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Month: June 2023

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Summer Hotel

The question of whether rising interest rates will push the United States into a recession continues to be the topic of daily economic debate. However, executives from major hotel conglomerates do not appear to share these fears. Despite acknowledging the potential concerns, they believe the hotel sector could avoid a downturn due to revenge spending patterns and the recovery of the business, group and international travel sectors.

The pre-pandemic shift in spending from material goods to experiences continues and extends across all generations. After losing a couple of years of life experiences, people are embracing a “live for now” attitude and prioritizing experiences over materialistic items, even if it means paying a premium. So far, in 2023, the average national rate per available hotel room is up 6 percent.

Thousands of Americans are flocking to Europe for their summer destination vacations where hotel rates overseas are surging to record highs. This is especially true in premier destination cities, including Paris, London and Berlin, where rates are up 50 percent, 30 percent and 15 percent, respectively. Luxury hotel bookings are also experiencing this surge, driving the demand for more luxury development.

Domestic hotel executives are particularly bullish about business travel, which is experiencing a resurgence as companies return to in-person meetings and conferences, driving the demand for business accommodations. Recovery in the business sector is a significant tailwind for the hotel industry’s overall growth.

The summer of 2023 could set a precedent for remarkable hotel growth opportunities in the near future. There are plenty of hotel developers sidelined and waiting for an opportune time to strike. Given the improved hotel demand, this powder keg could blow if inflation begins to ease in the latter half of 2023.

  • Sperance, C. (2023, June 19). Hotel CEOs on Summer Rates, Recession Risks and How AI Can Affect Future Travel. Retrieved June 30, 2023, from www.thepointsguy.com
  • Penny, T. and Costello, J. (2023, May 22). Hotels Planning for Another Bumper Summer of Revenge Travel. Retrieved June 30, 2023, from www.bisnow.com

 

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Alternative Lenders

The 2007-2008 financial crisis rejuvenated non-bank, alternative lenders in commercial real estate. In a time when credit and liquidity requirements restrained banks, experienced financial professionals found creative solutions to circumvent traditional banking regulations. Consequently, the alternative financier became a viable capital source when banks were hesitant to loan despite quantitative easing policy and interest rates below one percent.

Another strength of alternative lenders is their ability to hone their specialization. They don’t have to be massive, all-capable banks. Instead, they can be lean, mean lending machines with expertise in a particular region, asset class, financing maneuver, etc.  Their ability to compete with the banks comes from the growing popularity of capital sourcing.

Alternative lender money comes from family offices, insurance companies, pension funds and high-net-worth individuals looking to invest with seasoned professionals. Their exponential growth over the past 15 years comes from trust in these systems, their strategy to borrow and lend long, as well as recruiting talent from top business programs and other financial institutions. The debt fund business model is far more flexible in an environment where bank runs are a scary reality that can happen overnight.

This is not to say that banks are inadequate and not a viable option. The banking system is still impressively robust. However, it is important to note the growing importance of alternative lenders.

BayBridge Real Estate Capital works with a wide range of lenders to source and secure financing for clients. We have a reliable and trusted network of relationships with traditional and flexible capital sources that allow us to find creative solutions in any market.

  • Gonzalez, T. (2017, November 29). A Look Back at The 2017 Capital Markets Landscape. Retrieved June 22, 2023, from www.bisnow.com
  • Cunningham, C. Pascus, B. Gross, M (2023, June 15) The Back Story Podcast: The Rise of Alternative Lenders. Retrieved June 22, 2023, from www.spotify.com
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Self-storage Market

The self-storage sector witnessed a significant surge in institutional popularity over the past decade. Although REITs dabbled in self-storage for some time, the past several years have brought a flood of established investors. A combination of rising consumer popularity and a cost-friendly business model ramped up investor demand.

Traditionally, the self-storage market maintained a mom-and-pop operation—especially in smaller markets across America—following a cyclical pattern with increased activity during the second and third quarters, which align with school schedules and summer moving trends. However, the Covid-19 pandemic accelerated some already-emerging trends and flipped the sector on its head. With a shift to a remote work and school lifestyle, consumers are moving and storing year-round. City renters are back in the suburbs and countryside, leaving their furniture in storage.

Another surprising factor leading to the success of self-storage is the industrial sector boom. Many small businesses turned to self-storage for their warehousing needs because they were priced or sized out. The growing success of self-storage operations caught the attention of investors who are now buying out mom-and-pop stores everywhere. They bring technology, efficiency and a standardized approach to the revitalized sector, increasing consumer experience and renting retention.

The ready-to-use storage units are offered turn-key and available immediately. Occupancy rates are high and trending upward–currently 40 basis points above compared to this time last year. Demand is increasing prices with occupancy, as rental rates from Q1 are up to three percent higher on average than in Q1 of 2022. Additionally, compared to other real estate sectors, self-storage requires less staffing for maintenance and operation.

Competitive cap rates indicate the presence of fundamental macro drivers that point to further growth in the coming years. With new developments in the self-storage sector below the 10-year average, there is healthy demand and high occupancy rates, ensuring that the market remains stable and rent prices favorable.

There are several apparent opportunities in the self-storage sector. The Western market is experiencing significant growth, driven by the need for climate-controlled facilities in hot regions like the Southwest and the population exodus from California. Urban areas are also prime locations due to the limited availability of larger properties, creating a need for additional storage space. There is even an option to convert suburban office space into self-storage facilities.

The fundamentals and long-term outlook on self-storage remain extremely positive. The sector’s advantages, rising rental rates, low completions and various growth opportunities, indicate a promising future.

  • Richter, J. (2019, September 25). Real Estate Daily Beat. Daily Beat NY. Retrieved June 16, 2023, from www.dailybeatny.com
  • Stribling, D. (2023, March 5). The Pandemic Boom Over, Self-Storage Returns To Steady Growth. Retrieved June 16, 2023, from www.bisnow.com

 

 

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Senior Housing Market

The senior housing market is slowly rebounding from pandemic record lows. The sector experienced a 10 percent overall decrease in occupancy rates by Q1 2021. Initially, regulations imposed to avoid overcrowding and the general fear of shared spaces within a vulnerable community caused demand to decline sharply. Overall occupancy is now bouncing back above 83 percent, up from 77 percent. Despite the initially low occupancy percentage, the senior housing market has reached its highest number of occupied units on record.

With an aging baby boomer population—individuals born between 1946 and 1964—the senior housing market is positioned for additional expansion. The youngest baby boomers have approximately six years before they enter the age range for senior housing. As the demographic shift continues, the market will naturally experience growth, creating opportunities for industry players.

Melancholy statistics may also bolster senior housing demand. For instance, rising divorce rates among older adults potentially contribute to the lack of spousal care, and the decreasing number of children available to care for aging parents places additional pressure on senior housing facilities to meet the growing demand.

Senior living providers must adapt to baby boomers’ evolving preferences and priorities to remain a lucrative option. While safety, room and board, and care coordination were once primary concerns, the focus is now on lifestyle, purpose and socialization. Baby boomers seek an enhanced quality of life and community engagement. Consequently, more seniors are anticipated to opt for senior housing facilities that prioritize wellness, lifestyle amenities and opportunities for social interaction. Developers must consider these shifting preferences to attract and retain residents.

Developers also need to have an in-depth understanding of building structures optimally designed for senior care. The dimensions and amenities of these facilities differ from the standard multifamily units. Accessibility and staff-friendly designs are essential for functionality and meeting the lifestyle requirements to support resident well-being—a key factor for occupancy. For these reasons, ground-up construction is more feasible than converting other assets. While it’s important to avoid overbuilt locations, the general attitude among developers can be summarized as “if you build it, they will come.”

  • Richter, J. (2019, September 25). Real Estate Daily Beat. Daily Beat NY. Retrieved June 9, 2023, from www.dailybeatny.com
  • Lueckemeyer, O. (2023, May 1). Senior housing industry mounts a comeback as Baby boomers age in and new construction stalls out. Bisnow. https://www.bisnow.com/dallas-ft-worth/news/senior-housing/senior-housing-industry-mounts-a-comeback-as-baby-boomers-age-and-new-construction-stalls-118736. Retrieved June 9, 2023, from www.bisnow.com
  • Bull, M., & Costello, J. (2023, Jun 1). Senior Housing Performance and Strategies. Spotify. Retrieved June 9, 2023, from www.spotify.com

 

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What’s Happening in Retail Markets?

Today’s metrics will tell you the retail sector is in shambles. However, a nuanced examination of recent performance reveals a mixed picture. While sales volume and investment activity in April 2023 are down 75% compared to the same period last year, it’s important to remember that the exceptional rebound experienced in 2022 was fueled by pandemic revenge spending. Consumers who had been shut in were eager to spend, and the cashflow revival proved to investors that their worst fears of 2020 weren’t realized. Demand had not disappeared; it had simply been repressed.

Another propellant of last year’s investment rebound was the cushy 500 basis point spread between cap and interest rates. As of April this year, that spread has reduced to 295 basis points as the 10-year treasury has risen considerably. It’s harder for investors today to be as excited as they were not long ago.

Underwritten deals must show steady or above-average income growth. Herein lies the primary concern for retail: predicting income stability moving forward as the rebound from the pandemic has played out to some extent. In a time when the economy’s next steps are uncertain, underwriters are going to be especially conservative.

Across the various classes, distressed assets seem to be a hot commodity for current investors. The retail industry’s response to the 2008 crisis, characterized by finding distressed cash-flowing assets, acquiring them at low prices, and benefiting from value recovery, does not necessarily translate well to the current retail landscape.

Many of the distressed assets today are suburban retail centers that were overbuilt across America in the boom period of the 70s and 80s. Successful navigation of this challenging environment requires a deep understanding of the local economy and zoning regulations. There isn’t a one-size-fits-all approach.

Amidst these challenges, there are still opportunities to be found in the retail market. Areas with strong local income growth, constrained new supply and/or high barriers to entry offer potential avenues for success. Identifying these opportunities and adopting a tailored approach can help overcome the stress and uncertainties of the retail markets.

  • Richter, J. (2019, September 25). Real Estate Daily Beat. Daily Beat NY. Retrieved June 2, 2023, from www.dailybeatny.com
  • Bull, M., & Costello, J. (2023, May 24). Retail Cap Rates Today. Spotify. Retrieved June 2, 2023, from www.spotify.com

 

 

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