting to new work patterns, said CBRE. Tenants in non-prime buildings have leveraged the higher availability of space to negotiate more flexible terms and concessions.

More than 92% of occupiers with more than 10,000 employees were considering executing a lease renewal while less than half of small occupiers with fewer than 1,000 employees were considering a lease renewal. Large occupiers tend to be more successful in renewal negotiations because landlords are motivated to avoid a sizable vacancy, said CBRE.

Leasing activity should increase later this year and in 2025 as more tenants look for space in major markets in anticipation of lower interest rates and greater clarity around office utilization, the firm said.

Source: “Office Leasing Activity Expected to Continue Upward Climb Into Next Year”