Author Archives: levercp

Unlocking Investment Potential and Asset Diversification: The Rise of Suburban Mixed-Use Developments in a Dynamic Real Estate Landscape

by: Kyle Tran

In the dynamic world of real estate investment, suburban mixed-use developments stand out as a key opportunity for investors. Catering to the changing needs of a workforce where 12.7% are working from home and 28.2% engage in hybrid models (TenantCloud, 2023), these developments offer a unique blend of residential and commercial spaces. These developments are not just about blending spaces; they are about maximizing utility and profitability. With diversified revenue streams, they present a robust platform for investment. The presence of on-site retail and recreational amenities enriches the living experience and enhances the value of these developments, making them multifaceted and secure investment options.

The resilience of mixed-use developments is particularly noteworthy when considering their performance during and after the global pandemic. In the wake of the pandemic, these developments have shown remarkable resilience, attracting the attention of a diverse array of investors. This includes interest from EB-5 investors, private equity firms, and Real Estate Investment Trusts (REITs), as noted by Kirk in 2022. This resilience is partly attributed to their operational efficiency, which stems from a unique mix of residential, commercial, and retail elements. This blend not only optimizes operational costs but also creates a variety of revenue streams, further enhancing their appeal in the ever-fluctuating real estate market.

In addition to their resilience and diversification, mixed-use developments also stand out in terms of financial performance. Research by JLL indicates that office spaces in mixed-use developments command higher rents – by about 24.7% – compared to those in nearby submarkets. Furthermore, these properties often have higher market valuations, with lower capitalization rates by approximately 75 basis points than prime assets in the broader real estate market (Kirk, 2022). This economic advantage underscores the appeal of mixed-use developments in the current investment landscape.

Hudson Yards in New York City is a perfect example of a successful mixed-use development. This project has transformed over 28 acres of underutilized land into a thriving urban space. It boasts more than 18 million square feet of commercial and residential space, including over 100 shops, a range of restaurants,  approximately 4,000 residences, and state-of-the-art office towers. The transformative development has rejuvenated a previously dormant area of Manhattan and contributed to creating a dynamic environment that merges modern living, work, and leisure. Its design emphasizes sustainability and a community-centric approach, making it a landmark project in urban development.

Mixed-use developments were initially challenging due to the complexity of integrating multiple asset classes into one, this made financing, permitting/approvals, and valuation quite tricky. However, developers and capital providers have grown to love mixed-use assets as it allows them to mitigate risk through further diversification and operational efficiency. Data from JLL (2023) reveals that these properties maintain lower vacancy rates, even during market fluctuations. Major metropolitan areas like Chicago and San Francisco demonstrate this resilience, showing lower vacancy rates compared to central business districts.

The broad tenant base in mixed-use developments contributes significantly to financial stability. For example, if the retail sector faces a downturn, the residential or office components can continue providing steady cash flow offsetting significant loss. This balance across different tenant types ensures a consistent and resilient income stream, as highlighted in a 2023 report by JPMorgan. To summarize, mixed-use developments represent a safe and attractive investment opportunity in the current market. Their ability to adapt to changing work models, combined with their financial stability and market resilience, positions them as a strategic choice for investors.

At Lever Capital Partners, we specialize in complex financing for these kinds of developments. With over 1,000 capital provider relationships we are able to procure tailored financing solutions that cater to the unique needs of mixed-use assets and many others. We work with our clients to curate the most efficient capital stack for any commercial real estate project nationwide, allowing them to focus on what they do best. Contact Lever Capital Partners today to explore the potential of mixed-use developments in your portfolio and the financing you’ll need to get your next project across the finish line.

References:

https://www.wealthmanagement.com/development/post-pandemic-boom-mixed-use-mega-projects-underway https://finmodelslab.com/blogs/rising-capital/mixed-use-development-rising-capital https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/the-growing-popularity-of-mixed-use-properties https://communityimpact.com/dallas-fort-worth/plano/development/2022/07/18/mixed-use-developments-look-to-transform-planos-landscape/ https://montgomeryplanning.org/tools/research/real-estate-and-land-use/mixed-use-study/ https://s3da-design.com/the-mixed-use-future-urban-development-in-2023-and-beyond/

The Medtail Revolution: Transforming Retail Real Estate

by: Cody Nakatsukasa

Unlocking a promising solution for the commercial real estate sector, medical-retail real estate, commonly referred to as ‘Medtail’, stands poised to counter the prevailing decline in retail developments. The industry is now turning its gaze towards this innovative approach, asking the pivotal question: Can Medtail be the game-changer we desperately need? This specialized asset class represents the intersection of medical office specialty use and retail commercial real estate. These developments now feature more national credit tenants and larger-scale urgent care facilities, transitioning from the smaller mom-and-pop dermatology and optometry-type clinics that once occupied the majority of these spaces. With retail becoming such a distressed asset class in a post-COVID era with the rise of E-commerce alternatives, there are questions as to how to keep demand for retail space up. This specialized asset could be an answer.

Prior to the global upheaval caused by the pandemic, the retail real estate market had been witnessing a noticeable decline in available capital, signaling a departure from the robust funding prevalent in the early/mid-2000s. This shift, marked by waning interest in conventional retail spaces like enclosed malls and shopping centers, had already begun to unfold. Against the backdrop of this challenging retail climate, the dynamics of financing for retail developments, renovations, and acquisitions faced constraints, yet still served as a stable product type for investors.

However, as the pandemic accelerated the shift towards E-commerce, traditional retail spaces faced unprecedented challenges. According to the 2023 United States Census Bureau Quarterly E-Commerce sales report, E-commerce sales accounted for around 15.6% of total sales in the third quarter of 2023 (5). Foot traffic plummeted, with shoppers preferring online, no-contact alternatives, leading to store closures and bankruptcies. This turmoil had a profound impact on the perception of retail as an investment, turning many lenders and investors more cautious. This was coupled with the recent hikes in federal interest rates to combat inflation, making lending terms less favorable. Vacancy rates in retail markets across the country have skyrocketed, with one of the largest jumps being in Dallas, increasing vacancy by around 21.31% according to the Federal Reserve Bank of Atlanta (3). Other major markets including Los Angeles, New York, and Philadelphia all saw around an 8-10% increase in retail vacancy.

‘Medtail,’ the fusion of medical office and traditional retail, is rapidly gaining prominence as it reshapes the retail landscape. It offers resilience in the face of E-commerce, as healthcare services remain immune to digital disruption, ensuring consistent demand and foot traffic. The inclusion of healthcare tenants diversifies the tenant mix, providing stability and financial predictability for property owners. These tenants are also largely part of a demographic of medical practice known as traditional alternative medicines, including practices such as massage, chiropractics, and meditation, an industry that has grown in employment by double, increasing from 60,000 to 120,000 employees in the space according to the U.S. Bureau of Labor Statistics (1). Adaptive reuse of vacant retail spaces for ‘Medtail’ purposes addresses oversupply issues while catering to the growing need for accessible healthcare facilities. 

Furthermore, ‘Medtail’ fosters community-centric experiences, creating destination shopping hubs and appealing to investors seeking reliable, long-term income streams. According to NAIOP, “The era of monumental health care facilities (mega-hospitals and sprawling campuses) is coming to an end. They are not consumer-friendly and tend to be an unpleasant clinical experience” (4). Smaller ‘Medtail’ offices and community-centric projects offer a more personal and less institutional feel to the patient experience that has become sought after in a post-digital world.

Looking ahead, the future of capital availability in ‘Medtail’ real estate is poised for growth. A compelling real-world example of such potential is evident in Black Salmon & The Allen Morris Co.’s ambitious new development plan in Highland Park Miami. This $1 billion, 7-acre mixed-use project, announced at the end of September, aims to expand the Miami Medical District (6). Encompassing 500,000 square feet of medical office/retail, a hotel, residential units, and ground-floor retail, the joint venture seeks to establish a walkable medical community. Projects like this underscore the integration of Medtail into diverse product types and highlight its evolving role within urban ecosystems.

Drawing on our extensive expertise in the retail sector for both value-add and ground-up development, we are able to procure the best available capital solutions to suit any Medtail project. Empower your investment journey by partnering with Lever Capital Partners and allow us to leverage our network and experience to find the capital for your next real estate project.

References:

https://www.cushmanwakefield.com/en/united-states/insights/medtail-when-healthcare-meets-retail https://agentblog.nationwide.com/commercial-insights/general-industries/the-future-of-commercial-property-considering-the-covid-19-pandemic/ https://www.atlantafed.org/blogs/macroblog/2021/06/01/covid-lasted-longer-than-expected-what-happened-to-retail-space https://www.naiop.org/research-and-publications/magazine/2019/spring-2019/business-trends/how-health-care-and-wellness-properties-can-anchor–mixed-use-developments/ https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf https://therealdeal.com/miami/2023/09/25/black-salmon-allen-morris-plan-miami-health-district-project/

The Rise of Industrial Outdoor Storage: CRE’s Latest Gold Mine

by: Cristina Sosa Lindo

As the world rapidly evolves, we see new concepts being born, and such is no exception for the industrial landscape. IOS, Industrial Outdoor Storage, is a relatively new commercial property type in the real estate world that grew as a result of the industrial boom the world experienced a few years ago when companies struggled to find proficient storage options (1). IOS refers to the practice of effectively using outdoor (industrial) space to mainly store vehicles, materials, and large pieces of construction equipment. With this said, they often partake as container storage and truck terminals. Most are sized between 2 to 10 acres, with a small building in the middle deemed for tenant’s use. While their look might not sound appealing to investors initially, their high returns lure them back to the deal (2). Their unattractive look, yet incredible returns, have made them proudly gain the name “a beautiful ugly duckling” by Green Street. They consider that “Industrial Outdoor Storage sites in infill submarkets are priced to deliver risk-adjusted expected returns that are superior to those available on most other commercial real estate property investments, including “traditional industrial.” (Green Street)  

The Industrial Outdoor Storage market has witnessed a remarkable surge in demand, effectively meeting the storage needs across diverse sectors. However, despite its rapid growth, the market remains underdeveloped, thus presenting a tremendous potential gold mine for investors (2). In a comprehensive report by Commercial Search, the valuation of the IOS market was conservatively estimated to exceed $200 billion, with continuous new investors and developers attracted to it. Aside from this, Green Street analysis highlights that the IOS is a “fragmented” industry where a considerable portion of its supply is owned and managed by conventional operational methods or individual proprietors, not part of big institutions or platforms. This portrays a compelling opportunity for developers and investors seeking to enter the market and capitalize on its growth trajectory. (1)

The widespread success of IOS can be attributed to various factors. Yet, most of it is attributed to its unique set of tenants and how they are responsible for directly impacting the supply chain. According to Green Street, the transportation and logistics sectors are the primary users of these spaces. Third-Party logistics companies strategically leverage the prime locations of IOS units, which are typically near highways, ports, and airports, to capitalize on transportation cost savings. By taking advantage of these convenient locations, logistics companies can reduce transportation costs and allocate more funds to renting IOS units, thus enhancing the supply chain operations and making IOS an influential factor in improving its overall effectiveness. (1) 

Due to many favorable factors, Industrial Outdoor Storage sets itself as an up-and-coming investment option. It portrays a compelling case for investors or developers seeking profitability with easy and cost-effective maintenance, consistent cash flows, low capital expenditures, and rapid growth in response to increasing storage demands. (3) However, its most enticing attribute is its relative newness in commercial real estate. IOS is the perfect opportunity for investors and developers looking for something new to build to capitalize on its current upward trajectory and position themselves for long-term success. Now is the time to take the risk and invest in this thriving sector. 

Here at Lever Capital Partners, we thrive on embracing risk and actively seeking out innovative investment opportunities. Our extensive experience in financing successful developments has allowed us to identify promising ventures, and we believe that Industrial Outdoor Storage presents an exciting opportunity for growth and profitability. We are excited to offer our support and financial backing for your development in IOS, empowering you to achieve new heights of success. With our expertise and resources, you can confidently embark on this journey, knowing we are fully committed to your project’s triumph. Contact us today, and let’s take the first step toward a rewarding partnership.

References:

https://greenstreet.com/insights/blog/industrial-outdoor-storage-a-beautiful-ugly-duckling https://www.commercialsearch.com/news/industrial-outdoor-storage-continues-to-grow/ https://rebusinessonline.com/stashing-success-the-growth-of-industrial-outdoor-storage/

From Dream Destination to an Oversupply in the Sun Belt

by: Connor Bobis

In the years preceding the widespread economic shutdown in 2020, the Sun Belt region experienced a stable demand for residential real estate that continued to grow even amid the pandemic. Throughout 2020 and 2021, cities in the Sun Belt, including Phoenix, Houston, Dallas, Austin, and Atlanta, collectively saw a population increase of 300,000 residents from mid-2020 to mid-2021 (1). This ongoing population growth transformed these major city hubs in sunny southern cities into attractive investment destinations, enticing both investors and tenants with the glimpse of favorable returns.

Fast forward a few years, a major ongoing trend shaping the real estate landscape in 2023 is the hybrid work model, which notably impacted the surge in residential leasing activity during the pandemic. The hybrid work arrangement had an evident effect on two property types: office and residential spaces. Despite these broader trends, the Sun Belt region saw robust rent growth in residential real estate since 2013 (2), solidifying its reputation as an appealing relocation for various tenants seeking remote work opportunities. Notably, apartment leasing rates in 2021 surpassed 2020 figures by 26%, although they didn’t fully reach pre-pandemic 2019 levels (3). This uptick in demand appeared promising to investors in multifamily units, leading to increased construction activity as the pandemic waned. However, the success of these new residential units entering the market hinges on stable demand within the Sun Belt throughout 2023 and 2024.

The evolving investment landscape in real estate has been shaped by population growth, heightened leasing activity, and the increased demand for residential units following the pandemic. As a result of these market dynamics, the number of development projects multiplied, responding to the demonstrated demand for residential spaces in Sun Belt cities as the economy emerged from the pandemic. In Q1 2023, CoStar data revealed an almost 4% rise in vacancy rates compared to Q1 2022. Despite this increase in vacant units, demand for apartment units from 2022 Sun Belt projects under construction continued to grow in 2023 (4). The success of these new units hinge on property values maintaining their integrity within existing lending parameters and prevailing interest rates.

Looking ahead to the remainder of 2023, the pressure to preserve cash flows against rising interest rates is mounting. Fluctuating cap rates could lead to the postponement of construction projects. Already, new construction in the Sun Belt surpasses that of 2022, and the vacancy rate for multifamily properties is on the rise. This trend is exacerbated by population growth struggling to match the influx of new residential units to the market. Ultimately, tightening finance terms amongst rising vacancy rates and further compressed returns could create an unfavorable investment environment for residential projects. Additionally, this will grow the need for alternative investment avenues such as REITS, crowdfunding, and gap financing, which will help alleviate the pressure of loan payments on potential profitability. 

For instance, the national average cap rate for multifamily units stands at 5.1%, while major Sun Belt cities are projected to decrease to 4.8% in 2023 for Dallas-Fort Worth, 4.0% for Phoenix, and 4.3% for Las Vegas (5). Despite these challenges, resilient returns for Sun Belt real estate investments are anticipated, contingent on property values remaining steady and rebounding to pre-pandemic levels. Nonetheless, the influence of vacancy rates on the newly introduced residential real estate supply by the close of 2023 remains  pivotal, and the profitability will significantly rely on the established lender relationships for obtaining essential capital at favorable terms.

Leveraging 14 years of expertise, the Lever Capital team specializes in facilitating connections between clients and lenders across the capital stack and in unique scenarios. Whether the property is in the Sun Belt or not, commercial real estate projects often encounter complexities upon completion. Allow Lever Capital Partners to lighten the load with our strong relationships across the entire country to secure the capital necessary for your next real estate project. 

References:

https://www.nytimes.com/2022/03/24/us/census-2021-population-growth.html https://www.clarionpartners.com/insights/sun-belt-apartments-multifamily https://arbor.com/blog/sun-belt-apartment-transaction-activity-post-covid/ https://www.costar.com/article/1837458446/the-supply-and-demand-paradigm-continues-to-shift-in-the-sun-belt https://base.berkadia.com/wp-content/uploads/2023/01/Berkadia-2023-Forecast-National-Apartment-Research-Report.pdf

Rising Demand for Spec and Built-to-Suit Developments in Northern Nevada (TRIC) and Las Vegas

by: Michael Marchese

In recent years, the demand for speculative (spec) and build-to-suit developments has witnessed a significant surge in both northern Nevada, particularly the Tahoe Reno Industrial Center (TRIC), and the vibrant city of Las Vegas. The growth can be seen in the increase in professional sports teams moving and creating a franchise in the city of Las Vegas like the Las Vegas Raiders, Golden Knights, Aces, and soon to be the A’s. This growing trend can be attributed to various factors that make these regions highly attractive to businesses and investors. From a favorable business environment to strategic locations and the diversification of industries, the appeal of these areas is attracting companies seeking to establish a strong presence and capitalize on their potential for growth.

Nevada’s strategic location in the western United States makes it a prime hub for logistics, distribution, and manufacturing operations. The state’s proximity to major markets such as California, the Pacific Northwest, and the Southwest enables businesses to efficiently serve a wide customer base. This advantageous location reduces transportation costs and allows for faster and more convenient supply chain management. A key component to Nevada industrial is the Tahoe Reno Industrial Center (TRIC), located in northern Nevada. The TRIC is one of the largest industrial parks in the world. Ample land availability, and supportive business environment make it an attractive destination for businesses. TRIC’s expansion is expected to continue, attracting more companies and driving further economic growth in the region. The rapid growth of e-commerce will continue to drive the demand for industrial spaces in Nevada. As online shopping continues to become more prevalent, companies will require strategically located distribution centers and fulfillment facilities to ensure efficient last-mile delivery. 

Before the recent growth and development in Nevada’s industrial sector, capital availability was relatively limited compared to the present situation. Historically, Nevada’s economy heavily relied on sectors such as gaming, tourism, and mining, with less emphasis on industrial development. As a result, industrial capital investment was not as prevalent or substantial as it is today. Unlike the past, lenders and investors see the potential for attractive returns on investment, increasingly allocating capital to support the growth and development of Nevada’s industrial landscape. Traditional banks will likely continue to be a significant source of capital for industrial projects. As the industrial sector in Nevada continues to grow, banks may become more familiar with the unique needs and potential of this market, making it easier for businesses to secure financing. Institutional investors and REITs may show greater interest in acquiring and developing industrial properties. These entities can provide substantial capital for large-scale industrial projects and offer investors opportunities to participate in the industrial market’s growth through real estate investments.

Our team at Lever has cultivated strong relationships with a diverse network of lenders, allowing us to provide access to a wide range of debt and equity partners. One of our offices is located in Las Vegas, Nevada, giving us the knowledge and experience to understand the specific financing requirements associated with these projects in the state of Nevada. Our founder, Adam Horowitz, is on the Nevada Mortgage Advisory Council, a state appointed commission advising on mortgage related issues. Whether you are seeking debt financing, equity investment, or a combination of both, we will work closely with you to identify the optimal capital terms and secure the necessary funding for your industrial project. We are ready to leverage our knowledge, experience, and network to help you secure the best financing options and support your success in the Nevada industrial market.

References:

https://www.nnbw.com/news/2022/oct/24/industrial-park-tahoe-development-at-reno-tric-nnb/ https://www.rgj.com/story/news/local/mason-valley/2020/06/04/zoning-change-approved-large-lyon-county-industrial-park/3145074001/ https://www.nnbw.com/news/2023/may/03/record-amount-of-industrial-development-underway-i/

From Crisis to Opportunity: Investing in the Rebounding Hospitality Industry

by: Ethan Ritz

The emergence of COVID-19 and the pandemic that followed created a ripple effect that impacted nearly all industries in the economy, specifically hospitality. 2020 represented the worst year in recorded history for United States hospitality with unsold rooms per night reaching an excess of one billion dollars surpassing the prior peak of 786 million during the 2009 recession (1). While the economic consequences of the pandemic still linger, the hotel industry is steadily making a comeback. Three years removed from 2020, with the demand for travel increasing rapidly and a surge in hotel construction projects ensuing, hospitality investment has become a bullish investment choice. 

In the United States, hospitality performance has already exceeded the levels attained prior to the pandemic. According to the U.S. Travel Association, travel spending totaled $93 billion in February 2023 which is 5% above the levels earned in 2019 (2). Furthermore, since July 2021, average daily room rates surpassed comparable 2019 levels in every month but one (January 2022 missed by $0.35) (3). This drastic change is directly correlated to the sharp increase in the demand for travel. In a study by Destination Analysis that involved 4,000 Americans answering about their budget prioritization, domestic leisure travel took the top spot, with 35% of American travelers saying that it will be a high or extremely high priority in their household spending this year. This beat out restaurants (32%), education (24%), home improvement (21%), clothing & accessories (20%) and entertainment (18%) (4). In addition, a study by Oxford Economics stated that 89% of global business travelers wanted to add a private holiday to their business trips in the next twelve months (5). It is clear that regardless of the type of traveler, the demand for travel has significantly risen and become a priority purchase for a large portion of Americans. Due to this, current investment in the hospitality industry when prices are still low could prove bountiful. 

As demand for travel continues to rise, the construction of the hotels used to host these eager travelers has also moved in a similar direction. At the end of 2022’s fourth quarter, the U.S. construction pipeline was up 14% by projects and 12% by rooms year-over-year, according to Lodging Econometrics. 2022 saw new project announcements up 35% year-over-year and construction start-ups increasing by 36% year-on-year (6). In particular, two cities, Dallas and Atlanta, which have become two of the hottest spots for investment, are leading the way in hotel construction. At the end of the fourth quarter of 2022, Dallas had 176 projects with 20,790 rooms and Atlanta had 145 projects with 18,100 rooms (6). In terms of hotel developers, the Marriott, Hilton, and Intercontinental groups were the three largest companies in the fourth quarter of 2022 in terms of projects and rooms with the Marriott constructing 1,490 projects with 180,113 rooms, the Hilton constructing 1,378 projects with 154,790 rooms, and Intercontinental constructing 789 projects with 78,951 rooms (6). Given these key performance indicators from the fourth quarter of 2022, for investors interested in the hospitality industry, equity should be considered for allocation in Dallas and Atlanta under projects managed by the Marriott, Hilton, and Intercontinental. Furthermore, hospitality construction has been thriving throughout the U.S. under a variety of developers, so any investment nationwide in this industry is likely to be successful. 

However, in spite of these positive trends for hospitality investment, the industry is also facing increased speculation due to rising interest rates and the recent collapse of SVB bank. The federal funds rate currently sits at 4.83%, which is significantly higher than the rate of .33% from a year ago today (7). As the interest rate continues to rise, investors have begun focusing less on hospitality investment due to its growing costs. In addition, the recent collapse of SVB bank has caused uncertainty within the industry, as the bank was a major player in financing hotel projects with over $2.6 billion dollars worth of loans in commercial real estate (8). This has led to banks becoming warier to lend money into hospitality and to increased caution from potential investors. Unless the Fed gradually decreases its rate, there is the potential for a halt in hospitality construction. In turn, this potential halt in construction could create an undesirable market space for investors. As such, while the hospitality industry still remains an attractive option for investors, caution should also be taken given these recent events.

Investment in hospitality will always remain a high-risk, high-reward decision. The end of the pandemic represents a time period where that level of reward has never looked more appealing. Even with rising interest rates and the SVB bank collapse, due to the pent-up demand for travel and the rise in new hotel constructions, the hospitality industry is poised for a breakthrough in profitability. 

References:

https://www.smartcapital.center/news/2021/05/20/is-it-worth-investing-in-the-hotel-markets-post-covid-19/ https://www.ustravel.org/research/monthly-travel-data-report https://www.pwc.com/us/en/industries/consumer-markets/hospitality-leisure/us-hospitality-directions.html https://www.destinationanalysts.com/blog-the-state-of-the-american-traveler-in-march-2023/ https://www.ahla.com/news/report-hotels-continue-moving-toward-recovery-2022#:~:text=Hotels%20lost%20a%20collective%20%24111.8,projected%20to%20represent%20just%2043.6%25 https://www.matthews.com/the-collapse-of-svb-and-its-impact-on-cre/ https://www.newyorkfed.org/markets/reference-rates/effr https://www.bdcnetwork.com/us-hotel-construction-pipeline-14-close-out-2022

The Emergence of Student Housing as a Lucrative Asset Class

by: Ori Nozar

Over the past few years, student housing has emerged as a distinct asset class, separating itself from the multi-family sector. This shift is evident in the rise of multi-billion-dollar REITs and funds devoted exclusively to investing in student housing. Just this past year, Blackstone acquired American Campus Communities, a student housing REIT, for $13 billion (1). The popularity of this asset class is due to the consistent growth in university enrollment from both domestic and international applicants since the great financial crisis (2). In 2022, student housing experienced one of the highest appreciation, with rent growth increasing by double digits, providing the groundwork for it being the most attractive investment option on a risk adjusted basis.

Due to the pandemic, the uncertainties faced by other asset classes such as retail and office have led commercial real estate investors to focus on student housing and multifamily investments as people will always require housing. Moreover, recessions often result in increased university enrollment, as laid-off employees seek further education to improve their job prospects. Student housing investments offer unique advantages such as the ability to capture current market rents through one-year lease cycles and minimizing credit losses through guarantor requirements.

The value of a student housing property is heavily influenced by its proximity to the university, the amenities it offers, and the availability of housing near the campus (3). While flagship universities continue to expand, smaller institutions in the Midwest and Northeast are struggling to maintain enrollment levels. Some state university systems are consolidating smaller campuses into larger regional ones, such as in Wisconsin and Georgia  (4). Real estate investors should be cautious of public universities’ capacity to use eminent domain and increase dormitory supply, potentially decreasing market rents. Rising rates have impacted transactions in Q4 2022 across all asset classes, leading to a cap expansion and causing sellers to be reluctant to sell at the prices buyers are willing to offer (5).

Student housing deals enjoy widespread support from various capital providers including banks, credit unions, and private capital due to their resilience. In 2022, transactions reached an annualized total of $18.9 billion, nearly doubling the previous year’s high (6). Despite rising interest rates, most lenders and capital providers are likely to continue financing student housing deals in 2023. However, loan-to-value ratios across the board have decreased compared to previous years and financing for ground-up developments came to a screeching halt.

In areas with student housing supply shortages, operators can significantly raise rents and capitalize on increased appreciation and cash returns, making these investments even more attractive to investors and lenders. The unique benefits of student housing investments support their claim as the most desirable asset on a risk-adjusted basis.

Lever Capital Partners has provided capital for various student housing projects across the United States, including ground-up development, value-add remodeling, and turnkey acquisitions. We can help source debt, mezzanine debt, preferred equity, and equity to ensure no deal or opportunity is left unexplored. Furthermore, we connect clients with capital providers, fostering partnerships between them and sponsors. In these times of high inflation and interest rates, securing capital has become more challenging. Collaborating with Lever Capital Partners can alleviate the stress of sourcing capital, allowing you to focus on executing your business plan and seizing opportunities.

References:

https://www.blackstone.com/news/press/blackstone-funds-complete-13-billion-acquisition-of-american-campus-communities/ https://research.com/education/student-housing-trends https://www.multihousingnews.com/what-experts-expect-for-student-housing-in-2023/ https://www.forbes.com/sites/michaelhorn/2018/12/13/will-half-of-all-colleges-really-close-in-the-next-decade/?sh=23f09c2a52e5 https://www.wealthmanagement.com/student-housing/student-housing-investment-sales-activity-grinds-halt https://www.us.jll.com/en/newsroom/student-housing-sees-record-transaction-volume#:~:text=Jenna%20Sharp&text=CHICAGO%2C%20Jan.,of%20%2411.5%20billion%20in%202021.

The Rise of Luxury Apartments: A Flight-to-Quality Trend

by: Will Lin

The COVID-19 pandemic has had a profound impact on the real estate market, with demand decreasing in the hospitality industry and among many others. However, in the luxury apartments sector, many tenants elected to hop on the trend of paying more for less and valuing quality over quantity; as a result, the demand for luxury apartments has increased significantly. According to JLL, overall leasing volume in luxury property types has increased 24% over 2021 activity and a record number of leases have been signed (1). This activity illustrates the resiliency and relevancy of luxury properties within the real estate market which proves to be valuable information for investors and developers who would like to capitalize on this market. 

One of the major driving factors for the increase in demand for the luxury apartment sector is the increased growth of the U.S. population. In 2022, the U.S. Census data revealed that there was a 0.4% increase, or 1,256,003, to 333,287,557 in the U.S. resident population as well as an influx of 1,010,923 immigrating to the U.S. (2). With the continued population growth, the demand for housing will continue to increase and that proves to be true, especially in the luxury apartments sector. Furthermore, Mike Cobb Jr, director of analytics at the CoStar Group states that the increasing costs of construction and materials make it challenging to construct profitable multifamily properties of lower quality rather than higher quality (3). Not only are developers and investors flocking towards the high-end and profitable luxury apartment market, but consumers are also gravitating towards these properties that boast premium features and access to luxury amenities. This flight-to-quality trend is especially prevalent among young affluent professionals who are looking for places to live that provide access to a variety of high-end amenities within a short walking distance. 

With the current economic conditions it is essential to take into account the impact of the Federal Reserve’s interest rate increases and how this can influence the luxury apartments market. At first glance, rising interest rates can pose a potential threat to investors of luxury apartments as they need to pull out money from their portfolios to purchase these types of real estate (4); however, higher interest rates can deter buyers from taking out mortgages to purchase homes which can drive up rental prices and potentially lead to higher profits for luxury apartment owners and investors. For example, JLL reveals in their 2022 end-of-year recap that tenants have signed a historic number of leases for premium rental spaces in Manhattan, with 190 leases starting at $100 or more per square foot and covering a total of 6.1 million square feet. This leasing volume is twice as much as the previous record set in 2021, which was three million square feet for premium rentals. 

The flight-to-quality in the multifamily apartment sector is a trend that is continuing to grow in the post-COVID world. Here at Lever Capital Partners, we pride ourselves on our ability to finance all types of multifamily deals including your next luxury apartment project. Our expertise in financing luxury apartment projects in various stages is diverse and extensive and we are able to get you the most accretive financing options catered specifically to your strategy and business plan. We believe that understanding the availability of different capital structures is the foundation for curating the most efficient capital stack for our client’s projects. Our ability to promptly evaluate creative alternatives allows us to direct any project towards the most optimal capitalization structure given the current market conditions and our client’s strategy and goals.

References:

https://rew-online.com/record-number-of-100-plus-leases-signed-in-2022-as-tenants-seek-premium-space/ https://www.census.gov/newsroom/press-releases/2022/2022-population-estimates.html https://www.virginiabusiness.com/article/flight-to-quality/ https://www.wsj.com/articles/new-york-citys-luxury-apartment-market-under-pressure-in-2023-11673742970

A Hot Market For Medical Office Buildings

by: Ethan Newman

Are you aware medical office buildings (MOBs) are arguably the safest asset to invest in? Since the pandemic, vacancy rates skyrocketed for traditional offices. The Sage Group reported office space vacancy rates in 2022 in downtown Los Angeles and Long Beach, California were 18% and 26% respectively (1). Despite MOBs being a subset of traditional offices, the demand for medical office space stayed resilient throughout the pandemic even with the rise of telemedicine (2). The Connected Real Estate Magazine shared how 2022 vacancy rates for MOBs nationally were only 8% (3). With MOBs outperforming traditional offices, what has contributed to MOBs becoming a reliable investment?

Because of the rise of the aging United States population, the demand for medical office space is increasing. Although there is strong demand, supply is relatively low for MOBs mainly due to construction obstacles that have in turn made existing healthcare properties more valuable. 

One of the reasons for this noticeable demand for medical office space has to do with the aging population in the United States. U.S. data census estimates one in five Americans will be 65 and older by 2030 and one in four Americans will be 65 and up by 2060. Because of the aging population, medical-related office visits are becoming more frequent which leads to practices demanding more space. For example, RPC reported that the average amount of current office space per person is around 5.3 square feet, but this number is estimated to increase to 11.2 square feet per person in order to accommodate the higher aging population (4).  

Although there is an increased demand for MOBs, new supply is lagging.  The San Diego Business Journal claimed supply of MOBs in 2022 does not meet demand (5). Alliance reported that the average price per square foot for MOBs is $498 where retail is $245/per square foot and normal offices are $315/per square foot. Because MOBs are costly and require complex construction standards compared to other assets, there is less activity in the construction pipeline which results in a lower supply. To put this in perspective, there is only 1% of the amount of space under construction for MOBs compared to the existing stock available (6).  

Due to the recent pandemic and the realization that there is a significant shortage, MOBs have become a very desirable investment. From the second quarter of 2021 to the second quarter of 2022, the average price per square foot of MOBs increased by 20%. As a result, the limited supply makes existing properties more and more valuable (7). With property values increasing, the average cap rate for MOBs dropped to an all-time low of 5.5% in 2022. Aside from rapidly increasing values, investing in MOBs allows capital providers to diversify their overall portfolios by tailoring their tenant mix in each MOB that they own. This can be done because of the variety of medical tenants in need of the same type of space.

The escalating demand for MOBs presents a momentous prospect for investors seeking steady cash flow and low-risk investment opportunities. As medical practices continue to expand and require more space, the construction of new buildings is anticipated to persist. Capital providers nationwide have expressed keen interest in financing the development and acquisition of such assets, and Lever Capital Partners collaborates closely with these entities, which actively disburse senior and mezzanine debt, preferred equity, and joint venture equity for the acquisition, development, and recapitalization of medical office assets across the country. By optimizing our clients’ capital structures, we enable them to concentrate on operations, construction, and asset management, while ensuring that the capital we procure establishes each project for success, regardless of the prevailing market conditions.

https://www.sageregroup.com/did-remote-work-collapse-the-southern-california-commercial-office-space-market/embed/#?secret=CXTEGUhD3k

https://risingrp.com/insights/medical-office-building-investment/embed/#?secret=sUOUafpZDH

https://connectedremag.com/uncategorized/medical-office-cre-shows-strong-signs-of-improvement/embed/

https://www.rpcpropertytax.com/archives/aging-u-s-population-expected-to-drive-demand-for-medical-office-space/embed/

https://www.sdbj.com/news/enews/medical-office-space-high-demand-low-supply/embed/#?secret=m6Qb5MBUoN

https://alliancecgc.com/education/medical-office-building-market-trends-past-and-present/embed/#?secret=6iXjSMUCeY

https://www.commercialsearch.com/news/medical-office-sector-resists-adversity/

The Millennial Influence: What the Rise of Short-Term Rentals means for the Housing Landscape

by: Ao Ma

The rise of the Millennial generation has had a significant impact on the real estate market, particularly in the area of short-term rentals. Reaching “peak Millennial” in 2015, USC Professor Dowell Myers states that the majority of this cohort has surpassed the age of 25, which has historically been the threshold for generations entering the first stage of the housing life cycle – homeownership.(1) For millennials, however, they arrived at an inopportune time. From 2014 to 2022, US multifamily rents have increased by a staggering 49%, while wages and salaries at private companies rose only 29.1%. High living costs, coupled with elevated student debt balances, have made it difficult for many Millennials to afford to buy a home. On top of this, Millennial values also gravitate toward short-term living solutions since they offer a more flexible lifestyle than traditional year-long lease terms, granting them very sought-after lifestyles to travel and “live in the moment.” As a result, the vast Millennial cohort has turned to short-term rentals.(2)

Accompanied by the rise in demand, data from AirDNA, a vacation rental analysis company, illustrates that the supply for US short-term rentals has increased by nearly 20% since 2019. Companies like Sonder, a boutique apartment-hotel hospitality company, have expanded their short-term rental offerings by operating traditional condo units like hotel rooms. Marriott has also capitalized on this opportunity by introducing its sub-brand Homes & Villas, a vacation rental platform. For many investors, this short-term rental model can typically yield higher income due to higher daily rates and the ability to adjust prices in high versus low seasons. The distinctive implication for the housing market here is that this approach significantly impacts housing affordability and the availability of long-term rentals.

As investors realize they can generate higher incomes via a short-term rental model through platforms like Airbnb, they are more willing to pay a premium for properties that otherwise wouldn’t be profitable if leased out traditionally. In other words, if a homebuyer can rent out their unit on occasion at the additional monthly mortgage amount from the premium, the decision to pay more can be justified. For example, a homebuyer may consider paying $100,000 over the listing price if they can rent out their unit for a weekend per month at a rate of $600-$665 since this would be the monthly mortgage payments assuming 6-7% interest rates. While this method can make homeownership “more affordable,” the increased willingness to pay at a premium further drives up prices. 

On the other hand, long-term rents will rise due to limited supply and increased competition when more traditional units get converted to short-term units. The implication of this offers an opportunity for investors looking to acquire or develop multifamily properties. From core to opportunistic multifamily investors, there is an opportunity to capitalize on the tight rental markets by attracting tenants who were forced out of long-term lease apartments that have since been converted to a short-term model.

In the current economic environment, it’s critical to consider how the Fed’s interest rate hikes control rent price inflation and how that affects the housing landscape. Though the belief is that lowered consumer and business spending leads to lower home and rent prices, that might not be the case. Instead, rising rates can force frustrated buyers into the rental market, increasing competition. Also, rate hikes can limit new construction lending, reducing future housing supply. Either way, there is no clear correlation between rates and rents, but what’s clear is that such raises can create market instability and potentially force the economy into a recession. For short-term rental giant Airbnb, CFO Dave Stephenson says the possible economic downturn hasn’t been enough to cause concern as he believes the increasing number of tourists eager to get back to traveling can preserve demand even in tough economic times.(3)

The decline in homeownership among Millennials and their changing lifestyle preferences, combined with favorable industry trends and financial data, suggests that this short-term operating model is here to stay. Here at Lever Capital Partners, we pride ourselves on our ability to finance your next short-term rental project. Through our significant experience in the space, we are able to get you the most attractive financing the market has to offer. We look forward to discussing your next project and putting together a capital structure that best suits your needs.

References:

https://www.nytimes.com/2017/01/23/upshot/peak-millennial-cities-cant-assume-a-continued-boost-from-the-young.html

https://educationdata.org/student-loan-debt-by-generation

https://www.costar.com/article/1874040746/us-short-term-rental-market-poised-for-further-growth