AP- The Wall Street Journal recently published an article on the slowing down of the commercial real estate market. For those that follow us on this blog and social media, this comes as no surprise.
Here, we will provide excerpts from the article, highlight the important data and provide our own opinion feedback where appropriate.
Commercial real estate is showing the first signs of cooling in more than a year, disrupted by rising interest rates that are already causing some deals to collapse. Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. (The decline followed 13 consecutive months of increases).
Property
sales tanked sharply during the early months of the pandemic…A rebound began in
late 2020 as investors took advantage of low interest rates and started to buy
in anticipation of an eventual rebound. Demand for multifamily and industrial
properties in particular helped fuel commercial sales through 2021 and into this
year. The success of those sectors outweighed the drag on property markets
caused by underperforming office buildings which continue to be hurt by remote
work.
Weitz Commercial: as we have referenced in our facebook posts, we think they office market will continue to face uphill battles as the desire to reduce office footprint will assuredly be a common theme in lease renewals. We predict the large companies will have more offices with smaller footprints to accommodate the hybrid work model and employees that may live a distance from city centers.
Analysts
are starting to ask whether the rally is running out of steam. Hotels,
office buildings, senior housing and industrial properties recorded big drops
in sales last month. Sales of retail properties were up in April,
the fourth consecutive month that U.S. households boosted spending, while apartment building
sales continued to rise due to strong tenant demand and landlords’ ability to
raise rents. But analysts and brokers said activity in even these sectors
may be slowing as rising interest rates keep some investors from making competitive offers.
April’s
16% decline in sales marked an abrupt turn from March, when total commercial
property sales rose 57% from the same month a year before.
But with interest rates considerably higher—the yield on 10-year Treasury notes, a common benchmark for commercial mortgages, has nearly doubled this year—property investors that relied on large amounts of cheap debt to purchase buildings have been some of the first ones to fall out of the market, brokers and investors said.
“Suddenly,
you’re just not competitive,” said John Carrafiell, co-chief executive of
property investment firm Bentall GreenOak, describing buyers who use debt to
finance 60% or more of a property’s sale price.
Surging
interest rates in recent weeks have left many investors with a choice between
losing their deposit or paying much more than expected for their mortgage, said
Jay Neveloff, a partner at law firm Kramer Levin Naftalis & Frankel LLP.
Most have
been moving ahead with planned purchases, he said, but other investors are more
cautious now about signing new contracts. That will inevitably drive down
prices. “The pricing can’t be blind to changes in capital markets,” Mr.
Neveloff said.
But lower
prices also offer an opportunity for bargain hunters, especially for
real-estate investment funds that are sitting on big cash reserves. “I have
heard people say, ‘this is when I’m making deals, this is when I’m finding
properties. ” Mr. Neveloff said.
The investment firm Apollo Global Management Inc. and hospitality investor Newbond Holdings recently agreed to buy the Hilton Times Square for about $85 million, according to people familiar with the matter, a significant discount to the hotel’s 2006 sale price of $242.5 million.
Weitz Commercial: this drop in price for the Hilton Times Square is fairly staggering. Its hard to say whether this is COVID driven, general malaise of the property, or a sign of the times in Manhattan these days. Whatever the reasoning, it’s a significant drop for a trophy property like this one.
As the
buyer pool narrows and interest rates rise, sellers are becoming more likely to
make concessions to close deals, said Henry Stimler, an executive in the
multifamily capital-markets division at the Newmark real-estate
firm.
His firm
recently brokered the sale and financing of a $457.5 million multifamily
portfolio concentrated in the Carolinas, where rent growth has been strong over
the past year. “It’s now turning into a buyer’s market,” Mr. Stimler said.
Weitz Commercial: For those in our investor database, we have been very clear that we think the market will fall, now is a good time to diversify into other assets/ cash and prepare for a changing market. That plan hasn’t changed one bit. In fact, articles like this are turning what was once a contrarian view to perhaps more of a mainstream analysis. Just how much the market turns will vary market to market, and we continue to like essential (multi-family/ industrial) properties in mid-markets, but generally speaking, we think tremendous opportunities lie ahead for a patient purchaser.
For more information on Puget Sound Commercial Real Estate News, consider contacting a Snohomish County or King County Commercial Real Estate Broker.
Our Firm:
Weitz Commercial
108 Union Street
Snohomish, WA
Scott@WeitzCommercial.com
No comments:
Post a Comment