Raising CRE Equity Through a Fund Structure

When is it more advantageous to raise equity capital through a fund structure as opposed to one transaction at a time?

One of the most crucial pieces of a real estate investment and development firm is raising equity funds. Numerous smaller and mid-sized real estate corporations have a main operating organization and a number of affiliated limited partnerships and limited liability companies that own the real estate assets and contain equity investments from different investor groups. Typically, the general partner or managing member of these investment firms is an affiliate of the operating company.

The operating entity is typically owned by a family or an entrepreneur and serves as the public face of the business. In spite of the abundance of capital in today’s booming real estate market, it can be quite difficult for smaller and midsized businesses to raise equity financing. The associated flow-through organizations that own the individual properties often handle it deal by deal. Take for instance, a well-established medium-sized CRE investment business on the West Coast, may have any number of associated partnerships and limited liability corporations that collectively control $300 million worth of CRE properties, with $200 million in debt and $100 million in equity.

The operational company and the general partner or managing member of these organizations must manage all the different mortgages, equity offers, private placement memorandums, partnership agreements, subscription agreements, etc. throughout time. For example if there are 25 deals and 400 different investors in the twenty-five deals, the typical equity investment is $250,000.

When does it make sense to start raising equity money in a fund structure as opposed to one deal at a time? This is a topic that many of these smaller and mid-sized real estate enterprises need to consider as their business grows. For equity capital, a fund structure is more effective. It’s less expensive in terms of fees, paperwork, and legal costs, and takes less time to complete. Raising equity for 25 different projects one at a time may potentially result in missed investment opportunities if the general partner is unable to swiftly obtain the necessary equity capital to take advantage of good agreements that call for a speedy closing. In contrast to the six to ten years it may take to accumulate twenty-five independent real estate acquisitions, the general partner might have placed all the properties in the fund if the fund had a $100 million equity raise.

As with any investment program, gravitating to a fund structure is not an easy undertaking, and the first one is always the most challenging. However, for any seasoned real estate investment firm, the advantages exceed the disadvantages by a wide margin. Who will sell the fund’s equity is the main issue with a fund structure. Only accredited investors, such as high net worth individuals, pension plans, endowments, registered investment advisors, and wealth managers, are often catered to by CRE private placement funds. A minimum yearly income of $200,000 ($300,000 if a joint investment) or a net worth of at least $1 million, excluding the investor’s primary residence, qualify as accredited investors. To market the fund’s units, the majority of companies will need to work with an experienced securities firm, broker-dealer, or other placement agency; the cost of this service ranges between 5% and 7% of the fund’s equity raised. As placement agents for third-party funds, there are a lot of independent broker-dealers and real estate brokerage companies.

The unit size of the offering is the next crucial factor. Depending on the fund’s investors, unit sizes will vary. If mostly people, then $100,000 per unit is typical. $250,000 per unit or more is typical if the fund targets multiple institutions. What is the fund’s investing strategy, which is the following crucial question? For instance, would the fund diversify throughout the four main CRE sectors of office, retail, flats, and industrial, or will it invest in a single type of property, such as apartments? Will the fund invest in or engage in development in specialized CRE markets like senior living, modular housing, and self-storage? Will the investments in the fund also be diversified by industry and by geography? This is important and a means of lowering portfolio risk. For instance, a fund that buys office buildings in No. California and Silicon Valley lack industry, geographic, and property type diversity. These regions’ economies are driven by the technology sector, therefore any downturn there will be disastrous for the portfolio. Additionally, any fees or payments from the fund, the investor desired return, and ownership interests must be decided by the fund’s sponsor or general partner.

For organizing the private placement, locating the properties to be purchased, and setting up the financing for the properties, the sponsor of many private placements is charged an upfront fee of 1% to 2%. Additionally, there is an annual asset management fee for managing the fund of.5%-1.5% of the equity raised. A quarterly fee for asset management is charged. The preferred yearly return on investment for the investors will normally range from 5% to 10%, and they will own between 70% and 80% of the fund. In addition to receiving a carrying interest of 20% to 30%, the general partner or sponsor will also be expected to contribute.5% to 5% of the stock offering in cash. It is necessary for the sponsor to make an equity investment in order to put some money, even if it is little, at risk and to better align its interests with those of the investors. A crucial step in the development of the rising medium-sized CRE investment firm into a more institutionally focused investor is raising capital in a fund structure.

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

Banks with a high proportion of commercial real estate loans will be subject to more scrutiny from the Federal Deposit Insurance Corp.

According to American Banker, the government agency cited uncertainty surrounding labor and commerce following the coronavirus outbreak as the primary reason for the increased checks and balances.

The FDIC’s Summer 2022 Supervisory Insight bulletin states that there will be a greater emphasis on new loan activity, as well as subsectors and geographical locations suffering difficulty.

Although the majority of the banks under the FDIC’s supervision are smaller organizations, these businesses have made sizable loans to the sector. During the previous year, banks under FDIC supervision owned 41% of the $2.7T in commercial real estate loans.

FDIC inspectors noted that, “The dollar volume of CRE loans is at an historic high, and a growing number of banks report CRE concentrations…The majority of banks with CRE loan concentrations are satisfactorily rated. Nevertheless, CRE loan concentrations add dimensions of risk that necessitate continued attention from banks and their regulators, especially as the pandemic lingers and uncertainties remain.”

Sectors are not being impacted evenly. According to the analysis, pandemic trends like the shift from in-person to online buying, particularly in denser urban regions, might pose problems for the portfolio health of banks.

FDIC inspectors are still circumspect even if default rates for homes affected by the pandemic are not double-digit high as they were in 2020.

“While more recently improved, the delinquency rates remain above pre-pandemic levels. The [FDIC Quarterly] article indicates that economic stress caused by the pandemic is one of the challenges facing the CRE industry and the lending landscape,” the FDIC bulletin states.

Several local banks have begun to keep an eye out for any industry weak spots. Executives at Fifth Third Bank increased reserves in their commercial real estate portfolio, citing “key risks” such rapid rate increases and labor shortages.

Since the majority of its transactions have been with small CRE clients in the previous six months, First Republic Bank Chief Banking Officer Michael Selfridge stated during an earnings call that the bank has also been extra cautious and selective.

Between the first and second quarters, bank lending into the commercial real estate sector decreased by more than $8 billion, according to Trepp data cited by The Wall Street Journal.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

Inflation has accelerated at its quickest rate in 40 years. As the second half of 2022 begins, inflation has some borrowers rethinking borrowing.

Borrowers are turning toward alternate sources such debt funds, bridge funds, community bank loans, and life company loans. With advantageous conditions offering more revenues to fund value-add or other investment plans, these alternative methods of funding are becoming more attractive.Fannie Mae and Freddie Mac still provide funding because these agency loans continue to be a popular choice for many borrowers in spite of the competition. Agency lenders may wish to be mindful of the following factors impacting multi-family borrowers in addition to inflation-related worries:

Updated Standards for Radon Testing & Mitigation
In Colorado and New Jersey, American National Standards Institute (ANSI)/AARST (American Association of Radon Scientists) standards have been approved. The new rules went into effect in Colorado on July 1, 2022, and they go into force in New Jersey on December 3, 2022. To be deemed a Radon Professional qualified to conduct testing and undertake mitigation, both states require state-specific licensing. Additionally, for multifamily complexes, these states will call for sampling of all ground-level units in addition to 10% of upper level units. Minnesota, Iowa, Indiana, Illinois, Ohio, Pennsylvania, and Maine are among the states that have already embraced the ANSI/AARST criteria for multifamily properties. Every state, with the exception of Colorado, has an exemption code. Ask your provider of due diligence if your property qualifies for that exemption code.

Numerous federal and state agencies, including the Department of Housing and Urban Development (HUD) and the Environmental Protection Agency, use the national consensus ANSI/AARST Radon Standards of Practice (EPA). Here is a list of national consensus standards for various building types.

California SB-721 Deadline Approaching

By January 2025, owners of multifamily buildings in California must abide by SB-721. 2018 saw the signing of California Senate Bill 721, sometimes known as the Balcony Bill. After a balcony collapse in Berkeley, California claimed the lives of six students and seriously injured another seven, SB-721 was passed into law. The law mandates examination and retrofitting of Exterior Elevated Elements (EEE) such balconies, decks, staircases, and pathways in multifamily structures with three units or more. The assessment of a piece of EEE by an engineer, architect, or other certified provider is required by building owners in order to identify any urgent hazards and suggested countermeasures. The initial inspection shall be done for each and every impacted building prior to January 1, 2025. Timelines for reporting, obtaining permits, and making repairs apply, and subsequent reviews are required every six years. More detail on SB-721 can be found here.

Lastly, some would wonder if agency lenders will adhere to the 2022 loan limits. In order to boost the multifamily sector, the Federal Housing Finance Agency (FHFA) raised the multifamily loan purchase caps for each entity in October 2021, totaling a combined $156 billion. The FHFA required that, in addition to the caps, 50% of the loan volume be used for mission-driven, affordable housing or other mission-oriented businesses. This made sure that affordable housing and traditionally neglected markets received adequate investment. We have seen an increase in Fannie/Freddie lending activity over the past few weeks. Agency loans are now slightly more competitive as a result of market pressure and the requirement to reach the cap. Considering the current pattern, we do anticipate that the 2022 caps will be met.

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

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.

Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.

According to a notice published in the Federal Register, the Office of the Comptroller of the Currency, Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration are debating a new policy statement. The change would modify a policy that was initially put into place in 2009 following the financial crisis of the time.

The announcement states “the agencies are proposing to update and expand the 2009 Statement by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses (proposed Statement).” The notification goes on, “In developing the proposed Statement, the agencies consulted with state bank and credit union regulators. If finalized, the proposed Statement would supersede the 2009 Statement for all supervised financial institutions.”

The focus of the proposed statement stresses the value of “working constructively with CRE borrowers who are experiencing financial difficulty and would be appropriate for all supervised financial institutions engaged in CRE lending that apply U.S. generally accepted accounting principles (GAAP)” and acknowledges that accommodations and workouts are frequently in the best interest of both parties.

Two important themes from the 2009 declaration continue to be supported by the statement, which is significant. One is that, even if the amended loans have flaws, a lending institution won’t face criticism for making a “prudent CRE loan accommodation.” The second is that because the value of the collateral is smaller than the loan total, the modified loans won’t be classified negatively as long as the borrower has the ability to repay under fair circumstances.

The suggested amendments would affect three areas. These arrangements are described as tools “to mitigate adverse effects on borrowers and would encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations during periods of financial stress” in a new section on short-term loan accommodations.

Secondly, beginning in 20009 there have been modifications to GAAP accounting, including CECL, or current anticipated credit losses. “In particular, the section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.”

The Financial Accounting Standards Board (FASB) “ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” is also mentioned. Financial institutions won’t be required to classify and account for loan modifications as troubled debt restructuring, once this standard is implemented.

Lasty, CRE exercise examples would be modified. “The examples in the proposed Statement are intended to illustrate the application of existing guidance on (1) credit classification, (2) determination of nonaccrual status, and (3) determination of TDR status.”

Even if demand declines, the industry will be able to survive because to limited multifamily building.

Despite worries about a recession, analysts believe that slower building will likely maintain a balance between supply and demand for multifamily housing for some time.

Three Moody’s economists argue in a recent analysis that “housing substitutability” can shift demand to the sector, so even if multifamily demand cools, restricted multifamily building will help preserve the sector. As the average property is currently approximately 44% more expensive than in 2019, would-be buyers of single-family houses are choosing to rent rather than buy, which in turn is boosting demand for multifamily units. The increase in short-term rates and their effects on mortgage rates are further exacerbating it, and Moody’s observes that there are already indications of markets cooling in several of the areas where prices rose most swiftly during the pandemic.

The Moody’s report states: “Although this may not lead to a widespread slashing of housing prices everywhere, housing price declines are a real possibility in the next few quarters or years depending on how severe and how long the next recession will be if there is one. Multifamily rents, on the other hand, are generally slower to respond to rising interest rates and remain more stable. If the substitutability within housing matches the Great Recession’s strength, then multifamily rents may remain elevated for some time until single-family housing stabilizes. Based on the past few recessions, the effect on multifamily performance may not begin until near or after a recession ends.”

The demand for multifamily housing is also likely to be sustained by low unemployment and a competitive labor market, which was not the case in prior recessions (as in the 1980s, when unemployment topped 9 percent ). However, while household balance sheets are usually doing better than they did during prior downturns, personal incomes with disposable cash are declining.

“As the multifamily and single-family home affordability crisis intensifies across more and more metros nationwide, this diminishing financial safety net is troubling, even for multifamily,” Moody’s notes. “Job losses or affordability issues could force some renters to find roommates or put off that move to single living.”

Strengthened financial regulations “may be a godsend” for multifamily, according to Moody’s analysts.

“Even if the Federal Reserve fails to engineer a soft landing this year or next, these rules will likely prevent the real estate market from sliding into a deep and long recession or suffering large aftershocks,” the trio wrote. “While many single-family markets will likely see small to moderate prices decline in this situation, multifamily’s positive performance should hold up relatively longer, as in previous downturns. Overall, in a mild recessionary environment, we would expect only a moderate vacancy rate increase and rent growth to simply decelerate. A slight and short-lived dip into negative territory towards the end of the recession is possible, but a free fall is highly unlikely.”

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

Experts say the cost of financing will keep rising to unprecedented levels.

The benchmark interest rate set by the Federal Reserve has increased by 75 basis points for a second consecutive month. The goal range for overnight interbank lending is 2.25 percent to 2.5 percent, and as it rises, so do many other interest rates, including those that commercial real estate companies will have to pay to get credit.

According to Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, “The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected.” The majority of market participants in commercial real estate are likely to have anticipated this, especially lenders as they have seen loan interest rates climb by more than 50 basis points in 2022, primarily in the second quarter. As a result, asset values are under pressure, and lender profits and borrower returns are constrained. Therefore, [as the industry evaluates the near-term future], [we predict] both loan issuance and commercial real estate sales volume to decline in Q2.

The Federal Open Market Committee of the Federal Reserve, which is tasked with containing both inflation and unemployment, justified its actions by highlighting recent steady job growth, high inflation, widespread pricing pressures, and Russia’s ongoing invasion of Ukraine.

Stephen Bittel, founder and chairman of Terranova Corporation, says there is a clear gap between expectations of buyers and sellers in our current investment climate. “..sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Bittel. He adds, “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”

Commercial real estate is already feeling the effects. According to Adil Hasan, director of real estate at Yieldstreet, “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed.” Hasan notes that, “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines.” He also argues that the, “…rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”

Investors who made real estate purchases three years ago and are trying to roll over financing are getting one-year extensions from their lenders, according to Bill Doyle, co-founder and managing director at Equity Oak Ventures. Due to a significant decrease in appraiser valuation, he says, “All forms of lenders, especially debt funds, are in need to rebalance those notes.” The continuing rate increases only put more pressure on the need to rebalance mortgages. Experts note that in the debt market, the next 90-120 days will determine whether existing mortgages will need to be extended, refinanced,or ultimately handed back to lenders.

Some, however, do stand to benefit from the current state of the lending market. Hasan points out that, “This could present some attractive acquisition opportunities for investors that have the capital available.”

These programs, which are provided by schools, universities, and business associations, are influencing the subsequent generation of CRE leaders.

People wishing to expand their skill sets within the commercial real estate market can now access a wide range of resources. Although they were not as common in the past, commercial real estate-specific degrees and certifications have become more and more popular in recent years. Young professionals with formal educations in commercial real estate are now more prevalent in the labor market.

According to Thomas Sherlock, a principal at Talonvest Capital, “Having a formal education in commercial real estate is an opportunity and advantage for anyone interested in a CRE career, For many individuals, that formal education provides the opportunity to start a career with a greater understanding of important fundamental factors in a variety of the industry’s interconnected specialties.”

While working in the industry, many seasoned experts are obtaining qualifications in commercial real estate.

At the Marshall Bennett Institute of Real Estate at Roosevelt University, Catherine Hughey is pursuing a Master of Science in Real Estate while also enrolling in two in-person evening courses. She also serves as general manager for JLL at the modern, 473,000 square foot 800 Fulton office skyscraper in Chicago’s Fulton Market. Hughey, a lifelong learner who graduated from Project REAP – Chicago in 2018, holds real estate broker licenses in Wisconsin and Illinois. She participates in both the BOMA/Chicago Diversity and Inclusion Committee and the JLL Midwest PM Diversity and Inclusion Committee.

Hughey declared, “You can’t lose. The Marshall Bennett Institute of Real Estate gives you all the tools you need to win, and all the instructors make the classes interesting.”

There are numerous reputable programs given by colleges, universities, and organizations that offer classes, real-life experience, practical knowledge, problem solving, group projects, and internship opportunities to match the career objectives of persons like Hughey. not to mention the intangible advantages like networking and mentoring. For instance, Chloe Asnes, a member of the George Washington University School of Business’s 2022 graduating class, says that the school’s real estate undergraduate concentration has a sizable and vibrant student body. “We are very fortunate to have engaged alumni who mentor students, help us expand our networks and provide us with technical training and interview prep,” according to the speaker.

These programs prepare the next generation of business executives for the opportunities and difficulties presented by commercial real estate by awarding a variety of degrees and certificates. The Advanced Management Development Program in Real Estate at Harvard University Graduate School of Design is where Sinobo Group’s director of asset management, Angela Han, is enrolled. She claims that the training is quite useful and covers a variety of topics in addition to only the high-level technology in buildings.“The program introduced the different standards that buildings can seek, LEED, WELL, etc., but also gave insight into the cost/benefit of which of these to pursue depending on the project you are working on. It also discussed the technological and practical overlap of different standards—some have more similarity, while others are very different. And the group discussion challenged us to think about the pros and cons of the different standards for our different projects.

For students who may not desire to pursue a university degree, there are other options. For instance, the CCIM designation is a demanding program of advanced study and training in financial and market analysis offered by the CCIM Institute. Students who want to receive the designation must enroll in classes, present a portfolio of relevant experience for review by a special committee, and pass a one-day exam. According to Karl Landreneau, a senior instructor at the CCIM Institute, “one of the biggest advantages of a CCIM Institute education is that all courses are taught by instructors who are CRE practitioners. The instructors are certified and trained, required to attend two adult education courses annually, and are also graded by their students.”

Another illustration is Project REAP, a diversity initiative for the commercial real estate sector that also provides an 8–10 week continuing education course on the fundamentals of real estate asset classes and its different functional disciplines, such as finance, leasing, property management, investment, brokerage, and development.

We are ready to assist investors. For questions about Commercial Real Estate for rent and Commercial Real Estate Listings, contact your Los Angeles commercial real estate advisors at SVN Vanguard.

Multifamily rent increases cost landlords.

Since the pandemic threw the status quo on its head and rattled it, multifamily has been one of the gleaming aspects of commercial real estate, along with industrial. Rent growth’s capacity to continue justifies lower cap rates and contributes to price increases.

But nothing can remain in one place for ever. The ordinary person still has a salary that trails inflation despite a strong employment market, according to research on multifamily rents. Additionally, when consumers pay more, they frequently expect something worthwhile in return.

The “2022 State of Resident Experience Management Report” from Zego came to that conclusion. The analysis stated that, “Renters are going to see increases for the foreseeable future, albeit, not at such drastic rates,”. According to projections made by the National Apartment Association, annual rent growth will continue to increase through 2022, albeit at a moderate rate of 6.3 percent to 7.0 percent.

Although the industry may use the phrase “moderate,” consumers are unlikely to. The rule of 70, a quick calculation for the time required to double a value accomplished by multiplying the percentage rate of increase into 70, makes the amount even bigger than it might appear. Given all other factors being equal and a 7 percent annual growth, someone renting an apartment for $1,500 a month would end up spending $3,000 in 2032.

The turnover cost is at what is probably a record level when people leave, such as when they relocate to a place that is more inexpensive for them or that they believe offers a value that is more in line with what they pay. Zego estimated that, compared to $3,850 in 2021, the average cost of promotion and marketing, unit maintenance, concessions, and missed rent will be $3,976.

It would take 17.6 months to repay the turnover costs if you increased the $1,500 unit’s rent by $225, or 15%. And as Zego pointed out, according to a Zumper poll, 81.6% of respondents planned to relocate in the following 12 months.

This leads to a vicious cycle. Customers demand even more with increased pricing and are more likely to leave if they don’t get what they want. People move, turnover costs are high, owners and management increase rents to try to cover the expense within a reasonable amount of time. Their online reviews also have an impact on future visitors to a location.

According to Zego, “modern living features” are the main factor in renters renewing their leases, while a lack of such elements is the main cause of their eviction. “Renters always want the best value for their money, particularly now when rent prices are at their peak. New and modern is not only attractive, but it signals that companies prioritize updating the community.” Which means investing in community façade, unit features, and building technology. The other choice is to spend money on turnovers.

Alternative assets are finally caught up by stock and bond repricings.

The fundamental tenet of Newtonian physics is that anything that ascends will eventually descend under the force of gravity unless it is caught by a soaring eagle. The Green Street Commercial Property Price Index indicates that, overall, this is what occurred to commercial real estate property prices in the second quarter of 2022.

The index, which is defined as a “time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate deals are currently being negotiated and contracted,” fell by 3.7 percent between May and June. 4.9 percent of the value has been lost overall from the peak point in March.

Overall, that is a 10% increase over the previous 12 months and a 10% increase since pre-covid periods.

Peter Rothemund, co-head of strategic research at Green Street, stated in prepared remarks that “the repricing that has occurred in bonds and stocks is finally evident in the commercial property market.Price discovery is still taking place, and economic uncertainty and interest rate volatility make that challenging, but prices of most properties are down 5%+ from recent highs. In a few sectors, pricing has held up better.”

By property type, performance varies considerably. Strip retail (down 7%) and net lease were the two worst-performing sectors between May and June (also down 7 percent ). Since before the pandemic, strip retail had increased by 7%, and in the past year while economies were recovering, it had increased by 15%. Before Covid, net lease saw a 6% growth and a 5% 12-month growth.

It’s interesting to note that the third highest decline, from May to June, was in the industrial sector, which has been particularly hot since the epidemic, growing at a rate of 42 percent and rising 15 percent over the past 12 months.

Manufactured home parks have done well generally, with a 17 percent growth over the past 12 months, up 33 percent prior to Covid, and no loss between May and June, despite general stresses on the availability and cost of rental accommodation.

Another industry that has fared well in the face of economic and societal pressures is self-storage, which has grown by 58 percent since before Covid, by 28 percent over the past 12 months, and by a lower-than-average 4 percent during the most recent recorded month.

Office decreased by only 4% in the most recent month, but was down 1% over the previous 12 months and -9% since before the epidemic. Consequently, the net result is negative.

Multifamily has increased by 15% over the past 12 months and by 16% since before the epidemic, although it has decreased by 4% during the past month.

After the sharp rise in prices in so many categories over the previous two years, it was fair to wonder how much higher prices, as well as rents paid by consumers and businesses, could rise. There were numerous indications that price growth was beginning to slow down.

Housing prices have started to decline, but the lack of available inventory has prevented a collapse, and investor purchases of SFR are rising. Over the next six months, CoStar anticipates a decline in demand for multifamily housing.

We are ready to assist investors. For questions about Commercial Real Estate for sale and Commercial Real Estate Listings contact your Los Angeles commercial real estate advisors at SVN Vanguard.

1. Jobs Report

Despite rising capital costs and renewed recession fears, the US economy added 372k jobs in June, according to the latest employment numbers from the Bureau of Labor Statistics.
Business Services led the way with 74k new payrolls in June. Management roles had the largest increase within the industry, with 12k jobs added in the month.
Leisure and hospitality had a strong month with 67k new jobs added in June. Food services and drinking places continued to grow, adding 41k of all Leisure and Hospitality job gains. According to the Federal Reserve’s most recent beige book release, most of the nation is reporting an increase in travel and recreational activity. Still, employment in Leisure and Hospitality remains down by 1.3 million or 7.8% since February 2020.
The unemployment rate remained unchanged at 3.6%, where it has sat for the past four months. The number of unemployed persons was also unchanged at 5.9 million.
The Labor Force participation was little changed at 62.2% and remains below the 63.4% registered at the labor market’s pre-pandemic peak in February 2020.

2. Inflation and Inflation Expectations

The Consumer Price Index (CPI) rose 9.1% year-over-year through June according to the Bureau of Labor Statistics, another four-decade-plus high for the popular inflation gauge.
Core-CPI inflation, which excludes food and energy prices and is more consequential for policymakers, appears to have peaked at 6.5% in March and has nicked down in each successive month since. Nonetheless, the continued pressure on food and energy prices continues to be a significant concern for policymakers and forecasters.
The energy sub-index of CPI rose 7.5% in just the past month and accounted for almost half of overall price increases in June.
Inflation-adjusted or “real” incomes reduced by 1% in June and are down 3.6% from one year ago, according to data from both the CPI and Jobs reports.

3. Beige Book

Several of the twelve Federal Reserve districts reported growing signs of slowing demand, with at least five districts concerned about an increased risk of a recession, according to Fed’s July 13th Beige Book release.
Overall economic activity has been expansive since mid-May, but most districts reported a moderation in consumer spending as higher food and gasoline prices soaked up households’ discretionary income.
Auto sales remained sluggish, largely due to low inventory rather than slowing demand. Meanwhile, manufacturing activity was mixed, with several districts reporting that supply chain and labor issues
continued to slow down production.
Hospitality and tourism activity remains strong, with several districts reporting an uptick in group travel.
Housing demand continues to noticeably weaken. Growing concerns about affordability is believed to have contributed to non-seasonal declines in sales, causing inventory to climb and prices to moderate.
Commercial Real Estate conditions also slowed, while overall loan demand was mixed across most districts. Demand for consumer credit lines has grown while residential loan demand has weakened in the face of higher interest rates.

4. NMHC Construction Survey

Developers reported continued permit delays, materials price increases, and labor market tightness, according to the latest Quarterly Construction Survey conducted by NMHC in early June.
97% of respondents reported permitting delays—though the backlog has been consistent through the pandemic and is evident of similar labor and resource shortages being felt by state and local governments.
83% of respondents report that they have had to re-price deals over the past three months. Repricing has improved since March—the average project in June was repriced up by 11% compared to 25% three months ago.
Developers reported a 5% decline in lumber prices over the past three months, a reversal from the
previous quarterly survey.
Labor shortages are impacting over half of apartment developers. 53% report increased labor costs over expected levels within the last three months. 50% report that labor availability has remained the same compared to three months ago, while 40% report that availability has worsened.

5. CMBS Delinquencies

The CMBS delinquency rate posted a small but unexpected uptick in June, climbing 6 bps and landing at 3.2%, according to data by Trepp. The uptick was only the second over the past two years, with the last increase occurring in late 2021.
Each of the major property sectors saw a slight increase in delinquencies last month, with 0.18% of all loans now in the 30 days delinquent bucket— up five bps from May. The percentage of loans with special services fell to 4.91, a decline of 21 bps from May.
By sector, Industrial remained on the most solid footing (0.23%) but saw delinquencies climb by 11 bps month-over-month in June. Multifamily (1.04%) is up 2 bps from May. Office (1.28%) rose 5 bps. Lodging (5.08%) is up 6 bps from May while Retail (5.69%) is up 14 bps.

6. Gas Prices

Wholesale gasoline futures are falling, with unfinished gas, commonly referred to as “RBOB” down roughly 20% since its June 9th high. Prices at the pump often follow RBOB prices.
The average price per gallon at the pump stood at $4.63, down 15 cents from the week prior and down 38% over four weeks, according to AAA. Gasoline prices have now declined for 28 days straight.
According to an analysis by the NY Times, energy analysts say that Americans are spending in total $140 million less per day at the pump than they were one month ago.
Despite a massive, 11.2% month-over-month increase for the all-gasoline sub-index of CPI in June, fuel oil posted a -1.2% month-over-month decline over the same period.

7. Office Demand

New Office demand ticked up in May, according to the VTS Office Demand Index (VODI).
Office demand has essentially plateaued since March, falling into what appears to be a new post-pandemic equilibrium. However, VODI is up 21.8% quarter-over-quarter as the office market has shaken off the temporary headwinds induced by the omicron wave. VODI is down 14.1% year-over-year.
On a metro level, many metros showed slight recoveries in May but remain below their post-vaccine peak. New York City saw a notable increase of 12.7% month-over-month in May and 31.1% quarter-over-quarter. However, the Big Apple remains 16.7% below its post-vaccine peak in Fall 2021.
Other metros that saw Office demand climb were San Francisco (+2%), Boston (+3%), and Seattle (+9%). Declines were seen in Chicago (-14%), Washington D.C. (-2%), and Los Angeles (-1%).

8. GDPNow Predicts Recession

A growing number of analysts, institutions, and key indicators are increasingly signaling signs of a recession, and the Atlanta Federal Reserve’s GDPNow index just became the latest metric to flash a
warning sign.
According to the latest GDPNow update (July 8th), seasonally adjusted real GDP growth is expected to
register an annualized -1.2% decline in Q2 2022.
While the GDPNow forecast finished the week stronger than it had started, the predictions add to the grey cloud hovering above markets. Following Friday’s jobs data and wholesale trade reports from the BLS and Census Bureau, respectively, GDPNow revised up real personal consumption expenditures from 1.3% to 1.9% annualized, and private investment was revised up from -14.9% to -13.7%, annualized.

9. The Hot Market for Cold Storage

Cold Storage, which saw an influx of interest during the pandemic as increased demand for food delivery, groceries, and vaccine distribution poured money into those assets, faces an uncertain future as we move into the post-pandemic phase.
Overall, high demand remains, with the average vacancy rate standing at 3.5% for Cold Storage properties according to an analysis by Wealth Management.com. Cold Storage is seeing lower vacancy rates than overall traditional warehouse space.
High population, a large volume of agricultural imports, proximity to large ports, and limited space for cold storage are thought to be the key factors aiding asset pricing. Jacksonville, Detroit, and South New Jersey stand out as examples of where this is taking place, according to the analysis.
Historically, Cold Storage has been dominated by a handful of specialized REITs, but in recent years, the sector has attracted interest from private equity and institutional capital.

10. Apartment Development Risks

While apartment demand remains strong in the face of growing economic uncertainty, the industry should remain on the lookout for oversupply risks, according to an analysis by Apartments.com and CoStar.
Multifamily construction stands at its highest level in 40 years with over 842k units currently in development. Recent trends largely reflect an attempt to catch supply up to soaring apartment demand,
which has been responsible for some of the fastest residential rent growth on record.
However, the analysis looked at metros that fall into three categories: Markets with the greatest rise in apartment vacancies over the past year; markets that have experienced the steepest rent growth
declines over the past year; and current supply levels compared to the previous three-year average.
The analysis found that Phoenix, Tampa, and Austin could be candidates for potential overbuilding using the three metrics, as both Phoenix and Tampa fall in the top 10 for all three categories, while Austin does for two categories and registers at #11 in a third. Raleigh and Las Vegas, while considered as high-risk as the previous three, came in close behind.

SUMMARY OF SOURCES

(1) https://www.federalreserve.gov/newsevents/pressreleases/monetary20220615a.htm
(2) https://www.bls.gov/news.release/cpi.nr0.htm
(3) https://www.federalreserve.gov/monetarypolicy/beigebook202207.htm
(4) https://www.nmhc.org/research-insight/nmhc-construction-survey/quarterly-survey-ofapartment-construction-development-activity-june-2022/
(5) https://www.trepp.com/trepptalk/monthly-snapshot-cre-structured-finance-banking-activityin-june-as-first-half-of-2022-concludes
(6) https://gasprices.aaa.com/
(7) https://www.vts.com/vts-office-demand-index-may-2022
(8) https://www.atlantafed.org/cqer/research/gdpnow
(9) https://www.wealthmanagement.com/industrial/consumers-take-step-back-home-deliverieswill-cold-storage-remain-hot-asset-type
(10) https://www.globest.com/2022/07/06/the-apartment-markets-at-greatest-risk-foroversupply/COMMERCIAL