- August 25, 2023
The demand for data center leasing is reaching new heights, particularly in non-traditional locations. A recent report from JLL revealed that the North American data center market experienced an impressive surge in leasing activity during the first half of 2023. Cloud and artificial intelligence (AI)-driven demand are fueling this growth, prompting tech enterprises to secure data center space well in advance.
Typically, core markets are constrained by available power, pushing data-driven tenants into secondary and tertiary markets. This trend is reshaping the leasing landscape. In fact, established markets like Northern Virginia trail behind newer markets such as Phoenix and Denver in terms of new leases.
Megawatts replace square footage as the primary benchmark of data center leases. One megawatt is equivalent to 4,000 servers and requires an immense source of power. In the first half of 2023 alone, North America saw 1,236 megawatts in new leasing. Currently, more than 3,000 megawatts are available in the U.S. market pipeline. Prospective tenants, from tech giants to startups, are negotiating early in the development process to ensure their wattage will be secured in these growing hubs.
Previously, cloud providers were the demand drivers of data center expansion, but a new catalyst maintains full throttle. Major tech companies and the AI arms race has doubled data center megawattage since 2018. This is a direct result of AI centers requiring more megawattage than cloud companies. They’re building bigger sites with more power and creating new tech hubs where resources allow. Big-picture economic concerns seemingly haven’t phased this industry or its budding pipeline.
- Barr, A. “Nvidia CEO predicts $1 trillion will be spent over 4 years upgrading data centers for AI. A lot of that bill will probably be paid by Amazon, Google, Microsoft, and Meta.” Retrieved August 25, 2023 from www.businessinsider.com
- Miller, R. (2009, Nov). “Data Center Leasing: It’s All About the Megawatts” Retrieved August 25, 2023 from www.datacenterknowledge.com
- August 18, 2023
After years of cautiousness, institutional money is trickling into the retail sector. Amid the pandemic, retail space’s resilience demonstrated its occupancy, tenant-demand rebound and rent growth strength. Today, owing to the high costs of capital and a lack of new construction, shopping center foot traffic is on the rise, and vacancies are minimal.
During Q2 2023, commercial real estate investment fell 64 percent to $75 billion as tighter underwriting and higher rates stifled upsides for borrowers and lenders. In response, retail transactions declined more than 67 percent. Despite this challenging landscape, the retail sector’s comparatively strong yields provide a glimmer of optimism.
Annualized returns across various property types dropped to -6.6 percent. While industrial and multifamily property returns decreased to -4 percent and -5.1 percent, respectively, the retail sector experienced a more moderate decrease of only -0.9 percent.
The latest Reuben Brothers deal is just one industry example of opportunistically transacting in the retail sector. Earlier this week, the private lending firm purchased a $124 million retail portfolio consisting of several Manhattan locations from Vornado. Reuben Brothers also recently sold an 11,000 square feet retail co-op at the corner of 65th and Madison to a UK-based firm. In the last two years, 97 large retail centers and enclosed malls traded hands.
Prior to the pandemic, several significant issues plagued the retail space. An excess of supply coupled with the rise of e-commerce led to a wave of closures, only exacerbated by the pandemic. These events resulted in a natural filtering process, leaving behind a smaller pool of tenants THAT who demonstrated their ability to withstand the worst scenarios. Consequently, the retail space is more efficient, and healthier for it.
So, will retail be the most successful asset class of the next five years? Although unlikely, the future of retail looks brighter than it has in a long time.
- Lueckemeyer, O. (2023, August) “Optimism is Returning to Battle-Tested Retail Sector – But More Importantly, So Are Investors”. Retrieved August 18, 2023 from www.bisnow.com
- Richter, J. (2023, August). Real Estate Daily Beat. Daily Beat NY. Retrieved August 18, 2023, from www.dailybeatny.com
- August 11, 2023
In response to the economic impact of the pandemic, central banks around the world implemented historically low-interest rates as part of their monetary policy measures. The logic was to stimulate economic activity and encourage borrowing and investment during times of economic uncertainty. With central bank rate cuts, interest rates reached all-time lows, which led to increased demand for commercial development and refinancing opportunities. Investors borrowed record amounts when Secured Overnight Financing Rate (SOFR) was .25 percent, now up to 5.25 percent.
The pandemic’s blow to office space is all over the headlines. Office spaces constitute 80 percent of the new commercial real estate loan delinquencies, with an occupancy rate of approximately 50 percent. However, they form only a modest 15 percent share of the $20 trillion market. Multifamily is a different beast by several billion dollars.
$8 billion in multifamily commercial mortgage-backed securities (CMBS), known as the “Red October,” are set to mature in the latter half of 2023. Essentially, this surge is equivalent to the total expected maturation of office CMBS throughout all of 2023. The combination of stricter lending criteria and higher-cost debt options leaves borrowers with limited choices.
As a result of higher interest rates, the cost of borrowing for multifamily property owners increased dramatically. With a wave of approaching maturities, the sector can expect the following:
- Reduced property valuations. Higher interest rates can lead to lower property valuations since potential buyers may be less willing to pay a premium for properties with higher financing costs.
- Refinancing challenges. Some borrowers may find refinancing at higher rates challenging, leading to potential defaults or distress in the multifamily sector.
- Investment performance. Higher interest rates can instigate a decrease in the value of multifamily mortgage-backed securities, impacting overall investment performance.
- Market demand. Higher interest rates may drain the demand for multifamily properties, further affecting property sales and development.
Take, for example, the A&E Real Estate $500MM Portfolio. Around June 2021, during a period of historically low-interest rates, the major player in the multifamily housing sector decided to restructure a collection of 31 properties spread across the Bronx, Brooklyn, Queens and Upper Manhattan. They secured a fresh loan of $506 million from JPMorgan Chase, a three-year arrangement carrying a 2.4 percent variable interest rate. The primary objective was to complete ongoing projects, raise rental prices and enjoy the resulting profits.
However, the Federal Reserve had a different trajectory in mind. The portfolio’s debt service coverage ratio experienced a sharp decline to 0.88 due to the increasing interest rates. With the loan maturing next June, A&E will potentially face another interest rate hike unless it manages to secure an extension. There’s even a chance that refinancing might not be feasible at all. Across the years 2021 and 2022, property owners specializing in multifamily housing borrowed a total of $682 billion through short-term, low-interest loans.
Due to risk management operations, banks are temporarily taking a step back. Private lenders, including mortgage REITs, debt funds and private equity groups, are poised to capitalize on this market. BayBridge Real Estate Capital has extensive relationships with major players that will shape the commercial landscape in the next decade. For a comprehensive capital markets consultation, contact the experts at BayBridge.
- Cavannaugh, Suzannah (2023, July 3) “A Maturity wall is Coming for Multifamily. Can Rescue Capital Save the Day?” Retrieved August 11, 2023 from therealdeal.com
- Richter, J. (2023, August). Real Estate Daily Beat. Daily Beat NY. Retrieved August 11, 2023, from www.dailybeatny.com
- Snyder, Xander. (2023, August 2) “First American Economic Outlook” America’s Commercial Real Estate Podcast. Retrieved August 11, 2023 from spotify.com
- July 21, 2023
Texas is renowned for its low regulation, favorable tax policies and affordable cost of living. These factors have contributed to its emergence as the ninth-largest economy in the world by nominal GDP. However, as Texas’ economy continues to flourish, the cost of living in the state has steadily increased, leading to a growing housing crisis.
Since 2000 Texas has experienced a staggering 50% increase in population. Census data suggests that the population could reach 55 million by 2050. Despite this significant surge, housing production has remained stagnant, exacerbating the housing shortage. The demand for housing has far outstripped supply, leading to a drastic rise in home prices. Since the start of the pandemic in 2020, house prices surged by more than 45%, making it increasingly challenging for many Texans to afford a home.
Former Governor Rick Perry is widely credited as the architect of the “Texas Miracle,” a term coined to describe the state’s impressive economic resilience during the 2008 recession. While other states suffered the ramifications of a recession, Texas experienced a surge in corporate relocations, contributing to its economic growth. Perry firmly believed in a laissez-faire approach to governance. He argued that by keeping taxes, regulations and litigation at a minimum while fostering a skilled workforce, Texas would attract entrepreneurs and create a conducive environment for development.
Taking on a different approach, housing advocates suggest creating a reformed state version of the federal low-income housing tax credit (LIHTC) program. Texas has more than 2,500 LIHTC properties that provide shelter for more than 210,000 families. Under state law, nonprofit institutions known as public facility corporation (PFCs) qualify for property tax and construction materials sales tax exemptions. This exemption is explicitly for the construction, acquisition or repair of property intended for use as a public facility. PFCs are established by government entities, such as school districts, municipalities, counties and housing authorities.
At an alarming level of use and abuse, savvy developers continue to reduce their tax expenses through a loophole in PFC guidelines. To qualify for the tax exemption, private apartment developers transfer the land to the PFC. Subsequently, the PFC leases the land back to the developer, and the government entity overseeing the process receives compensation for its participation. A study by the University of Texas School of Law determined the average tax break is $1 million per property. Texas lawmakers believe these tax breaks significantly outweigh the benefit to the public. Another troubling fact is that the public housing authorities who approve these projects are unelected officials exempt from political culpability.
The Texas housing crisis presents a critical challenge to the state’s economic success. As the population continues growing and housing prices soar, policymakers and stakeholders must work together to strike a balance between economic growth and affordable living. Finding innovative solutions and addressing the housing crisis at the local and state levels will be crucial in ensuring a prosperous future for all Texans.
- McCarty, Maddy. (2023, Feb 13) “Texas Senate Bill Would Close Affordable Housing Property Tax Loophole.” Bisnow, retrieved July 21, 2023 from www.bisnow.com
- DOMUS, R (2023, Feb 16) “Affordable Housing in Texas: and the Enormous Tax Credits That Come along with It.” Retrieved July 21, 2023 from DOMUS.beehiiv.com
- July 14, 2023
The commercial real estate market faces a wave of distressed assets and a looming wall of maturities. The market anticipates approximately $270 billion in maturities from traditional bank lenders by the end of the year. Combined with a record number of commercial mortgage-backed securities (CMBS) maturing this year and the following, the industry is bracing itself for some daunting numbers.
Numerous low coupon loans in the 3 percent range from three to 10 years ago, are due for refinancing at significantly higher rates of 8 to 10 percent. Consequently, underperforming properties struggling to achieve net operating income (NOI) growth will encounter the biggest challenges when refinancing. Ultimately, we can expect lower property values across most sectors of the market.
The average delinquency rate throughout all asset classes is 3.9 percent, with CMBS delinquency rates similarly recorded at 4 percent. In contrast, standard banking has a considerably better delinquency rate below 2 percent. This results from a more favorable approach to working with borrowers to find solutions. In addition, banks are not restricted by the same covenants of CMBS and can modify or extend loans to keep borrowers afloat.
The lending space has tightened, causing credit availability to become more challenging. Still, capital is available, albeit at a higher interest rate, and despite these circumstances, deals continue with brokers finding ways to discover and adapt solutions. Even though rapidly increasing rates may be concerning, historical trends indicate they are not far from the rolling averages of the last 10 years.
Investors who entered the market during the previous bull run, characterized by zero interest rates, have hit nothing but green lights until recently. They may now face greater difficulties finding profitable deals and keeping current investments alive. Nevertheless, savvy and seasoned investors will survive.
Amid the challenges, there are always new opportunities and silver linings. First, new loans do not carry the same rate risks as those generated when rates were negligible. Furthermore, there may be less competition in the market, offering advantageous conditions for established investors. Hotels bounced back after the COVID-19 pandemic and the industrial sector’s speculative pipeline dropped from record highs but maintained strong demand. Multifamily properties will offer opportunities to purchase value-add assets at discounts. As with any downturn, there will be winners and losers.
A broad-lens perspective reveals that the industry remains resilient. Though success is not guaranteed for every property, not all is doom and gloom. What seemed impossible six months ago can transpire. The hope is for a soft landing. Anticipate a turn towards compressing cap rates and increasing transaction volume by 2024. As the commercial real estate market evolves, stakeholders must remain vigilant and adaptable in navigating these challenging times.
- Hendry, Lonnie. Bull, Michael. (2023, July 6). Distress Debt Expectations, Solutions, and Opportunities on America’s Commercial Real Estate Show. Retrieved July 14, 2023 from www.spotify.com
- Pascus, Brian. (2023, June 1). How Private Equity Plans to Capitalize on Commercial Real Estate Distress, Retrieved July 14, 2023 from www.commercialobserver.com
- Richter, Joseph, et al. (2023, July). “Daily Beat – Commercial Real Estate News.” Daily Beat, Retrieved July 14, 2023 from www.dailybeatny.com
- June 30, 2023
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