For income property investors these days, it’s all about dodging bullets; office, retail, multifamily.
According to a recent Morgan Stanley report, office and retail property valuations may be looking at as much as a 40% drop from peak to trough.
This is in no small part due to the fact that as much as $1.5 trillion in U.S. CRE debt will come due before the end of 2025 – “and the lending window for refinancing has been slammed shut.” (globest.com 4/11/2023).
There is a massive bifurcation in real estate performance. What you own really does matter. To put this in better perspective, office made up nearly 50% of institutional portfolios as recently as 2007. Now, it’s less than 2%. No wonder Trump went from being a developer to a reality TV star and politician!
Historically, the biggest lenders to the commercial real estate sector have been small and regional banks. The recent failure of SVB, Signature Bank and near miss by Republic Bank have largely closed this door for the time being. How long this may last and its ultimate effect on CRE pricing is yet to be seen.
On a positive note, the more conservative lending standards that came in the wake of the Great Recession may act as a cushion. However, refinancing will still be a tough row to hoe.
The multifamily sector which heretofore has been a safe haven for investors may also disappoint. This should come as no surprise with interest rates up, consumers beset with higher prices across the goods and services spectrum, along with growing concerns regarding recession and increased layoffs that may come in its wake.
This has slowed rent growth significantly and may ultimately impact leasing activity. Even though the apartment market added 19,243 new renters in the first three months of 2023, (globest.com 4/10/2023), this fell far short of the 95,237 new units completed concurrently.
It doesn’t take a rocket scientist to figure out if new supply continues to outpace new renters, landlords may be competing with one another thereby placing downward pressure on rents.
It’s hard not to assume that some sort of price correction may be in the offing here too. With a continuing housing shortage nationwide, it’s unlikely to be as severe as office and retail. However, with the biggest new supply of units in 50 years arriving on market, things are going to get competitive. Stay tuned.
Then there is the pandemic CRE darling, industrial warehousing. Ready, set, go, much of it is already being given back by landlords via subleasing.
Giants like Amazon clearly got in over their head from an acquisition and development standpoint. As they now try to right-size (read downsize) things after two years of intense expansion, there may be a lot of recently leased space coming back to market. We think it best to take a wait and see approach in terms of how this effects rents.
This leaves us with our two tried and true options; storage and senior living. The former has a tendency to go up when other things go down while inexorable aging of the population drives the latter. In an uncertain investment environment, it may be best to err on the side of caution.
Finally, there is the old saw that real estate is “location, location, location.” Considering this, income property investors must keep in mind that liberals nationwide are destroying many of the cities they rule in an uncontested manner – Philadelphia, Los Angeles, San Francisco, Portland, Seattle, Denver, Chicago, Baltimore, Washington D.C. and many others. When they get upset about the decay that their policies are causing, they refuse to do what is necessary to restore their cities.
This happened remarkably quickly and caught many landlords unawares. With DST, you have a safety-hatch. With it, you can escape the pro-crime ideologies that are shaping the way most major cities are now run. Life is better in the burbs and exburbs. And out here you might actually get what you pay for.