Author Archives: levercp

The Evolving World of Commercial Real Estate and Movements to Keep an Eye on in a Post-Covid World

By: Andy Evans

As vaccines roll out across America, and day-to-day life begins to resume as usual, it is crucial to understand how Covid-19 has affected the commercial real estate industry. As we know, the pandemic shifted people’s perceptions on the necessity to work in an office every day or go to a physical store to purchase the goods they need. We saw a significant rise in work-from-home structures as well as a staggering 44% growth in e-commerce volume compared to the previous year (Forbes).

With that being said, the commercial real estate industry remained remarkably stable. The number of foreclosures barely increased, while prices fell far less than after the 2008 financial crisis and are already rebounding much quicker than anticipated. Stability can partially be attributed to supportive federal monetary policy and low interest rates that allowed struggling assets to hold out. As we near the end of the pandemic, US private real estate companies are sitting on record levels of dry powder nearing 400 billion (PGIM) and are looking to capitalize on the increased momentum in the economy. While asset classes such as industrial and multifamily will continue to show their strength in the market, we have identified several emerging sectors where investors can expect to see significant growth and potential.  Out of crisis comes opportunity and the trends that we have outlined below are creative ways to tap into newly emerging markets, asset classes, and strategies. 

  1. Logistics/Cold Storage

A surge in online shopping and grocery sales has led to a steep increase in demand for cold storage space. Developers across the country are eager to get into the space due to the consistency of cash flows and the overall stability of the business. In 2020, online grocery shopping grew 81% in comparison to 2019 (Coresight Research) and factors such as subscription meal services and specialized pharmaceutical products are driving this emerging asset class. Growth is projected at 11.71% from 2019 to 2026 (Foodinstitute).

  1. Multifamily Conversions 

Converting other types of buildings into multifamily apartment complexes for rent has grown increasingly popular as construction costs have skyrocketed in the last year. Malls, factories, office buildings, and hotels are considered ideal candidates for traditional, micro, affordable, and senior living concepts due to the fact that they are generally located in already desirable areas. These conversions often have unique characteristics considering their history and are attractive because they are generally less expensive on a cost-per-door basis than newly constructed units. 

  1. Retails Creative Repositioning Opportunities 

With malls and retail centers struggling to garner shoppers and foot traffic falling 22% in the country’s top 10 malls (FNRP), many redevelopment opportunities are presenting themselves across the country. 78% of consumers expect online shopping to become more popular post-COVID 19 (Deloitte) and as a result, landlords must find new and innovative ways to stay relevant.  Popular redevelopment projects include apartment complexes, school campuses, medical facilities, and even churches. Another study conducted by Deloitte explores how malls could stay relevant by repositioning the assets based on the goal of creating a place where people can socialize, eat, live, and work all in one location. These physical spaces are not going anywhere anytime soon, so finding innovative ways to capitalize on the significantly discounted assets presents ample opportunity for massive upside.

  1. Last-mile Distribution

Industrial assets located within the urban core or strategically placed in high-density areas to reach the maximum population (known as “last-mile distribution”) are seeing record growth with the increase in e-commerce. The increase in e-commerce that we are witnessing places massive pressure on logistics operations, and these assets are proving to be the solution. America’s appetite for one and two-day deliveries depends on access to local inventory. With the high demand for these spaces, we can expect to see buildings repurposed for this use or new built-to-suit development projects. Regardless, these assets will provide stable returns for investors and provide diversity to a portfolio.

  1. Office – Coworking Space 

Coworking spaces and micro-office units will continue to grow in popularity as more and more entrepreneurs start online businesses and seek a workplace where they can work distraction-free. E-commerce start-ups continue to grow and having a physical office space is critical for their continued success. These businesses do not seek large class A office spaces but instead like the new and trendy coworking locations that also offer amenities within the building. This repurpose strategy can be implemented by any office owner/operator and will prove attractive to a wider variety of tenants. Reaching high occupancy levels is becoming harder and harder for landlords and this innovative strategy may be the gateway to success. 

  1. Affordable Housing 

As housing becomes more expensive and landlords are once again able to enact eviction memorandums, we can expect to see shifts towards affordable housing. The majority of the US population continues to find renting an apartment or home a more affordable option compared to homeownership and this sector is expected to yield high growth. Affordable housing brings a more certain guarantee of payment and allows landlords to feel safe in their projections and yields during uncertain times. Despite below-market rents, this sector has better occupancy and less volatility than market-rate units. Throughout the pandemic, affordable housing rent growth was 1.2% in 2020 and outperformed traditional multifamily (GlobeSt.).

  1. Non-traditional Sectors (Data centers, senior housing, and self-storage) 

Non-traditional sectors continue to provide evidence of resilience through economic downturns.  Data centers are in high demand across the country as we see a massive increase in access to internet-related services and the rise of 5G. These centers need physical space which provides a great investment opportunity. Further, in the next 10 years, the senior population cohort will grow at twice the pace of the past decade and will need to meet a demand of more than 23,000 units per year (HavenSI). This demand spike will provide investors and developers stable and safe investment opportunities. Lastly, the self-storage sector is projected to see annual compounded growth from 2020-2025 of 134.79% (Forbes). Population growth and rental vacancy are the driving factors for this notable increase that will bring bountiful investment opportunities with it.

The trends outlined above illustrate the new high growth and innovative movements of the commercial real estate industry in a post-COVID world. Lever Capital Partners understands the changing landscape of this industry and knows how to adapt to it. Reflecting on conversations with many capital providers at the 2021 Annual MBA Conference, as well as several current clients, we can firsthand see the unspent capital out there in the market right now. Investors are hungry to get back to investing in projects that they believe in and most importantly in ones that are backed by a compelling story. Lever understands the opportunities out there and can provide you with the capital to lead the initiative. Whether your needs include debt, joint venture equity, or secondary financing, we can discuss the capital currently available for your project and work together to guide you to an efficient closing. 


What is Driving the Demand for Industrial Real Estate Assets?

By: Liam Lewis

As we end the first quarter of 2021, the commercial real estate investing landscape is experiencing many changes. Entering the second quarter, everyone wants to know which asset classes will see quick recovery and which will continue to struggle in the post-Covid world. In the past 12 months, the pandemic has reshaped many industries. These shifts have demanded that investors adjust and have also expanded our ability to understand how external factors dramatically impact tenant and investor demand. In 2020 and into 2021, retail and office assets have faced challenges that no one ever predicted. These unprecedented circumstances have forced us to quickly adapt and underwrite assets in different ways to meet both tenant and investor needs driving creativity and innovation in the process. The pandemic has impacted economies around the world, tenant needs have shifted, and in turn, capital supply has changed as well.

Given the covid challenges that office and retail are facing, many investors are reassessing portfolio distribution. Thanks to the e-commerce boom spawned by the pandemic, industrial assets are offering a more conservative investment opportunity, whether it be core+ acquisitions with credit tenants or ground-up build-to-suit construction. Investors are not the only ones adjusting and capitalizing on these shifts in the industrial space. Institutional capital is becoming more and more readily available especially in terms of industrial development and acquisitions. Not only is the institutional space growing, but private capital is coming in with increased flexibility. Some of the creative options that we have seen in the first quarter and expect to see even more moving forward include the use of senior stretch loans, mezzanine debt, preferred equity, and sale-leasebacks to fill the gaps left by institutional money. In terms of capital availability, investors and lenders are holding a significant amount of dry powder, especially compared to where we were a year ago today. Industrial assets are shifting from the least favorite food group to being highly sought after by investors, lenders, and tenants.

To determine the sustainability of this spike in demand we must explore the driving factors. E-Commerce is defined as any purchase or sale of a good or service through an online platform. In retail e-commerce (of physical goods), yearly total revenue increased by $71.55B in 2020 and is projected to increase by another $131.74B by year-end 2025 (Statista). This exponential growth is a great indicator of what’s to come in terms of industrial space demand. Before 2020 yearly growth averaged only $37.09B per year. To put this into perspective, e-commerce retail revenue grew 120% in 2020 even as the Covid pandemic put the brakes on the overall economy. The revenue growth rate is expected to continue this pattern and we will likely see yearly growth breach 100% yearly through 2025. In the fast-paced world of e-commerce, logistics and distribution are central concerns that are driving a focus in purchasing on increasing efficiency and reducing logistics-related expenses. With this dramatic change we have seen as a result of Covid and technological advancement, it’s only fair to ask, how is this impacting industrial space needs?

With this dramatic increase in demand and the expectations of its continued growth, industrial asset needs will continue to skyrocket. As more and more products are purchased online, these retailers are facing scale challenges that in most cases have to do with manufacturing and warehouse capacity. With 1 and 2-day delivery becoming increasingly popular, and soon to be a must, companies have to rethink the way each product is getting from the manufacturer to its final destination. A key term to understand here is “last-mile” delivery/distribution. The “last-mile” is the final step in the transportation and delivery process. This is defined as the period in which the product leaves the last checkpoint and arrives at the final destination. This “last-mile” is the most expensive (about 50% of supply chain costs) and time-consuming part of the shipping process. In the wake of such dramatic demand growth, companies are doing anything possible to cut logistics-related costs. A trend that we are seeing, as a result, is an increase in the number of industrial warehouses that companies are leasing, building, or acquiring. Real estate expenses currently only reflect 3-5% of supply chain costs, providing a perfect opportunity to reduce expenses. In order to reduce the expenses involved with “last-mile” delivery, you must increase the number of hubs you own, which in turn reduces transport distances. With increased demand also comes increased inventory levels, impacting space needs significantly and pushing firms to buy, lease or build bigger warehouses. In 2020 there was a record 680 million square feet (MSF) of new industrial space leased in the Americas alone (Area Development). A logistical transition is upon us that presents ample opportunity when it comes to lending on or investing in industrial assets.

Product demand has seen significant growth in the last few years, and the Covid-19 pandemic has accelerated it. The increasing demand for products sold online and quick delivery is directly impacting suppliers, manufacturing levels, and of course demand for industrial assets. A key contributing factor to demand for industrial space is the quick recovery seen in US manufacturing. Chris Williamson, the chief business economist at IHS Markit reported that “the US manufacturing sector is close to fully recovering the output lost to the pandemic last year.” Manufacturing levels have reached a 3-year high, and the exponential demand we are witnessing is pushing suppliers to their limits.

The combination of the intense demand growth seen in the last year, and 1-to-2-day delivery norms is recreating the increased need for industrial space. With these shifts in the market, capital must also adapt and realign itself with the changing times. Reflecting on conversations with many capital groups at the 2021 MBA conference, as well as several current clients, we are very aware of the dry powder available, and what it’s looking for moving forward. Here at Lever Capital Partners, we understand that when trends like this present themselves, the capital is not far behind. Whether your needs include debt,  joint venture equity, or secondary financing, we are confident that we can assist you along the way, while emphasizing efficiency and transparency.


Cold Storage Market Provides Endless Possibilities

By: Aesha Mehta

The Industrial market has turned from the ugly stepchild of the 4 major food groups into a sought after commodity, especially in the last year. A subcategory of industrial that you might not be that familiar with is Cold Storage. These facilities store perishable products such as fruits, vegetables, meat, or fish under controlled conditions for long periods of time. Cold storage is becoming crucially important because of a need to store the Covid-19 vaccine as well as food distribution via e-commerce that has grown immensely over the last 12 months.

How the Financing Markets are Heating Up to Cold Storage

Consumers are purchasing much more food via e-commerce because it was a very convenient and easily accessible solution during the lockdown. In particular, Amazon Fresh’s sales have grown by allowing customers to purchase and receive deliveries for their groceries and consumer products. The future of cold storage is still untold because it will be more prevalent when more pharmaceutical companies such as Johnson and Johnson, Sanofi, and Bayer come out with approved vaccines with FDA approval along with the current demand of the vaccines from Pfizer and Moderna. With consumer trends shifting to buying more items online, the investors we speak with believe that increasing Cold Storage assets in their portfolio will be inevitable.

The future of cold storage has endless possibilities that will not diminish anytime soon due to the increased food distributions through e-commerce channels. According to David Egan, senior director and global head of research for CBRE, “food in the U.S. is a category worth approximately $2.5 trillion, with grocery sales representing almost $1 trillion of that number. If e-commerce grocery sales grow to 15% penetration, that’s about $150 billion in sales that would shift from an in-store model to an online model. To put that in perspective, all e-commerce in the U.S. is about $500 billion” (NAIOP). Based on these statistics, this showcases how attractive cold storage is becoming in 2021 and where institutional investors will look in the coming years as a major investment for cold storage as an asset class in the industrial real estate sector. 

The Changing Landscape of Available Capital

Prior to COVID-19, cold storage was primarily used by grocery store distributors to help facilitate their sales of produce and meats along with a growing demand from e-commerce companies. Jones Lang LaSalle Incorporated (JLL), a global commercial real estate services company, mentions, “In May 2018, Blackstone, one of the most prolific investors in commercial real estate, purchased a 2.3-million-square-foot portfolio of nine industrial properties that were primarily cold storage facilities for $255 million at a 6.25 percent cap rate.” Due to these new changes and demands, lenders and investors are now looking at this niche market as an attractive investment. Lever Capital Partners and their sister firms at the Real Estate Capital Alliance held a virtual MBA in early February. At that event many capital providers talked about lending and investing in Cold Storage for the first time. Once a majority of capital providers sees the Cold Storage space as a critical component of the Industrial segment rather than a niche business, the competitive landscape will increase thereby increasing the competition for available capital.

We’re Here to Guide You!

Lever Capital Partners knows the Cold Storage business and in fact financed their first one back in 2005 in a Boston suburb. We have increased our tracking of available capital due to the occurrences we’ve seen in the last few years and can help guide you through today’s capital availability. Our team of industrial experts will advise on your ability to get financing up and down the capital stack utilizing debt and equity for acquisitions, adaptive reuse, or development. Because we’re a relationship oriented firm, our preference would be to work with established sponsors looking for programmatic capital rather than one-off projects. Please reach out so we can quickly evaluate your project and guide you towards the best available capital!


The Distressed Debt Wave: 5 CRE Experts Discuss Trading Nonperforming Loans in 2021 and Beyond

By Keren Goshen

Feb 4, 2021

We entered January 2020 with unprecedented momentum. A strong economic outlook called for a year of tremendous growth after nearly a decade of global economic expansion. While all the indicators of growth and success presented themselves, the global pandemic put the era of growth to a screeching halt; leading to a year of tremendous loss and uncertainty, changing the world as we know it.

A year later, with the vaccine rollout in full swing and the end to election uncertainty, we anticipate 2021 will be a strong year for the capital gains market. We are seeing a positive market outlook that boasts low interest rates, banks and investors flush with cash, and an S&P 500 index that’s up 3.8% YTD.

While we anticipate a strong year of recovery, we gathered the latest research and interviewed the most influential CRE experts to expand on our predictions. Here is what they have to say.

Distressed commercial real estate loans and discounted asset sales will continue to rise 

The Fool reports 20 large real estate firms have filed for bankruptcy by the end of 2020, including two with more than $50 million in assets. In the next five years, CoStar Group predicts there will be a more than $126 billion flash sale of distressed commercial real estate, equating to $321 billion in sales by 2025.

Additionally, data from the Federal Reserve shows commercial property debt increased to a record of $3.06 trillion for the first time during the third quarter of last year, up from $2.2 trillion in the third quarter of 2012, which was a 10-year low.

Brock Cannon, Head of National Loan Sales at Newmark believes the distress created as a result of COVID will last beyond our predicted 5-year growth period. He says, “my team is still working on sales that originated in 2007 and 2008, thirteen years later. We will be working through this distress for at least ten years to come.”

Bid-Ask Spread to Lessen 

Distressed deals in 2020 were also challenged with a large bid-ask spread, a leading indicator of illiquidity of the market. We anticipate that the spread shrinks in 2021, due to lenders having more realistic expectations of below-par sales and increased available capital.

Chris Skinner, author, speaker and expert on banking says the lasting impact will stretch beyond 2021 saying, “it’s not just in the CRE space but in all aspects of society. Most people had exposures to loss in 2020 and they will pass those losses onto the banks. Expect a major downturn and increasing NPLs through to 2025.”

Hotel and Retail Will Struggle to Recover; Office Recovery Uncertain

FitchRatings reports that hotel and retail delinquencies rose to $2.0 billion in December 2020 from $1.5 billion in November. New delinquencies were largely made up of $1.2 billion in hotel loans and $582 million in retail loans. The delinquency report from Moody’s Analytics paints the same picture.

Adam Horowitz, Principal at Lever Capital Partners, shares a different perspective. “Every time there is a downturn in the market, funds are raised with the anticipation of a flood of NPLS hitting the market,” he says.

Research from Real Capital Analytics indicates that CMBS had the highest leverage and market share during the last crisis. This time around, we are seeing higher leverage with direct lenders and banks. However, CMBS is more concentrated in the hotel and retail areas, which will be reflected in deeper discounts on CMBS distressed sales.

Marco Santarelli, Founder and CEO of Norada Real Estate Investments points out that while the commercial space is suffering, residential real estate remains strong. He says “the brick and mortar retail space has suffered the most, but demand for homes, logistics and storage have increased.”

Unanimous Uncertainty and Novel Ideas Around Office Recovery

CBRE predicts that the office sector will recover the slowest from pre-pandemic investment volumes. The cloud of uncertainty around the future of work and office spaces are widely shared across the board, with a general consensus that evolving trends that include remote and flexible working are here to stay.

New York Times editor, Matthew Haag, suggests NYC’s real estate can be positively transformed if office spaces are converted to residential spaces. Data shows that job growth in New York City has tremendously outpaced housing growth, leading to a massive housing shortage. While this would require zoning and density rules to change by the City Council and State Legislature, this is one of many novel ideas presented due to the uncertainty around a return plan to corporate offices.

The report states that only 10% of Manhattans’ 1 million office workers are physically reporting to the office, and filings to erect new buildings dropped by 22% in 2020, the lowest number since 2010.

AI and Technology Will Transform the Way CRE NPLs Are Sold Forever

“The real estate industry as a whole has been very slow to adopt new technology,” Santarelli states. His sentiments are widely shared amongst experts interviewed, confirming a need for broader capabilities of technology platforms to fully meet the increasing demand to manage CRE deals.

The success of lenders, brokers, and CRE firms in a post-COVID world depends on the extent to which their people can perform in remote work environments. Deloitte reports that most CRE companies are unprepared to meet the demand in this wave of distressed debt.

Jim Berry, Vice Chairman and US real estate leader at Deloitte states, “While the pandemic was an eye-opener, we see it as an accelerant of existing trends. It is telling that 56% of CRE respondents to our 2021 CRE Outlook survey said that the pandemic exposed shortcomings in their organizations’ digital capabilities. Only 40% of respondents said their company has a defined digital transformation roadmap.”

It’s clear that digital adoption is not enough – a digital transformation is necessary for firms, brokers, and sellers to keep up with demand and operate efficiently.

Horowitz shares how technology is helping his firm today by saying, “Technology helps with the two main components of our business; who needs capital and where to find it. There are various ways to determine whose loans are coming due, what projects are on the docket for future development, and what assets are currently in default.

On the capital side, technology is helping us determine capital availability, making sure we connect with the right person at that firm, then create a process using technology to close the deal in the most efficient way.”

Technology platforms driven with AI, like Metechi, help fill in the gap to meet this increasing demand. Increasing analytical capabilities coupled with security and transparency will transform the way the market will operate. To find out how you can buy and sell CRE NPLs at scale, schedule a free demo with Metechi today.

About Our Contributors

Brock Cannon serves as the head of national loan sales with the Newmark Loan Sale Advisory Group. Based in the firm’s New York headquarters, Brock focuses on secondary debt transactions on a national basis. Brock’s experience with loan sales is extensive and includes the origination of debt and equity financings, restructuring and modifications of distressed loans, loan servicing, loan sales and investment sales. For more information on how to get on the investor list, speak with Brock here.

Chris Skinner is an author, expert and speaker on banking, finance and fintech. He is the author of the The Finanser blog and chairs the Financial Services Club. He defines purpose-driven banking as more than sustainability or ESGs. He likes to pose the key question: if your company doesn’t stand for something then it will fall for everything. What does your company stand for? 

Trisha Connolly is a Senior Managing Director at B6 Real Estate Advisors focusing on equity and debt transactions for the capital advisory team with clients across the country and a focus on the lower Manhattan territory. Ms. Connolly specializes in commercial real estate financing with over 15 years of experience including loan restructure, term financing, syndicated credit facility, construction financing, acquisition financing and advisory and joint venture equity structures.

Adam Horowitz is the Founder and Principal at Lever Capital Partners. Lever focuses on two types of transactions; large one-off deals for institutional sponsors ($50MM+) and programmatic equity investments for established owners looking to build out a niche platform ($10MM+).

Built-for-Rent Housing is Exploding and Capital is Ready to Deploy

By: Aaron McGinley

The purpose built Build-for-Rent (BFR) market growth chart is starting to look like a hockey stick and LCP is actively speaking with debt and equity capital hungry for deals. A strong market opportunity is emerging and LCP is here to help qualified sponsors capitalize on this sector.

Commercial Developers vs Traditional Homebuilders

Commercial Developers can leverage the scale of their in-house investment management, property management, and development groups to build horizontal multifamily developments. Single family homes will be a new product type for most commercial developers and they will need to have the right contractors in place to get it right. However, what they lack in single family home development experience, they most likely make up for in institutional investment management and large scale project execution. 

Homebuilders have a demonstrated track record of construction and development of single family communities which puts them in great position to capitalize on this new market. They’ll likely need to partner with an established management company or hire a 3rd party manager as they traditionally are merchant builders and not owner operators with a track record of asset and property management.

What are Debt and Equity Providers Looking For?

Equity investors are interested in partnering with commercial developers and homebuilders that show a demonstrated track record of home construction, development execution, and long-term rental management. The investors can either come in as an LP when they feel the sponsor has an existing portfolio or a Co-GP where they need to bring in their development expertise. Investors want to create a portfolio of BFR communities that can be managed like multifamily but with double digit unlevered returns. Market rate yield on cost is variable due to market specific construction costs but expectations are generally higher than for multifamily construction. 

Debt lenders like cash-flowing rental properties and as more people escape the big cities for suburban living, they feel like this asset type will hit the right chord for many people used to choosing between owning a home vs apartment living. You can expect a variety of options for first mortgage debt, including high leveraged stretch loans, mezz, and pref options along with non-recourse facilities available to the strongest sponsors. Expect pricing will be inline with multifamily loans.

We’re in the market right now!

LCP has been tracking this space for a long time and can help you navigate the capital markets to get your project financed. We are talking with sponsors and institutional investors on a daily basis and know who the right groups are to be speaking with and can help guide you to supplement any holes in your presentation or team. LCP’s Build-For-Rent program can arrange programmatic solutions for long term growth in the marketplace. This is an exciting space with lots of future opportunities and we know what it takes to grow your BFR platform.  


How Lenders and Investors are Changing Their Underwriting Assumptions

By: Adam Horowitz

Lever Capital Partners is speaking with lenders and investors on a daily basis and have been hearing that changes in underwriting are at the forefront of their minds. The number one question capital providers are asking is, “In the current post-Covid world, what changes have you made in your underwriting assumptions?”. The conversation is a non-starter if the sponsor has not thoroughly thought through these changes and can’t clearly point to adjustments made in the proforma with a compelling story to back it up. Here are a few of the major underwriting changes we’re requesting from our sponsors (for now) and our recommendations about how to present them to the market: 

  1. Cap Rates – Needless to say there is pricing uncertainty in the market (investment sales volume has dropped roughly 70% in Q2 2020 from the same period in 2019, according to CoStar and RCA Data). Pre-Covid comps are being ignored so it’s important to factor in a conservative premium to appease investors. Recently, we’ve seen value adjustments of 10%+ for multifamily properties up to 30%+ for hospitality, depending on the specific asset. Don’t be shocked when looking at your updated IRRs.
  2. Rent Growth – Underwriting future income streams poses a considerable challenge for most properties without long term leases or credit tenants in-place. Across the board, investors are underwriting untrended rents and factoring in zero rent growth for the next 2-3 years. In rare instances, some markets are projected to have a negative rent growth rate over the next 1-2 years. Where you build / purchase will be heavily scrutinized now.
  3. Exit Cap to Yield on Cost – In regular times we’d typically look for untrended yield on cost spreads of 150 basis points compared to the exit cap rate. The industrial and core multifamily spreads are holding close to those numbers but we’re seeing a much wider spread for all other asset classes. Be prepared to show numbers in the 175-200+ range.
  4. Spec Development – Building spec has always been a challenge, even in the most bullish of times. Office and retail have required a fair amount of pre-leasing even in the early part of this year. But now, given the circumstances, nothing is going to happen unless you are heavily pre-leased with credit tenants in tow. Walking into the lender’s office with a mask and a dream won’t cut it, so start lining up those credit tenants.
  5. Debt Assumptions – The lending world has dried up considerably with some participants leaving the market (debt funds) and others on the sidelines only willing to lend to existing relationships (banks). Overall, leverage has decreased with developments maxing out at 65% and more commonly in the 50-60% range while interest rates spreads have widened, increasing all-in rates. You’re likely going to need more cash, and investors are much more focused on the debt status than ever before.

Without these adjustments, most lenders / investors will take a quick pass. Your ability to identify and edit your original underwriting shows you’re adapting to the new normal, have an understanding of what metrics had to change and are able to craft a workable solution around the modified numbers. To come off as a sharp sponsor and on top of the market, we recommend having your changes ready to present by (1) preparing a doc that outlines your changes that you can share with investors and lenders and (2) crafting a compelling story for the asset and market that you can talk through.

These are the first things we ask for when looking at new deal packages. If you follow the above rules you might be one of the fortunate few to get a new loan or investor equity. We can help when you’re ready to “turn and face the strange” as Bowie said. We’re home working in our PJs waiting for you to call.

Which of the 4 Food Groups are Safe to Eat this July 4th?

By: Aaron McGinley

There have been many changes to the commercial real estate sectors largest food groups since Covid-19, some are temporary and some will be here to stay. Below we share some statistics and our thoughts on which property types you should devour and which ones to avoid as we hit this very unusual July 4th weekend. We’ll list the sectors from 1-4, ranked as the number of turns left on the BBQ until it’s ready to eat.

Multifamily (1 turn left)

Multifamily is poised to recover better than other sectors for a few reasons. The sector had strong momentum going into the Covid crises and as heard on a recent webinar, “you can’t sleep on the internet.”  Per CBRE, vacancy is expected to rise 3.1% from from Q4 2019 (4.1%) to Q4 2020 (7.2%) but fully recover by the end of 2021. Similarly, rents are projected to drop 8.1% in 2020 and fully recover by Q1 2022.  

However, that doesn’t mean there won’t be changes.  People will live where the jobs are and the changing landscape of the “work-from-home” era might affect the long-standing trend of people moving closer to big cities.  We think the so-called 18-hour cities that have job growth, lower taxes, less traffic, and a cost of living that provides the ability to work from home will benefit more than the largest US cities.

Industrial (1 turn left)

Industrial is another palatable menu option.  Although COVID is suppressing the macroeconomy and may experience a brief downturn through 2020, the shift toward social distancing has encouraged e-commerce spending, providing some protection for the industrial sector over the next few quarters. Over the long term, it’s expected that e-commerce will largely maintain its gain in retail share and businesses across the economy will look to carry larger amounts of inventories, boosting industrial demand.

From Lever Capital’s perspective, strong sponsors who can pre-lease or pre-sell industrial will be one of the most attractive asset classes for both debt and equity markets given the strength of e-commerce spending. Everyone will try to enter this space without the knowledge or relationships to get these deals done. We’ll encourage new entrants to partner with experienced groups.

Office (2 turns left)

Office still needs a few more turns on the BBQ before it’s fully cooked.  However, according to CBRE, despite the staggering rise of unemployment and negative GDP figures, 9 of 10 respondents to a Bureau of Labor Statistics survey considered themselves on a temporary layoff.  The office sector benefited from a fast adoption of work-from-home policies. Looking forward, the U.S. office sector most likely will not be able to go through the current crisis unscarred. New office densities and the magnitude and duration of work-from-home regimes is still not ready to eat.

It’ll take a while to determine the level of hurt this sector will take as tenant leases roll over the next year. The opportunity here exists on the distressed side, having a tenant lined up to occupy a vacant building, or repurposing to industrial.

Retail (Overcooked)

The impact of COVID-19 has put additional pressure on the retail industry. According to CBRE, the overall availability rate is expected to rise and reach its peak in Q1 2021 at 12.5%, or 380 basis points (bps) higher than the Q1 2020 level.  Rent is forecasted to reach its trough at Q2 2021, with an 8.5% decrease compared to Q1 2020. This is a challenging time for retailers as many close their stores and more retail space becomes vacant or converted to other property types.

Lots of our friends and clients admit that the country was already “over retailed” and given the shift to e-commerce for some products that previously were dominated by brick and mortar it’ll feel even more-so.  However, with retail sectors being impacted so differently, their recoveries will have different trajectory paths.


The U.S. Real Estate sector will look different this 4th than in years past and some food groups appear to be more appetizing than others.  Multifamily and industrial are poised to recover in short order, while office has some cooking to do and retail has already been burnt from sitting on the grill for too long and may need to be replaced with a fresh dog.

We’re Here to Help

Lever Capital Partners is a boutique capital intermediary with deep relationships in the debt and equity capital markets for commercial real estate. To learn more about our services or if you have questions about capital, reach out to us and we will evaluate your project.

Seeking Positive CRE News? I’d Click On That

By: Adam Horowitz, Principal

There’s been a lot of change recently and commercial real estate has not been kept out of the fray. Sure, there are some obvious losers (retail and hospitality) and winners (distribution and data centers) that we can see a mile away, but what about the ones harder to find. Here are 3 less obvious sectors:

Office – Not all jobs can be done remotely, and many firms will still favor the social and collaborative benefits which are fostered through in-person working relationships.

Manufacturing – Supply chains could be re-focused domestically, as the outbreak caused global disruptions. The thought is that the industry would be better equipped to handle a similar pandemic in the future if more operations were located in the U.S.

Healthcare – This sector is expected to grow 10% to 16% annually over the next decade as the entire local, county, state, and national healthcare facilities infrastructure and platform are reshaped, integrated and expanded as society mends and strengths as a result of a pandemic like the world has never seen.

Commercial real estate is a slow moving animal, the Manatee of the real estate market some might say. The pandemic has pushed the envelope of how fast CRE markets can shift creating some havoc in certain sectors and opportunities in others.

Short term there will be a quick reaction to run away from office creating plenty of distressed opportunities in this sector, with some assets bouncing back fairly quickly. I don’t expect significant new development without strong pre-leasing from credit tenants nor do I think 50% of the workforce will be working from home in the next year or two. The lack of new supply in the coming years will provide some good deals to get in when the sector is in panic mode.

Industrial in general has been one of the hottest sectors in the commercial real estate business for some time now, but mostly on the distribution and energy fronts. What might be less apparent is what’s happening in the manufacturing space. There will be a small but significant increase in manufacturing as companies concerned about supply chains and their ability to weather future global issues decide to keep more of the work stateside.

Putting aside the challenges with Skilled Nursing at this time, the rest of the Healthcare sector ranging from low acuity products like Independent Living and Assisted Living, to higher acuity such as Memory Care and Hospice will continue to grow. Ancillary property types including Medical Office Buildings and Biotech will follow suit as well. Most of these assets are operation intensive endeavors and therefore have high barriers to entry.

There are sunny times ahead if you can get into the right sector, at the right time. Some sectors will continue to thrive. There will be some new hot property types to consider and also lots of distressed assets coming down the pike if you can gain access to them and have the capital to quickly close.

We are speaking with the markets daily and can tell you that capital is available for both assets that are doing well during this downturn and opportunistic deals in more challenging sectors. The real opportunity will come as deals fall apart for weaker sponsors allowing stronger ones to come in with cash or great capital relationships to pick up the pieces at a discount.

To learn more about these trends and how they might affect your business, or if you have questions regarding a commercial property, reach out to us and we will evaluate your project.


What to Consider When Restructuring in Times of Distress

By: Aaron McGinley, Director

In light of the current economic situation, property investments may experience distress and there are certain considerations that should be taken into account.  First, is to stay calm!  Owners, lenders and investors have weathered uncertain times before and this too shall pass – this may even present an opportunity for some to grow. In coordination with experienced advisors, owners and lenders here are 3-steps to identifying the right path forward:

Step 1: Review the existing deal and investment plan 

Before making any changes, it’s important to understand the structure of the deal in place.  Lever Capital Partners is constantly reviewing and negotiating deals on behalf of clients and can help make sense of restructuring a deal.  Who are the parties involved and what are their interests and motivations?  Review the partnership and loan docs to clearly define rights, consents and obligations.  Who has decision making authority and what requirements need to be met in order to be in good standing?  Focus on major covenants such as recourse obligations, cash controls and consents required for changes to the capital structure or operations. 

Step 2: Identify changes, immediate needs and reset goals

What changes are temporary vs permanent?  Lever Capital Partners spends a significant amount of time in the bankruptcy and workout world, and can quickly identify problems that need to be addressed.  Define the immediate cash needs to fund carrying costs and service debt.  Identify what short-term and long-term targets need to change. Run sensitivity analyses to understand the impacts these revised assumptions have on investment returns for each party.  Based on this information, begin to reset expectations for the asset and redefine short- and long-term goals. 

Step 3: Develop a plan and come to a resolution with the right parties involved 

At this point, a realistic plan can be made.  Bring all parties to the table, along with expert advisors such as Lever Capital Partners, who can help facilitate a dialogue and implement changes. The goal is to optimize alignment of interest among all parties and come to consensus about how to move forward collectively.  From an operations standpoint, investigate creative solutions for the property and alternative uses that could support the asset in the short term. Financially, there may be a simple solution such as short-term capital, raising equity or bridge financing or a possibly a longer-term workout solution that satisfies the lender and existing investors.

This is not the first period of distress that the commercial real estate industry has seen, and there are tried and true ways to evaluate whether to restructure an asset.  With the right team in place and the right advisors such as Lever Capital Partners, problems caused by current distress in the market can be solved and, in fact, may present an opportunity to grow. 

We’re Here to Help

Lever Capital Partners is a boutique capital intermediary with deep relationships in the debt and equity capital markets for commercial real estate. To learn more about our services or if you have questions about recapitalizing a property, reach out to us and we will evaluate your project.

Why You Want to Raise Equity Privately, but Should Consider Other Options

By: Adam Horowitz, Principal, Lever Capital Partners

Private equity sounds awesome and sometimes it actually is. When sponsors are building out their capital stack they often have a need for outside equity to compliment their own capital. They then have to decide if they want private partners or an institutional one. There are pros and cons of raising equity from private sources vs institutional ones and we’ll try to provide some of the biggest factors you should think about.

Equity from private sources certainly can have some upsides. Private sources will typically allow for the general partner to have greater control of the project, more favorable deal splits and less complicated partnership terms. With all of those positives, why would anyone take on an institutional partner you might ask. Well, if you need more capital than your private sources have lying around, don’t want to spend half your day raising capital, or want a partner that’s an expert in commercial real estate, then maybe finding an institutional partner is for you.

As we all know, time is money, and if you want to grow your business, work on bigger deals, and not spend your days capital raising, then you’re better off with an institutional partner. Making the transition isn’t always an easy one. The required reporting is much greater and you’ll be asked a lot of questions regarding your project or business model that you hadn’t thought of previously. Having answers to those difficult questions when the credit markets tighten will benefit you as you’ll have a professional partner that understands how to navigate the difficult waters.

Is having “control” important? Of course it is. Loss of control is always a big contender for those contemplating going the institutional route. Control rights typically come in to play only if you run into a problem with the project and your partner has a different vision than you. The operating agreement clearly spells out all the control rights and there will be a buy/sell agreement giving everyone a fair shake when it comes to staying in or exiting the investment. 

What about the complicated IRR hurdles? OK, so you’ll have to break out your Excel modeling skills here or ask the analyst on your deal to step you through the model. These IRR hurdles usually are only going to come into play once a capital event, like a sale or recapitalization takes place so it’s not like you’re going to have to run the formulas daily.

Everything seems great until it doesn’t. When problems arise, as they are now, you want an institutional partner that knows how to navigate troubling times. This won’t be their first rodeo when dealing with economic uncertainty. They’ve been there before and can work with you to figure out the best plan of action going forward. Private investors scare more easily and would be more likely to try and pull their money out of a deal rather than backing your plan and coming out the other side in one piece.

Sometimes you’ll find a perfect investor where you get all the benefits with none of the downsides. When that happens, take it and be grateful. For everyone else, it might be time to look at institutional partners to see if they’re a good fit for your next project.

We’re Here to Help

Lever Capital Partners can guide you through the process of determining which partner is best for you. To learn more about this topic, or if you have questions regarding other financial needs, don’t hesitate to reach out to us.