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Regulators Ring the Alarm: Lenders to the Rescue

In response to the growing strain in the commercial real estate market, top US banking regulators are calling on lenders to engage constructively with their creditworthy borrowers.

Regulators Ring the Alarm: Lenders to the Rescue

In response to the growing strain in the commercial real estate market, top US banking regulators are calling on lenders to engage constructively with their creditworthy borrowers.

Together with

Good morning. US regulators are urging lenders to collaborate with creditworthy borrowers experiencing commercial real estate stress. Yardi Matrix released their Summer 2023 Multifamily Outlook, which showed that multifamily performance remained strong through the year's first half.

Conversely, industrial sales have taken a significant plunge compared to 2022, indicating a return to normalcy in this once-booming sector.

Today's edition is brought to you by AirGarage. The end-to-end solution for parking lot owners to boost their NOI and reduce operating expenses.

Market Snapshot

S&P 500
GSPC
4,396.44
Pct Chg:
0.4%
FTSE NAREIT
FNER
706.70
Pct Chg:
1.1%
10Y Treasury
TNX
3.842%
Pct Chg:
3.5%
SOFR
1-month
5.06%
Pct Chg:
0.0%

*Data as of 6/29/2023 market close.

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REGULATORY SOS

US Regulators Encourage Lenders to Support Firms Facing CRE Stress

In response to the growing strain in the commercial real estate market, top US banking regulators are calling on lenders to engage constructively with their creditworthy borrowers.

From the Fed’s mouth: In recent guidance issued by the Federal Reserve, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the National Credit Union Administration, financial firms are urged to engage with their reliable clients in a prudent and constructive manner. This update revises the previous 2009 guidance on workout strategies, emphasizing the importance of fostering productive relationships during challenging times.

Mounting challenges: As borrowing costs reach unprecedented highs, property owners find themselves in increasingly precarious positions, leading to companies like Brookfield Corp. and an office landlord managed by Pacific Investment Management Co. defaulting on their debts. The situation is particularly acute for office property owners, who face the double blow of high financing costs and a decline in tenants due to workforce layoffs and the rise of remote working.

Regulatory to the rescue: In light of these challenges, the updated regulatory guidance recommends banks to provide short-term loan accommodations to struggling borrowers. This can include measures like deferring payments, accepting partial payments, or providing other forms of financial assistance. Furthermore, the guidance addresses necessary accounting changes to be implemented to effectively navigate the current scenario.

➥ THE TAKEAWAY

Navigating the labyrinth of debt negotiations: The commercial real estate sector braces itself for a challenging period, as nearly $400 billion of debt is due to mature this year. Complicating the situation further, distressed commercial property assets have surged to nearly $64 billion in the first quarter of the year, according to MSCI Real Assets. As such, lenders will need to embark on intricate negotiations and demonstrate flexibility to ensure their own survival while also supporting their clients through this economic turbulence.

TOGETHER WITH AIRGARAGE

Philadelphia Parking Garage Ditches Gates, Boosts NOI

Imagine this: it’s 2023 and your parking garage is still collecting cash.

Worse still, your parking garage has full time parking attendants staffed on site at great expense and the gate arms have been driven through so many times that you have resorted to replacing them with 2x4s instead of continuously paying $1000 to the parking arm company every week.

That was the situation before AirGarage took over the parking garage at 1601 Callowhill St in Philadelphia.

Despite being a Class A, 900-space parking garage, the property was being run by the old parking operator like it was still 1980. AirGarage took over the property and quickly turned things around.

How well is well? The Net Operating Income at the property is up 21% year over year, and the owner hired them to run more of their parking properties.

Their proprietary dynamic pricing algorithms combined with real-time license plate enforcement cameras increase NOI by 23% on average.

Is your parking garage still being run like it’s 1980? Talk with AirGarage.

MULTIFAMILY OUTLOOK

Yardi Matrix: Moderate Rent Growth in the Forecast for U.S. Multifamily

Per Yardi Matrix's Summer 2023 Multifamily Outlook, multifamily rents experienced a surge in H1 2023, propelled by strong job growth and new household formations, despite sector obstacles and economic uncertainty.

Rental dynamics: In the initial five months of 2023, U.S. apartment asking rents saw a modest increase of $17, or 0.9%, while year-on-year growth slowed to 2.6%. The Yardi Matrix Summer 2023 Multifamily Outlook predicts a further slowdown, projecting an annual rent growth of 2.5%. The average apartment rent in the U.S. hit a record high of $1,716 in May.

Market challenges: Despite a solid first half, the real estate industry's capital arm faces challenges with persistently high interest rates, leading to a 15-20% decline in property values. The high cost of capital perpetuates this downward trend. Despite this, new property completions will stay high through 2024 due to a million units under construction. However, costlier debt and dwindling bank finance are causing a slowdown in new projects.

➥ THE TAKEAWAY

Homeownership hurdles: The plunge in home sales and steep mortgage rates are hindering first-time and middle-income buyers' transition from renting to owning homes. With mortgage rates peaking at 6.5% in March 2023, monthly mortgage costs and overall homeownership costs have surged, reinforcing multifamily demand despite potential headwinds for homebuyers.

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AROUND THE WEB

📖 Read: AI is revolutionizing the real estate industry by transforming the way developers plan and build their projects while boosting returns and reducing carbon emissions.

🖥️ Watch: In this Q&A interview, Mike Hazinski, Chief Investment Officer at First National Realty Partners, provides insightful analysis on why he champions the idea of investing in necessity-based commercial real estate (CRE) in the current challenging climate.

🎧 Listen: In this episode of Fort with Chris Powers, trust and estate attorney Ryan Heath discusses all things estate planning, including setting up plans for children, family business succession planning, and using trusts in PE investments.

SECTOR STABILIZING

Industrial Sales Plummet Compared to 2022

NEW WAREHOUSE DEVELOPMENT IN SOUTHERN CALIFORNIA’S INLAND EMPIRE NEXT TO RIALTO MIDDLE SCHOOL. PHOTO: ROBERT GAUTHIER/LOS ANGELES TIMES

According to CommercialEdge, interest rates and market normalization have slowed the fast pace of industrial sales, with the U.S. seeing approximately $16.3B of industrial sales through the end of May, compared to $31.2B in 2022 for the same period.

Buy and hold: The report anticipates that many owners will hold properties rather than sell them due to higher capital costs and tighter credit conditions. But unlike office assets, which are falling in value, prices for industrial properties have remained relatively stable. The national average price per SF sat at $129 in 2Q23, down 1.3% from 2Q22. National rents for industrial space averaged $7.29 per SF in May, an increase of 11 cents from April and up 7.4% YoY.

Market demand: Port markets continued to see the biggest rent gains in May, led by increases of 17% in Southern California's Inland Empire, 13% in LA, 10% in New Jersey, 10% in Boston, and 9% in Orange County. The Inland Empire recorded $1.9B in industrial sales, the nation's highest, followed by LA. LA's standing as the largest entertainment hub in the country plays a role on the industrial side as well.

Rising vacancies: The national industrial vacancy rate increased to 4.3% in May, up 20bps from April, after record levels of new warehouses, logistics centers, and other industrial buildings have been delivered in recent quarters. More than 200 MSF of new space opened in the first five months of 2023 alone. While much of the space has been absorbed, some markets may see an uptick in vacancy over the next few quarters.

➥ THE TAKEAWAY

Back to normal: Industrial saw a massive increase in demand during the pandemic, and now that demand is normalizing. Nationally, 618.9M SF of industrial space is under construction, but CommercialEdge expects a slowdown in construction starts for the rest of the year. Given where interest rates are at, a pullback was inevitable. But the good news is that fundamentals are still strong, and new leases continue to push rents higher.

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✍️ Daily Picks
  • EQT Exeter closed its Industrial Value Fund VI at $4.9B, planning to invest in U.S. logistics properties amidst softening industrial market fundamentals.

📈 Chart of the Day

Roughly 2.2M people moved to the Southeast in the past 2 years. The southern states continue to attract individuals and families seeking lower taxes, affordable housing, and a favorable business environment.

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