Archives for 2024

While watching what types of artificial intelligence technology are in the CRE and general software in use at a CRE company, executives should pay attention to what might affect how the systems have an impact on operations.

There are technical limitations that can result from large language model hallucination (when AI makes things up), machine learning with a bad choice of training data, dependence on third-party data sets, and more. However, that is only part of what needs watching. Another big part is legislation.

There are federal attempts at regulating AI but put even that to the side for a moment and consider state legislation. Multiple organizations are tracking what the states are doing. Some law firms like BCLP and Husch Blackwell seem to have the most inclusive counts at the moment.

More than 30 states have proposed and maybe also enacted legislation. Some are directly pointed at AI usage. Some are focused on consumer privacy or other areas where actions will have implications on how AI programs can work and what you can do with them. Some of the states that have at least considered legislation include Washington, Oregon, California, Montana, Colorado, New Mexico, Texas, Oklahoma, Louisiana, Minnesota, Florida, Alabama, Georgia, South Carolina, Tennessee, Illinois, Indiana, Ohio, Kentucky, Western Virginia, Virginia, Delaware, Maryland, Pennsylvania, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, and Maine.

Texas, for example, passed the Texas Data Privacy and Security Act last year. It will allow consumers to opt out of profiling. Companies would also have to perform data protection assessments for high-risk profiling activities. What didn’t pass, but was at least introduced, was a law that would prohibit the use of AI to provide counseling, therapy, or other mental health services.

Washington State passed privacy legislation but hasn’t yet passed bills that would forbid employers from using AI systems to evaluate or make decisions on employment. Indiana also passed a consumer privacy law giving people the ability to opt out of inclusion but also has rules for profiling and automated decision-making. Kentucky legislators early this year proposed a bill that would prohibit bots from interacting with people with the intent of misleading them about the automated nature of the encounter as part of trying to sell goods or services. It hasn’t been enacted but could be in the future.

The list goes on. Some of the laws might not have direct effects on a CRE business, but then again, they might. Only by monitoring legislation and considering how it might affect your business can you know whether there are adjustments — simple or significant — that you’ll need to make.

Source: “CRE Firms Should Keep Track of State AI Legislation” 

Banks are eager to lend for certain high-performing properties, according to Michael Thom, attorney in the business and finance department at Obermayer. “Lenders are more eager to get the money on the street,” Thom told GlobeSt.com, who encourages property owners to explore financing opportunities that may have been unavailable in the past.

At the same time the commercial real estate market is undergoing a shift, particularly in suburban areas, Thom said, pointing in particular to the robust performance of commercial real estate around Philadelphia and parts of New Jersey. Thom emphasized the improved loan performance in these regions, attributing this uptick to a combination of factors, including declining interest rates and refinancing opportunities that have emerged over recent quarters.

Occupancy rates are another crucial factor driving the appeal of suburban real estate. “More tenants have returned to the office in some suburban markets because people live close to the offices,” according to Thom, indicating that lower vacancy rates make these properties more attractive to lenders. This trend is leading banks to show a preference for financing suburban properties over urban ones.

In recent months, there has also been a noticeable shift towards financing single-tenant properties, which offer more security due to long-term leases.

“If you have one tenant and it’s 100% occupied for a 10-year lease, it gives that lender some comfort,” Thom explained.

In addition, banks are showing a keen interest in financing specific types of properties, such as manufacturing, industrial, warehouse, and self-storage facilities, which are considered safer investments. “We’re starting to see some of the banks come back around to lending on more secure real estate,” Thom remarked.

None of this is to say banks are relaxing their stringent underwriting standards. “Banks remain cautious about the commercial real estate loans,” Thom said, adding that properties are being underwritten to higher standards to prevent defaults.  In short, banks are striking a careful balance to capitalize on promising opportunities while maintaining rigorous standards.

Source: “This Expert Detects a Shift in CRE Bank Lending” 

Dated office buildings, even four-star properties classified as commodity Class A, continue to struggle to maintain occupancy and have had difficulty replacing tenants who move out. As tenants increasingly favor new construction, renovating older office buildings, which used to be a surefire strategy to increase occupancy, is no longer paying off like it once did, according to an analysis by CoStar Group.

Only office buildings less than a decade old have been able to increase occupancy since 2020, the analysis said. New office construction is the only segment that has generated positive absorption, while buildings between three and 10 years old have managed to maintain most of their tenants and occupancy. But buildings older than that have experienced severe losses regardless of innovations, CoStar said.

This presents a dilemma for owners of older buildings who might consider a renovation to provide the fit, finish and amenities to compete for top-tier office tenants. The significant capital investment to do so does not guarantee success and CoStar’s data suggest any rewards from doing so are likely to be temporary. In addition, return on investment may be diminished compared with what landlords once achieved on renovations, said CoStar.

Net absorption in office buildings renovated between 2014 and 2018 was positive for four or five years immediately following renovation, far above the national average. However, following the pandemic-related downturn in 2020, almost all of those properties experienced occupancy losses greater than the national average.

Since the beginning of 2020, buildings older than 10 years have lost nearly 420 million square feet of occupancy, an amount roughly equivalent to all the office inventory in the Dallas-Fort Worth Metroplex, said CoStar. At the same time, the amount of sublet space available at office buildings less than 25 years old has been striking and is even more pronounced in buildings between three and 10 years old, the report said.

“This suggests that office tenants today prefer brand-new office buildings more strongly than they did 15 years ago,” said CoStar. “They have been more willing to let leases expire even in relatively new buildings to have the opportunity to move into the latest and greatest developments. This bodes poorly for renovated buildings.”

Source: “Can Renovations Compete with New Office Construction?”

Rental rates on some apartment types slipped in July compared to the same time a year prior, the first time that’s occurred since June 2020 — the height of the Covid-19 pandemic.

Median asking rents for studios and one-bedroom apartments fell 0.1%, two-bedroom apartments fell 0.3% and units with three or more bedrooms fell 2.4% between July 2023 and July 2024, according to Redfin Corp. (Nasdaq: RDFN).

All unit types tracked by the real estate technology company are down at least $50 from the rental-rate highs seen in recent years.

Additionally, several fast-growing metro areas posted significant declines for rental rates and upticks in the percentage of landlords offering concessions — a consequence of robust apartment construction in recent years.

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But it wasn’t all good news for renters. Although rent declines were recorded among different unit-size categories, the median asking rent for all bedroom counts combined actually rose 0.4% year over year in July, according to Redfin.

Concessions on the rise for apartments

At the same time, rental-housing landlords are upping their concessions offerings to remain competitive.

Nationally, 33.2% of rental listings on Zillow offered a concession in July, up from 25.4% last year, according to a recent analysis by Zillow Group Inc. (Nasdaq: ZG).

An economist with Zillow wasn’t available by deadline to provide additional context about the U.S. rental market and concessions offerings.

“Builders have stepped up and built an incredible number of homes in response to soaring rents during the pandemic, and renters are now seeing the benefits,” said Skylar Olsen, Zillow’s chief economist, in a statement. “Rents are still growing, but it’s a far cry from the steep rent hikes of two or three years ago, and renters will find sweeteners being offered by more than half of rentals in some places.”

Olsen noted a slowing job market and lower mortgage rates could mean falling rents if the current trends hold.

Zillow also found the typical U.S. rent grew 0.4% in July, down slightly from 0.5% growth seen in June and 0.6% growth in April and May.

Annual rent growth was 3.4% as of July, compared to 3.5% year-over-year growth seen the month prior.

The overall rental vacancy rate has stayed at 6.6% for four consecutive quarters, according to Redfin. Meanwhile, the vacancy rate for buildings with five or more apartments grew to 7.8% in the second quarter, up from 7.4% during the same three-month period a year earlier.

Sheharyar Bokhari, senior economist at Redfin, in a statement pointed to the “sheer number” of apartments built over the past two years as a key reason for rents holding steady or even declining among some unit types.

In June, 59,200 units nationally were completed in buildings with five-plus units, according to Federal Reserve data. That’s the highest number — by a significant margin — of completions on a monthly basis since the mid-1970s.

Areas of the country seeing the biggest rental-rate declines and most concessions are largely in the Sun Belt, which has also received the most new supply of any region since — and even predating — the pandemic.

More than half of rental listings on Zillow in metro areas like Raleigh, North Carolina; Charlotte, North Carolina; Atlanta; Salt Lake City; Nashville, Tennessee; and Austin, Texas, were offering concessions in July.

The median asking rent in Austin dropped the most of any metro analyzed by Redfin in July, falling 16.9% year over year. Jacksonville, Florida, came in at No. 2, with the median asking rent falling 14.3% annually, followed by San Diego (down 12.7%), San Francisco (down 7.6%) and Tampa, Florida (down 5.9%).

Multifamily loans top of mind

Debt backing multifamily properties across the U.S. is being closely watched as the national apartment market tips into a period of oversupply in some places.

An estimated $669 billion in multifamily loans is expected to mature between 2024 and 2026, Newmark Group Inc. (Nasdaq: NMRK) found earlier this summer.

The delinquency rate of commercial mortgage-backed securities debt backing multifamily properties has inched up every month since April, going from 1.33% that month to 2.63% in July, according to Trepp Inc.

Sharon Karaffa, president of multifamily debt and structured finance for Newmark’s multifamily capital markets division, told The Business Journals in July that much of the debt maturing over the next three years is operating below a 1.25 debt-service coverage ratio, meaning a property’s net operating income can cover its debt service by 125%.

Additionally, a lot of that debt was originated with shorter-term, variable-rate financing, and underwritten to rent-growth projections that were more optimistic than what has actually transpired.

Similar to the office market, which is facing its own distress and dislocation, multifamily borrowers are requesting extensions or modifications to their loans at refinancing.

But Mike Haas, founder and CEO of CRED iQ, recently told The Business Journals that while savvy operators will be able to negotiate modifications or come up with creative financing mechanisms, value-add plays by less sophisticated borrowers meant highly leveraged loans were taken out a few years ago to refurbish properties and raise rents significantly.

Those rental-rate gains have largely not come to fruition since.

Source: “Apartment rents hit a post-pandemic milestone – and more landlords are sweetening their deals”