FIU NEWS – May 20, 2022 BY CYNTHIA CORZO
“Inflation is a big problem,” said Bittel, chairman of commercial real estate developer Terranova Corp. “We’re set for a repricing on all of our asset classes.”
FIU’sReal Estate Student Association (RESA) hosted the presentation, which was sponsored by the Hollo School of Real Estate. Clay Dickinson, an adjunct lecturer at the Hollo School, led the conversation.
Changes to the commercial real estate landscape began as the COVID-19 pandemic expanded, explained Bittel, who founded Terranova in 1980. Today, the value of what were prime properties for institutional investors is minimal, and those that many wouldn’t have imagined became top performers, he said.
Dickinson asked: “How is what is going on economically impacting the real estate market?”
Industrial assets, he responded, such as e-commerce distribution centers, are stars, as are multi-family developments, because they’re going up in large volumes in key markets across the country. Self-storage facilities filled up and also performed well during the pandemic; short-term leases are one drawback.
The same can’t be said for offices, hotels and many retail spaces.
“No institutional investor wants to go near office space, especially downtown in a major city, because no one can begin to understand what the future of an office will look like,” Bittel said. “Suburban hotels are doing great while convention center hotels are dead and are going back to lenders every day.”
He described retail properties as messy, with malls dependent on department stores as traffic generators dying. By contrast, suburban malls with supermarket anchors performed well during the pandemic and continue to show positive signs. Restaurants that shifted to takeout and delivery in order to survive often made more money after the transition.
“Evolution is fundamental to every platform. Some retail, those that evolve, are doing exceedingly well,” said Bittel. “We’re seeing and will see more hotel-type amenities in office buildings. No one would have thought of this 20 years ago.”
One student asked: “Where do you see downtown Miami?”
“Every half acre is going to be a high-rise. Impenetrable by cars, expensive parking, a walking downtown,” Bittel predicted. “An increase in food and beverage locations, dependent on how quickly they can serve and turn around, will make it a 24-hour city, which it already is in many respects.”
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CRE Financing Adapts to the Times
/in Financing, General, In the newsOnce upon a time, debt was inexpensive, meaning more leverage for more commercial real estate investments and projects. Fast-forward today, and so-called cheap money is dwindling in the rear-view mirror. Up ahead seems grim news as the Federal Reserve attempts to pull back on inflation, and the GDP fell for a second quarter in a row.
What this means for commercial real estate is that “borrowers and lenders alike are becoming more discerning about their financing decisions,” said Gary Bechtel, CEO of Red Oak Capital Holdings. Or, as Bechtel and other experts told Connect CRE, commercial real estate financing borrowing and lending are far from dead. Rather, they’re undergoing some shifts as investors, owners and developers attempt to navigate through today’s economic reality.
Aeraj Patel pointed out that both investors and capital providers are coming up with what he called “several unique methods” that seem to be effective when considering economic and market volatility. “These include use of interest rate swaps, interest rate cap purchases and low-cost bridge financing,” explained Patel, who is Matthews Real Estate Investment Services’ Associate of Capital Markets. Still others are “seeking out assets that carry a debt structure, which includes assumably,” Patel added.
Meanwhile, iProperty Management, which works with apartment and property owners and managers throughout the United States, has long been examining other financing methods. “It’s definitely pushed us to look for other methods of financing, like hard money loans,” said CEO Leonard Ang. “We’re also starting to explore the idea of tokenization to raise money from investors.”
Other operators and investors that saw the writing on the wall in 2021 acted to add cash to their balance sheets. Terranova Corp. refinanced approximately $150 million of its properties in Q4 2021 in anticipation of a run-up in interest rates and an economic slowdown. “We entered the downturn with strong liquidity, ready to participate in distress opportunities as they begin to surface,” Terranova Founder and CEO Stephen Bittel said.
Along those lines, Patel noted that many investors are cashing out, re-leveraging and trading up into greater cash-flow assets, sometimes with help from 1031 exchanges. Meanwhile, Ang said iProperty is directing more financial resources into upgrading and improving units, and “automating our management practices to increase margins with less growth.”
Even in the midst of fearful economic news, the experts expressed confidence that plenty of capital is available for a multitude of projects. But in the current environment, obtaining that liquidity requires ingenuity, planning and some creativity. “The good news is the number of options available for borrowers is higher than ever, particularly from the alternative/non-bank lending community,” Bechtel said. “The capital stack has expanded, and borrowers now have a wide array of options, and don’t have to rely on one capital sponsor for the entire project.”
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Fed’s Latest Interest Rate Move Puts More Pressure on CRE
/in Financing, In the newsGLOBEST.com – July 28, 2022 BY ERIK SHERMAN
Another month, another 75-basis point increase in the Federal Reserve’s benchmark interest rate. And as the overnight inter-bank lending goes – with a target range of 2.25% to 2.5% – so go many other interest rates, including what commercial real estate firms will be paying for access to financing.
“The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected,” Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, tells GlobeSt.com. “This was likely baked in by most commercial real estate market participants, particularly lenders where we’ve seen loan interest rates rise north of 50 basis points in 2022, mostly in the second quarter. That puts pressure on asset values and squeezes lender profits and borrower returns. Therefore, [we expect] both debt issuance and commercial real estate sales volume to pull back in Q2, as the industry assesses the near-term future.”
The Fed’s Federal Open Market Committee, which is charged with keeping both inflation and unemployment in check, pointed to continued job gains, high inflation, broad price pressures, and Russia’s ongoing invasion of Ukraine as reasons for its actions.
“A clear bid/ask gap between buyers and sellers is chilling sales activities, as sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Stephen Bittel, founder and chairman of Terranova Corporation. “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”
Impacts on commercial real estate are already visible. “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed,” Adil Hasan, director of real estate at Yieldstreet, tells GlobeSt.com. “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines. The rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”
Bill Doyle, co-founder and managing director at Equity Oak Ventures, said that investors who purchased property three years ago and are looking to roll over financing are getting one-year extensions from their lenders. “All forms of lenders, especially debt funds, are in need to rebalance those notes due to a large drop in appraiser valuation,” he says. This rate increase only puts more pressure on the need to rebalance mortgages if there is an opportunity to do so. The next 90-120 days will be very telling in the debt market for existing mortgages that need to be extended or refinanced or will we see keys handed back?”
But bad news can mean good for some. “This could present some attractive acquisition opportunities for investors that have the capital available,” Hasan says.
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Commercial real estate landscape remains in flux, experts say
/in In the news, Receiverships Expert TestimonyFIU NEWS – May 20, 2022 BY CYNTHIA CORZO
An unstable economy and its impact on commercial real estate makes institutional investors nervous, South Florida innovator Stephen Bittel recently shared with FIU Business real estate students.
“Inflation is a big problem,” said Bittel, chairman of commercial real estate developer Terranova Corp. “We’re set for a repricing on all of our asset classes.”
FIU’sReal Estate Student Association (RESA) hosted the presentation, which was sponsored by the Hollo School of Real Estate. Clay Dickinson, an adjunct lecturer at the Hollo School, led the conversation.
Changes to the commercial real estate landscape began as the COVID-19 pandemic expanded, explained Bittel, who founded Terranova in 1980. Today, the value of what were prime properties for institutional investors is minimal, and those that many wouldn’t have imagined became top performers, he said.
Dickinson asked: “How is what is going on economically impacting the real estate market?”
Industrial assets, he responded, such as e-commerce distribution centers, are stars, as are multi-family developments, because they’re going up in large volumes in key markets across the country. Self-storage facilities filled up and also performed well during the pandemic; short-term leases are one drawback.
The same can’t be said for offices, hotels and many retail spaces.
“No institutional investor wants to go near office space, especially downtown in a major city, because no one can begin to understand what the future of an office will look like,” Bittel said. “Suburban hotels are doing great while convention center hotels are dead and are going back to lenders every day.”
He described retail properties as messy, with malls dependent on department stores as traffic generators dying. By contrast, suburban malls with supermarket anchors performed well during the pandemic and continue to show positive signs. Restaurants that shifted to takeout and delivery in order to survive often made more money after the transition.
“Evolution is fundamental to every platform. Some retail, those that evolve, are doing exceedingly well,” said Bittel. “We’re seeing and will see more hotel-type amenities in office buildings. No one would have thought of this 20 years ago.”
One student asked: “Where do you see downtown Miami?”
“Every half acre is going to be a high-rise. Impenetrable by cars, expensive parking, a walking downtown,” Bittel predicted. “An increase in food and beverage locations, dependent on how quickly they can serve and turn around, will make it a 24-hour city, which it already is in many respects.”
CLICK HERE FOR THE FULL ARTICLE