Below are a few notes on the current climate in commercial real estate. I welcome questions and comments and am happy to expound on any of the bullet points.
Here is what is going on:
- Prices are starting to decline in most asset classes.
- The frequency of first-in, high-bid buyers terminating purchase agreements is increasing.
- Sellers are not getting the prices they want.
- Equity is pausing or saying no. This is likely due to volatility in the macro economy and CMBS market. They are focused on investing at a low basis.
- Debt is pulling back. That said, banks will price aggressively on deals they want.
- Ground-level real estate fundamentals are fine. Occupancies are strong and rents are stable to rising.
- Transactions are taking longer.
- There are more opportunities in distressed and illiquid properties due to ownership issues and asset-level issues.
- As values slowly decline, the equity investor is affected, but the debt investor is not.
- Interest rates are slowly increasing.
- Markets are not able to accept higher rents/prices. Rents are not rising as fast as income or profits resulting in more risk.
- Investors are paying too much for assets and using overly aggressive income and occupancy assumptions.
- Focus on the middle market (assets under $50M). Typical owners are aging individuals.
- In 2016 and 2017, the market will see the greatest amount of maturing loans over the last ten years. Real Capital Analytics estimates 1/3 of these loans will need more capital.
- Macro market volatility will remove significant credit from the system, resulting in more opportunity in distressed real estate, especially in dislocated markets.
- Middle market assets that are value-added or opportunistic