Nov 6th, 2023
By Wen Shiau
In today’s commercial real estate (CRE) landscape, challenges abound. At a recent excellent Marcus & Millichap conference, Northern California Multifamily Forum, experts in the field discussed the following key points:
- Capital Markets, Developers, and Value Add Participants: Many are taking a cautious approach in 2023 due to limited lending options and high loan rates. CMBS delinquency rates hit 4.63% in Oct 2023 vs 10.34% GFC high in July 2012. Lending activity has ground to a halt. Developers are extending closing dates 3 to 4 years and focusing on entitlements in the meantime, hoping for lower rates at closing. Traditional value-add strategies are underwater, (buying at a 4.5% cap rate, value add to 6% and then selling it back to the market at 4.5% in “Smile States”). Investors are dealing with distressed legacy deals.
- Apartment Cap Rates: National apartment cap rates average 5.2%, up by 50bps from 2022. The spread between apartment cap rates and 10-year Tsys is historically narrow at 30bps. Today’s deals are offering 6-6.5% cap rates, but we at Cypress Capital Group (“CCG”) believe that they should be closer to 7-8% with 10-year Tsys at 5%. This suggests the potential for a 50% discount on pre-2022 pricing.
- Other CRE Sectors: Office spaces face growing challenges not only from the hybrid work model but longer-term AI impacts on white-collar jobs. As there is no visibility on office demand, CCG believes that there cannot be a clearing price yet. Industrial properties are reaching growth limits after 20 years of Amazon expansion. Data centers and cold storage are niche. Most CRE sectors are struggling with negative carry due to the lack of higher cap rate adjustments after a historical run up in Tsy yields.
- Single-Family Investment: The single-family real estate sector stands out as it’s not tied to cap rates. It’s influenced more by supply/demand and is showing pockets of growth in both capital appreciation and rents in 2023. As we head into economic slowdown, local economic vibrancy and regulatory restrictions which provide the economic moat to inhibit supply are more important than ever.
Cypress Capital Group focuses on residential real estate investment and development in select US markets with strong growth in rent and capital appreciation.
In our next market commentary, we shall highlight Where can we invest in CRE Today?
-Cypress Capital Group.