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Multifamily Real Estate Is Changing FAST – Here’s How to Profit in 2025!

by: Adam Horowitz

The multifamily real estate sector in 2025 presents both challenges and opportunities. Investors must navigate financial distress, shifting rent trends, and evolving market dynamics. However, those who take a strategic approach can capitalize on emerging opportunities and position themselves for long-term success. This article explores the key factors influencing multifamily investments this year—why to invest, what to consider, where to focus, and when to act.

Partnering for Success in Multifamily Investment

At Lever Capital Partners, we understand the complexities of today’s housing market. As industry leaders in multifamily financing, we provide tailored solutions to help investors, developers, and property owners navigate market fluctuations with confidence. Whether you’re acquiring new properties, developing rental communities, or optimizing your portfolio, our expertise ensures you secure the most competitive financing for long-term growth.

Why Invest in Multifamily in 2025?

The multifamily sector is experiencing significant financial distress, which presents both risks and opportunities. Community banks have reported a 12-year high of $6.1 billion in delinquent loans, while the CMBS multifamily distress rate has climbed to 12.9% as of January 2025. Although acquiring distressed properties at deep discounts is not always straightforward, these conditions indicate a market where well-researched investments can yield strong returns.

Despite short-term volatility, multifamily properties remain a resilient asset class. Rising demand, improving affordability, and strong long-term fundamentals continue to make them attractive to investors.

Key Considerations for Investors

With an increasing supply of multifamily properties hitting the market in 2025, competition is intensifying. This may lead to stagnating rents in some areas, making market selection more critical than ever. Investors must conduct thorough research to identify locations where demand outpaces supply. Additionally, higher interest rates impact borrowing costs and deal structures, making strategic financing essential to maximizing profitability.

Top Markets for Multifamily Investment

Selecting the right markets is crucial for optimizing returns. Some of the most promising cities include:

  • Chicago, IL – Affordable pricing, a diverse economy, and a large population base create long-term stability.
  • San Diego, CA – High rental demand and a limited apartment supply ensure steady market conditions.
  • Columbus, OH – Affordable investment opportunities and ongoing infrastructure improvements enhance its market appeal.
  • Austin, TX – A booming tech economy and rapid population growth continue to drive rental demand.
  • Indianapolis, IN – Strong job growth and an affordable housing market make it an attractive investment choice.
  • Boston, MA – Economic stability is reinforced by key industries in education, healthcare, and technology.
  • Southwest Florida – Rapid population growth fuels sustained rental demand, particularly in key coastal cities.
  • Baltimore, MD – A strategic location and economic diversification create compelling investment opportunities.

When to Invest: Timing the Market for Maximum Returns

Several key indicators suggest that 2025 could be an ideal time for multifamily acquisitions:

  • Continued Demand Despite Increased Supply – While new developments are entering the market, strong demand persists in key areas, supporting rent growth and occupancy rates.
  • Improved Rent Affordability – Rent affordability has increased over the past 18 months, making multifamily housing more accessible to tenants.
  • Stable Employment Rates – With unemployment remaining below 5%, rental income streams are expected to remain steady.
  • Favorable Interest Rate Outlook – The 10-year Treasury yield and federal funds rate are expected to stabilize near 4% by the end of 2026, creating a more predictable financing environment.

Seizing Opportunities in the 2025 Multifamily Market

By staying informed on market conditions, selecting high-growth locations, and strategically timing acquisitions, investors can unlock the full potential of the multifamily sector in 2025.

For those looking to maximize opportunities in this evolving landscape, Lever Capital Partners offers expert guidance and tailored financing solutions to ensure long-term success.

Will Renting Still Be More Favorable Than Buying Across Major Metros by the End of 2025?

by: Kayla Refoua

As housing affordability remains a pressing issue in the U.S., many prospective homeowners are reevaluating whether buying a home is still within reach—or if renting will continue to be the smarter financial choice. With home prices, mortgage rates, and wage growth increasingly out of sync, renting is likely to remain the more viable option for many Americans in major metropolitan areas through the end of 2025.

At Lever Capital Partners, we recognize the challenges and opportunities presented by today’s housing market. As experts in the multifamily sector, we provide tailored financing solutions that empower investors, developers, and property owners to navigate the evolving real estate landscape. Whether you’re acquiring new properties, developing rental communities, or optimizing your investment portfolio, our strategic approach ensures you secure the most competitive financing for long-term success.

Affordability Challenges: Rising Home Prices and Mortgage Rates

The cost of buying a home has climbed beyond what the average household can afford. The median home price now exceeds affordability levels by more than $70,000, making homeownership increasingly difficult. This issue is compounded by:

  • High Mortgage Rates: While interest rates may stabilize or decline in 2025, they are still significantly higher than the ultra-low rates seen in previous years.
  • Housing Supply Shortages: A lack of available homes, particularly starter homes, continues to drive up prices.
  • Rising Construction Costs: Increased material and labor costs make building new homes more expensive, limiting supply expansion.

These factors have led to a significant decline in housing affordability. In 2019, 94% of U.S. counties had homeownership options within reach of median-income households. By 2024, that number had dropped to just 63%. Without a major shift in supply or affordability, many potential buyers will remain priced out of the market.

Renting: A More Practical Choice for Many

While buying a home is often seen as a long-term financial investment, renting continues to offer several advantages in the current economic climate:

  • Lower Upfront Costs: Unlike homeownership, which requires a large down payment and closing costs, renting typically demands a lower financial commitment.
  • Flexibility: Renters have the freedom to relocate without the burden of selling a home, which is especially valuable in uncertain economic times.
  • Less Financial Risk: With rising property taxes, insurance costs, and maintenance expenses, renting can provide more financial predictability.

Even if mortgage rates decline slightly, home prices remain high, making it difficult for many renters to transition into homeownership. As a result, the demand for rental properties—especially in urban centers—will likely remain strong.

How Investors and Lenders Are Responding

The shift toward renting is not going unnoticed by real estate investors and financial institutions:

  • Investors are focusing on multifamily housing as rental demand stays high, particularly in expensive metropolitan areas where homeownership is out of reach for many.
  • Lenders are introducing new mortgage products to attract buyers, anticipating opportunities when affordability improves. However, until housing supply increases, these efforts may have limited impact on shifting renters into homeownership.

By the end of 2025, renting is expected to remain the more favorable option for many individuals, particularly in major metropolitan areas where home prices continue to outpace wage growth. While homeownership will always be a long-term goal for some, economic conditions suggest that renting will still be the more practical and affordable choice for a significant portion of the population.

Will the Construction Slowdown Continue to Drive Up Asking Rents for Industrial Properties?

by: Tiara D’Mello

Limited Supply and Past Trends

A recent decline in construction starts could result in increased asking rents for industrial properties in 2025. Throughout 2024, industrial construction starts experienced a 33.5% decline, mirroring broader trends. In 2023, new starts fell by 40%, reflecting tightened loan conditions, rising costs, and economic uncertainty (Lung). Nationally, in-place rents increased by 7.5%, indicating supply constraints are already influencing prices. These trends highlight how reduced construction activity has consistently driven up rents by limiting the availability of new industrial spaces (CommercialEdge).

Rising rents in the industrial property sector offer exciting opportunities for both existing and new owners. However, securing capital for these projects can be challenging as we enter 2025. Lever Capital Partners, experts in the industrial real estate market, are here to help. We specialize in crafting tailored strategies to secure the most competitive financing solutions, whether you’re developing new projects, acquiring properties, or optimizing your investment portfolio for sustained success.

Future Trends and Demand-Supply Gap

Looking ahead, demand for industrial spaces remains robust due to e-commerce growth, nearshoring, and shifting supply chain strategies. However, the slowdown in new projects will likely continue to widen the gap between demand and available supply. Industrial facilities, particularly in key logistics hubs like Los Angeles and the Inland Empire, continue to report rising rents as vacancy rates tighten. For example, rents in the Inland Empire increased by 12.5% in 2024, demonstrating the price pressures created by sustained demand coupled with limited new construction (CommercialEdge).

This persistent demand is driven by several factors. The e-commerce sector’s expansion has increased the need for strategically located warehouses and distribution centers. Similarly, nearshoring—the practice of relocating production facilities closer to domestic markets—has spurred demand for industrial properties in North America. Additionally, evolving supply chain strategies emphasize the importance of proximity to major markets and transportation networks, further increasing demand for logistics hubs. These factors, combined with limited new construction, are expected to exacerbate the demand-supply gap, keeping pressure on asking rents.

Regional Variations

The impact of the construction slowdown varies by region, with high-demand areas like Southern California, Dallas-Fort Worth, and Chicago feeling the effects more acutely. Southern California, particularly Los Angeles and the Inland Empire, has consistently seen some of the highest rent increases due to its critical role in global trade and logistics. In these regions, vacancy rates have fallen below 2%, leaving tenants with few options and driving up competition for available spaces. Meanwhile, markets like Dallas-Fort Worth and Chicago, which serve as major inland logistics hubs, are also experiencing rising rents and tightening vacancies. However, regions with more available land or slower demand growth may not experience the same level of price increases, highlighting the localized nature of these trends.

Rising Costs and Inflation’s Impact

While construction slowdowns create supply challenges, rising costs and inflation also impact landlords. Higher expenses for maintenance and financing push property owners to increase rents to maintain profitability. Yet, it’s important to connect these costs directly to construction trends. Developers are pausing projects partly because high interest rates and economic uncertainty have made financing less viable. These factors intertwine, with slower construction reducing new supply and compounding the effects of inflation on rent increases (Coldwell Banker).

In addition, inflation has driven up the costs of raw materials and labor, making new developments more expensive. This has led many developers to delay or cancel projects, further straining the supply pipeline. For existing property owners, these rising costs create additional pressures to increase rents, as they seek to offset higher operational and financing expenses. The interplay between construction slowdowns and inflation highlights the broader economic dynamics at play in the industrial real estate market.

Strategic Implications for Tenants and Investors

The current trends in industrial real estate have significant implications for both tenants and investors. For tenants, rising rents and limited availability mean they must act strategically when securing space. Long-term leases and early renewals can help mitigate exposure to escalating costs. For investors, the supply constraints and rising rents present opportunities for strong returns, particularly in high-demand markets. However, navigating the challenges of financing and rising construction costs requires careful planning and market analysis.

How Will Multifamily Operating Expenses Affect NOI in 2025?

by: Dalton Morgan

Multifamily properties have long been considered one of the more resilient real estate asset classes. However, rising operating expenses are posing challenges to profitability. Factors such as high inflation, wage growth, and increased material costs due to supply chain disruptions are driving up these expenses. As operating costs rise, net operating income (NOI) is directly impacted, diminishing investment returns. Read on to see what we think the impact will be next year.

Rising Operating Costs

Operating costs have historically risen over time, but since 2021, the growth has accelerated. According to Moody (2024), expenses like payroll, utilities, repairs, and insurance are increasing at two to three times the rate of the preceding decade. For example, payroll and benefits have risen by $75 to $120 per unit annually, utilities by $55 to $95, and repairs and maintenance by $35 to $95 per unit depending on the market quartile (Globe St., 2024). 

Key Drivers of Cost Increases

Inflation: Rising prices for goods and services are significantly impacting multifamily properties. Utilities, which account for 15%-20% of overall operating expenses, have risen by an average of 10.7% across the top 50 U.S. markets, increasing total operating costs by up to 2% (Matthews).

Construction Materials and Labor: Prices for materials like timber, steel, concrete, and copper have surged due to high demand, supply chain issues, and inflation. Labor shortages are exacerbating the issue. As of May 2023, there were 396,000 job openings in construction (NAIOP). To attract skilled workers, companies are raising wages, which in turn increases development costs, further impacting NOI.

Insurance Costs: Insurance premiums for multifamily properties have risen 33% year-over-year, amounting to an additional $180 per unit (Matthews). This increase is driven by the heightened risk of natural disasters such as hurricanes, floods, droughts, and wildfires, which collectively cost the U.S. between $179.8 billion and $496 billion annually (Center for Disaster Philanthropy).

Impact on NOI and Rental Market Dynamics

Net operating income growth has slowed significantly, achieving only 2.8% in Q1 2024 compared to 24.8% in late 2021 (Globe St.). Owners may attempt to offset rising expenses by increasing rental rates, but market competition and tenant affordability concerns limit rent growth. The oversupply of multifamily housing is another factor. In June 2024, private-owned housing completions rose by 10.4% to a seasonally adjusted annual rate of 1.71 million units, with 656,000 being multifamily units (Globe St.).

With supply outpacing demand and mortgage rates keeping homeownership costly, property owners face limited room to raise rents. Moody’s forecasts asking rent growth in the low- to mid-1% range for 2024, while the gap between asking and effective rents exceeds $90 per unit. For a 100-unit property, this translates to $9,000 in unrealized rental income, while expenses remain elevated.

These factors also put pressure on debt service coverage ratios (DSCR), which generally need to be in the range of 1.20x to 1.25x. Rising expenses reduce the cash flow available for debt payments, heightening the challenges of refinancing and the risk of default, particularly in an unpredictable economic environment. At Lever Capital Partners, we understand the obstacles many investors encounter when acquiring or refinancing multifamily properties. Contact us today for a prompt analysis of your unique situation, so we can provide a customized solution that aligns with your investment strategy.

Future Outlook

Some factors may provide relief for multifamily property owners in 2025:

  • Onshoring and Supply Chain Adjustments: The push for onshoring could stabilize material costs over time. Infrastructure enhancements may balance supply and demand, potentially reducing construction expenses.
  • Interest Rates: Mortgage rates are expected to remain in the low 6% to high 5% range throughout 2025, a notable improvement from the 7% national average in 2023 (US News). Additionally, loan rates from Fannie Mae, Freddie Mac, CMBS, and other sources could drop by 1%-2% due to Federal Reserve rate cuts, easing borrowing costs.
  • Inflation Trends: Inflation is projected to slow to 2.4% by late 2025 (Goldman Sachs). However, potential tariff policies could push inflation closer to 3%.

While the outlook suggests possible improvements, the timeline and effectiveness of these changes remain uncertain. Multifamily investors must navigate ongoing challenges and adapt strategies to preserve NOI amid fluctuating operating costs and market conditions.

Secrets to Client Success: Leveraging Expertise and Strategic Partnerships

by: Adam Horowitz

In our years of experience, we’ve observed key factors that distinguish successful deals from unsuccessful ones. By studying what works, we’ve identified some core strengths of our clients that consistently lead to successful outcomes. Let’s explore three key strategies that have contributed to these successes. We’ll look at how one of our retail clients creates value before a deal even closes, how an industrial client leverages deep local knowledge, and how a multifamily client rigorously examines underwriting.

1. Creating Equity Before Closing

Over recent decades, many sponsors have turned away from retail investments, favoring multifamily and industrial sectors. However, the shift away from retail has presented valuable opportunities for those who remain. One of our retail clients has excelled in finding value-add assets in this sector by identifying spaces where they can secure tenants that the previous owner couldn’t. They’re highly selective, reviewing a large number of deals but quickly zeroing in on properties where their unique strengths will allow them to secure signed tenant contracts before closing. This ability to reduce vacancy and increase asset value even before a transaction is finalized is a powerful way to build equity upfront.

2. Knowing the Market—Down to the Street Level

When evaluating a property, having an in-depth understanding of the market can make all the difference. Often, lenders or LP investors will scrutinize location details, down to the side of the street. A client of ours in the industrial sector has a level of market knowledge that turns this type of analysis on its head—rather than hearing why investors have concerns, he explains to them why his choice of location is optimal. Knowing a market this intimately builds credibility with lenders and investors, who are more inclined to back a developer with this level of insight.

3. Trusting the Numbers—Rigorous Underwriting in Multifamily

Every proforma looks good on paper, especially when an exit cap is set low. But are the numbers realistic? Are they thoroughly tested, or simply optimistic estimates? One of our multifamily clients takes an exceptionally rigorous approach to underwriting, testing various scenarios across economic shifts, index changes, and local market dynamics. This client refuses to close on a deal unless it meets stringent criteria. By modeling both the upside and downside possibilities, they go into each project with a high degree of confidence in their decisions. This approach doesn’t just minimize risk—it allows them to make informed decisions they can stand by.

Leveraging Expertise and Strategic Partnerships

While each of these clients brings specific expertise to the table, they don’t attempt to handle every aspect of the process themselves. Instead, they focus on what they know best and outsource other critical components, like financing, to experts like us at Lever. By doing so, they streamline their efforts and ensure each element of a transaction is handled by a specialist. When these clients come to Lever, they trust us to manage the financing so they can focus on other priorities, secure in the knowledge that their deals are in capable hands.

This delegation enables them to hit their projected numbers consistently and sometimes exceed them. They rely on their strengths, whether that’s in creating pre-close equity, mastering their market, or rigorous underwriting, and turn to us to handle the financial aspects seamlessly. They know that the right financing partner can make the difference in a competitive market, allowing them to achieve their goals more efficiently.

Why a Client Relationship Matters

The distinction between having a client versus a customer is significant. Our clients bring all their financing needs to us because we know their business inside out, which enables us to represent them effectively. We’re prepared to answer lender questions without needing to consult our clients constantly. This deep understanding allows them to capitalize on the cost of our services within each deal, letting them concentrate on what they do best without distractions.

Our Client Exclusive Program exemplifies this approach. By working exclusively with Lever, our clients benefit from a dedicated, knowledgeable partner who handles the financing end with as much diligence and care as they apply to their own areas of expertise. Our collaboration allows them to pursue their vision confidently, knowing they have a financial partner invested in their success.

If you’re interested in exploring how our Client Exclusive Program could benefit your business, please reach out to us via email at [email protected]. We’d be happy to discuss how we can help you focus on your strengths while we handle the financing to bring your deals to a successful close.

From Overbuilt to Optimized: The New U.S. Retail Landscape

by: Simone Mehdizadeh

Retail vacancy rates hit a 20-year low of 5.4% this summer, down almost 50% from the pandemic peak. Even before COVID-19, vacancy rates were already very high at 9.7% in January 2020. Three key factors are contributing to this historic drop in vacancy; store closings, better tenants, and conversions to mixed-use.

The recent surge in store closures that has ultimately surpassed openings is creating a window of opportunity for opportunistic retail investors across the country. A Coresight Research report highlights that 4,548 stores have closed compared to 4,426 openings, resulting in a net loss of 122 stores (CoStar). This shift has been driven by significant closures from retailers like Big Lots (not to mention many others) which plans to shut 258 locations nationwide. Despite this, according to CoStar, analysts remain bullish that the demand for retail space continues to outstrip supply, indicating a tight market and a substantial demand from various sectors for retail space. This imbalance between the need for retail space and its availability, combined with significant bankruptcy activity closing stores across the country, leaves a window of opportunity for investors to buy retail centers at a discount (due to recent vacancies) and take advantage of the many retailers looking to expand and willing to pay higher/market rents.


Developers are revitalizing shopping centers by introducing more experiential tenants such as entertainment venues, modern restaurants, and recreational activities that attract a broader customer base. This shift started in the mid-2010s when traditional retailers like bookstores were replaced by more trend-driven brands and entertainment options. Experiences like pickleball courts and escape rooms are now major draws. For instance, the State of the Escape Room Industry Report shows that 68% of owners plan to expand, indicating how these new activities boost foot traffic and help retail centers thrive. In today’s retail landscape, centers that incorporate experiential elements and are anchored by major grocery chains like Walmart, Target, or other essential retailers are experiencing significant revenue growth among nearly all tenants, while those lacking such features continue to face challenges.


Many middle-market retail centers that have been hit hard are being redeveloped into mixed-use spaces, combining retail with residential, office, and recreational elements. This transformation creates vibrant community hubs, boosting retail while meeting demand for housing and office space.  It also draws people into retail center locations as a destination and keeps them there as long as possible to maximize the return on investment. For example, Trademark Property Company is reducing retail space by 50% in one of their developments, and adding office, hospitality, and residential components to revitalize the area. Similarly, Paradise Valley Mall in Phoenix now includes residential amenities like a fitness studio and dog park, turning it into a desirable mixed-use destination.


Retail centers are becoming more attractive investments, particularly when compared to apartment and industrial properties with lower cap rates and less value-add opportunities. Our retail clients are finding good investment acquisitions all over the country where they can take advantage of the higher cap rates and add value quickly by utilizing the strategies above. Lever Capital Partners can help secure tailored financing solutions to help investors navigate retail real estate opportunities, secure profitable deals, and maximize returns. Whether you’re looking to finance a retail project or explore new investments, Lever’s expertise ensures you get the best guidance for success.

AI-Powered PropTech: The Future of CRE Efficiency and Innovation

by: Caden Jang

Amid an ever-evolving commercial real estate (CRE) industry, the emergence of property technology (PropTech) has sparked a significant transformation. We talked about PropTech last month and highlighted companies that are on the rise. PropTech encompasses a wide range of digital solutions designed to streamline every aspect of real estate; from development and management to marketing and tenant engagement. In 2021, the global PropTech market was valued at over $25 billion, with a projected compound annual growth rate (CAGR) of 15.8% annually through 2030. This surge is largely fueled by the growing use of Artificial Intelligence (AI), which promises to revolutionize the industry by enhancing energy efficiency, elevating tenant experiences, promoting sustainability, and providing advanced analytics for data-driven decision-making. As AI-driven PropTech continues to gain traction, these innovations are sure to reshape the future of CRE, bringing both economic and operational benefits. 

Energy Saving

One of the significant advancements of AI-driven PropTech is its application in Energy Management Systems (EMS) and Building Management Systems (BMS). These systems bring together critical building components such as HVAC, lighting, and security under a single, centralized platform. By utilizing data from Internet of Things (IoT) sensors and smart meters, EMS and BMS can pinpoint inefficiencies and suggest corrective measures, ensuring properties run harmoniously to reduce energy consumption and improve building performance. A study by the American Council for an Energy-Efficient Economy found that implementing smart lighting, window shading and HVAC systems can lead to energy savings of 30-50%​. This translates to lower utility bills and a smaller environmental footprint, making these properties more attractive to eco-conscious tenants and investors, alike.

Tenant Experience 

Keeping tenants happy is key to maintaining high occupancy rates, and AI-powered smart building technologies are transforming how tenants interact with their spaces. From personalized climate control and lighting settings to easy app-based amenity bookings, tenants now enjoy a level of convenience that was hard to imagine just a few years ago. The integration of IoT devices allow for real-time adjustments to these features, providing a tailored living or working environment that boosts tenant satisfaction. Properties utilizing these technologies have reported up to a 30% increase in tenant satisfaction thanks to the personalized comfort and seamless digital experiences they offer.

Beyond day-to-day comforts, AI also provides property managers with invaluable insights into tenant behavior and preferences. By analyzing this data, managers can anticipate issues before they arise, address concerns quickly, and proactively improve tenant services. This approach not only strengthens relationships with existing tenants but also offers greater attraction to prospective ones, helping reduce vacancy rates and increase long-term revenue​​. 

Sustainability

With sustainability now a main concern for many CRE stakeholders, AI-driven PropTech solutions, particularly ClimateTech, are playing a crucial role in addressing these demands. According to the 2023 JPMorgan Business Leaders Outlook for CRE, improving energy efficiency is a top priority for building management. AI-powered EMS are making that goal easier to achieve by using real-time data from IoT sensors, weather forecasts, and historical energy usage patterns to fine-tune energy consumption. For example, by adjusting HVAC and lighting systems based on building occupancy or natural light availability, energy use can be reduced by 10-25% in HVAC alone. 

Integrating AI-driven sustainability solutions can not only help companies meet their Environmental, Social, and Governance (ESG) goals but also reduce operational costs and improve tenant retention by creating healthier, greener environments.

Advanced Analytics for Informed Decision Making

One of the most transformative aspects of AI in PropTech is its capacity to deliver advanced data analytics. AI algorithms can process vast amounts of data from various sources, including market trends, tenant preferences, and property performance metrics. This data-driven approach enables property managers and developers to make more informed decisions.

For instance, AI can identify optimal pricing strategies based on current and historical market data, forecast demand for different types of spaces, and highlight promising investment opportunities. These insights enable CRE professionals to react quickly to market shifts, adjust leasing rates as needed, and position properties to maximize appeal and profitability. By relying on data rather than intuition, AI-driven analytics significantly improve decision-making and ROI across the board. 

How Lever Can Help

As AI-driven PropTech continues to reshape the commercial real estate landscape, Lever Capital Partners is uniquely positioned to help clients leverage these innovations as they are investors at many PropTech firms and follow the most recent trends. At Lever, we pride ourselves on our ability to finance a wide array of PropTech-driven projects, from energy-efficient upgrades to smart building systems. Our expertise in evaluating and structuring capital ensures clients have access to the most accretive financing options tailored to their strategic goals.

References:

https://www.grandviewresearch.com/industry-analysis/proptech-market-report https://www.aceee.org/sites/default/files/publications/researchreports/a1701.pdf https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/real-estate/deloitte-nl-fsi-real-estate-smart-buildings-how-iot-technology-aims-to-add-value-for-real-estate-companies.pdf https://www.jpmorgan.com/insights/outlook/business-leaders-outlook/commercial-real-estate-business-leaders-outlook https://brainboxai.com/en/solutions/ai-hvac-optimization ” CoStar https://www.grandviewresearch.com/industry-analysis/proptech-market-report https://www.aceee.org/sites/default/files/publications/researchreports/a1701.pdf https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/real-estate/deloitte-nl-fsi-real-estate-smart-buildings-how-iot-technology-aims-to-add-value-for-real-estate-companies.pdf https://www.jpmorgan.com/insights/outlook/business-leaders-outlook/commercial-real-estate-business-leaders-outlook https://brainboxai.com/en/solutions/ai-hvac-optimization

PropTech Companies on the Rise

by: Adam Horowitz

Welcome to the exciting world of PropTech, where real estate meets cutting-edge technology. Two years ago I became a Venture Partner with RE Angels, an Angel Fund dedicated to investing in technology-driven real estate solutions. We’ve carefully selected and invested in nine companies so far, including Daisy, Covercy, Paraspot, Blanket, Waltz, block.a, Tough Leaf, Tweaks, and Pest Share, which we’ll explore in this overview. 

Mastering Retail Bankruptcies: Key Strategies for CRE Success

by: Samantha Armendariz

The commercial real estate (CRE) landscape has been significantly impacted by the upsurge in retail bankruptcies seen in the Spring of 2024. The fallout following the decline of once-stable retail giants such as 99 Cents Only Stores and Red Lobster is extensive. The closure of thousands of retail locations has not only resulted in decreased property values and rental income but has also triggered high vacancy rates that threaten to diminish foot traffic and affect neighboring tenants. Investors in retail centers anchored by these former tenants are left to grapple with stabilizing their properties and mitigating financial losses. 

The financial implications of these bankruptcies are stark. Properties with substantial vacancies often face revaluation downward, impacting investors’ balance sheets and reducing their borrowing capacity. This is likely driven by the loss of revenue, which lowers the net operating income (NOI) and the property’s value based on income capitalization. A higher vacancy rate within a retail center may also lead potential investors or lenders to believe the center is undesirable or is located in a declining market. Devaluation can lead to higher interest rates or stricter loan terms when seeking acquisition financing or refinancing, further complicating financial stability in the sector.

Amidst these challenges, the industry has witnessed a notable shift towards repurposing vacant retail spaces. Repositioning vacant commercial buildings has not only breathed new life into dormant properties but also aligns with evolving consumer preferences and community needs. Creative strategies have emerged to reposition vacant retail spaces effectively. From transforming these areas into vibrant lifestyle entertainment hubs (ie. adding fitness centers and experience-based retail) to integrating residential or office spaces within mixed-use developments, these adaptations cater to diverse demographics and inject vitality into local economies. Reusing old building shells significantly reduces carbon emissions. Repurposing existing foundations, structures, and enclosures helps to avoid the emissions tied to producing, transporting, and installing new materials like concrete or steel. This process capitalizes on the carbon already embodied in the existing buildings. This trend of repurposing assets has also proven beneficial to developers as these projects are 16% less expensive than ground-up construction and accelerate the construction timeline by 18%. Such initiatives not only optimize existing infrastructure but also align investments with long-term sustainability.

There are several underlying issues that may lead to retail bankruptcies. Often, private equity acquisitions burden companies with high debt loads, leading to financial strain and prioritization of short-term gains over strategic long-term planning. The CRE industry has witnessed cases of retailers filing for bankruptcy, such as with Toys “R” Us and Payless ShoeSource, following a merger or acquisition. When managing the portfolios of these retail companies, some private equity firms may sell off valuable assets of the acquired company to repay debt or generate quick profits, leaving the company weaker and less competitive. As most recently seen with mass sale-leasebacks for both 99 Cent Only Stores and Red Lobster, the lack of industry-specific expertise within acquiring firms can exacerbate these challenges, resulting in misaligned priorities and ineffective management practices. 

The shift in consumer behavior has also played a pivotal role in the downturn of retail fortunes. The exponential growth of e-commerce, accelerated by the COVID-19 pandemic, has reshaped spending habits. E-commerce sales in the U.S. currently makeup over 22% of retail sales and recently increased over 7% from $1.040 trillion in 2022 to $1.119 trillion in 2023. This trend has significantly impacted brick-and-mortar stores, particularly in sectors such as apparel and electronics, where online retailers dominate market share. In response to these dynamics, retail giants like Target and Walmart have pivoted towards hybrid models, blending online convenience with enhanced in-store experiences. Such adaptations reflect a strategic recalibration to meet evolving consumer expectations and sustain competitive relevance. 

When navigating this complex landscape, CRE professionals can leverage specialized expertise and strategic insights to mitigate risks and capitalize on emerging opportunities. Finance brokers such as Lever Capital Partners offer crucial support through financial restructuring, portfolio diversification advice beyond retail, and market intelligence for repurposing retail spaces. Lever Capital Partners is a premier player in the space with an extensive network, structured finance experience, and a commitment to personalized service nationwide. We offer access to both debt & equity capital, as well as advisory services for loan renegotiations, ensuring investors can maintain control in changing economic conditions. This makes Lever Capital Partners an invaluable resource for investors managing CRE finance amidst tenant retail bankruptcies.

As the retail sector continues to evolve, proactive adaptation and strategic foresight will prove pivotal for CRE investors and developers. By embracing innovation and leveraging comprehensive insights, stakeholders can not only weather the storm of retail bankruptcies but also foster resilient, adaptive real estate ecosystems poised for sustained growth. Although challenges are presented, opportunities for reinvention and success in retail development emerge. 

References:

US Ecommerce Sales Reached $1.119 Trillion in 2023 Adaptive Reuse: The ‘wrong’ Project in the Right Market.” ACRES Capital, 19 Oct. 2021 Commercial Real Estate Trends 2023: Reuse and Redevelopment.” CRE Knowledge Base, 29 Aug. 2023 Goldberg, Jason. “E-Commerce Sales Grew 50% to $870 Billion during the Pandemic.” Forbes, Forbes Magazine, 12 Oct. 2022 Here’s a Look at 99 Cents Only’s Retail Locations.” CoStar Rental Vacancy Rate [2024 ]: National Trends & Rates by City.” iPropertyManagement.Com, 5 May 2024 Meyersohn, Nathaniel. “Red Lobster Files for Bankruptcy | CNN Business.” CNN, Cable News Network, 20 May 2024 Williams-Eynon, August. “The New, Old Real Estate: Capturing Value, Sustainability, and Community Impact by Repositioning Older Buildings.” Urban Land, Urban Land, 10 Aug. 2020

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

  1. Stronger Guarantors: Lenders now prefer sponsors who can provide robust guarantees. This additional security assures lenders of the repayment capabilities, thus reducing their risk.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.