boots-on-the-ground-perspective-on-todays-commercial-real-estate-market

Boots on the Ground Perspective on Today’s Commercial Real Estate Market

The fear is palpable. I have not felt this level of negative sentiment amongst the investor community since the fall of Lehman Brothers in 2008.

Boots on the Ground Perspective on Today’s Commercial Real Estate Market

The fear is palpable. I have not felt this level of negative sentiment amongst the investor community since the fall of Lehman Brothers in 2008.

Just assembling the litany of reasons behind this angst is anxiety-inducing: inflation, bear market, negative earnings outlook, risk of severe global recession, exploding yields, UK turmoil, escalation of the conflict in Ukraine, energy crisis in Europe, political and economic volatility in China. I could go on but the list is seemingly interminable and compiling an exhaustive compendium is not terribly helpful.

Instead, we wanted to take this opportunity to provide a snapshot of what we are seeing and feeling within our own portfolio today and how we are evaluating new opportunities given the current landscape.

Leasing

Leasing velocity within our flex, industrial and medical office buildings continues to be brisk. While there has been an uptick in overall leasing activity, new leases and renewals have been challenging to execute, due in large part to pricing pressure on materials and supplies which continues to cause delays for build outs and tenant improvement projects. The majority of new leases are outperforming pro-forma rents, and there is a continued appetite for flex industrial space from the tenant side.

Leasing momentum within our legacy office assets acquired pre-Covid continues to be largely stagnant. However, we do believe that recessionary fears, household level inflationary pressures, the market selloff and the expiration of Covid-era stimulus will create leverage for employers to demand employees return to the office in order to increase productivity.

Deal Activity

We are seeing less activity and lower transaction volume compared to the beginning of the year. Though there’s potential for an increase in cap rates in the near term, we do not believe this will be substantial or long lasting.

Securing attractive debt is the biggest inhibitor to executing on transactions at the moment. Lenders are cautious across all asset classes and focused on preferred sponsors, as they adjust to uncertain valuations in an environment of dramatic and compressed increases in mortgage rates. Leverage ratios have decreased with Loan-to-Value moving from 65% to 55% over the course of the last six months.

The current debt market is making it especially difficult to buy deals with upside or value-add characteristics because of in-place debt-service coverage ratio (DSCR) requirements (shifting from 1.3 to 1.4 DSCR with significant structure, which ultimately eats into investor returns). Bank lenders are stressing the importance of DSCR (NOI / Debt Service) and Debt Yield (NOI / Total Loan Amount).

There are still deals to be had but it takes a reasonable seller with a deadline or sense of urgency; otherwise, sellers are on the sideline and typically only willing to negotiate if NOI has increased dramatically or they are tired of managing the asset. Anecdotally, we have seen an uptick in the volume of Baby Boomer sellers that have owned through the Great Recession and COVID and don’t want to stick around to see if we do in fact endure another potentially deep recession.

Takeaway

In general, there’s a disconnect between brokers, sellers, buyers and lenders in the marketplace, which poses challenges to execution, but also provides for pricing dislocations and, therefore, opportunities to find value for nimble sponsors with deep debt relationships.

To learn more about how political and economic volatility is impacting the current investment landscape, check out our episode on The Capital Club podcast.

Previous Articles

the-ultimate-guide-to-commercial-real-estate-investing

The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.

carrying-costs-in-commercial-real-estate

Carrying Costs in Commercial Real Estate

Understand how this one key concept will impact your ROI for your next commercial real estate investment. Carrying Costs…

Why Investing in Women Founders Will Give You a Dramatically Better ROI

Sherry Deutschmann was the founder of the health revenue cycle company LetterLogic – a company she sold in 2016.

Make Money Strategically in the Rare Earth Market

Louis O Connor is the Founder of Strategic Metals Invest, which is currently the only business in the world offering Rare Earths as physical assets to private investors.

Venture Capital & The US Economy: How the Private Markets are Generating More Profit

Teddy Himler is a Venture Capital Partner, running a fund at Antler that focuses on what he calls emerging tech ecosystems.

The Secret to Longevity Is Not What You Think

Dwayne J. Clark is the Founder and CEO of Aegis Living. With more than 37 years of senior housing experience, Dwayne is nationally known for redefining the industry.

Understanding Trauma as a Key to Your Financial Behavior

Diana Chambers is a highly respected Family Wealth Mentor and Philanthropic Advisor who established her business in the US in 2002 and subsequently in Switzerland, where she now resides.

Direct & Co-Investing for Family Offices

Randy Castleman advises family offices and institutional investors on their direct investing, fund investing, and fund formation.

an-investors-guide-to-rent-roll

An Investor’s Guide to Rent Roll

A rent roll is one of the most important tools for analyzing a prospective investment. Here’s what you should look for.

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?

Excelsior Capital

104 Woodmont Blvd, Suite 120
Nashville, TN 37205

investors@excelsiorgp.com

w

Livechat

Disclaimer: Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.