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Greetings,
Here is an update on the current National Commercial Multifamily Real Estate Market in The United States of America as of March 10, 2024:
Multifamily investment activity dipped below $100 billion in 2023 for the first time since 2014. After peaking in the second quarter of 2022 at $316 billion, trailing 12-month transaction volume finished the year close to 70% off the recent highs.
As interest rate volatility whipsawed the capital markets last year, a noticeable shift in buying patterns saw investors move up the quality spectrum. The reason for the upward reach is at least twofold. The first is the opportunity to acquire high-quality assets that are marked down over 20% compared to peak pricing in the first quarter of 2022. The second is a growing desire to manage risk through owning better-quality assets where unexpected capital expenses are less likely. In the 3- Star property segment, price declines were less pronounced, falling about 15% from the peak where deals once traded for approximately $210,000 per door.
In addition to asset quality, investors adapted their approaches to stay ahead of rent growth, leading to noticeable shifts in sales volume rankings. The buying frenzy of the second quarter of 2022 propelled national transaction activity, with cities like Atlanta, Phoenix, New York City, Los Angeles, and Washington, D.C., taking the lead. However, subsequent increases in interest rates caused a substantial reshuffling, reestablishing New York and Los Angeles as the dominant players. Meanwhile, previously thriving markets like Atlanta and Phoenix experienced decreased transaction volumes due to the steady influx of new supply and stagnant rent growth.
In the aftermath of the pandemic, institutional capital was in the spotlight, surpassing private-buyer activity as they outmatched lesser-known names while competing in the same arena. Yet, as interest rates rose, institutional capital took a breather, which allowed private buyers to gain market share in 2023.
Pricing trends have also experienced discernible changes. Loan-to-value (LTV) ratios, once commonly found at 70%-80% with 3%-3.5% interest rates, have now slipped to around 55%-65% LTV with high-5% to mid-6% interest rates. Therefore, sellers increasingly offer debt assumptions to preserve disposition targets and supply greater financing certainty to their buyers.
As property values decline, rising yield requirements are diffusing across assets of varying quality and vintages. These spreads were flattened during the buying spree in 2021 but are re-emerging with rising uncertainty. Currently, cap rates for many 4 & 5 Star assets fluctuate in the mid-5% range, while 3-Star assets have broadly climbed toward 6%. Older, less luxurious assets are now pushing north of the 6% threshold.
With a significant stake in the $4.5 trillion commercial real estate mortgage debt, the multifamily sector anticipates a modest increase in loan maturities this year, with obligations of $255 billion and $243 billion in 2024 and 2025, respectively. Remarkably, despite these ongoing shifts, delinquency rates remain low on a relative basis when compared to the office, retail, and hospitality sectors.
Although factors such as declining household formations, rising supply deliveries, and weakening demand may present temporary obstacles, the sector has successfully emerged from similar challenges in the past. The ability to adapt and evolve reinforces its continued importance in the commercial real estate landscape, emphasizing the significance of a mindful strategy to navigate these ongoing shifts.
Here are several graphs illustrating the current national commercial multifamily market in The United States of America:
Full Commercial Multifamily Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189859/United_States-MultiFamily-Capital_National-2024-03-10_a.pdf
Greetings,
Here is an update on the current National Commercial Retail Real Estate Market in The United States of America as of March 10, 2024:
In 2023, retail transaction volume dropped to $53 billion, marking a roughly 25% decrease from the average over the past decade. However, signs suggest that sales activity may be nearing its lowest point in the current cycle, as the first two months of the year were only 13% below the levels from the same period in 2023.
The capital markets environment today revolves around two main strategies. At different price points in the retail investment market, smaller private investors often pay cash to leverage 1031 tax-deferred exchanges and focus on long-term investments for estate planning purposes. On the other hand, investors who rely heavily on debt markets tend to respond swiftly to macroeconomic factors like rising interest rates, concentrating on large, management-intensive projects, and adjusting their price targets based on their evolving cost of capital and future cash flow projections.
The top end of the market sees a limited number of marketed investment deals, but the sluggish transaction activity is not due to a lack of supply at the lower end. In fact, the number of triple-net listings is increasing as the average time on the market goes up. One reason for the declining sales volume is the mismatch between pricing expectations as builders deliver new pre-leased offerings.
Smaller exchange buyers might be willing to accept going-in yields below short-term treasuries and up to the 6% range, but larger investors need to adjust to a higher cost of capital. Investment sales over $10 million, which had cap rates in the mid-5% range in early 2022, are now more commonly found in the mid-6% to mid7% range in the early months of 2024.
Overall, retail properties have experienced a drop in value, with struggling malls significantly contributing to the double-digit price declines at the top end of the market. Grocery-anchored neighborhood centers, on the other hand, are highly sought after and often command cap rates in the 6% to 7% range, with better quality assets pushing well into the 5% region.
For example, institutional investment manager Nuveen acquired Peachtree Crossing in Atlanta for $21.8 million, or $270/SF, in January 2024. The 80,750-SF grocery-anchored neighborhood center, which traded at a 6.5% cap rate and was 92% occupied, has had The Fresh Market as its anchor tenant for the past 12 years.
Higher up the pricing spectrum, unanchored and open-air shopping centers may see cap rates above 7% and occasionally push into the 8% to 9% range as specific market and quality factors influence each transaction.
In the open-air shopping center segment, Nuveen sold the 1 MSF Fayette Pavilion to 5Rivers CRE, a private buyer from Houston, for $134 million, or $128/SF. The 96%-occupied shopping center, one of the largest retail centers in Georgia, attracts over 8 million visitors a year. Due to the rising cost of financing, the deal fetched an 8% cap rate, typical for transactions in this size range.
As we move through the first quarter of 2024, the $180 billion in retail loans maturing between 2024 and 2026 presents a significant consideration for the market. Lending standards are tight across all lender types, and regional banks are scaling back their pace of originations. This year will also test the U.S. consumer's ability to continue spending. However, the limited new retail construction and historically low availability rates should help limit any potential surge in vacancy rates in the event of a demand pullback
Here are several graphs illustrating the current national commercial retail market in The United States of America:
Full Commercial Retail Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189858/United_States-Retail-Capital_National-2024-03-10_a.pdf
Greetings,
Here is an update on the current National Commercial Office Real Estate Market in The United States of America as of March 10, 2024:
In the challenging landscape of U.S. office sales, a potential bright spot is that sales activity may have reached the cycle low. Despite a 56% year-over-year decrease in transaction volume to a 14-year low of $35 billion, quarterly sales activity remained stable throughout most of 2023, with 23Q4 volume slightly above the level set in 23Q1.
The early months of 2024 saw a significant shift in the market dynamics, with owner-users overtaking private buyers as the primary buyers of large office developments. This change marks a departure from the trend since mid-2022, where private buyers led acquisitions as REITs and institutional investors reduced their exposure. The first quarter of 2018 was the last time owner-users dominated net buying activity. Although this trend may be temporary, substantial pricing discounts could attract more corporate investment into the sector.
A notable example is CoStar's acquisition of Central Place Tower in Arlington, Virginia. The 31-story, 552,000-SF trophy office development was purchased in February at a significant discount due to upcoming vacancies, allowing CoStar to relocate 500 employees from Washington, D.C., into 150,000 SF. The property, sold by a joint venture between JBG SMITH and PGIM for $325 million, or $588/SF, was approximately 26% below its 2019 valuation.
Other examples include Lennar's acquisition of its Miami, Florida headquarters for $68 million, or $319/SF, and First Energy's purchase of its Akron, Ohio headquarters for $49 million, or $136/SF, both at substantial discounts to replacement cost.
Investors pricing deals at discounts to existing debt is a parallel trend. Two examples include R2 companies' acquisition of 150 N Michigan Avenue in Chicago for $90/SF and In-Rel Properties' purchase of 7500 Old Georgetown Road outside of Washington, D.C., for $92/SF.
Such steep discounts can be necessary as negative absorption and declining rent growth make it difficult to underwrite office today. With increasing vacancies, fewer deals are priced based on going-in yields. They are often based on a combination of unleveraged internal rates of return and discounts to replacement cost due to the scarcity of debt.
Where cap rates are used, they have seen significant movement off the 2021 lows, with 5-star properties seeing yields expand by 175-200 basis points. More commonly, 4-star properties have seen as much as 200- 250 basis points of expansion.
This range of cap rates is generally found in the upper 7% to 9% territory, indicating that office property values for transactions over $10 million are down by roughly 35% from the all-time high in 2021, excluding medical and owner-user sales.
Debt maturities pose challenges for 2024, with around $206 billion in office loans maturing this year and another $180 billion in 2025 and 2026 combined. With delinquency rates at 7.4%, there is a possibility that they will surpass post-GFC levels of 10.5% in the next year. However, as asset valuations become clearer, the vast pool of capital remaining in the sector could offer strategic opportunities for informed investors.
Here are several graphs illustrating the current national commercial office market in The United States of America:
Full Commercial Office Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189856/United_States-Office-Capital_National-2024-03-10_a.pdf
Greetings,
Here is an update on the current National Commercial Industrial Real Estate Market in The United States of America as of March 10, 2024:
Initial estimates of industrial investment activity suggest that a little less than $60 billion exchanged hands in 2023, approximately 15% below the market's 10-year average. Comparatively, trailing 12-month sales volume peaked in the second quarter of 2022 at $140 billion, but has since fallen close to 60% from the recent highs.
This slowdown highlights the lingering impacts of rising interest rates and the commensurate uncertainty around asset pricing as rent growth has begun to decelerate.
However, private capital remains at the forefront of buying activity, fueled by a steady tide of fresh entrants to the sector and existing operators' efforts to beef up their portfolios. Not to be left behind, institutional and public REIT investors persist in their pace of acquisitions, homing in on first-class developments and prime locations.
Yields on stabilized industrial investments continue to price in a tight range over treasuries, which began falling in the fourth quarter due to slowing economic growth and the market's expectations of rate cuts beginning in the first half of 2024.
Properties offering in-place rents substantially below market can still see cap rates in the upper 4% range, but a growing portion now trades in the low 5% spectrum. These yields were once seen in the low- to mid-3% range before the Federal Reserve's rate hiking campaign began in 2022. By contrast, secondary markets and deals with a restrained mark-to-market opportunity can see pricing in the 5% to 6% band, as investors in these markets are less willing to apply negative leverage beyond the first couple of years. At the top end of cap rates, deal profiles that lack a sizeable rent growth story and rely on bank or CMBS debt can find yields in the 6% and 7% range.
In October, Faropoint purchased two 1970s vintage business parks outside Newark, NJ, from a venture between Camber Real Estate and Advance Realty Partners. The 770,603-square-foot, 10-building portfolio traded for $144.5 million, or $188/SF, at a 6.25% cap rate. The transaction signifies a growing trend of industrial investors acquiring shallow-bay product in established locations to avoid competition with the growing supply of distribution centers hitting the market.
In the same month, Terreno Realty (NYSE: TRNO) acquired a two-tenant, 112,363-square-foot shipment facility in Redondo Beach, CA, from Link Logistics, a subsidiary of Blackstone. The 1968-vintage, 100%- leased project was priced at a 5.3% cap rate, which equated to $45.7 million, or $407/SF. The property is situated immediately west of the 405 freeway north of Manhattan Beach Boulevard, and it checks several boxes for institutional capital as this buyer profile continues to be drawn toward infill locations in coastal markets.
After eight quarters of declining transaction volume, 2024 may see an uptick in sales velocity if the 2008-2009 commercial real estate downturn serves as a guide. During that period, the number of closings fell for seven consecutive quarters before rebounding 74% over the ensuing two years.
Additionally, the $24 billion in maturing CMBS loans this year could stimulate sales activity as the interest rate environment will likely be much different from their rates at origination. Fortunately, a substantial amount of equity has been built up in recent years, and a near-term maturity may serve as a catalyst for owners to take profits and recycle the capital into new ventures
Here are several graphs illustrating the current national commercial industrial market in The United States of America:
Full Commercial Industrial Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189855/United_States-Industrial-Capital_National-2024-03-10_a.pdf
Greetings,
Here is an update on the current National Commercial Hospitality Real Estate Market in The United States of America as of March 10, 2024:
To no one's surprise, trading volume in 2023 decreased by over 50% year over year. As higher interest rates keep deal underwriting difficult, the bid-ask spread continues to be elevated. Owners with strong operating histories encountered buyers looking for distress, and neither side was willing to give. Now that the Fed has signaled rate cuts in 2024, the expectation is that deal flow will increase again in the second half of the year. The impact of the Fed's action will likely be not only on interest rates but also on spreads, which in turn will restart activity up and down the debt capital stack.
Hotel cap rate forecasts have been inching higher. Part of the calculus was the contraction in cap rate premiums over cap rates observed in the office sector. Historically, hotel cap rates were 100 to 150 basis points higher than office cap rates. In the most recent past, this margin continued to contract, and the forecast is that office cap rates will rise, and that hotel cap rates, although higher as well, will have a smaller delta over office cap rates, down to sub-100 basis points.
Despite lower trading volume, luxury class deals and deals in major markets are getting done. Ryman Hospitality Properties bought the 1,000-room J.W. Marriott resort in San Antonio to add to its stable of meeting-oriented hotels for $800 million. Blackstone was able to transact this property at a profit of over $120 million. Early in 2024, Blackstone was also able to sell the Arizona Biltmore to a UK-based fund for over $1 million/key.
These deals signify that, for motivated buyers, financing costs are not as important a consideration as the location or a strategic rationale to own a property in a preferred market.
Borrowers of two high-profile portfolios decided to stop supporting their loans, so industry participants are assessing the likelihood of these properties trading. Park Hotels and Resorts decided to stop debt payments on their two-hotel, 3,000-room, portfolio in San Francisco, the Parc 55, and the Hilton San Francisco Union Square. Subsequently, Morningstar decreased the value of these properties in their calculations by roughly $1 billion, from $1.5 billion in 2019 to $475 million today. And Ashford Hospitality decided to hand back the keys to a 19-hotel portfolio to the lender.
The transaction outlook for 2024 is constructive, with investors eager to get in on a commercial real estate sector that is poised for more growth.
Here are several graphs illustrating the current national commercial hospitality market in The United States of America:
Full Commercial Hospitality Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189854/United_States-Hospitality-Capital_National-2024-03-10_a.pdf
Have you invested in syndications as an LP (limited partner) in the past 3 years?
Who were the operators / GPs (general partner)?
What asset types did the syndication invest in?
Where were the properties located?
What were your returns on investment during the holding period and then after the property was sold?
How was your experience?
Were your returns as projected?
Were the properties repositioned and capital returned in a timely manner?
Were there any capital calls?
Greetings,
Here is an update on the current Commercial Multifamily Real Estate Market in Los Angeles County:
Recent multifamily sales activity in Greater Los Angeles has been muted. The fourth quarter witnessed $1.3 billion worth of multifamily assets transact. This follows the $877 million of properties that traded in the third quarter. Recent activity is well below the $2.2 billion worth of multifamily sales that traded quarterly, on average, during the past decade in the L.A. metro.
The increase in debt costs since early 2022 has led to declining sales volumes during the past year. Several local brokers have said many buyers in many deals now expect a 10-20% discount relative to early 2022 pricing. Average market pricing, $370,000/unit, is down 15% from a recent high of around $430,000/unit in 22Q1.
Starting April 1, the market has had to face an additional headwind to transaction activity. Sellers in the City of Los Angeles now face an extra 4% transfer tax for any sale above $5 million and 5.5% for any sale above $10 million. The new transfer taxes are on top of the 0.45% transfer tax the city had in place before April. The impact of the tax was clear on sales activity within the city.
Around 130 properties worth just over $600 million, transacted in the City of Los Angeles during the fourth quarter. Activity represents around a third of the dollar volumes witnessed quarterly, on average, during 2022. Of the properties that traded in the city in 23Q4, only 15 closed with a sale price above $5 million, around a quarter of the 58 properties that traded above that threshold quarterly, on average, in 2022. Activity in the fourth quarter follows a more tepid third quarter, which saw around $380 million of properties transacted. Only nine properties traded in 23Q3 for more than $5 million.
Going forward, the transfer tax could continue to suppress transaction activity, as buyers, especially developers and value-add buyers, who typically hold properties for shorter periods, need to incorporate this cost into their underwriting. The measures also have the potential to shift investment to other cities in L.A. County and other markets across the nation, where transfer taxes are much lower or not imposed.
Properties that have recently traded often see pricing below what would have been achieved before the rise in debt costs. In October, R.W. Selby & Company acquired Tower at Hollywood Hills, an 80-unit building at 1800 N Normandie Ave. in Los Feliz, from institutional investor Clarion for $27.47 million ($343,000/unit). The buyer financed the purchase with a $15.64 loan (57% loan to value). Clarion is selling the asset for a loss, having purchased the property for $30.1 million ($376,000/unit) in September 2018. Given the property was located in the City of Los Angeles, Clarion paid a transfer tax of 5.95%, or just over $1.6 million.
In September, Winstar Properties purchased William on Sunset, a 79-unit building in Hollywood at 5837 W Sunset Blvd., for $27.3 million ($346,000/unit) at a 5.5% in-place cap rate. Given the building was built in 2016, it is not subject to the Los Angeles Rent Stabilization Ordinance. Winstar financed the acquisition with a $17.5 million loan (64% loan to value). The seller, Cypress Real Estate Advisors, is selling the property for a loss. It acquired the property in 2019 for $38 million ($481,000/unit) at a 3.5% cap rate. With the building located in the City of Los Angeles, the seller paid a transfer tax of 5.95%, or just over $1.6 million.
In November, a private family trust purchased 945 Locust Ave., a 16-unit building in Long Beach, from H.G. Fenton Company for $3.9 million ($244,000/unit) at a 5.8% cap rate. The property sold for 6% less than the initial asking price of $4.15 million. The buyer financed the acquisition with a $2.6 million loan (67% loan to value) from J.P. Morgan. The property last sold for $3.525 million ($220,000). The cap rate at the time of the 2017 sale, 4.5%, was 130 basis points below the 2023 cap rate, demonstrating the impact of rising debt costs on area transactions.
The outlook calls for continued price erosion through 2024. As interest rates are anticipated to remain elevated through 2024, debt will remain more costly. Additionally, market conditions are expected to remain softer, with limited rent growth and modest renter demand in the near term.
Here are several graphs illustrating the current multifamily market in Los Angeles County:
Full Los Angeles County Commercial Multifamily Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1183595/Los_Angeles_County_MultiFamily_Market_Report_as_of_January_15__2024_compressed.pdf