ROCHELLE PARK, N.J., Dec. 20, 2019 – Today’s record low interest rates would normally act as a magnet for commercial real estate (CRE) investors — but uncertainty in the sector, mirroring the questions about the direction of the general economy — is scaring off some. Who is right? Some investors see the Federal Reserve’s recent rate cuts, the third in a row, as a signal that the economy may be edging toward a recession. But others, who focus on healthy consumer spending and a low unemployment rate, see this as a buying opportunity.
To provide guidance, industry veterans at Case Real Estate Capital, LLC recently gathered to share their perspectives. Based in northern N.J., the commercial real estate investment company is active as a market-leading, high-yield private lender; a financier of transitional properties; a purchaser of performing, sub- and non-performing debt; and a mezzanine and equity investor.
Q. What are some of the top issues in the CRE investment market right now?
A. Sanford Herrick, founder and managing principal: Finding the ideal balance of caution and opportunity can be challenging. That’s particularly true today, where a bank account — traditionally seen as a “safe haven” for cash — typically offers annual returns of only tenths of a percent. That’s helping to drive up investor demand for real estate, although some asset classes continue to perform better than others.
Also, there’s no doubt that a lot of capital is sitting on the sidelines. The concern is that some inexperienced investors may jump the gun when they find what appears to be a good deal and could overpay. In this rapidly changing environment, it’s important for investors to maintain a disciplined strategy.
Q. What advice would you offer CRE investors?
A. Aysha Cox, vice president: I’d like to build on Sandy’s observations about maintaining discipline in an evolving market. The South Florida commercial real estate landscape — which has seen robust activity in industrial, multi-family, and technology/e-commerce — illustrates this concept. The growth across these segments is driving more demand for assets like housing, land, warehouse and office buildings, but businesses and developers should be cautious as they search for reliable financing sources. While banks may offer lower interest rates compared to private lenders, the traditional-lender loan approval process can be lengthy and subject to multiple restrictions.
In any type of environment, exercising reasonable caution is well advised in every step of the process, including choosing experienced brokers and other advisors. If an investor is considering existing properties, requesting income and expense statements for the current and previous years is a good idea. In addition, potential investors can review rent rolls, service contracts and other reports.
Another tip for investors is to maintain an adequate cushion of cash reserves as unexpected events may occur, particularly at larger properties. For example, the property may not always be at an attractive occupancy level, and/or some tenants may fall short on their rental payments.
Q. Chris, you’ve previously talked about a borrower’s “checklist” to avoid delaying a project and/or losing money. Could you give us details about that?
A. Chris Mavros, managing director, principal and CFO: To increase the likelihood of success when applying for a loan, a borrower needs to mind the details and take certain proactive steps. At the outset, those include determining the purpose of the loan and its urgency – the why and when – and understanding his or her creditworthiness, which encompasses issues like the collateral that will be offered.
When it comes to real estate collateral that generates income, a loan applicant will likely need to provide documentation of leases and rent rolls, as well as agreements with contractors. In addition, a lender will expect to see evidence that the real estate collateral has the required environmental clearances.
Overall, lenders don’t want to be surprised about any easements or encroachments, evidence of use by other parties, and whether the property is accessible by existing roads, so arranging for a survey is another proactive step. Lenders also want to know about any zoning or other approvals that are needed to conform to the planned use of the property. Other items on the “checklist” include creating a well-crafted business plan and exit strategy.
Q. In what sectors are you seeing opportunities as we head to the New Year?
A. Herrick: Based on Case’s research, retailer-occupied real estate may offer opportunity, at least among the tenant-retailers that have been able to survive the online onslaught. Within this class, lenders may be able to structure a business loan secured by the underlying real estate, or a real estate loan that’s secured by the business’ assets. The hybrid nature of the collateral may minimize any downside.
Also, office continues to show strength. Cushman & Wakefield’s “Marketbeat U.S. Office – Q3 2019” reported that leasing demand remained healthy in Q3, with volume totaling 79.7 million square feet, though down from the 98 million square feet leased during Q2. The Cushman & Wakefield report also reflected on how the tech sector continued to dominant leasing. In Manhattan, tech’s dominance is clear, particularly at Hudson Yards, where Facebook leased more than 1.5 million square feet in November. In addition, Amazon leased 335,000 square feet at Hudson Yards in December, representing its largest expansion in N.Y.C. since the company decided against creating a second headquarters in Long Island City.
At the same time in the office sector, co-working space continues to lose its luster as witnessed by WeWork. We expect this to create opportunities when co-working space becomes available.
This year, we’ve also seen some slowdown in multifamily permits. We believe the pullback was spurred by over-saturation in some markets, along with a reduced appetite for lending on the part of banks. However, as certain investors lose heart participating in the multifamily business, others may see another window of opportunity.
Earlier this year, we saw some concerns about the possibility of higher interest rates, but recent Fed actions point away from that. In our opinion, market demand is healthy enough to withstand incremental increases in rates. Uncertainty, of course, is something that can’t be avoided. But investors who keep up with market shifts and remain aware of their own risk tolerance are likely to continue to uncover opportunities in a variety of environments.
Case concentrates on transactions in the $2.5 million to $50 million range for transitional properties in the New York metro area and south Florida, as well as the Northeast and Mid-Atlantic regions. Funds can be deployed as real estate debt purchases, bridge and acquisition loans or rescue and restructure capital. Case is one of the leading bridge lenders in New Jersey, New York and Florida.