Tag Archive for: construction costs

After ‘Throwaway Year’ In 2023, South Florida CRE Leaders Say 2024 Is Comeback Time

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Despite an undeniable slowdown in 2023, optimism still permeates Miami’s commercial real estate sector — buoyed by the Federal Reserve‘s recent signaling that rate cuts are on the horizon.

“The problem is not South Florida real estate,” said Arnaud Karsenti, managing principal at 13th Floor Investments. “We’re probably way better off than our peers around the rest of the country.”

The city has settled into a new normal and is positioned to see continued growth in 2024 despite challenges in office supply, multifamily dynamics and construction costs, nearly a dozen industry insiders told Bisnow in interviews this month.

“Out of all the markets we’re in, and we’re at a decent amount across the country, South Florida is far and away the healthiest,” said Ryan Shear, managing partner at PMG.

The rapid growth spurred by the pandemic — with corporate behemoths from Citadel to Microsoft moving to the region and an influx of $7.4B in wealth in 2022 — has slowed, but it remains the driving force behind the city’s expansion.

Investment volume has also tailed off, but the latest signal from Fed Chair Jerome Powell that 2024 could see as many as three rate cuts has buoyed the expectation among investors, developers and brokers that Miami will see an increased flow of capital next year.

“2023 was a throwaway year,” said Michael Fay, managing director of Avison Young’s Miami office and chairman of the brokerage’s U.S. Capital Markets Group Executive Committee. “People are looking for reasons to be back in the market and looking for opportunities, but to do that they need to have rates participate in that look.”

‘We Feel Like We’re At The End Of The Cycle’

Miami was far from immune to a rate-driven slowdown. The office sector saw 12 transactions through the first three quarters of 2023, compared to 26 deals over the same period a year prior. But even as volume plummeted, the sales that closed signaled confidence in the market, with the price per SF dipping only slightly from 2022 and outperforming 2019, before the pandemic helped boost the city’s profile.

Investors and brokers told Bisnow deal volume across all asset types is poised to rise again next year. But there is some debate as to when capital will begin flowing more freely, with some expectation that any rate cuts from the Fed will take time to percolate down to banks and loan originators.

“A lot of us are expecting some rate decreases in the first half of next year, which will lead to a more attractive forward curve,” Karsenti said. “Banks will start to lend on that curve and will ultimately provide loans at lower rates.”

The presidential election in November is likely to increase the political pressure on the Fed, said Fay, who described rate cuts as “candy” for the market. He said the beginning of 2024 will likely see a few deals before deal volume picks up in the back half of the year.

“We feel like we’re at the end of the cycle,” Fay said. “We’re hopefully going to be at a point that will mark stability. When you have stability and clarity, people can price in risk in a much better way.”

Investors across the country are raising billions of dollars to target distressed assets facing loan repayment hurdles, especially in the office sector, where an estimated 44% of properties have more debt than value at this point.

But South Florida’s office market has been an outlier to national turmoil, with Miami, Fort Lauderdale and Palm Beach all among the top five markets for annual rent growth through October. South Florida office asset values are expected to grow in 2024, according to CoStar, while most of the country is still in correction mode.

Miami’s apartment market is also ranked as the most competitive in the country, with a 97% occupancy rate and the fifth-highest rents in the country.

The $5.5B in CMBS loans on South Florida properties set to mature in 2024 account for only around 5% of the national total, according to CoStar. Falling interest rates are expected to spur acquisitions, but assets trading in South Florida are unlikely to be facing debt challenges.

“I am concerned that rates are going to come down and everybody that’s been on hold, waiting and delaying, they’re all going to try to run through the same gate at the same time, which will just drive prices right back up,” Shear said.

‘They’re Not Massive HQ Moves’

Office buildings in Miami are forecasted to grow in value in large part because the pandemic-era leasing boom has waned, but not abated.

“There’s around 3.8M SF of pent-up office demand among tenants touring in Miami,” said Tere Blanca, the CEO of Blanca Commercial Real Estate.

Around 20% of those companies are new to the market with much of the remaining activity being driven by firms that opened offices in Miami during the pandemic that are now looking to expand their footprint.

“Every lease that we do today in our existing buildings, that’s a record for the highest rate in that building,” said Brian Gale, vice chair at Cushman & Wakefield in Miami. “I think office rents could rise another 25% in 2024.”

Office development remains the third rail of real estate investment, even in South Florida where the sector has continued to perform well. Few new office developments are expected to break ground next year, leaving tenants that are engaged in an ongoing flight to quality with limited options for space.

Miami had 1.6M SF under construction at the end of the third quarter, according to Blanca, half of which is the fully leased 822K SF 830 Brickell tower.

“The lack of new construction will hinder leasing activity next year with the new-to-market tenants pausing and sitting on the sidelines because the new product is not in place,” Blanca said. “For a new office project to get financing, lenders often want to know an anchor tenant has signed on, and the companies currently in the market are generally looking for spaces ranging from 5K SF to 20K SF. A lot of these deals are not getting done, because they’re smaller transactions than the Citadels of the world,” Blanca said, referencing the 90K SF lease the hedge fund signed at 830 Brickell last year. “They’re not massive HQ moves.”

‘I Can’t Imagine A Multifamily Project That Would Pencil Out’

Apartment development is also expected to face headwinds in 2024. Rent growth has tapered off amid a wave of new supply — there are around 30,000 luxury apartments alone under construction in Miami — and cuts to interest rates won’t be enough to offset the high cost of construction, developers told Bisnow.

“I can’t imagine a multifamily project that would pencil out, and I can’t imagine a lender that’s going to lend money to multifamily,” said Armando Codina, executive chairman of Coral Gables-based developer Codina Partners. “That space is going to go down significantly.”

The state-level effort to spur apartment construction through the Live Local Act generated a wave of interest, but those proposals are also facing financial hurdles. The law created tax abatements and other incentives for projects with at least 40% of units set aside for workforce housing, but those tax savings have so far been outweighed by the high cost of debt and construction.

“In the meantime, the projects that are expected to move ahead are those near mass transit stops, which can leverage county-level zoning to achieve the needed density to make projects financially viable,” said Iris Escarra, co-chair of the land use practice at Greenberg Traurig.

Miami-Dade County has been adding to its Rapid Transit Zones as it encourages the use of rail and bus lines to alleviate growing traffic congestion and increase density around transit stops before an expected push for federal funds to expand the rail system.

“There’s always a chicken or an egg with transportation and rail lines,” Escarra said. “For the county to extend the line north, for example, they need to show that there’s enough density on the line to qualify for federal dollars.”

“Condo development, by contrast, has remained attractive for developers. Financing for condos can be easier to secure because the deposits on units that are pre-sold can offset the size of construction loans and the shorter-term investment horizon is more attractive for lenders,” said Edgardo Defortuna, CEO of Miami-based developer Fortune International Group.

Condo sales have declined from pandemic highs, but the buyer pool has been boosted by international interest extending beyond Latin America. Many buyers see the purchase of a pre-construction condo at today’s pricing as a hedge against inflation and a way to avoid today’s high cost of debt.

“In a way, they have the best of both worlds, protection against inflation because they’re fixing the price, and also potentially getting lower interest rates when they need to close on their acquisition and finance,” Defortuna said.

Contractors ‘A Little More Hungry’

A slowdown in new development this year has reduced some of the upward price momentum on construction. With fewer projects breaking ground, developers said they have regained some leverage in negotiations with construction firms and contractors, even though material prices remain high.

“The numbers have gotten better but, even more important, I’m seeing the contractors being a little more hungry,” Codina said. “I’ve had [subcontractors] a year ago say to me, ‘I don’t want to bid unless I’m going to get the job, I’m too busy.’ Now, we’re breaking ground because we’ve seen a little bit of a different attitude.”

Jay Fayette, Suffolk Construction’s president for the east coast of Florida, has seen the number of proposals coming across his desk decline but said he still expects to have a busy year as his firm moves through a backlog of projects that have been waiting to begin construction.

“We’re going to be very busy, and busier than last year,” Fayette said. “But that’s not necessarily due to the abundance in the market, it’s really due to the abundance that we had in the pipeline that we’re finally getting shovels in the ground. The shortage of workers that has plagued the construction industry is expected to continue, and Suffolk is investing resources into worker recruitment and retention to try to offset some of the challenges.”

Raw materials like wood and concrete have become more available, but switchgears, the backbone of a building’s electric system that became difficult to source during the pandemic, remain one of the largest hurdles for new construction.

“We don’t dare tell an owner it’s less than 65 weeks” to secure switchgears, Fayette said.

Construction costs have also begun to stabilize, but a crowded development pipeline in the region means strong demand for materials will keep prices from falling significantly in the year ahead.

“I think there is a world where construction costs come down. I can’t say that it’s in the Southeast region,” Fayette said. “We’re in nine regions nationwide, and we are seeing some softening of construction costs in other regions, but the state of Florida is a robust construction market.”

 

Source: Bisnow

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The ‘Worst Is Over’: The Fed’s Planned Rate Cuts Boost Confidence For South Florida Real Estate

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Brokers are giddy over the Fed’s announcement, while some caution fundamental challenges remain.

Commercial broker Jaret Turkell is ready to rock and roll. Turkell posted a GIF of Minions dancing with the tagline: “It’s time to PARTYYYYYY!” shortly after Federal Reserve Chairman Jerome Powell announced that the Fed was keeping interest rates unchanged, and signaled it would make three 0.25 percentage point rate cuts next year.

“We are back baby.  LFG!!!!!!” reads another tweet from Turkell, who focuses on multifamily and investment land sales at Berkadia in South Florida. (LFG stands for “let’s f**king go.”) The sentiment changed almost overnight,” Turkell said, tempering his initial enthusiasm a bit. “I’m not saying we’re back to 2021. Valuations will start to get a bit more attainable. Massive distress is going to be somewhat off the table, at least I hope so.”

The Fed’s decision is expected to boost confidence across commercial and residential real estate, especially in South Florida. The region has been somewhat insulated from headwinds in other U.S. markets since the Fed began hiking rates in the spring of 2022, but investment sales  volume is way down.

More than anything, the expected cuts are a sign of improving — not worsening — conditions. That could result in a boost of sales and financing in the second half of next year, brokers and attorneys say.

“Real estate is not a liquid asset, and it takes time for things to change. It takes time for that sentiment to build into transactions,” said Charles Foschini, senior managing director at Berkadia.

Still, the planned rate cuts won’t solve all problems, experts say. The high cost of insurance and construction will continue to hamper deals, brokers say.

“While South Florida maintains advantages over other major metros in the U.S., its biggest downside is insurance,” Foschini said.

Eternal Optimism Meets Reality 

Some pointed to the stock market rallying and the drop in inflation as breadcrumbs indicating that more good news is on the way.

“The signal that rates have stopped going higher and will go lower, psychologically is very impactful,” said industrial developer and broker Ed Easton. “But it’s not earth-shattering,”

In fact, most expected Powell would leave rates unchanged.

“No one was anticipating anything more than a standstill at this time of year,” said commercial broker and developer Stephen Bittel, chairman of Terranova Corp. The expected cuts are “not an enormously meaningful adjustment, but it does telegraph future expectations.”

Jaime Sturgis, CEO of Fort Lauderdale-based Native Realty, said he is already seeing that confidence translate into better terms.

“That will continue next year,” Sturgis said.

Still, asset classes like office and multifamily could suffer disproportionately, especially as suburban office tenants continue to downsize and multifamily landlords struggle to turn a profit.

“There will be pain and distress in that market, no question about it,” Sturgis said. “Some multifamily landlords and developers were already operating on razor thin margins to begin with. The smallest variations in that model can break it.”

Multifamily developer Asi Cymbal, who has projects in Miami Gardens, Fort Lauderdale and Dania Beach, agreed that rate cuts won’t solve major problems, such as if a developer overpaid for land.

But, Cymbal said, “the worst is over.”

Cymbal and others expect more groundbreakings in 2024, with some self-funding initial construction, expecting that they can secure a loan. He plans to self-fund the groundbreaking of Nautico, a $1.5 billion mixed-use development fronting Fort Lauderdale’s New River, in the next 90 days.

“The Fed news could help top tier developers get lower rates on construction. But not most,” Cymbal said. “Lenders will continue to be conservative.”

“Some prospective buyers who were ready to purchase may postpone their decision until rate cuts happen,” said Bilzin Sumberg partner Joe Hernandez.

 

Source: The Real Deal

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Ten Issues That Will Impact CRE For The Rest Of 2022

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LaSalle is expecting a high-impact second half of 2022, according to its Mid-Year Update.

The firm provided the top 10 issues it believes could steer commercial real estate’s direction, including those related to bonds, returns, capital flows, expenses, energy, construction and central banks.

GlobeSt.com highlighted LaSalle’s No. 1 top issue: Cost Of Debt.

Following are the others that made its list and LaSalle’s assessment, as well as commentary from others in the industry.

2. Rising Corporate Bond Yields – Upward pressure on discount rates and exit cap rates.

Jon Spelke, managing director of LFB Ventures in El Segundo, tells GlobeSt.com, “Cap rates will continue to follow interest rates upward trends to avoid negative leverage situations. It will be difficult to underwrite a deal with negative leverage and relying on rent growth to bail out the deal. Especially while expense growth continues to trend and at an equal rate as rents.”

3. Higher Required Returns – As a corollary of No. 2, investors will seek slightly higher returns from real estate, given that alternative credit market products will now be priced at higher yields.

Spelke added, “Unlevered yields will continue to follow interest rates and as asset pricing adjusts to the new financing norms (i.e. sellers come to grips with the current asset pricing versus what they thought they could get 90 days ago) deal flow will resume. This economic situation was/is not caused by the real estate industry, (i.e., over building, etc.) so real estate remains a healthy asset class in most regions and submarkets. Once values adjust, the deal flow will resume with strong fundamentals following.”

4. Capital Flows To Real Estate – Despite the mixed impacts listed above, real estate’s reputation as a better inflation hedge than fixed income will likely maintain its status as a favored asset class while the securities markets experience volatility.

Eli Randel, chief operating officer, CREXi, tells GlobeSt.com that increasing costs of capital will likely result in expanded yields and softened values, however, large supplies of capital seeking deployment may help sustain current asset values.

“Commercial real estate, even at compressed yields, remains a more attractive investment vehicle to many relative to cash, bonds, and equities and as a result quality assets in quality markets will find abundant capital demand even at still high-prices,” Randel said. “Look for low-leverage, negative-leverage, and all-cash deals to become more prominent with pricing on those deals reflecting sub-optimal levels. An institutional flight to quality will create a bifurcation in the market where core deals will trade at aggressive pricing with suboptimal deals seeing a decline in value.”

5. Capital Market Shifts – Investor demand moves away from fixed long-term leases and toward shorter indexed leases.

Jeff Needs, director, Moss Adams Real Estate Advisory, tells GlobeSt.com, “As markets continue to search for price stabilization, expect to see shorter-term leases, reduced capital improvements and negotiating leverage continuing to tip to tenants. Vacancies that are best suited to be used in ‘as-is’ condition will lease first, and some landlords will do minor tenant improvements upfront to be more competitive. Though individual markets perform at their own pace, we haven’t reached the bottom yet so expect this to continue until there’s a turning point.”

 6. Rising Cost Of Construction – Chilling effect on construction, wherever rents can’t keep pace.

“As the market slows, the upward pressure on cost (labor and materials) should ease for a bit,” Spelke said. “Subcontractors looking to keep crews engaged will look to be more competitive as projects are put on hold and shelved.”

7. Higher Energy Prices – Higher occupancy costs will erode tenants’ ability to pay higher rents.

Marilee Utter, CRE, global chair of The Counselors of Real Estate, tells GlobeSt.com “The consequences building and that business owners are facing – and need to consider in business continuity and resiliency planning – include rising insurance costs and increased investment in on-site energy resilience.”

8. Slowing Demand – While central banks attempt to cool off overheated sectors, broad-based tenant demand will likely step down a notch because monetary policies are blunt instruments that don’t distinguish well between sectors. In some parts of the world, ‘recession’ danger signals are flashing.

9. Currency Movements – Differentials in interest rates/inflation will favor currencies with rising interest rates and could raise hedging costs for currencies with lagging interest rate increases.

10. Rising Expenses – Just about every expense category associated with operating a property will be under upward cost pressure. Operational-intensive properties that require a lot of headcount or energy consumption could be most affected.

As a corollary to No. 5, LaSalle said net leases will be preferred by investors, but tenants will be under new cost pressures that could affect their ability to renew or to expand. Long leases to real estate operators whose margins could be squeezed by both rising occupancy and labor costs are an example of the kinds of risk to avoid.

Michael Busenhart, Vice President Real Estate at Archer, tells GlobeSt.com that with the recent inflation increases, owners are feeling the benefit on the rental income side, but also feeling the pressure on the expense side.

“As multifamily owners look to maximize LOI, many are seeking an edge to curb expense spending,” Busenhart said. “To do this, they can review financials internally to notice increased trends, or use data that enables asset managers to benchmark their properties/portfolio against the competition to seek areas where they can improve against the overall market.”

 

Source: GlobeSt

Industrial Revolution Continues: ‘Ongoing Boom’ Draws Out Latest Crop Of Newcomers

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It’s rare for a property type to extend a growth cycle beyond a decade. But industrial real estate’s dominance only seems to grow — attracting newcomers while big players scrap for the materials and land they need to keep their projects moving and potential clients happy.

While longtime powerhouses like Prologis and Panattoni plow forward with their own mammoth projects — and Amazon admits that it has too much industrial space on its hands — other companies are making their debut, hoping to seize on some of the continued demand and expanding yields.

Although the industrial market has been on an expansion trajectory for years, there seems to be plenty of room for newcomers.

“It’s no secret why industrial is doing so well, with the e-commerce boom really accelerated by what’s happened in the last couple of years with the pandemic,” said Scannell Properties Director of Development in Southern California Jay Tanjuan. “People were almost forced to order online, and many realized how convenient it was. E-commerce has huge demand, and so there’s the need for warehouse.”

There seems to be widespread consensus that the industrial heyday is far from over.

“We’re in an ongoing industrial real estate boom. We had been in an above-average growth phase pre-pandemic and obviously, the pandemic accelerated that. Post-pandemic, it continues to grow,” said RBC Capital Markets Director Michael Carroll, an analyst who covers Prologis and other REITs. “I don’t think we’re at the end of it, it’s still ongoing.”

Carroll pointed to the nationwide vacancy rate for industrial space — 3.3% in the first quarter, according to Cushman & Wakefield, with lease rates up 15.2% on average compared to a year ago — and a rapid pace of leasing that means new spec development is snapped up as soon as it’s finished, if not before.

Among the industrial newcomers is Peterson Cos., the Virginia-based developer of residential communities, huge retail districts and data centers. Peterson took the plunge into industrial development last year, and has two projects totaling 334 acres underway in the Washington, D.C., area, with another 915 acres in the planning stages, according to Peterson President of Development Taylor Chess.

“We started looking at industrial eight to 10 years ago, seeing that as the wave of the future,” Chess told Bisnow. “We felt as though distribution was going to become a much more integral part of the retail market. But we kept getting beaten out by people buying land for data centers, so we pivoted to data centers.”

Now, as the company’s initial prediction proved out, hastened along by the pandemic, Peterson doubled down on its efforts, launching an industrial arm in earnest to capitalize on the staggering demand.

 

“There’s no question that internet sales and distribution were going to become a key industry eight years ago, and that’s why we started teeing it up. We had no idea it was going to accelerate as fast as it did,” Chess said.

Peterson’s not alone. Nationwide companies that have operated successfully for decades in other property types are also diversifying their efforts by turning to industrial.

South Carolina-based Greystar, for example, is a bastion of multifamily development and management, with thousands of units in major markets across the country. But Greystar in March paid $43.7M for 154 acres near the Phoenix airport, setting up the company’s first large-scale industrial project. Greystar got a leg up on its foray into a new product type by purchasing a parcel with plans that were already approved by the local planning authority. Greystar will work with a development team assembled by the former owner of the land, a Phoenix-based company called Unbound Development, according to a press release announcing the deal.

Similarly, private equity giant KKR & Co. earlier this month announced a dramatic push into industrial development, with plans to build 1.8M SF worth of mid-sized warehouses in last-mile distribution locations in Atlanta, Dallas, Denver, and Orlando, Florida.

And Tishman Speyer, known for its office buildings, hired Andy Burke, formerly of industrial developer Terreno Realty Corp., as its managing director to oversee industrial acquisitions and development. Tishman Speyer in December 2021 announced that it acquired two middle-mile distribution centers in Colorado and Pennsylvania.

Each of these new entrants to the industrial market appears to have a focus on last-mile distribution, which is basically the white whale of industrial development right now, according to Carroll, thanks to its demand paired with a lack of available land.

“Companies are trying to build industrial warehouses close to consumers because it reduces shipping costs and labor costs,” Carroll said. “It’s important to be as close to consumers as you can, but most cities don’t want industrial warehouses because they want the highest value for their tax base and the least traffic. It’s hard to build industrial warehouses where they actually need to be.”

The lack of available land is something about which Chess at Peterson knows a lot.

“This has never been an industrial market, it’s always been a government market,” Chess said of his company’s target market around the nation’s capital. “Zoning is a challenge, as well as finding large tracts of land. Many other areas have large industrial sections of their metro area that have already been designated or are being redeveloped from manufacturing. D.C. doesn’t have that, so finding the right location has been a challenge.”

Land availability is just one of the challenges for any company trying to develop industrial properties right now. Shipping delays and turbulence in markets and foreign countries continue driving up the cost of materials, and labor is difficult to find in most markets. This doesn’t just make buildings cost more, it impacts a key factor for potential industrial tenants: speed to market.

“The biggest issue with leasing is that when tenants enter the market, they want it now. That is the biggest issue. The tenants are there, but we have to finish building to be able to put them in. That’s why going spec is so important,” Chess said.

With so much competition for land, materials and labor, the addition of new players to the marketplace could be considered a negative for existing companies that are already battling to get what they need.  But Tanjuan says that for those who are committed to the product type, there’s a way forward.

“There are opportunities out there for everybody,” Tanjuan said. “It’s competitive, and finding space is extremely difficult, but there are opportunities out there. If you’re out there and being proactive, you’re going to run into something.”

 

Source: Bisnow

ULI, PwC Identify Top Markets To Watch In 2022 As Real Estate Investment Powers Up

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Change is a major theme in this year’s Emerging Trends in Real Estate, an annual report by the Urban Land Institute and PricewaterhouseCoopers LLP, heading into 2022.

Housing affordability, soaring construction costs, climate change, proptech and the lasting impacts of remote versus in-office work are, unsurprisingly, some of the major topics and trends identified in this year’s installment. The report includes data, insights and survey responses from 1,700-plus real estate industry professionals.

While the economic recovery for the real estate industry has been better than expected since the pandemic, some adaptations and changes to the office, the way consumers shop and even how and where people live will be changed forever. The report’s survey found 47% of real estate professionals didn’t think changes implemented during the pandemic would revert back in 2022.

 “Long-term impacts from pandemic changes, such as the growing acceptance of work-from-home on the office market, are still unknown. But there’s a greater understanding that such shifts will impact commercial real estate,” said Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “A big lesson has been how things don’t have to change completely to have impact,” Kramer continued. “In the office sector, it’s not that everybody has to be working from home for changes to occur. The office sector is not dead but there will be a bit of a shift within it.”

She said when a fuller picture of how work-from-home will affect office emerges, that’ll prompt further questions: What happens to downtown businesses that rely on lunchtime crowds during the week, or older office buildings and retail centers that may be obsolete in a post-pandemic world?

Real estate investors’ capital war chests have been bolstered this year, but a disproportionate amount of money is flowing into a few sectors.

Tom Errath, managing director and head of research at Chicago-based Harrison Street Real Estate Capital LLC, said during a real estate economic forecast panel at ULI’s fall meeting this week that investors — some fairly new to real estate — are more recently wanting to understand alternative asset classes, which Harrison Street specializes in.

“We are seeing great interest from not only domestic capital but foreign capital,” Errath said. “These asset classes we focus on exist in other countries but they’re not as well developed there. If you want to access them in a meaningful way and take advantage of the transparency and liquidity that exists here, you have to be the in United States.”

Ben Breslau, Americas chief research officer at Jones Lang Lasalle Inc., also said foreign capital has been constrained during the pandemic because of travel restrictions and the inability to tour assets or markets. Once those restrictions lift, he said even more international capital will likely flow in to U.S. real estate.

Ken Rosen, chairman of Rosen Consulting Group of Berkeley, California, also said investors want to pile into the same few sectors. Disproportionately, industrial, multifamily and more niche sectors like life sciences are seeing the greatest competition from capital. The success of those sectors and more broad real estate fundamentals set the stage for more capital flowing in to commercial real estate in 2022.

But what about more traditional asset classes that have become less certain since Covid-19?

“Office remains a bifurcated sector,” said Breslau. “The flight-to-quality theme touted by many in the office space applies to investors, too. It’s not a rising tide lifting all boats but the best office space is seeing bidding wars from tenants. We have a lot of clients and investors who are getting incredibly frustrated, trying to deploy everything in two-and-a-half asset classes,” he continued, referring to industrial, apartments and alternative sectors.”That could propel savvy investors to find opportunities within sectors like office.”

“Properties are available to acquire now but investors may have to have more courage to buy what he called the more contrarian stuff,” Rosen said.

The ULI and PwC survey found most respondents felt there will be a year-over-year increase in availability of capital from lending sources, especially non-bank lending sources, in 2022 as compared to 2021. Sixty percent said they felt equity capital for real estate investing would be oversupplied in 2022.

Perhaps underscoring the continued optimism of the commercial real estate industry, 89% said they were confident about making long-term strategic real estate decisions in today’s environment, with 45% “strongly” agreeing with that statement.

ULI and PwC also identified several markets to watch in 2022.

“The scoring criteria is based on survey respondents’ scores on a city’s investment and development prospects, and other opportunities, said Kramer. “Smaller Sun Belt cities like Nashville, Tennessee, and Raleigh, North Carolina, are identified as supernova cities because of real estate fundamentals, in addition to having walkable downtowns and other factors.”

 

Source: SFBJ

 

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South Florida Developers Dish On How They’re Financing And Building Through The Late Stages Of The Cycle

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At The Real Deal‘s fifth annual Miami Real Estate Showcase & Forum, Editor-in-Chief Stuart Elliott moderated a panel on how South Florida developers are financing and building amid the late stages of a market cycle.

Panelists included Jules Trump (The Trump Group), Moishe Mana (Mana Group), Michael Stern (JDS Development), Louis Birdman (Birdman Real Estate Development) and Kieran Bowers (Swire Properties).

Click here  to read more coverage of the event.

Click here to view an event video.

 

Source: The Real Deal

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Banks Get Company on the Commercial Real Estate Lending Front

Developer Graham Cos. wanted to have more time than the typical 10 years to repay a $120 million loan.

Property manager Cardinal Point Management LLC wanted to work with a flexible lender who can provide low interest for a $41 million loan.

And Vutec Corp. wanted a lender willing to issue $3.3 million after the electronics company filed for bankruptcy protection.

They all turned to alternative lenders rather than more heavily regulated banks.

“I think in this market, we are seeing a lot more of developers using alternative financing sources as opposed to going to the traditional banks because generally the alternative financing sources — private equity funds, for example — they don’t have to follow as many of the regulations as traditional banks do,” said Phillip Sosnow, a real estate partner at Bilzin Sumberg in Miami. “They have a little more flexibility in being able to lend.”

While national banks are the main player in South Florida commercial real estate lending, some alternative lenders are gaining ground. Life insurance companies set a record in 2017 when they issued $80 billion in commercial loans nationally, 4 percent more than in 2016, according to a Mortgage Bankers Association report.

In South Florida, borrowers are opting for alternative lenders because of the flexibility they provide, experts said. From offering more competitive interest rates and long repayment schedules to higher loan-to-value ratios, alternative lenders are less restrictive and increasingly becoming the choice for commercial borrowers.

Just ask Stuart Wyllie, head of Miami Lakes-based Graham Cos., which has developed much of the northwest Miami-Dade County town from its pioneer past as a family-owned dairy into an affluent suburb. The company closed June 21 on refinancing for a 29-property commercial portfolio, picking New York-based global insurer American International Group Inc. as the lender.

“We went with the life insurance company primarily because of the deal we were looking for. This is a 15-year deal. Your normal banks and those kinds of lenders don’t tend to go that long. Some do, but generally speaking they don’t,” Wyllie said. “These life insurance companies have long liabilities, and they look to match these mortgages up with those liabilities.”

Vutec, a video projection screen maker, needed to refinance its industrial owner-occupied building at 11711 W. Sample Road in Coral Springs about two years ago. But the was a year after its Chapter 11 bankruptcy filing, which likely reduced the pool of lenders willing to work with the company.

“A lot of banks won’t lend to companies that are either in bankruptcy or emerging from a bankruptcy,” said Brett Forman, president and CEO of commercial bridge lender Trez Forman Capital Group.

Trez Forman issued a nonrecourse loan with a 65 percent loan-to-value ratio. The 24-month financing allowed for a possible extension and had a 9 percent fixed interest rate.

“They had gone through a reorganization, and we gave them flexible terms so they can deploy more capital into their business,” Forman said. “We didn’t really look at the value of the business. We looked at the value of the real estate, and we made a loan based on the value of the real estate. Kind of a true asset-backed loan.”

Lending Overview

Despite the flexibility of alternative lenders, Federal Deposit Insurance Corp.-insured banks held 40 percent of the total $3.1 trillion outstanding debt, making them the largest single source for commercial and multifamily mortgage loans nationally in 2017, according to the Mortgage Bankers report.

But the report also showed banks had the lowest year-over-year increase at 6 percent in debt holdings in five years. At the same time, life insurance companies grew their portfolios by $40 billion, a 9 percent increase.

“The long-term nature of commercial and multifamily loans matches well with the long-term nature of many of the liabilities of these companies,” the  report said.

The Dodd-Frank Act implemented in 2010 added restrictions on banks, including their commercial real estate lending. The U.S. Senate in March and the House in May voted to relax some of the restrictions on lenders with less than $250 billion in assets.

“The search for alternatives might be a result of the stricter regulations imposed on banks following the 2008 financial crisis,” Sosnow said. “New regulations aside, banks became more cautious. The banks have learned their lesson, and they don’t want to be stuck with a bunch of failed projects. Traditional banks are being a lot more cautious in their lending. Regulations have changed. And so their requirements are definitely a little more stringent than what a private equity lender or some of these alternative sources may be required to do.”

“At the same time, an influx of alternative lenders means they are competing hard for borrowers,” said Brian Gaswirth, HFF director in Miami. “The debt markets in general are super-competitive right now just given the amount of liquidity in the marketplace, and there’s a lot of groups that are looking to put out money. In order for them to win deals, you are seeing more competitive spread. There’s a lot of supply, not as much demand. So when there is a good deal in the marketplace, you get a lot of great options. Some alternative lenders are willing to go as high as 85 percent on loan-to-value ratios and as long as 30 years on loan terms.”

The Projects

Still, brokers and borrowers said it comes down to matching a project to the right lender, bank or otherwise. Cardinal Point, a Tampa investor that paid $47.5 million in July for the 12-story Coastal Tower at 2400 E. Commercial Blvd. in Fort Lauderdale, considered both banks and alternative lenders when looking for a loan.

It picked New York Life Insurance Co. as the issuer of $41 million in financing, including $32.4 million was for acquisition and the rest for renovations of the office building, said Gaswirth, who was part of the HFF team that secured the loan. The decision to go with the third largest life insurance company in the U.S. was based on the type of financing it offered, although Gaswirth declined to disclose the terms.

“There’s also the nonmonetary benefit of being able to start a new relationship with one of the largest life insurance companies in the country,” Gaswirth said.

“The Graham Cos.’ pool of lenders includes banks and alternatives,” Wyllie said. “A lot of its $120 million loan will be used for new construction.”

This includes Graham Cos.’ nearly finished 40,000-square-foot, two-story office building southeast of Main Street and Ludlam Road in Miami Lakes’ Town Center; two nearly finished industrial buildings with a combined 76,000 square feet at Business Park West; and a planned 220-unit senior apartment community also at Business Park West.

“Every deal stands on its own,” Wyllie said. “When we decide to go on the market looking for capital, we will look at all the sources.”

 

Source: DBR

Monitoring Evolving Trends In South Florida Industrial Real Estate

As part of Colliers International South Florida’s annual Industrial Owners Forum, more than 50 institutional owners gathered in Miami.

They converged to take part in a closed discussion on the state of the industrial market in South Florida, where they own properties.

Steven Wasserman, executive vice president of the Colliers International’s South Florida industrial services team, hosted the forum. He sat down with GlobeSt.com to highlight the main takeaways from the discussion and the sentiment these influential leaders have about South Florida’s industrial market. In part two of this exclusive interview series, he spoke about evolving industrial market trends.

“There’s still a lot of excitement surrounding e-commerce and the impact it’s having on brick and mortar retailers,” Wasserman tells GlobeSt.com. “While many retailers are downsizing their retail stores, there is a growing demand for distribution space as consumers are buying their products online. Distribution centers near urban cores are in high demand.”

Wasserman pointed out another trend shaping the industry: construction costs. Construction costs have been on the rise, but he expects they will most likely remain flat in 2017 as the condo construction market slows down.

“Institutional owners expect the cost of labor and construction materials to start to level off after years of increasing costs,” Wasserman says. “New development construction costs are ranging from $70 to $100 per square foot for new class A warehouse space and will most likely remain at that price throughout the year.”

On the other hand, he says, cumbersome environmental and permitting issues continue to slow the construction process down. That is forcing tenants to holdover because space takes so much longer to build out in South Florida.

Another topic of discussion was the trend of parking requirements. Institutional owners discussed the significant increase in employee and trailer parking requirements for all sites nationwide, especially “last mile” sites.

“This used to be a requirement from larger tenants but they’re now seeing it from smaller tenants in the 80,000-square-foot range,” Wasserman says. “We’re also seeing growing demand for cold storage facilities. As population continues to increase and lifestyle patterns change, we’re seeing increasing demand for cold storage facilities. This particularly true in South Florida where suburbs are becoming urbanized.”

 

Source: GlobeSt.