I follow and engage with some very interesting and intelligent folks on ‘X’ (aka) Twitter and while the majority of us chime in with brief opinions or support, there are some vocal folks on there. They provide a lot of knowledge, information and insight to whats happening in their asset classes, their specific markets or the whole general commercial arena overall.
One of my favorite voices and people on ‘X’, is @stripmallguy (Trent)
Below find a recent tweet of his which is a succinct and concise summary.
“Responsible investment in commercial real estate requires a thorough understanding of the bond market.
Commercial real estate cap rates (yields), simply compete with other financial products that provide income, and people always shift to investing in whatever pays them the most risk-adjusted income.
And it happens quickly.
Think of how fast you shifted from your savings account to a high-yield money market, CD, or bond this year? It took you minutes, it was a no-brainer.
We are in a climate where bond rates are climbing substantially as governments continue to turn to issuing bonds in order to pay off creditors and keep up with rising costs.
The government needs to keep raising money, lots of it, and there is no end in sight.
Commercial real estate owners are convinced that the increase in rates will not last long, but signs simply point otherwise.
Recency Bias (placing too much emphasis on the trends of the last 5-10 years) is heavily impacting their decisions, and it’s objectively irrational.
Many bought properties at 4% and 5% cap rates, and the only way to justify their decision now is to tell themselves that the rate rise is temporary and that those cap rates are coming back.
It’s a self-preservation technique, and is counter to rational investing. The fact is, their equity is wiped out.
I am not here to make predictions, never have been, but I relay what I see as playing out, and what is actually happening on the ground.
Our team is underwriting exit cap rates based on the fact that commercial real estate is a financial tool that provides yield, and based on the fact rational investors know commercial real estate comes with inherent risk.
It’s happening slowly, but the market is going back to understanding you need a spread between the cap rate and the borrowing rate.
In an environment where it costs 7% to borrow, a 50 to 250 basis point spread (depending on the asset characteristics) is required in order for the purchase of a stabilized property to make financial sense.
Yes, that means 9% cap rates for class B properties in secondary markets. Yes, it means 7.5% cap rates for class A properties in prime markets.
We should be there now. We are not, but we are clearly headed that way.
The people who think otherwise are making economic bets counter to what is happening.
If they could successfully make those bets, there are much easier ways for them to make big money without messing with a complicated asset class like real estate.
The new reality is here.
If you don’t see it, your eyes are closed.
Invest accordingly.”
On another note, I cannot get enough of the statistics, research, metrics, etc from @jayparsons at Realpage
Here is a article he posted on LinkedIn in early 2023. Spot on and bullseye in my opinion.
“Here are a few takeaways from NMHC this week.
1) Apartment buyers vastly outnumber sellers. Or put another way: Lots of buyers are waiting for better pricing to offset higher interest rates / cost of debt. I suspect pricing may not “correct” quite as much as many buyers hope or need to see. Investors still love multifamily relative to other options, and it’s difficult to see how pricing falls as much as the public market suggests. Given the gap in pricing expectations, it seems unlikely much will trade in the first half of 2023, before eventually buyers get more aggressive — perhaps once the Fed signals a pause in interest rate hikes.
2) There will be some distress among investors who bought <4 cap deals last couple years with high leverage and/or floating rate debt, as well as among some developers struggling with lease-up targets. But how many of those deals actually hit the market in 2023? There are so many “rescue capital” funds looking to inject preferred equity or mezz financing, and even chatter about some lenders playing that role directly or playing matchmaker with capital. Remember that most owners will want to avoid selling at a loss — as once you do that, it becomes exceptionally difficult to get back in the game and raise capital again. I imagine many higher quality assets with financing issues get quietly worked out behind the scenes, while much of the distress that hits the market could be lower-quality, sub-institutional assets. Anyway, this will be a fascinating story to watch play out in 2023.
3) On the fundamentals side, leasing traffic is re-accelerating to healthy (not crazy) levels. Prospective renters re-entered the market after New Year’s following a super slow second half of 2022. Affordability isn’t the big issue (incomes are plenty high), but the question is: How serious are these prospective renters, and is this a blip or a sustainable trend? We continue to be of the view that apartment demand in 2023 will significantly outpace 2022 (but not reach 2021’s peak levels), but the next few months will tell us a lot — particularly when the traditional leasing season starts in March/April.
4) Lease-ups remain a concern, particularly in urban core submarkets (pretty much everywhere, not just Sun Belt) getting inundated with supply. Remember that nearly all lease-ups are competing for renters in the top quintile for incomes — typically six-figure income households (which will mostly insulate the Class B suburban assets that comprise the majority of apartment stock). Many projects are going to face prolonged lease-ups and deep rent cuts / concessions.
5) Expense control is for real. Taxes, insurance, payroll, utilities are way up. Big focus on efficiency and centralization. Big focus on limiting resident turnover to not only protect occupancy, but also control turn costs. Less interest in heavy value-add. I suspect value-add work is more focused on deferred maintenance and cosmetics.”
The Commercial Real Estate Alpha Site 
Leave a comment