Tag Archives: CommercialRealEstateFinancing

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

Lifestyle Centers As The Future of The Mall

by: Kennedi Templeton

When depicting Austrian architect Victor Gruen’s notable rise to fame, Malcolm Gladwell commented, “Gruen didn’t design a building; he designed an archetype.” Gruen’s work, the first introverted indoor mall, became an international icon. The success of the indoor mall remained relatively unchallenged until the notorious retail apocalypse began and was followed by the thunderstorm of COVID-19. Department stores filing bankruptcy have further accelerated the classic indoor mall’s decline and led many to close as they lose traditional anchor tenants. Investors are showing increased sensitivity to the future of the retail asset class with more than $40 billion in CMBS loans for shopping malls coming due from 2022-2024 (1) Despite many fears over the death of the indoor mall, lifestyle centers serving their community as a place to gather regularly (for reasons beyond shopping) still show signs of hope. Connectivity between consumers remains essential as recovery from the pandemic revealed that there is no substitute for human connection. While customers and investors shift away from the traditional indoor mall, people are still gravitating toward the “togetherness” provided by open-air malls classified as lifestyle centers. By offering neighborhood connectivity, these lifestyle centers still serve as both profitable investments and anchors in their community.

Green Street’s November Commercial Property Price Index reports that malls have lost more value in the past seven years than any of the nine other asset classes used in comparison: a staggering 48% decline in property value (2). In Q2 2022 alone, super-regional malls lost 1.3 million SF in net absorption, while in contrast, lifestyle centers saw absorption rise to more than 1 million SF. Demand for lifestyle centers continues to increase as consumer preference shifts towards seeking a recreational experience in retail. From Q2 2021 to Q2 2022, foot traffic for experiential tenants increased by 39.4%, while soft goods, electronics/office, home, and hobby tenants lost traffic with declines ranging from -3% to -12.9%(3). This data suggests that as consumers seek entertainment from their in-person retail experiences, lifestyle centers will become increasingly more attractive assets compared to empty-ing traditional malls. Even in the face of rising gas prices and inflation, open-air lifestyle centers showed visits increased 6.3% nationally from September to October of this year (4). Lifestyle centers inviting people to gather for reasons beyond retail—such as farmer’s markets, small concerts, and holiday gatherings—show promise and longevity. It is their ability to provide neighborhood connectivity that still brings in a year-round regional draw.

Repurposing retail spaces within indoor malls to bring in more of the community has recently gained traction in an attempt to revive the popularity of the traditional mall. With many Gruen-esque indoor malls now lacking the ability to keep retailers alive on their own, owners have begun adding mixed-use operations such as apartments and entertainment, with 32 indoor malls across the country even including health care services (5). A shift away from the retail-only mall allows owners to bring in non-traditional tenants that keep the building financially viable and offer a unique sense of place. However, this rise in popularity of alternative uses in malls further indicates that the traditional indoor mall is not financially viable on its own. Without a vision to promote neighborhood gatherings and bring people together, many indoor malls have lost ground and likely will continue to decline. In the wake of the pandemic, families, and customers continue to gravitate towards togetherness and activity in public. A partnership with the community is thus vital for the success of malls today, which is why lifestyle centers will continue to attract the institutional investment that is leaving traditional shopping malls. Sturdy underlying market fundamentals indicate that developers and investors will continue to see favorable returns on these assets. Lifestyle centers stand at the forefront of the opportunity to provide connectivity to their communities and, because of this, will likely continue to attract investment.

We pride ourselves on our ability to finance many different types of retail projects. Our experience ranges from the recapitalization of existing malls to the financing of inline power centers, neighborhood retail centers, and the repurposing of struggling retail assets. Knowing what capital is available for your strategy is key to getting the right project off the ground and we can quickly assess the financing options to determine which direction to go.

References:

https://www.bnnbloomberg.ca/cmbs-market-faces-crunch-as-40-billion-of-mall-debt-comes-due-1.1663360

https://www.greenstreet.com/insights/CPPI

https://www.us.jll.com/en/trends-and-insights/research/retail-market-outlook

https://www.placer.ai/blog/placer-ai-mall-indexes-october-2022-update/

https://fortune.com/2022/04/25/shopping-malls-health-clinics-medical-care-conversion-covid-19/

The Growing Popularity of Secondary and Tertiary Markets

by: Michael Wyant

In the past few years, the number of residents opting to live in secondary and tertiary markets has increased significantly. This migration to once less attractive markets has been driven by affordability, the opportunity for growth, and increased residential mobility. So, it’s not surprising to see that these smaller markets are on track to outgrow many major US cities. The increased level of competition and the exorbitantly high cost of entry in primary markets, along with the declining demand for CBD office space due to the Work From Home phenomenon, has driven investors to seek opportunities for profit elsewhere. In this article, we’ll discuss some of the up-and-coming secondary and tertiary markets to look out for in 2023 and the availability of capital for different property types in those markets. 

Secondary markets, like Denver, Austin, and Portland, have seen significant population growth and job market expansion creating a need for more housing and amenities. Because these markets have less economic activity and exposure as primary markets, they aren’t nearly as saturated providing ample opportunity for investors. Tertiary markets, such as Charleston, Richmond, and Colorado Springs are not drastically different from secondary markets although they are usually more spread out and have smaller populations.(1)

There is huge investment potential in these growing markets for reasons such as less competition, lower barriers to entry, stronger growth potential, and a potential for higher returns. Over the next decade, members of the workforce and large companies will continue to move into these markets, creating an opportunity for investors to capitalize on more attractive acquisition economics. By entering these markets in the early growth stages, sponsors will be able to take advantage and in turn, see outsized returns on their investments.

Lenders used to be weary of these markets because of the inherent risk of investing in a smaller market with less demand and therefore reduced opportunity to push rents. Debt was more expensive for investors, and they also faced lower available leverage because banks needed to hedge for the riskier investment. Lenders are now keying in on these markets because of the larger demographic trends at play. People are choosing to live and work in less expensive cities as larger companies such as Microsoft, Google, and Coca-Cola move in.(2)

The lower level of competition is based on the fact that real estate private equity firms and big REITs generally focus on primary markets and sometimes secondary, creating fierce competition among themselves. This is driving up pricing and reducing cap rates. On the flip side, secondary and tertiary markets tend to be less popular among big investors and more accessible to all investors, lowering the level of competition and barrier to entry.

We’re seeing a greater focus on specific markets from both the debt and equity providers and therefore make sure we capture as much data as possible as these parameters change. Because of our hyper attention to detail, we’ll only approach the capital providers we know are interested in your target markets.

References:

https://www.pioneerrealtycapital.com/compelling-reasons-to-focus-on-investment-in-the-secondary-and-tertiary-markets/

https://www.bisnow.com/atlanta/news/capital-markets/atlanta-tops-global-cre-investor-demand-other-secondary-cities-rising-in-prominence-112755

Investing in CRE: The ESG Framework

by: Brandon Fikhman

Implementation of Environmental, Social, and Governance (ESG) criteria within Real Estate investment plans is on the rise. According to CBRE’s 2021 Global Investor Intentions Survey, 60% of the survey respondents have implemented ESG metrics within their investment criteria, a significant increase compared to previous years(1). With the amplified focus on social responsibility, how can you be the next to implement ESG criteria within your investment platform and take advantage of this important trend in Real Estate investing? Socially conscious investors continue to adopt these standards, implementing them in their companies and overall investment philosophies allowing them to achieve attractive returns for investors while creating a positive impact on the environment and community.

Climate Change and its associated impact on our planet are one of the most pressing issues our society faces today. As we move towards a more sustainable future, real estate professionals can take the next step to reduce the negative environmental impacts of their properties. Some of these negative environmental impacts reveal themselves within the construction process and the yearly carbon footprint buildings produce with ongoing operations. To mitigate these negative environmental impacts, developers can incorporate water conservation methods, safe disposal of waste, and the use of renewable energy. One way this is measured in new builds is through the Leed Certification. Getting a property Leed Certified allows a landlord to implement a Green premium on rent while also reaping the benefits of numerous financing incentives. For example, HUD loans have a reduced mortgage insurance premium for green properties. Implementing these features would allow real estate operators to both increase profit and help reduce their burden on the environment.

As a society, recently we have been making major strides in equality, diversity, and other social measures to move towards a more just society. The “S” portion of ESG encourages business owners, managers, and real estate operators to consider the social impacts of their projects. Some examples are the impacts a business or investment has on the local community, a company’s employees, and the suppliers they partner with. Essentially, the goal of this metric is to ensure all of the stakeholders related to a business or project are treated ethically and fairly. To incorporate the social aspect of ESG into one’s investment strategy, investors should take into consideration the impact of a real estate project on the local community. Considering the local community, the lack of affordable housing is a major issue throughout our country. Local tenants are being priced out, and this is being exacerbated by the increase in new development projects and premium rents. Operators can also improve their social impact by focusing on the treatment of their employees by paying reasonable wages, offering various benefits, and encouraging the personal development of employees. One of the most important ways a real estate owner/developer can improve their social impact is by ensuring that the raw materials used in the construction or rehab process are being ethically sourced.

The final aspect of ESG is governance which focuses on how a company or real estate project is governed. Within a business, governance can be in the form of transparency, allowing shareholders voting rights on important issues, or ensuring board members do not have conflicts of interest. Particularly in real estate, firms have been working on improving the diversity of their board of directors and implementing corporate socially responsible policies. Real estate firms have also been adopting new technologies such as benchmarking and reporting platforms to ensure they are meeting their goals in terms of ESG metrics.

In recent years, firms have been working towards aligning their projects in accordance with ESG criteria. Operators have been focusing on incorporating environmentally friendly materials into real estate projects and improving social and governance aspects within their firms. Our society continues to further increase its focus on the implementation of ESG as sustainability and equality for all have become more important for employees and investors of companies. One reason why investors have been hesitant to invest in environmentally friendly building elements is due to the misconception that investing in ESG will reduce profits. As firms focus on environmental sustainability, this thesis is changing as they are finding that implementation of ESG criteria can help increase profitability.

As the industry continues to align itself with the ESG metrics, real estate firms will focus on implementing ESG criteria within their firm and investments. Investment teams are focusing on improving their green metrics within projects by working towards achieving certain certifications such as the Leed certification. The U.S Green Building council is responsible for reviewing projects and then certifying them with the Leadership in Energy and Environmental Design (Leed) Certification. Leed Certification is an internationally recognized green building rating system (2). There are different levels of LEED certification, depending on what sustainability and environmental aspects are implemented in a project will determine the level of LEED certification a project receives. As buildings achieve LEED certification, operators can both improve the lives of the people using the buildings and also charge a green rental premium to their tenants(3). As different elements are implemented to achieve the certification, projects will help reduce carbon emissions, improve environmental quality inside projects, create healthier spaces, and bring in happier tenants. Once owners implement ESG improvements to their projects, owners will be able to charge a green rental premium to their tenants. Green leases will incentivize owners and lessees to maintain certain usage metrics such as electricity per occupant (kilowatt hours per employee), water used by area, and the volume of waste disposed of in landfills as a percentage of total waste produced. With lease structures promoting change, we will start to see an increasing difference in prices between green rental premiums and brown rental discounts for projects.

For the social aspect of ESG, investors seek to implement socially beneficial measures. In the market, we are seeing an increase in affordable housing projects as we see sky-high rent prices. Building owners will also implement health and wellness amenities for their tenants to use. Especially with the recent coronavirus, we are seeing an increased emphasis on improved hygiene measures in buildings. In office space, owners are starting to redesign each of the spaces to promote the health of their tenants with improved air circulation systems and social distancing measures. Mixed-Use, multifamily, and retail owners are working to improve the tenant mix by including more healthy food options as part of their restaurant options.  Governing bodies also will work to improve the diversity of their board of directors or executives and improve the tracking of their benchmarks with the increasing use of technology.

Previously the industry did not focus on ESG investing metrics. Lenders and investors did not place an immense emphasis on sustainability, social, or governance factors while looking at projects(4). As of late, investors and lenders have been working on implementing ESG criteria within their own companies, and have been placing more of an emphasis on this space within their investments. As capital continues the implementation of ESG metrics within their work, we will see capital providers creating invectives for ESG-friendly projects. For example, lenders will provide lower interest rates for projects that fulfill certain ESG criteria, leading to the incentivization of investment into a more socially responsible future. 

Here at Lever, we have extensive knowledge and experience with a wide variety of lenders. Understanding how Debt and Equity partners are adjusting their criteria to incorporate ESG into their investing strategies, we see where the future is going with the incorporation of ESG into real estate. We can help advise you on the needs and wants of capital partners to help you strategically position your investment to achieve the most favorable capital terms to help support your project. As we see the prevalence of ESG investing in the Real Estate space, many capital providers are adjusting their parameters to incorporate ESG within their companies. Increasing the focus of a project to fit ESG goals, can not only help the investors but improve and grow the local community of investment projects.

References:

https://www.cbre.com/insights/reports/esg-and-real-estate-the-top-10-things-investors-need-to-know#introduction

https://www.tylercauble.com/blog/what-is-esg-investing-and-why-it-matters

https://www.usgbc.org/

https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp