Your Guide to Buying Commercial Real Estate with Seller Financing

Using “seller financing” is one of the most popular ways to put little or no money down when investing in real estate. Although it may be one of the earliest “creative financing” strategies, it seems to be losing favor in recent years, largely for the reasons to follow. All things considered, seller financing out the window, though. Knowing how to use it efficiently in your business might help you close more deals faster and for less money. This post will define seller financing, explain how to use it, and discuss potential pitfalls.

Seller Financing Explained:

Just as it sounds, seller financing involves the seller providing the financing. In other words, although legal title is transferred, the payment is sent directly to the prior owner rather than a bank, and the property owner serves as the bank.For instance:

I want to buy a specific investment property, but I don’t want (or am unable) to obtain typical bank financing. Although the seller wants $100,000 for the property, he or she is prepared to “carry the contract,” as investors say when they agree to finance a piece of real estate they own. The owner requests a $5,000 down payment and a $95,000 balance with a 30-year amortization period at 7% interest for a $632.03 monthly payment. I accept his terms, and, after performing my due diligence, I close on the property using a title company in my neighborhood. Then, in order to collect the monthly cash flow difference, I search for a tenant who will pay $1400 a month to rent the property.

The seller in the aforementioned situation receives an excellent fixed interest rate on their investment, I get to purchase the home for only $5,000 down, and I never have to interact with a bank.What’s the catch, though? Why don’t these have greater appeal?

Why Doesn’t Everyone Use Seller Financing to Buy?

The due-on-sale provision, which is a legal component of practically every mortgage and provides the bank the authority to demand that the loan be repaid, in full, immediately if the property is sold, is a significant issue with seller financing that throws a kink in the whole plan.

You can now see why seller financing is problematic: since the property is being sold, it doesn’t work well if there is already a mortgage on the property. In other words, if you have a mortgage on a property and use seller financing to sell it, the bank may contact you and demand immediate payment or proceed with a foreclosure.

Will that occur?

However, keep in mind that the “due on sale provision” only gives the bank the RIGHT to do so, not a commitment to do so.The bank might approve of the arrangement and say nothing about it, or they might never learn. However, whenever you sell a property with a due-on-sale provision, there is a significant risk involved. I personally don’t dabble with the due on sale clause since I want to reduce the amount of risk I take when investing in real estate. So, how do I benefit from seller financing?

How, therefore, can the “due on sale” clause be avoided?

As noted above, the risk of using seller financing when the seller already has a mortgage is that it may result in the “due on sale clause,” which could result in the property being foreclosed upon if you are unable to repay the bank the full loan total. In the event that you purchase a home from a homeowner, both of you would lose the property if the homeowner went into foreclosure. There is just one straightforward remedy because, obviously, you do not want to find yourself in this situation:

Use seller financing only if you have free and clear title to the property. (There are a few exceptions; we’ll discuss them later.)

In other words, if the property owner currently owes money on the house, you shouldn’t use seller financing to acquire it from them unless you first settle the debt. To purchase with seller financing, you must locate sellers without a mortgage. In this manner, they can offer the financing without having to worry about facing foreclosure.

The Advantages of Seller Financing
Let’s look at a few of the most frequent perks of employing seller financing, but there may be many.

1. Ease of Financing: As was already noted, using pure seller financing eliminates the need to work with a bank, which for many people can mean the difference between a sale and no deal. Seller financing is a fantastic weapon in your toolkit if you have “tapped out” on the number of mortgages you can receive and need to buy more investment property.
2. Due to the fact that you are negotiating with seller directly, there are no black-and-white regulations regarding the down payment. As opposed to Fannie Mae or Freddie Mac, who demand 20% to 30% down on investment properties, you are not subject to their strict requirements. As an alternative, you agree on a price with the seller. You won’t know until you inquire and negotiate what the seller wants in terms of a deposit, whether they want nothing or 50%.

The rules when dealing with banks can be very rigid, but not with seller financing. This leaves room for creativity in transaction structuring. You might think outside the box to find a solution to a problem with seller financing. Rate, period, payment sum, due date, and every other aspect are all subject to negotiation, which can transform a fair deal into an excellent one. Speaking of being inventive, I’ve seen investors work out 0% seller financing terms with the seller.

1. Purchase “Unfinanceable” Properties: On occasion, a property’s condition could be too bad for conventional financing. In these circumstances, seller financing may offer the buyer the opportunity to acquire the property, make repairs, and subsequently refinance into a more conventional form of financing.

Doesn’t Show Up On Your Credit Report: Chances are that your seller-financed agreement won’t land up on your credit report, which can make it simpler to get additional loans and mortgages in the future, unless the home seller joins up with one of the credit reporting agencies to report the debt (which is extremely rare).

Why Sellers Choose Seller Financing?

Monthly Income: Obtaining a monthly income is probably the main reason why sellers choose to use seller financing. Many people would simply prefer to receive regular checks each month rather than a single lump sum, just like in the scenario I presented above with the $100 or $1 per month. For older sellers who depend on monthly income to make ends meet and pay the bills, this is especially true. For an older seller, a $100,000 lump sum would only last them so long. However, if that income is financed over 30 years, it will last them much longer until retirement.
Better ROI: Because the interest they receive from the financing is higher than they are likely to receive elsewhere, many homeowners and investors choose to sell with seller financing. For instance, if a homeowner sold a property for $100,000, they had the option of investing the money in a bank’s Certificate of Deposit to earn 1.5% APY or seller financing their home to earn 8%. What is superior? This idea is well understood by many seasoned real estate investors, who eventually transition their portfolio from a “holding” phase to a “selling phase” by using seller financing to eliminate the hassles of ownership while continuing to generate monthly income by carrying the contract and offering seller financing. The investor then transitions from the “landlord” company to the “note buying” industry.

1. Spread out taxes: The government always wants a piece of your earnings, and selling real estate is no exception. Due to an IRS provision that exempts homeowners from paying taxes on up to $500,000 in profit from the sale of their principal residence provided certain requirements are met, this issue may not be as crucial for homeowners. Investors, on the other hand, are less fortunate and must pay taxes when they sell. For instance, if an investor pays off a rental property mortgage over the course of 30 years, becomes the owner free and clear, and decides to sell the property for $100,000, the investor would be responsible for paying taxes on the $100,000, which might result in a tax payment of close to $50,000. A “recapture of depreciation” tax that the investor will also be responsible for paying might substantially increase that tax bill. As a result, many investors opt to sell using seller financing rather than receiving a lump sum payment in order to postpone the majority of those tax payments. The seller may only have to pay a small fraction of that tax payment each year while the loan is being paid off because the IRS has specific tax regulations for installment transactions, such as those involving seller financing. This brings up the “ROI” issue once more. If an investor sold a property for $100,000, they might lose as much as half of that—or more—to taxes, leaving them with only $50,000 to put toward other investments. Even if they were to make 12% on the stock market, they would only make that on the $50,000 they sold, not the $100,000. They will, however, actually make more money if they offer seller financing at 8% because the interest they receive is on the “pre-taxed” interest.

Can’t Sell Otherwise: As was said in the section before, many properties are just not marketable to a regular borrower with bank financing. By providing seller financing, a seller may be able to sell a home without having to make the necessary repairs.

Drawbacks and Risks

Although seller financing might give you as a buyer some great possibilities, you should be aware of the risks and hazards associated with the tactic. This section will examine three of the most frequent worries when dealing with seller financing and provide some advice on how to avoid those potential issues.

The “due on sale” clause has already been discussed in great detail, but I feel compelled to recapitulate it here. You must fully comprehend the meaning of the due on sale clause and why it is significant. By attempting to go around this provision, you don’t want to jeopardize your credit or your connection with the vendor. Be aware that if you use seller financing to purchase a home and the property has a mortgage with a due on sale provision, the bank may foreclose on the seller, placing you both in a difficult financial situation. Again, the most straightforward answer is to limit the use of seller financing to assets that are owned free and clear. I only have short-term finance as an exception to this rule. There are investors out there who use seller financing with existing mortgages (often called a “wrap” because you wrap one mortgage over another) despite the due on sale clause because they think they can fix the property up quickly and either sell it or refinance it before the bank finds out and has an issue with it. I won’t advise you to do this; that is up to you and your level of risk tolerance.
Higher Interest Rates: Although seller financing encourages tremendous innovation, you will generally pay a higher interest rate than usual.Though some investors negotiate 0% interest seller-financed loans, it is difficult to convince a seller to accept such a low interest rate in today’s lending environment with loans under 4%.Just be sure to run the numbers with the interest rates you plan on obtaining and make sure they work for the deal.
Fewer Potential Properties: Although seller financing can be a fantastic win-win situation for both sides, the vast majority of homeowners are either unable (due to existing mortgages) or unwilling to carry a contract and provide seller finance. Therefore, when trying to cooperate with seller finance, the pool of viable offers is substantially smaller.

Seller Financing Is Not an Instruction to “Invest in a Bad Deal”

We’d like to reiterate that seller financing does not justify overpaying for a property, even if it allows you to purchase properties without utilizing a bank. Only when leverage is used appropriately does it remain leverage; otherwise, it simply turns into a liability.

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing Commercial Property Management? Contact us.

1. FOMC INTEREST RATE DECISION

On December 14th, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 50 basis points to 4.25%-4.50%, slowing their speed of rate increases after four consecutive 75 basis point hikes — an apparent response to evidence of slowing inflation.
In their statement accompanying the FOMC meeting, members remained hawkish in their commitment to slowing the economy’s price pressures, largely refraining from any shift in tone compared to their last meeting, despite a deceleration in rate increases. Officials expect to continue increasing rates well into next year.
Benchmark interest rates now sit at their highest level since 2007, with officials, on average, projecting a 5.1% terminal rate — the rate at which the committee stops increases — according to the FOMC’s latest dot plot.

2. CPI INFLATION

The Consumer Price Index (CPI) rose 7.1% year-over-year and just 0.1% month-over-month, according to the latest numbers from the Bureau of Labor Statistics — below most industry estimates. The annual inflation rate has now fallen for five consecutive months.
Core CPI, which removes food and energy prices from the calculation and is more closely tied to monetary policy decisions, rose 6.0% over the past 12 months and 0.2% between October and November.
Energy costs rose 13.1% year-over-year through November but contracted by -1.6% month-over-month. Food costs increased by 10.6% year-over-year and 0.5% month-over-month, the slowest monthly increase since December 2021.

3. RENTER VS. HOMEOWNER INFLATION

According to Chandan Economics’ recalibrations of CPI data, the adjusted inflation rate for renters was 7.1% year-over-year in November, squarely in line with the increase in headline inflation while falling -0.7% from one month earlier.
Meanwhile, fixed-rate mortgage homeowners experienced a 4.8% year-over-year inflation rate through November and falling -0.8% month-over-month.
The spread between renter and homeowner personal inflation rates reached 2.3% in November, a new record according to Chandan Economics’ calculations. In the six years between 2014 and 2020, the rate of renter inflation averaged 1.1 percentage points higher than homeowner inflation. Notably, the spread remained consistent over this period — never departing more than ten basis points from the 1.1 percentage point average.

4. FANNIE AND FREDDIE UNLIKELY TO MEET ALLOCATIONS

Fannie Mae and Freddie Mac are on a trajectory to undershoot the $78 billion in Multifamily allocations granted to them by the FHFA, a potential first for the Government Sponsored Enterprises (GSEs).
As explained by Yardi Matrix Research Director Paul Fiorilla, strong residential demand in recent years has meant high GSE lending capacity. Still, US inflation necessitated a rapid rise in interest rates, reducing some of this demand. Fiorilla forecasts a resulting $8 billion agency lending shortfall.
Reflecting a fall in mortgage demand, FHFA recently cut the GSEs’ 2023 allocations to $75 billion, $3 billion below the 2022 level.
Given the Agencies, and by extension, HUD’s role as a sort of lender of last resort, Fannie and Freddie’s lending capacity should remain solidly adequate to support the market’s credit needs. Further, half of all agency loans must be backed by properties that contain an affordable housing component, efforts which are likely to intensify as policymakers attempt to address a nationwide shortage of affordable housing.

5. NAIOP INDUSTRIAL SPACE DEMAND FORECAST

According to NAIOP’s latest forecast, industrial space acquisition volume fell during the third quarter of 2022 as retailers and logistics firms reduced purchases amid easing supply chain issues, increased carrying costs, and slowing growth in the e-commerce sector.
Amazon made headlines in the sector this year after nixing previously planned Industrial space expansions. At the same time, smaller e-commerce firms continued to lease new additional distribution spaces throughout the year, although at a lesser rate than in 2021.
Net absorption in the sector nearly doubled in 2021 compared to the year before, registering 432.5 million square feet of absorption, beating NAIOP forecasts. The group forecasts that 326.3 million square feet will be absorbed by year-end 2022, amounting to a 24.5% decline from 2021 but 31.4% above 2020’s total.
NAIOP notes that this year’s decline in acquisitions ran concurrently with decreases in the New York Fed’s Global Supply Chain Pressure Index, which has improved significantly from unprecedented highs.

6. THE SHORT AND LONG-RUN EFFECTS OF REMOTE WORK

A recent paper sponsored by the Economic Innovation Group (EIG) studied the impact of remote work on long-term housing affordability. The report found that much of the new demand driven by remote work is shifting into markets where supply can respond to changes in demand more quickly, resulting in a longer-run decrease in housing costs for renters.
The paper relies on research that has widely reported work-from-home’s dramatic impact on housing markets from 2020 to 2022, including increased overall demand, flattened “intra-city house price gradients,” and reallocated shares of demand among US cities. According to the report’s calculations, inflation-adjusted rents climbed by 8% while real house prices rose by over 20%.
The report considers two main ways remote work impacts long-term demand trends. First, by marginally shifting away housing demand from the central business districts of large cities, which tend to experience less housing supply elasticity (tepid reactions to changes in demand). Secondly, through an overall increase in space demand as workers use home offices and increase their overall time spent at home, therefore increasing the demand for amenities.

7. JOBS REPORT

The US economy added 263,000 jobs in November while the unemployment rate remained at 3.7%, according to the latest jobs report from the Bureau of Labor Statistics.
What has developed into a pattern in recent months, payroll gains blew past most market expectations, climbing above the consensus estimate of 200,000.
Notable gains were made in leisure and hospitality, health care, and government, with declines in retail trade and transportation/warehousing jobs. The trend is curious, given the winter month’s typical reduction in leisure demand alongside usual increases in retail store demand around the holidays.
Average hourly earnings rose by 0.6% for the month and 5.1% year-over-year.
Stocks fell following the news in anticipation of the Fed continuing its aggressive pace of rate hikes to slow consumption and, therefore, inflation. While the Fed ultimately slowed its rate hikes slightly to an increase of 50 basis points in December, officials remain committed to increases well into 2023 to calm price pressures.

8. CONSUMER SENTIMENT

Consumer sentiment rose by 4% above November’s estimate in December, according to the latest numbers reported by the University of Michigan.
Each of the sentiment index’s components rose in December, with one-year business conditions expectations booming by 14% and views of long-term business conditions improving by 6%.
The increase in sentiment was evident across several demographic groups, with a higher increase observed for high-income households and those with more significant stock holdings.
Concerns over high prices slightly declined in the month’s survey. Year-end inflation expectations improved but remained elevated compared to historical standards, falling from 4.9% to 4.6%, a 15-month low.

9. SUMMARY OF ECONOMIC PROJECTIONS

The Fed’s latest summary of economic projections, released alongside the December policy meetings, shows a higher forecast for 2022 year-end GDP growth compared to the September projection, but a much lower forecast for 2023. Members see growth slowing to 0.5% annually in 2023 compared to the September forecast of 1.2%. Longer-run growth forecasts were little changed.
The average forecast for the unemployment rate was revised downward for year-end 2022, from 3.8% in September to 3.7% in December. Their 2023 forecast moved the projected unemployment rate slightly higher, from a forecast of 4.4% in September to 4.6%.
Both headline and core inflation saw increases in their updated 2022 and 2023 forecasts despite a recent decline in consumer prices. Members expect a core-PCE inflation rate (the Fed’s preferred measure for monetary policy decisions) of 4.8% in 2022 and 3.5% in 2023.

10. BRICK-AND-MORTAR RETAIL OUTLOOK

A recent Moodys report on Brick-and-Mortar Retail details its evolution in recent years as e-commerce becomes an increasingly dominant force in retail development. The analysis finds that developers are employing a new mix of property types, including housing, office, and both experiential and goods retail, that optimizes foot traffic and consistency.
While the report acknowledges that recent rent and vacancy trends show weakness, they also point to a degree of steadiness experienced by in person retail in the face of pandemic-era stress. Retail vacancy has largely continued its post-GFC downward trend and has experienced little additional reduction from the COVID-19 pandemic.
Further, e-commerce’s share of retail sales peaked in 2022 at 16.4% before normalizing as in-person activity rebounded in 2021 and 2022, falling to 14.5%.

SUMMARY OF SOURCES

(1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20221214a.htm
(2) https://www.bls.gov/news.release/cpi.nr0.htm
(3) https://www.chandan.com/post/personal-inflation-rates-are-2-3-percentage-points-higher-forrenters-than-homeowners
(4) https://www.multihousingnews.com/gses-unlikely-to-meet-allocations/
(5) https://www.naiop.org/en/Research-and-Publications/Reports/Industrial-Space-Demand-Forecast-3Q22
(6) chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://eig.org/wp-content/uploads/2022/11/The-Short-and-Long-Run-Effects-of-Remote-Work-on-U.S.-Housing-Markets.pdf
(7) https://www.bls.gov/news.release/empsit.nr0.htm
(8) http://www.sca.isr.umich.edu/
(9) chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20221214.pdf
(10) chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ma.moodys.com/rs/961-KCJ-308/images/The%20Brick-and-Mortar%20Retail%20Evolution.pdf?utm_source=website&utm_medium=button&utm_campaign=retail

A higher level of risk will call for greater profits, which rely on higher commercial mortgage rates.

By the end of 2023, Fitch Ratings projects that the US CMBS loan default rate will have risen from its October 2022 level of 1.89% to between 4.0% and 4.5%. The firm cites increasing interest rates, ongoing inflation, and sluggish economic development as factors, with a minor recession beginning in the middle of next year.

According to the company, Fitch forecasts increased delinquency rates for all key property sectors next year. Multifamily, office, and industrial rates will surpass their previous peaks, according to the prediction. Retail and hotel prices, which are already the highest of all property kinds, will rise much further.

According to the estimate, many more new delinquencies, in particular maturity defaults, are expected. Due to the same variables that will increase defaults and distressed sales, as many in the CRE industry have been telling GlobeSt.com: greater refinancing costs, pressure on CRE fundamentals like rents, and rising cap rates, special servicing will still exist but at lower levels. The debt loads on a property undergoing a refinance will be larger, and there may be a requirement for less leverage, necessitating the need for extra funding from investors. However, rent growth has generally slowed down, and it typically fails to maintain prior net cash flows.

All major property categories will see an increase in delinquency rates. The highest-priced property types, retail, and hotels, will see further price growth, while multifamily, office, and industrial prices will rise above their previous peaks, according to a report by Fitch.

Retail, in particular, will be pressured by inflation and sluggish wage growth, which will impact consumer spending and the capacity to pay rent. In addition, Fitch predicts that numerous Class B and C mall loans that are coming due will default.

Hotel delinquency will rise, although Fitch doesn’t anticipate it to reach its 18.4% epidemic peak. For 2023, the agency stated that forward room bookings and pricing projections are high, supported by growing group room nights and healthy leisure demand. A recession will further postpone [the final recovery to pre-pandemic performance] even though 2023 is not likely to match the strong rebound of hotel performance measures in 2022.

With hybrid work arrangements, reduced demand for office space, rising expenses, and tenants moving to higher-quality workplaces, older and lower-quality B and C properties in the office sector are at the highest risk of default.

When compared to other types of housing, multifamily is in comparatively excellent shape since property prices and consumer mortgage rates prevent many people who otherwise would have bought a home from doing so. But as costs increase and rents remain stable or even decline over time, cash flow will deteriorate.

While still in demand, industrial tenants will notice a slowdown in rent increases as a result of the recession’s impact on business as a whole.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for commercial properties for sale.

Although it isn’t a perfect predictor, it shouldn’t be ignored.

When it comes to economics and finance, it’s all too common for past patterns—specifically correlations like the one between yield curve inversions and impending recessions—to be taken as unbreakable natural laws. That could result in serious risks and strategic errors.

When the yield curve inverts, with interest rates on shorter-term bonds higher than those on longer-term bonds, a recession usually, though not always, occurs within a year or two. The “market” as a whole believes that the economy will slow down in the long run, which is why the Fed is cutting short-term rates to avoid a recession. Because they won’t get as much money from reinvesting when bonds mature because rates will be lower, they require higher interest rates on short-term bonds to make up the difference.

Although recent yield curve inversions have been observed, speculators have pointed out a number of potential confounding variables. Short-term Treasury bond rates have increased more quickly than longer-term ones as a result of high inflation and the Federal Reserve’s swift interest rate rises in response. The Russian invasion of Ukraine, rising discontent, and protests in nations like Iran and China are all examples of geopolitical turbulence that prompts investors to seek out safer places for their money, such as 10-year US Treasury bonds, driving up prices and returns down. These pressures, according to speculators, are pushing rates in opposite directions and causing an uncommon inversion type.

Be that as it may, markets are gatherings of people, and people have emotional reactions to things. Mechanical stresses coming from two directions that cause inversion and recession fears won’t just go away on their own.

For instance, analysts of this data could claim that there had not been an inversion between the three-month and ten-year bonds after conducting the research. That’s not the situation anymore. According to reports from the Federal Reserve Bank of St. Louis, the 3-month yield has been higher than the 10-year yield for weeks. The 3-month/10-year inversion has predicted a recession in 7 out of 9 recessions between 1957 and the Great Recession, according to Christopher Waller, who is currently a Fed governor but was the St. Louis Fed’s director of research at the time of this 2018 presentation.

What about the global economic crisis following the coronavirus outbreak? 2019 had an extended period of a 3-month/10-year inversion.According to Duane McAllister, senior portfolio manager at US firm Baird Advisors, consistent inversions like this one has been a fairly accurate predictor of impending recessions in the past.

If the Atlanta Fed’s early indicator is accurate and the annualized GDP growth for Q4 is actually 4.3%, economic growth appears to have returned. Despite high-tech layoffs, labor markets have remained strong. It doesn’t appear that the Fed is prepared to lower rates.

The signs might not be 100% accurate, but ignoring them could be dangerous.

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

Fair enough, they’re only saying what the agency has said following rating increases.

High-ranking Fed officials have recently been nagging observers, warning that markets should not expect a quick end to higher interest rates. This idea could be a concern for commercial real estate.

Esther George, the 40-year Federal Reserve veteran and head of the Federal Reserve Bank of Kansas City, told the Wall Street Journal that bringing down inflation without a recession could be near impossible.
George remarked, ” I’m looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have a contraction in the economy to get there.”

Fed Governor Christopher Waller has been cautioning that better-sounding news on the consumer price index when the October statistics came out has caused the “market to have gotten way out in front on this.”
Although on Wednesday he stated, “Looking toward the FOMC’s December meeting, the data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike. But I won’t be making a judgment about that until I see more data, including the next PCE inflation report and the next jobs report.”

Waller continued, “If the FOMC were to step down to a 50-basis-point increase, it is important to remember that this would still be a very significant tightening action—in other words, just pulling back on the rate of ascent a little bit. At this angle of ascent, with policy already in the restrictive territory, the federal funds rate can still be increased quite rapidly with several 50-basis-point increases, a pretty aggressive path for policy.”

Susan Collins, president of the Federal Reserve Bank of Boston, was the most enthusiastic of the three when she spoke to the Journal earlier this month. Collins stated that the primary point he wanted to emphasize is still bringing inflation back to its target range. “We’re going to have to tighten further and then hold for some time. I am optimistic that there is a pathway that would not require a significant slowdown. And I’m happy to talk a bit more about that, recognizing that there are some key risks and that both inflation and unemployment are very costly and that those costs are not equally distributed.”

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for commercial properties for sale.

In a difficult rate environment, hotels and senior housing are likely to have greater activity than other property categories.

Expect the Federal Reserve’s latest 75 basis point rate hike to have little effect on the commercial real estate transaction volume, which is already down year over year.

According to new analysis from Marcus & Millichap, trading activity in recent months has fallen short of but is near same-quarter figures in 2019. However, according to the firm’s analysts, the compounding impacts of numerous interest rate hikes have made it increasingly difficult to conclude commercial real estate purchases. This constancy will help investors come to an agreement and close deals more readily if interest rates stabilize at a new, higher level, the author writes.

The Fed will probably wait until there is solid evidence that inflation is returning to the 2 percent objective before putting a stop to rate hikes, which leaves the door open in 2023. Experts in the CRE industry believe this is when the rate increases will end.

In this new climate, higher cap rate properties are doing better than others, such as hotels, which traded over the last four quarters with first-year returns in the low-8 percent range. Although hotel financing premiums are frequently higher, the company claims that performance gains are lowering investors’ perceptions of risk. Only 30 basis points separated the national occupancy rate for the year ending in September (62.2%) from the long-term mean, while average daily prices in September increased by 17 percent from the same time last year.The American Hotel & Lodging Association and Kalibri Labs predicted this month that the US hotel industry’s overall revenue will surpass 2019 levels by 14%, or over $12 billion.

With cap rates recently dropping into the mid-seven percent range, senior housing also offers relatively strong yields. And the deals are coming in thick and fast: in the first seven months of 2022, Walker & Dunlop sold $1.3 billion worth of senior housing and long-term care facilities, breaking all previous records. However, experts predict that labor concerns and increased operational expenses will continue to be challenges for the sector.

According to Julie Ferguson, executive vice president and senior living at Ryan Companies, the ownership and financial structure of a company [may affect] whether they’re able to manage through a fall in operating margin. There will be owners who, if their lease-up is not proceeding as planned or if their expenses exceed their budget, will not be able to contribute further working capital to projects. Given the numerous factors that go into these choices, it is difficult to predict whether there will be more or fewer of them in 2023.

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale leaseback? Contact us.

The GlobeSt. State of the Industry panel discussion. Influential thought leaders were gathered at the net lease national fall event to discuss transactional trends, a complex industry, and lessons from 2022.

During the recent GlobeSt. market state panel discussion The panelists at the net leasing national fall event concurred that price discovery is now taking place. Will Pike, vice chairman and managing director of CBRE, said on the panel, “We are bullish on retail, but we have a pricing disparity we have to work through.” Price discovery is widespread. Pike said we have to see what happens with the Fed during the next meeting. I think we are in the second or third inning of that. He said that the primary groupings are likely to transact in the market if they have a specific purpose to sell or if they have debt coming due.

The director of investments and managing director at W. Gino Sabatini P. Carey concurred, pointing out that although deals aren’t being made right now, they aren’t being written at W. P. Carey. Price discovery is taking place right now, but ultimately someone will have to act and the market will be moved.

He noted that the disconnect results from sellers still wanting yesterday’s pricing. “I don’t know how you’re going to accomplish a 6% cap rate if you can’t borrow below 6%,” the speaker said.

However, depending on which side you are on, there are organizations out there with money to invest, according to Gordon Whiting, managing director of Angelo Gordon. If you are a seller, you probably want to make a deal right now. Being a buyer makes you slightly more cautious. Do you intend to buy a leveraged asset? Can you survive this market? It is a more complex market.

“It also depends on how you view the investment if you are a buyer,” he continued. Since I’ve been doing this for several years, 40% of people see net leasing as a credit investment, 40% see it as a real estate investment, and the remaining 60% don’t really know or care and just appreciate the return.

The sale-leaseback market is one area that Brandon Flickinger, chief investment officer of bridge net lease at Bridge Investment Group, is observing. They continue to submit numerous offers, he claimed, but very few of them are accepted.

The SVP and national director of the retail and net leasing businesses of Marcus & Millichap, Daniel Taub, a panelist, noted that there is a significant distinction between institutional and private client money. It has a subtlety to it. “Even in the face of volatility and rising interest rates, we are conducting business with a range of REITs today,” he said.

The same is true for several PE firms that operate in the sector, Taub continued. I’d argue your private client is more impacted. Taub said, “Our organization has done more than 2,000 transactions with perhaps 450 lenders.” It depends on what kind of money you have—private, institutional, short-term, long-term—that is factoring into the transactional activity. The smaller lenders are still around, but they are reaching their capacity because the terms have definitely altered. Simply put, they lack the larger banks’ depth and breadth.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for commercial properties for sale.

1. INTEREST RATE HIKE

On November 2nd, the FOMC voted to increase the Federal Funds Rate by 75 bps for the fourth consecutive time, taking the benchmark interest rate to its highest since early 2008. The current Federal Funds Target Rate sits at 3.75%-4.00.
In the accompanying statement following the meeting, the Fed shifted its tone slightly, indicating that it intends to “take into account the cumulative tightening of monetary policy” and “lags with which monetary policy affects economic activity and inflation.” The statement signals that while the committee remains committed to raising rates to rein in inflation, they are beginning to look for signs that may justify a pivot.
Stocks initially rose on the news of the rate hike but began to fall during Jerome Powell’s news conference in reaction to the marginally more dovish statement on the future path of monetary policy.
While a new summary of economic projections did not accompany this month’s meeting, Chair Powell stated in his press conference that he now expects the “terminal” rate — the level at which the Fed stops further rate increases — to be higher than what it was thought to be a few months ago. The higher rates need to be to tame inflation, the harder it will be for the central bank to achieve a monetary “soft landing.”

2. JOBS REPORT

The US economy added 261,000 jobs in October while the unemployment rate rose slightly to 3.7%, according to the Bureau of Labor Statistics.
This month’s jobs report performed stronger than most expectations and signaled a resilient labor market amid a tightening financial landscape. Notable gains were made in health care, professional and technical services, and manufacturing.
Stock futures reacted positively to the report initially; however, the continued strength of job growth could force the Fed to continue the pace and degree of its monetary tightening campaign for longer.
Healthcare employment climbed the most during the month (+55,000), followed by professional and technical services (+43,000), and manufacturing (+22,000). Employment in social assistance services, wholesale trade, and leisure and hospitality all saw notable growth in October.
The average hourly earnings for all private employees rose by 0.4%, or 12 cents to $32.58.

3. MULTIFAMILY CAP RATES

According to a recent analysis by Trepp, despite facing rising Treasury yields, multifamily cap rates are holding below 4%.
The analysis uses an implied cap rate methodology, which examined the net operating incomes of transacted multifamily properties backed by a GSE-sponsored mortgage. While the report’s findings indicate that there has been some upward movement in cap rates between July and September, the increase has been a fraction of the observed rise in Treasury yields.
Cap rates holding at their low levels while the 10-year Treasury yield has risen means that investors are receiving less risk compensation than they have at any point post-Financial Crisis.

4. MALLS IN RECOVERY

David Simon, CEO of Simon Property Group, spoke to investors in his company’s third-quarter earnings call and talked about the improving conditions for their portfolio and the Mall sub-sector as a whole.
For the country’s largest Mall REIT, occupancy rates were up 1.7 percentage points from a year ago, reaching just shy of 95%. Further, base minimum rent per square foot is also on the rise, gaining $0.89 in the past year to $54.80.
According to daily pricing data from FTSE Nareit, no subsector in commercial real estate has enjoyed a more robust fourth quarter so far than Regional Malls. From the start of the quarter, Regional Mall REIT prices are up an average of 25.1%. The next best-performing sub-sector was Lodging/Resorts at a distant 13.3%.

5. FALLING RENT EXPECTATIONS

A new report by Yardi Matrix is warning that rent growth will likely slow significantly in 2022 and 2023.
“Almost all of the expected rent growth for 2022 has happened,” the firm posits, and forecasts that rent growth may become “anemic.” While some of this is due to seasonality, as transaction activity and therefore rent growth naturally falls when the weather gets colder, Yardi’s revision also reflects an uncertain economic outlook in the medium term.
Not all the analysis was negative, however. The firm notes that a mix of high infl ation (including wages) and continued employment gains could result in a “higher-than-average jump out of the gate” in the spring when seasonality typically swings in the other direction.

6. FANNIE MAE HOUSING FORECAST

Fannie Mae’s October 2022 housing forecast shows a slight contraction in home prices for 2023. The 1.5% decrease in home prices forecasted for 2023 would follow signifi cant increases of 18.9% and 9.0% in 2021 and 2022 (forecasted), respectively.
Fannie Mae’s forecasts expect elevated mortgage rates through the end of next year. The company is forecasting the 30-year fi xed mortgage rate to average 6.7% in the fourth quarter of 2022 and a gradual decline from 6.6% to 6.2% between the first and fourth quarters of 2023. The 30-year mortgage averaged 3.0% in 2021.
New multifamily construction is expected to stay strong through the end of 2022, averaging over 500 thousand units per quarter. It would be the second year of solid growth after starts increased by 21.8% in 2021. However, the forecasts call for starts to fall to an average of 390 thousand units per quarter. The drop would put multifamily housing starts back in line with benchmarks last seen in the years leading up to the pandemic.

7. CONSUMER SENTIMENT

The University of Michigan Consumer Sentiment Index rose by 1.3 points in October from September, diverging from the Conference Board’s confidence index, which had shown a decline in October following increases in August and September.
While recession concerns remain high, the Michigan index has risen in each month since hitting an all-time low in June. According to the report’s analysis, buying conditions for durables rose by 23% on the basis of easing prices and fewer supply chain issues. Still, future expectations for business conditions fell by 19%.
The worsening of future consumer expectations alongside steady improvements in current sentiment is noteworthy — as one would typically expect current conditions to reflect consumers’ dim outlook gradually. This divergence reflects the uncertainty created by today’s dual inflationary and recessionary environment and the trouble that both businesses and consumers have forecasting ahead.

8. PERSONAL INCOME AND PCE INFLATION

Both personal income and disposable personal income rose by 0.4% in September, while consumption increased by 0.6%, according to the latest figures by the Bureau of Economic Analysis (BEA).
Recent increases in personal income have helped wages buck some of the impact of inflation in recent months, albeit modestly. Real personal disposable income has remained positive since June when inflation last outpaced income gains.
PCE Price Index increased by 0.3% month-over-month in September and 6.2% year-over-year. The PCE price index has relatively consistently underpaced the more widely cited Consumer Price Index, but both have moved in the same general direction.
Core PCE prices, which exclude the cost of food and energy and are the Fed’s preferred inflation gauge when considering monetary policy decisions, increased by 0.5% in September and 5.1% year-over-year. Roughly over the past 3-4 months, core inflation has seen more upward pressure than headline prices, which could be a modest hand to households preparing for the winter months, some of who may need to
prioritize food and energy spending over more discretionary items. Still, base effects from last year are partially responsible for decelerating headline prices, as food and energy prices started to outpace core more significantly beginning in the summer of 2021.

9. NEW CONSTRUCTION

New construction continues to be delivered at a healthy pace through September 2022. The value of new construction put in place in September totaled $1.8 trillion at an annualized rate. The current speed is 0.2% higher than the previous month and 10.9% higher than in September 2021.
Residential construction accounted for 51% of deliveries by total value, coming at $918 billion. Measured from one year ago, the annualized pace of single-family home deliveries is down by 2.7%, while the rate from multifamily is up by 1.9%.
The annualized value of new office properties in place totaled $86 billion in September 2022, just 0.7% higher than last year. Meanwhile, commercial/retail properties, which saw their pace climb to $115 billion, were up by 22.4% from last year.

10. JOLTS

Job openings remained strong through September 2022, signaling that the U.S. labor market exited third-quarter 2022 with momentum and resilience. Data from the Bureau of Labor Statistics Job Openings and Labor Turnover Survey show the number of job openings rose to 10.7 million in September — an increase
from the 10.3 million in August. Though 10.7 million is down from the 11.9 million peak in March 2022, it remains well above the pre-pandemic peak of 7.6 million in November 2018.
Accommodation and food services led the push in openings, which gained over 200 thousand openings between August and September 2022. Losses in the wholesale trade and finance and insurance sector tempered gains.
September’s ratio of job openings to unemployed persons (1.9) underscores the nation’s tight labor market. The quits rate — the number of quits as a percent of total employment — stayed steady at 2.7% for the third consecutive month. The layoffs and discharges rates were little changed, showing employers were hanging on to talent through the end of the third quarter of 2022.

SUMMARY OF SOURCES

(1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20221102a.htm
(2) https://www.bls.gov/news.release/empsit.nr0.htm
(3) https://www.trepp.com/trepptalk/cap-rates-on-recent-sales-continue-to-hover-around-4-of-2021-noi
(4) https://therealdeal.com/2022/11/01/simon-malls-dont-suck-in-fact-theyre-doing-well/
(5) https://www.globest.com/2022/11/03/yardi-matrix-broadly-revises-multifamily-forecasts-down-for-2022-and-2023/
(7) http://www.sca.isr.umich.edu/
(8) https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=A%20 measure%20of%20the%20prices,reflecting%20changes%20in%20consumer%20behavior
(9) https://www.census.gov/construction/c30/c30index.html
(10) https://www.bls.gov/jlt/

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal office property for sale or lease. Interested in discussing a sale leaseback? Contact us.

Investors are reacting cautiously to higher interest rates, but many anticipate opportunities in the coming six months.

2022 will be remembered as a gloomy year for apartment investors. Following more than ten years of inexpensive debt, we are seeing the end of that era. The Federal Open Market Committee has raised interest rates five times so far this year. The prime rate rose to its highest level since 2008 in September, and further hikes are expected. The committee predicts that interest rates will be at least 4.25% or even 5% by the end of the year. Apartment investors are hesitating since this is the fastest increase in interest rates since the 1980s.

The second half of 2022 has witnessed a reduction in deal volume, according to Taylor Avakian, an associate vice president at Matthews Real Estate Investment Services and an authority on the Los Angeles multifamily market. He says the excessive increase in interest rates is having a major impact on investors. The majority of buyers secure financing, and with interest rates now two full points higher, returns are suffering, he claims. From his experience working with a wide range of investors, including family offices and institutional buyers, Avakian believes that all types of investors are being more cautious.

The Financial Community Is Split.

The level of investment activity is declining, although not uniformly. When interest rates rise, private investors are more at risk because they use the debt markets more frequently and have fewer capital options. According to Avakian, “This has a huge impact on mom-and-pop owners who have owned these buildings for decades.”
As opposed to early in the year, when 1031 exchange buyers were driving activity, they are now slowing down their buying. Avakian notes that because buyers are now obligated to put up more equity to offset increased rates, many of these “would-be” transactions are no longer making sense.

The Winds Are Against High-End Multifamily.

With rising interest rates, Class-A properties are most at risk. According to Avakian, higher-end assets are already experiencing price drops. Prior to the upticks in rates, Class-A apartment properties were trading at 3% or high 2% cap rates. Avakian says that no longer makes sense to anyone. He adds, “Investors would rather put their money in bonds at 4% than a 3% multifamily class-A building.”

As borrowing rates climb, investors have chosen to invest in affordable housing instead. “I think a lot of investors are moving in that direction and incorporating affordable housing into their portfolio,” says Avakian.

Investors have high hopes for the near future. Avakian and his clients anticipate better prospects and pricing over the next six months. Keeping your eye on the ball and your head in the game is time well spent. He concludes, “If a deal makes sense today, write an offer.”

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.

Tax rebates for converting former offices into homes are a sensible concept. We can only hope they’ll keep that in mind for the following lesson.

The National Multifamily Housing Council brought up a bill that was submitted to the House and Senate last year but is probably too late to be implemented.

The Revitalizing Downtowns Act, also known as S.2511 in the Senate and H.4759 in the House, was presented by Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA) at the end of July 2021.

If the bill had been passed, it would have offered a tax credit for repurposing outdated office buildings. For approved office conversions, developers would have been permitted to deduct 20% of their conversion-related costs.
Prior to the alteration, the building would have needed to be in use for at least 25 years. A space could be converted by a developer or owner for “residential, retail, or other commercial use,” subject to a number of restrictio

ns. For instance, 20% or more of the building’s units have to be rent-restricted and only open to those with incomes that are 80% or lower than the median for the area. A state or municipal government agreement might have included a building as well.
The bell was referred to a committee in both chambers. Together with a group of business allies, NMHC claimed to have written to Congress in support of the incentive and to suggest some changes, such as allowing REIT participation, extending the incentive beyond office buildings, and allowing states to use tax-exempt Private Activity Bonds to further reduce financing costs. It could also be a good idea to forbid the conversion of historic apartment buildings into other types of commercial property from receiving such a credit.
The core concept is excellent. Particularly in the US, there is a severe lack of housing in many areas. The costs of conversion are substantial. It takes time for old structures that were originally constructed as offices or for any other purpose to be converted into homes or, probably, any other kind of property. If major blocks of the converted units are low-income housing, as would seem only acceptable, finances, especially in times of high rates, might prevent a conversion from being profitable. The building of more housing, which is sorely needed, might be encouraged via tax incentives.
However, NMHC acknowledges that there is little probability of this occurring. In light of the upcoming midterm elections, authorities are reluctant to adopt positions that could harm their chances of winning reelection. Additionally, the National Defense Authorization Act and a hefty budget measure to avoid a partial federal government shutdown are mentioned by Politico.

That still leaves a ton of things that were started but never finished. It’s unlikely that something that didn’t attract enough attention to warrant a hearing will now receive a blaze of attention.

Given that, CRE experts might encourage their elected officials to think about this in the upcoming year. Some suggestions are resubmitted each year. There are some of those that do eventually pass.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.