Trouble for CRE Or Media Clickbait & Investor Opportunities?

Commercial real estate is feeling the impact of high interest rates, slower rent growth, and the banking turmoil, but is that asset class really set to implode? Many of the headlines you see today would lead you to believe that that’s going to happen but some real estate insiders say: “Not so fast. We could be in for a buying opportunity.”   Hi, I'm Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.   First, let’s take a look at what’s happening with apartment sales. Commercial real estate data company CoStar just released a preliminary report on first quarter sales that shows a 74% year-over-year drop. That’s the biggest slowdown since 2012 except for the second quarter of 2020, when the pandemic shut down the economy. From the start of the year to March 17th, sales were around $10.6 trillion. If the quarter finished with another $2.8 billion in sales, the total would be equal to the second quarter of 2020. (1)   Apartment Sale Slowdowns   In 2020, apartment sales fell because of the pandemic. Now, sales are slowing down because the Fed has been pushing up interest rates to fight inflation and investors can’t make the numbers work. Alex Horn of CoStar News says: “The value of multifamily assets across the United States has started to decline” over the last six months. And he expects valuations to fall further.    As dour as that sounds, CoStar reports that multifamily sales are doing better than other kinds of commercial real estate, such as office and industrial. CoStar’s Jay Lybik says that multifamily is “still the preferred sector to invest in.” But this kind of data is looking at a “national” snapshot, which doesn’t say much about the submarkets, and places where things aren’t quite so bad.   The Basic Tenets of Real Estate    Eric Brody of ANAX Ventures is one of those optimists. ANAX is a real estate developer and lender that provides funding to distressed real estate projects. Brody spoke with Benzinga about the current situation and said: “What are the basic tenets of real estate? Location, location, location and hyper-local markets. Now you have the mainstream media making projections based on a macro scale.” He says that the media should be asking about what asset class in which market and how they structured the deal. (2)   He also objects to stories about a big slowdown in construction that’s impacting values. According to Brody, you don’t count a half built building as worth only half of it’s value. He says the values are still there and there’s “a lot of stuff under construction right now.”   Maturing Debt Creates Investor Opportunities   In December, he forecast big buying opportunities in commercial real estate because of all the debt that’s maturing. He told GlobeSt.com that a report by Newmark shows “over $1 trillion in loans are coming due in the next two years, and due to rising interest rates, it is expected that repayment conditions will become more challenging, with bridge financing, office, and retail loans being the most at risk.” He said: “In addition to the rising rates because of increased construction costs, rent growth, and political headwinds, real estate will need an infusion of capital to either refinance assets at a lower rate, pay down existing debt, or complete current projects.” (3)   But what does that mean for investors with capital? Brody told Benzinga that this creates an opportunistic environment for investors with cash on hand. He says: “It’s an incredible moment in time if you have the capital and the expertise.”   That’s it for a more positive view of the commercial real estate market. You’ll find links to the stories I mentioned at newsforinvestors.com. You can also join RealWealth for free while you are there, if you haven’t already done so. As a member, you have full access to our website, with data on individual rental markets, sample properties, and experienced investment counselors who can answer questions for qualified investors.   If you haven’t subscribed to the podcast, please do so! And leave us a review!   Thank you! And thanks for listening, Kathy   Links:   1 - https://www.costar.com/article/2111442536/us-apartment-sales-on-pace-for-the-slowest-quarter-in-more-than-a-decade   2 - https://www.benzinga.com/real-estate/23/04/31659957/is-commercial-real-estate-dead-dying-or-just-the-subject-of-media-clickbait   3 - https://www.globest.com/2022/12/19/will-investment-sales-recover-in-2023/