NAI Global Capital Markets Monthly Review
December 2022 // NAI DESCO Blog
Capital Markets Monthly Review
The November meeting to discuss capital markets trends and activity featured more than 40 investment sales professionals from various NAI Global offices in the U.S. The meeting was facilitated by Arthur Milston, Senior Managing Director and co-head of the Capital Markets Group of NAI Global. The following is a recap of the event.
The sentiment on the Capital Markets Council meeting was overwhelmingly characterized by a significant reduction in institutional investment sales activity due to a combination of meteoric increases in lending rates and the separation of seller and buyer expectations.
A number of meeting participants said this is especially true of institutional investors and REITs, with the notable exception if there was an absolute steal (of a buying opportunity); otherwise, institutional investors have signaled to numerous NAI Global brokers that they would wait until the second quarter of 2023 before resuming acquisition activity.
Some of the more colorful comments from the meeting as it relates to the stalled sales environment and challenging debt market included:
- “We’ve seen some deals close with actual negative leverage.”
- “Sellers still think it is 2021 while buyers think it is 2008.”
- “Industrial and multifamily properties are holding up the best, retail assets are holding their own and even then, there is a flight to quality for some of the lenders and they are getting more particular on what they will lend on.”
That said, there is still a great deal of cash set aside for property investment and once there is price discovery – meaning a meeting of the minds between sellers and buyers, the market will likely move again. However, and based on past experience (most recently the Great Financial Recession), it could take as long as 6-12 months for meaningful price discovery to be achieved.
One of the conditions that could accelerate price discovery is loan maturities, yet it will depend on the types of loans in place before any kind of distressed sales activity may occur. For example, CMBS loans take much longer to unwind compared with more conventional bank financing.
While pencils may be down for the majority of institutional sales, that doesn’t mean they aren’t happening and if they are, prices are discounted considerably. One meeting participant said that his team is managing a portfolio sale with four assets in California and one in Ohio. They originally went into contract with the California properties at $73 million and the Ohio property at $35 million but the seller hesitated and the assets are being retraded at $58 million and $28 million respectively, or a 25% to 30% discount. The Cap Rate for the transactions is approximately 5.5%.
In contrast, demand is still strong in suburban Ventura County (north of Los Angeles) for commercial properties from $1 million to $5 million, and mostly with all-cash buyers.
In the Toledo, Ohio market, ground up development deals are being halted because of the debt costs. Leveraged at current borrowing rates, new development would come in between a 9% Cap Rate and 10% and current rents can’t justify the development costs. The situation is only getting worse, which inspired the comment, “you are really not going to like the 2024 price if you don’t like the 2022 price.”
There is an expectation that there will be some distressed sales activity in the Washington, D.C. area as the office leasing fundamentals is quite poor (office vacancy is +20%).
One potential hazard with projects under construction is that those developers and investors that took out construction loans 15 months ago at 2.5% with an expectation that upon completion they would put long-term financing in place with an agency financing package from Fannie or Freddie at 4%. The reality is that those projects are now facing conventional loans closer to 6%, which will negatively affect expected cash flow and debt-service coverage. One potential solution is for the lender on the construction loan to provide an extension of the construction loan at interest only until market fundamentals change and the owner can afford to put permanent financing on the project. Alternatively, project developers may have to come up with more cash to lower its debt coverage.
Self Storage as an asset class has been one of the healthiest in recent years. Transactions are still trading in the low 5s and even low 4% Cap Rate range. Some of the large institutional REITS in the storage space, including Public Storage, have shifted strategies from developing new storage facilities to buying new projects – largely from merchant Self Storage developers, at Certificate of Occupancy. There is continued consolidation in the Self Storage industry with many of the mom ’n pop owners selling to larger entities and most often, the REITs. Another trend in this sector is the expansion from core markets into secondary and tertiary markets.
- Bill Kiefer, NAI Capital, Los Angeles, CA
- Steve Harmon, NAI Harmon Group, Toledo, OH
- Chris Kubler, NAI KLNB, Washington, D.C.
- Chris Jackson, NAI Capital, Los Angeles, CA
- Ed Schmidt, NAI Miami, Miami, FL
- Lee Black, NAI Nashville, Nashville, TN
- Alex Waddey, NAI Global, Nashville, TN
- Jake Hallauer, CCIM, NAI Affinity, Greeley, CO
- Greg James, NAI James E. Hanson, Teterboro, NJ
- Jon England, CCIM, NAI Heartland, Kansas City, KS
- James “Jay” Verro, CCIM, NAI Platform, Albany, NY