Category Archives: News

The Keys to Unlocking CRE Loan Opportunities in the 2nd half of 2024 and beyond

by: Ashton Zakariaie

The commercial real estate (CRE) lending landscape is undergoing significant shifts, influenced by rising economic uncertainties and heightened caution among lenders. As we move into the second half of 2024, obtaining a CRE loan will remain a challenge, and only the most qualified sponsors will be able to secure financing.

The difficulty in securing CRE loans will persist through the end of 2024 and into 2025 due to increased lender caution and economic uncertainty. The stringent requirements set by lenders will significantly impact the acquisition, development, and refinancing of CRE projects, as fewer will meet the qualifications for funding. Developers will find it harder to start new projects, expand existing ones, or refinance current loans. However, there are strategic ways to navigate these economic constraints and meet the new, stricter requirements being implemented by lenders across the board.

New Requirements for CRE Loans

Stronger Guarantors: Lenders now prefer sponsors who can provide robust guarantees. This additional security assures lenders of the repayment capabilities, thus reducing their risk.
Experienced Sponsors: Sponsors with a proven track record and substantial experience in managing CRE projects are favored. Their experience suggests they are less likely to encounter insurmountable problems and are better equipped to handle and resolve issues if they arise.
Better Financial Economics: The financial requirements for CRE loans have become more stringent. Higher debt service coverage ratios (DSCR) and lower loan-to-value (LTV) ratios are now the norm. This means sponsors must demonstrate stronger cash flow capabilities and provide more equity upfront, further ensuring lenders of the project’s viability and that interests are aligned.

Impacts on Owners and Developers

The tightening of lending criteria has several critical implications for owners and developers:

Stronger Sponsors for Construction Loans: Only the most financially robust and experienced sponsors will secure construction loans. This limits the pool of potential developers and may slow the pace of new construction projects and therefore the delivery of new product for the next few years.
Reduced Construction and Acquisition Loans: Compared to previous years, the volume of construction and acquisition loans will likely remain low. This is a direct consequence of the stricter lending standards and the economic environment that is stymieing overall transaction volume.
Challenges in Refinancing: As property values drop and loan terms become more stringent, refinancing existing loans will remain increasingly difficult. Falling property values reduce the equity available for refinance, and the stricter loan terms make it harder to qualify for new loans. Sponsors may find themselves unable to refinance with favorable terms, which could lead to financial strain and potentially forced sales.

Strategies to Secure Loans in 2024-2025

Given the challenging lending environment, sponsors can adopt several strategies to improve their chances of securing a CRE loan:

Credit Enhancement: Enhancing the credit profile of the guarantor can make a significant difference. This might involve improving financial statements or finding additional guarantors to bolster the overall financial backing of the loan.
Raising Additional Equity: With lower LTV/LTC ratios, sponsors will need to raise more equity to fill the financing gap. This additional equity reduces the lender’s risk and makes the project more attractive for financing.
Higher Leverage, Higher Cost Debt: In some cases, taking on higher leverage, higher cost debt may be necessary to bridge financing gaps. While this increases the cost of capital, it can make it possible to move forward with projects that might otherwise be stalled due to equity shortfalls.
Leveraging Relationships: A large network and strong relationships with lenders can help sponsors find more favorable loan terms. Sponsors should leverage their connections and work closely with financial advisors to identify the best financing options that are tailored to their project and overall business plan.
Strategic Credit Enhancements: Finding credit enhancements that address both capital needs and credibility can be a game-changer. This might involve securing mezzanine financing, preferred equity, or other forms of credit support that can improve the overall financing package.

The CRE lending landscape in the second half of 2024 is characterized by heightened caution and stringent requirements. Only the most qualified and experienced sponsors with robust financial backing will succeed in securing loans. By understanding the new requirements and strategically enhancing their financial positions, sponsors can navigate this challenging environment and continue to pursue CRE opportunities. Lever Capital Partners’s knowledge and experience in times like these, matched with a well-connected network of capital providers with significant dry powder will be an invaluable asset for sponsors looking to secure the most favorable loan terms in this new era of CRE financing.

Is Rescue Capital Rescuing the Borrower or the Lender?

by: Eleni Zarokian

Rescue capital is a type of financing injected into distressed properties to support their business plans and prevent foreclosure or bankruptcy when traditional funding isn’t available. The primary goal of rescue capital is to stabilize the asset, allowing for refinancing or sale in the future. Given the complexity and risks associated with such funding, it is essential for borrowers to carefully evaluate their options, often with the guidance of experts like Lever Capital Partners, to ensure that the decision aligns with their long-term business objectives and does not result in further financial strain. Lever Capital Partners can help evaluate the current market options to ensure informed decisions and avoid further financial pitfalls.

Rescue capital can take various forms: first mortgage debt, mezzanine financing, preferred equity, or joint venture equity. Deciding to use it is often challenging, especially if you’ve signed recourse on the existing loan and feel cornered into borrowing expensive capital as your only escape from recourse. In such cases, it might seem like the only viable option to salvage your investment.

However, if you have a non-recourse loan, you might consider handing back the keys rather than taking on the risk of expensive borrowing. The goal is always to use the capital to stabilize the asset, and then refinance or sell it. At Lever Capital Partners, we help borrowers determine what options are available and strive to find those that align best with their business plans.

What Type of Rescue Capital Makes the Most Sense in Today’s Economic Environment?

Debt: Suppose you’re about to finalize an acquisition with bank financing, but just weeks before the closing, the lender’s credit committee rejects your deal because it doesn’t meet the new, stringent guarantor criteria. In this situation, rescue capital in the form of debt could bridge the gap, allowing you to close the deal.
Mezzanine/Preferred Equity: Imagine you’ve completed your development, but leasing is progressing slower than anticipated, and your construction financing has depleted all the reserves. In such cases, secondary financing like mezzanine or preferred equity can provide the time necessary to stabilize the asset until you can refinance it.
Equity: Consider a scenario where your existing loan is maturing, and refinancing isn’t an option due to high-interest rates. Your current lender may agree to extend the loan but requires a cash infusion to reduce the loan balance. Here, rescue equity can facilitate the loan extension, ensuring continued ownership and operation of the property.

When Not to Use Rescue Capital

Rescue capital isn’t a one-size-fits-all solution. It’s crucial to recognize scenarios where it might not be suitable:

If your plan will take years to execute, the cost of borrowing could outweigh the benefits over a prolonged period.
If rescue capital will significantly dilute your equity, it might jeopardize your investment’s long-term viability.
If it will consume all cash flow, making it difficult to manage ongoing expenses and operational needs, it’s likely not a feasible solution.

Who Are the Capital Providers and How Can LCP Access Them?

Understanding who provides rescue capital and how to access it is essential. At Lever Capital Partners, we analyze all available options to determine the most viable sources of rescue capital. Our extensive network and industry expertise enable us to connect you with suitable capital providers, helping to mitigate risks such as making capital calls to equity investors or losing your property altogether.

We carefully evaluate whether the available rescue capital is a good fit for your project, ensuring that you make informed decisions in today’s unpredictable market. Our knowledgeable team is dedicated to finding the best solution for your situation, providing you with the stability needed to navigate economic uncertainties.

While rescue capital can be a lifeline for distressed properties, it’s essential to thoroughly evaluate its implications. Lever Capital Partners can guide you through this complex process, ensuring that you make decisions that align with your long-term business objectives.

Heartbreak Hotel or Hotel California? An Investment Opportunity or Unnecessary Challenge in the Hotel Industry’s Revival in 2024

by: Elton Luk

As the hotel sector’s performance returns to pre-pandemic levels, fueled by eased travel restrictions and a surge in consumer demand for travel, activity within the hotel industry is poised for significant growth and opportunity. This revitalization of the hospitality industry combined with potential rate cuts and a maturity wall in 2024 will make it challenging for current owners to refinance existing loans without injecting more capital, opening doors for new investors. Opportunities for new buyers exist, however it’s not all rainbows and unicorns for existing hotel owners due to the current interest rate environment and the distress that the state of the capital markets poses.

The current landscape presents a unique scenario of buying opportunities for investors, primarily driven by a tough financing market that limits competition. Many current hotel owners who are locked in at affordable rates may look to offload their assets when their current loans reach maturity. While investors face significant headwinds in securing favorable financing terms, Revenue Per Available Room (RevPAR) is forecasted to grow 3.0% in 2024 according to a recent CBRE report. If interest rates continue to decrease as many expect to happen this year, hospitality investments should prove much more attractive. Another significant factor to take into consideration is the dislocation we are seeing between supply and demand. Yahoo Finance said that Metropolitan areas like New York City have banned short-term rentals causing hotel prices to rise roughly 10% on a year-over-year basis since the ban was implemented, further enhancing RevPAR growth. These short term rental bans and restrictions are becoming more and more common throughout the U.S. San Francisco, Santa Monica, Anaheim, and West Hollywood have also tightened restrictions on AirBnb listings making it more challenging to secure short term rental permits. Rising RevPAR, tightening short-term rental regulations, and anticipated interest rate reductions create a promising landscape for hospitality investments. Investors positioned to navigate the challenging financing climate and capitalize on these dynamics stand to gain significantly as the market adjusts to the evolving demand and supply conditions.

On the flip side, current hotel owners are facing their own set of challenges. Many investors are struggling to find financing options that allow for a cash neutral refinance. The combination of the current interest rate environment and lenders being constrained by 1.30-1.40x Debt-Service Coverage Ratio (DSCR) requirements leaves a gap forcing owners to either sell in order to repay existing loans or inject fresh equity. The situation is further exacerbated by an impending maturity wall due this year and next, totaling $42.3 billion, the third highest among all property types according to Cred IQ. This financial pressure is further heightened by the past reliance on CMBS loans (Commercial Mortgage-Backed Securities), which if refinanced in the current rate environment, would not only lock borrowers into higher interest rates but provided interest rates do come down would lead to elevated defeasance costs in future years. Many hotel investors and owners may need to sell off their assets to relieve themselves of these financial pressures or be willing to weather the storm that may or may not present a path to recovery in the near future.

Historically, the hotel sector enjoyed a healthy influx of CMBS loans, and the rates secured in 2019-2022 hugely benefited the sector and injected it with the capital that it needed. However, the present narrative has shifted, with the hotel sector now perceived as a riskier investment compared to other asset classes like multifamily. Opportunistic investors and lenders who are still willing to lend or invest in the hospitality space are looking to charge a risk premium for the increased risk they are facing in this current period of uncertainty or look to mitigate their downside in other ways. Many large institutions and banks are playing the waiting game on deploying capital given the looming election coming in November and the Federal Reserve’s heightened caution in terms of lowering rates too quickly. This shift has led to a tightening of available capital, making it harder for hotel owners to secure the necessary funding that they need to remain profitable. Looking ahead, the looming maturities provide both challenges and incentives for lenders and hotel owners alike to renegotiate terms. The concept of “extend and pretend” is likely to become more prevalent, with lenders reluctant to take back hotel assets and investors eager to preserve their equity.

The path to recovery for the hotel industry is paved with both golden opportunities and daunting challenges depending on your risk appetite. For prospective investors the market conditions present a ripe landscape for entry, bolstered by favorable RevPAR trends and a supply-demand imbalance. Conversely, existing hotel owners must navigate the current financial storm, facing refinancing hurdles and the looming threat of loan maturities. As the industry moves forward, the dynamics of capital markets will play a crucial role in shaping the future of hotel investment, with stakeholders on both sides of the aisle looking for innovative ways to adapt and thrive in the dynamic world of commercial real estate. With this in mind, Lever Capital Partners’s long track record in the hospitality sector allows us to guide owners and developers through these challenges. For the last 15 years, Lever Capital Partners has provided exceptional and reliable service by leveraging our strong relationships and connections to help our clients find the capital they need.

References:

https://www.cbre.com/press-releases/cbre-hotels-expects-revpar-growth-in-2024-fueled-by-higher-rates-and-stronger-demand https://cred-iq.com/blog/2023/12/13/2024-commercial-real-estate-maturity-outlook-2023-cre-loan-maturities/ https://www.costar.com/article/272132985/amount-of-maturing-hotel-cmbs-loans-balloons-this-year-after-getting-extensions https://hotelsmag.com/news/u-s-hotel-investment-set-to-accelerate-in-2024-particularly-in-top-urban-markets/ https://finance.yahoo.com/news/nycs-airbnb-ban-looked-trouble-131500196.html?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMV8xqBLs3bsrlOAn3_4KykEN5sRsq-Lw3jN2dUyTQu14a2HkpD0RK0khyBBnVF2dl75ja7YUKCFnBYYAiqxEmfC7zcIWLB-2Svd_mtps2yspHloOR0ufTVUBLLsxTk6RFZtEi0QoIbGm_BpoUkTwh0DCFDFaricn21TV6LkIa1x&guccounter=2 https://www.unfairbnb.net/airbnb-bans1

Why FinTech isn’t making a dent in Commercial Real Estate Finance Brokerage

by: Adam Horowitz

The pace of technological advancement is reshaping numerous industries, leading to significant transformations and job displacements. Yet, despite the efforts of numerous tech companies, the Commercial Real Estate Finance Brokerage industry remains largely untouched by disruptive innovations. Why is this the case?

We’ll explore what I think are the three main reasons for this:

1) At its core, commercial real estate finance is driven by relationships rather than simple matching algorithms.

2) Lenders and investors rely on trusted sources to conduct thorough underwriting processes, which cannot be easily standardized.

3) The human element of trust and expertise plays a crucial role in navigating the complexities of this industry.

Unlike residential mortgages, obtaining a commercial real estate loan entails a far more intricate process, involving a multitude of data points and considerations. From sponsor backgrounds to market trends, each project demands meticulous scrutiny. While technology can aid in identifying potential capital providers, it’s the expertise of individuals that ultimately ensures successful transactions.

The difficulty in standardizing the vetting process stems from the unique nature of each project. While some may appear straightforward, others require in-depth analysis of market dynamics and sponsor track records. Identifying the weak links in complex projects necessitates a discerning eye honed through experience.

Lenders have traditionally been reluctant to expand their workforce to evaluate every transaction, preferring to rely on trusted intermediaries. This reliance on expertise extends beyond mere checkboxes, as understanding the nuances of borrowers’ experiences is essential for informed decision-making.

How do I know so much about this topic? I’m a rare tech/finance guy whose undergraduate and graduate degrees focused on both business and technology. I rode the technology wave in the 90s until soon after the dot-com bubble crashed in 2000. That crash hurt more than you can imagine as I had a lot of stock options and the company I was at was going public on the NASDAQ two days after the stock market crash. I hung around for a bit longer, then moved into the CRE finance world in NYC just after 9/11.

Taking into account the knowledge that I had gained, I tried to implement as much tech as I possibly could to streamline processes, automate tasks, and focus on having the best database in the industry. I also acknowledged that you can’t stop progress so I invested in a few of those same FinTech companies that failed. Some of those investments were profitable due to increased deal flow, and others created a write-off after values went to zero.

At Lever, we use technology to help us do one thing and one thing only; to provide capital at the best available terms for our clients. If tech helps us do that then we use it, and if it does anything else, then we don’t. I look forward to seeing how tech evolves in the commercial real estate industry and we’ll continue to use it so long as it brings results to the only people that matter…our clients.

Micro-Construction: A Game-Changer for Solving the Student Housing Crisis

by: Rachel Epstein

A recent survey uncovered that 43% of students at four-year colleges in the United States grappled with housing insecurity in the year leading up to the study, an increase of over 100% since 2022 (Benbow, 2023.) This troubling trend is forcing many students to couchsurf with friends or commute from home to attend school. In response to this challenge, the University of San Diego turned to a temporary solution by placing students in hotel rooms due to a shortage of on-campus housing (Staff, 2023). The aforementioned solution has been seen at the University of Miami and other campuses as well. This predicament has been intensified by a 9% surge in student housing demand over the past year (Staff, 2023). To address the escalating housing crisis, micro-construction is emerging as a solution, offering compact living units that provide individuals with personal space while accommodating more occupants within a single building, thus alleviating the strain on student housing.

Micro units are smaller efficient units usually ranging from 100-200 square feet which are priced at a lower cost. These units include kitchenettes, bathrooms, and a small study space. A few other benefits of the buildings are fitness centers, game rooms, meeting spaces, and storage lockers. The buildings will incorporate larger common space for students to socialize and study. Internet is also included in the rent for their units which attracts many students to live there. An added bonus is that the units come fully furnished so one does not have to worry about purchasing furniture. As stated in the article, “… murphy beds that transform into desks”(Interactive, 2022) so the room can be transformed within minutes as one pleases. This allows individuals to have their own personal space when wanted but also gives them the opportunity to be with their friends. The emphasis on these small units genuinely represent the current generation and their need for personal space but also wanting to have time with friends.

The rent for micro-units could be significantly less expensive “…students in Vancouver can rent a 140 square foot unit for $675-$695 a month, as compared to $1,000 for a full-size unit” (Interactive, 2022). The price difference is significant enough that it can be the reason one attends school or not. This will certainly attract students to live in these units because they could have their own space and privacy but also be able to spend time with their friends whenever they want.

Historically, regular apartments were about 800 square feet with four bedrooms with one to two students per bedroom. The units came with a full kitchen and bathroom but the buildings had limited study and communal spaces. Students could not enjoy spending time in their apartment with all their friends. Most of the time they would have to find another location for everyone to be together. Lenders and investors are interested in these spaces because of the future micro-housing holds.

At Lever Capital Partners we are dedicated to remaining well-informed about the evolving market for modular housing construction in the Student Housing space by diligently tracking industry trends and staying ahead of developments. Our approach involves collaborating with lenders known for their reliability, ensuring that clients receive the best possible financing solutions for their projects.

References:

https://pointintimestudios.com/micro-student-housing/ https://apnews.com/article/rent-us-college-students-1cc3bc02f25f8a628f828902029bad9b\ https://studenthousingbusiness.com/maximizing-space-is-paramount-as-costs-soar-for-developers-students/ https://www.newsweek.com/student-housing-supply-crisis-america-1795711 https://therealdeal.com/national/2023/07/05/student-housing-holds-promise-for-cre/ https://www.preqin.com/insights/research/blogs/private-capital-is-making-space-for-student-housing https://www.biggerpockets.com/blog/student-housing-remains-as-resilient-as-ever https://www.nytimes.com/2020/12/15/business/modular-construction-pandemic-coronavirus.html

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/