Justin M. Weber

Single-Tenant Net-Lease: The Backbone of Steady Performance in CRE In a dynamic commercial real estate landscape, single-tenant net-lease properties have proven to be remarkably resilient. Marcus & Millichap highlight that as of March 2024, major U.S. markets have maintained sub-4% vacancy rates, a stability that echoes five years ago. What's driving this impressive performance? • Strong Labor Market: Boosting retail spending beyond inflation • Real Wage Increases: Giving consumers more disposable income A new benchmark for core retail sales was set in Q1 2024, despite households prioritizing essentials. More people are spending on dining out and experiences, increasing foot traffic and patronage at net-leased retail spaces. Highlights: • Fast food, convenience stores, and restaurants report sub-3% vacancy rates • Primary, secondary, and tertiary markets show vacancies at 4.6%, 4.3%, and 3.5% respectively. This market tightness benefits owners in lease renewals and securing new tenants. Local and regional banks remain primary financing resources, supported by strong sector fundamentals. Among the 50 major U.S. retail markets, 34 have single-tenant vacancy rates at least 100 basis points below their long-term mean, with notable performance in the Midwest, South, and Texas metros. Single-tenant net-lease properties continue to demonstrate their strength and stability, making them a cornerstone of commercial real estate. Read the article: https://lnkd.in/eBWShGBw #CRE #RetailTrends #NetLease #CommercialRealEstate #MarketTrends #RealEstateInvesting

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💥IRR-Underwriting terms💥👇🏽 Unlevered IRR and project IRR (often just referred to as "IRR") are closely related concepts, but they serve different purposes and include different assumptions in their calculations. Understanding the distinctions between the two can help investors evaluate investment opportunities more accurately. Project IRR (Levered IRR) - Inclusion of Debt: Project IRR, or levered IRR, includes the effects of financing in its calculation. This means it accounts for all cash flows related to the investment, including those from debt such as loan payments, interest expenses, and the principal repayment. - Higher Sensitivity: Because it includes debt, the levered IRR typically shows higher variability and sensitivity to changes in financing terms and costs. Debt can amplify the returns due to the leverage effect but also increases risk. - Actual Return: It provides a measure of the overall actual return on the investment, reflecting the total cost and benefits, including how the investment is financed. Unlevered IRR - Exclusion of Debt: As mentioned earlier, unlevered IRR calculates returns based solely on the operational cash flows of the investment, excluding any financing impacts. It reflects the return from the assets themselves. - Comparative Analysis: It allows for straightforward comparison between different investment opportunities regardless of how they are financed. This makes it particularly useful for investors who want to evaluate the pure performance potential of the assets. - Lower Risk Perception: By excluding debt, unlevered IRR tends to show a lower risk profile since it does not incorporate the risk associated with leverage. Practical Comparison for Investors For a real estate investor, here's how the two metrics might be used: - Project IRR might be more relevant if you're considering the total return of a project where you are actively managing both the operational aspects and the financing. It tells you what your total return will be, considering how you've structured the deal financially. - Unlevered IRR would be particularly useful if you're evaluating the core profitability of the property independent of financing. This is helpful when comparing properties that might be financed in different ways or if you're looking at potential returns without considering how much debt you might want to take on. In essence, while project IRR gives an investor insight into the effectiveness of the financing strategy combined with the investment’s operational efficiency, unlevered IRR strips away the financing layer to focus solely on the investment's intrinsic operational value. Understanding both helps an investor gauge both the raw potential and the actualized returns of an investment under specific financing conditions. #hsquaredcapital #mfree

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As the 2024 Presidential election approaches, will it shake up the commercial real estate market? Our latest findings reveal some surprising insights. Curious to know what really influences deal volumes? Click here to find out: https://lnkd.in/gU_5u3j4 #CRE #CommercialRealEstate #RealEstateInvesting #Election2024 #MarketInsights #InvestmentTrends #PropertyManagement #RealEstateNews #FriedmanRealEstate

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In commercial real estate development, there is a common issue that often leads to divergent expectations--and therefore disappointment--between sponsors and LPs. This is how equity is treated with regard to the calculation of IRR. Some CRE sponsors calculate equity IRR as soon as the equity is committed, i.e. the day it shows up in the project bank account. Other sponsors calculate equity IRR as the equity is drawn upon to pay for project needs. The former method is more conservative and requires that more cash goes toward the LPs' pref before the IRR hurdle is cleared. This is because the equity begins accruing "interest" on the entire amount the day the money shows up in the bank account. It is therefore more favorable to the LP. The latter method produces lower hurdles to clear, as the IRR clock only starts with the first draw on the equity account, and only on the amount drawn. For projects with multiple tranches/classes of equity, this can mean certain LPs won't begin having their equity drawn until several months after groundbreaking. Moreover, this draw period could be several months long before the project has fully drawn all its equity capital before resorting to drawing on the construction loan. This can mean an LP is effectively earning (A) 0% on his capital for months while it's sitting undeployed, and (B) a fraction of the stated return for several more months before his capital is fully deployed. This is obviously more favorable to the sponsor. In the realm of financial modeling, it is therefore essential to be able to toggle whether IRR is calculated on COMMITMENT or CUMULATIVE DRAWS. If the latter, and there are multiple equity tranches or classes, it is also essential to be able to model the order in which the different equity groups' capital is drawn. Modeling this precisely will set expectations according to the operating agreement. As a result, any surprises--good or bad--can be chalked up to project performance instead of poor communication. For the pro, this is an essential part of the process of benchmarking expectations PRIOR to closing the capital round. #commercialrealestate #financialmodeling #realestatedevelopment

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🌟 2024 CRE Market Outlook: Opportunities Amid Challenges 🌟 Pockets of Opportunity in CRE Analysts predict potential opportunities in the commercial real estate (CRE) market for the latter half of 2024, despite challenges from a cooling U.S. labor market. Current CRE Challenges   • High Interest Rates: The Federal Reserve's high rates have driven CRE delinquency rates up to 5% in May, from 3.6% a year earlier.  • Maturing Mortgages: $940 billion of the $4.7 trillion in U.S. CRE mortgages mature this year, with market values down about 30% since rate hikes.  • Office Vacancies: 20% of U.S. offices were vacant in Q1 2024, a historic high. Office construction has dropped by 63% since the pandemic. Jobs Market Impact  • Job Growth: Strong job growth has provided some stability, though office job growth is lagging.  • Labor Market Cooling: Recent unemployment data hints at a slowdown, which could prompt the Fed to cut rates. Rate Cuts and CRE Outlook  • Potential Fed Rate Cut: Lower rates might reduce borrowing costs and boost sentiment, but if cuts are due to a weak economy, CRE could suffer.  • Vacancy Rates: As the economy slows, vacancy rates might rise, impacting CRE further. Reasons for Optimism  • Sector Performance: Multifamily, retail, and industrial real estate continue to perform well.  • Opportunities: Specific areas like student housing present investment opportunities.  • Positive Forecast: Economists at Wells Fargo express cautious optimism for a CRE turnaround, contingent on sturdy economic growth. Strategic Takeaways for CRE Stakeholders  • Focus on High-Performing Sectors: Emphasize multifamily, retail, and industrial investments.  • Monitor Labor Market Trends: Stay informed on job growth and Fed rate decisions.  • Explore Niche Opportunities: Consider specific markets like student housing for potential gains. To read the full article visit: https://lnkd.in/gms5XzqJ #CRE2024 #CommercialRealEstate #MarketOutlook #InvestmentOpportunities #RealEstateTrends

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Winners & Losers Of REIT Earnings Season https://lnkd.in/ePGss2da Light at the End of the Tunnel? Two years of persistent rate-driven pressure on residential and commercial real estate markets appears to finally be abating, not a moment too soon. Amid an otherwise underwhelming earnings season across the broader equity market, real estate earnings results were notably better than expected, providing an added uplift to the rate-driven rebound. Upside surprises at the property-sector level included Retail, Sunbelt Apartment, NYC/Sunbelt Office, Senior Housing, and Industrial REITs. Ten REITs announced dividend increases this earnings season. There were few major "bombshells" this earnings season, but we did observe ongoing pockets of distress among some of the most highly levered REITs. Five REITs reduced their dividends. With recession fears ever-present, REITs are not entirely out of the woods yet. Losers included Self-Storage, Hotel, Farmland, and Mortgage REITs. The West Coast - particularly California - was a region of notable weakness. REIT Academy & The Executive REIT Masterclass | The Daily REIT Beat Newsletter | Brad Thomas | #REITs #Dividends #Investing #Income #Yield #RealEstate #Housing #Stocks #Bonds #HighYield #DividendInvesting #IncomeInvesting #Diversification #Inflation #realassets #investment

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How can real asset investors leverage data intelligence to unlock additional value for clients? In the latest edition of Institutional Real Estate, Inc. PATRIZIA's PD Dr. Marcelo Cajias, Dr. Anett Wins and Rebecca Restle explore how the the availability of amenities has a direct influence on residential rental values, helping investors identify the optimum conditions for maintaining sustainable income. #PATRIZIA #RealAssets #DataIntelligence #Residential

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CRE DISTRESSED SALES • According to CoStar data, distressed sales as share of total transaction volume picked up in 2023, increasing 1.2 percentage points. Overall, distress sales are 4.7% of total CRE transactions, their highest level since 2016, although well below financial crisis peaks. • The increase is almost entirely driven by Office distress sales, which rose to roughly 9%, up 3 percentage points from 2022. Increasing vacancy rates, mixed with high interest rates and declining values, have put pressure on office properties, and borrowers that are struggling to refinance at maturity. • The increase in distressed sales largely reflects what’s happening within CRE debt. In 2023, the non-Agency CMBS non-performing rate increased by 1.21 percentage points, with 90% of the increase coming from Office deals. Both distress and default in office are coming at maturity, with 53% of the increase in the overall non-agency CMBS non-performing rate in 2023 due to Office maturity defaults. ➡ Act sooner than later! Learn how we can help you manage risks and opportunities in your CRE portfolio > https://lnkd.in/eS4rK5XD #distressedsales #cre #banks #lenders Joseph Biasi Christiane Figueiredo Mendes, MBA John Vecchione Travis Fisher Scott Bell Xiaojing Li

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According to the Altus Group Q3 2024 U.S. CRE Survey, investor confidence in office, retail, and industrial real estate remains low, yet multifamily housing is gaining attention. 69% of investors expect #multifamily to outperform other real estate sectors. Why? High mortgage rates and costs, limited housing supply, and affordability challenges in the single-family market are shifting investor focus to rentals. Continued demand suggests that the sector’s appeal is not just cyclical but indicative of a broader shift in housing preferences. Reach out to investors@parkrowep.com to learn about our active multifamily investment opportunities. Read the full article here: https://lnkd.in/gawjHvKq

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2024: A year to be active in infrastructure According to a recent PATRIZIA report, the infrastructure asset class is well-positioned to thrive in 2024 despite economic headwinds. Here are some key takeaways for investors: 1. Infrastructure offers a refuge from volatility. With cash rates and bond yields expected to moderate, infrastructure's stable yields and resilient performance through periods of high inflation and rising rates make it an attractive diversifier. 2. Long-term secular trends create tailwinds. The energy transition and digitalization will drive infrastructure investment, with opportunities in renewables, energy storage, fiber networks, and data centers. 3. Opportunities for investment in the mid-market remain abundant. Smaller, decentralized infrastructure projects may accelerate due to geopolitical risks, providing nimble investors the chance to capitalize on market inefficiencies. 4. Despite 2023 fundraising challenges, infrastructure's fundamentals remain strong. The asset class's inflation-hedging and diversification properties continue to resonate with institutional investors. With uncertainty ahead, alternative investment strategies like infrastructure may help navigate the complex landscape and unlock long-term growth potential. Contact Alex Chu ,Abby Mak or Sophie Cai today to stay informed and adapt your investment approach to navigate the evolving market landscape efficiently! #InfrastructureInvesting #2024Opportunities #DiversifyYourPortfolio #InvestmentInsights #InflationHedging #AlternativeInvestments #MarketEfficiency #LongTermGrowth #AdaptYourApproach For more insights, check out the full report here: https://shorturl.at/hjrXZ

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Another major statement of confidence in the US #realestate sector. KKR making another bet of $2.1bn on the #multifamily sector; hot on the heels of their recent #studenthousing purchase. The prospects of the #multifamily sector seem poised for a recovery in values with supply limited due to curtailed development activity, potentially lower rates and continued strong demand from tenants as the cost of ownership continues to be a barrier to most people.

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Great example of how real estate "winners" and "losers" are defined over decades not months... ---- Flashback ---- Why were REITs slow to recover from the GFC? 1) What was once “conservative” wasn’t Before the GFC crisis, 43% LTV sounded safe, but a 40% decline in values turned that “conservative” leverage to 70%, leaving many REITs scrambling. Forced equity sales at low prices and distressed property sales became common. 2) Financial distress is extremely costly *** Despite property values recovering to exceed their 2007 peaks, REIT share prices stayed low for nearly a decade. The gap was largely due to the hangover from financial distress. 3) More debt means missed opportunities While private equity firms like Blackstone snapped up bargains during the trough, heavily leveraged REITs couldn’t play offense. 4) Better leverage metrics are essential Using asset values in leverage calculations can be misleading during market bubbles. Post-crisis, income-based measures emerged as better indicators of leverage. *** In its compelling study on effective REIT capitalization, Green Street noted: "Credit crunches have proven to be such disruptive events, that they create wonderful opportunities for companies that keep large amounts of 'untapped borrowing power.' The tendency of markets to transition from bubble to bust and back again has never been more obvious, and companies with balance sheets that allow them to play offense amidst the worst busts are likely to create a lot more value for shareholders than companies that are on their heels the whole time." Source: Capital Structure in the REIT Sector (2/26/15), Green Street ---- Back to today ---- "Balance sheet restructuring" may not sound as sensational as "bankruptcy," but a slow race to escape a troubled balance sheet may be more painful (and costly) than traditional bankruptcy. We think there are three big bombs in real estate: 1) Too much supply 2) Too much debt 3) Interest rate spikes One of these bombs tends to explode every ten years. ---- Sidelined ---- This downturn's culprit was an interest rate spike, destabilizing many real estate balance sheets. Firms reliant on unsustainably cheap debt originated during the Covid rebound, when the Fed pushed interest rates down by putting $4T+ into the bond markets, are sidelined. ---- In the game ---- REITs learned their lessons in the aftermath of the GFC. They couldn't compete with debt-fueled acquisitions over the last decade but are emerging with unique advantages. Among these advantages is more consistent access to relatively cheap debt. Since interest rates peaked last October, REIT bonds have been more than 15% cheaper than conventional commercial mortgage debt. REITs are in the catbird seat and will almost certainly use these advantages to make big moves in the coming months and years.

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Lennar’s $6B REIT Spin-Off: A Game-Changer for Homebuilding Strategy Lennar Corporation is making waves with its plans to spin off $5–6 billion in land holdings into a new REIT, Millrose Properties. This bold move supports Lennar’s transition to an asset-light strategy, aimed at mitigating risks and boosting cash flow. Key highlights include: The Spin-Off Details: - Millrose will act as a land bank, managing and selling land to Lennar and other developers on a “just-in-time” basis. - The REIT will leverage a recycled capital structure, ensuring liquidity without constant fundraising. - Backed by Goldman Sachs-linked Kennedy Lewis Investment Management, Millrose is poised for resilience during market downturns. Strategic Implications: - Lennar can focus on home construction while reducing exposure to land market volatility. - Millrose’s innovative model offers a blueprint for other developers seeking risk mitigation. Market Challenges: - Rising mortgage rates and falling Q4 home orders (down 3% YoY) pose immediate hurdles. - Lennar’s shares dropped 7% post-announcement, reflecting market skepticism. What’s Next? - Pending board approval, Millrose will redefine how land assets are managed. - This shift could inspire similar strategies across the homebuilding industry. This move underscores Lennar’s commitment to innovation and adaptability in a challenging market. What are your thoughts on this strategic pivot? #Colliers #Pittsburgh #MoreIn24 #ThriveIn25 #ClosersCoffee #ColliersCapitalMarkets #DidItClose? https://lnkd.in/e8qrgDH8

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A big step toward the industry's new normal? Yesterday, KKR announced it has agreed to buy $2 billion of apartments from Lennar. Two months ago, Blackstone agreed to pay $10 billion for AIRC. We think these trades suggest a new watermark for higher-quality apartments between 5% and 5.5% (cap rate). Two implications... 1. Running out of of altitude: Many apartment buyers purchased properties during the Covid rebound at cap rates well below 5-5.5%, and their yields are likely worse now due to sluggish rents and higher opex. A large share of these buyers purchased lower-quality assets with fix-and-flip strategies and short-term, floating rate debt. This plane ran out of fuel a few years ago and has been gliding toward a crash since rates began to spike. ...but these borrowers are quickly running out of altitude. 2. Thriving survivors: Those who weren't loading up on class B and C apartments with excess floating rate debt are back in the game and aren't as distracted by interest near-term maturities, loan paydowns, and rate cap renewals. These dichotomies are unquestionably simplistic and ignore nuances. ...namely, that many firms will have properties in both categories. However, we think they frame a positive turning point for the industry. Apartments remain the most financeable assets in commercial real estate, and these big trades provide incremental pricing clarity. The fix-and-flip hangover is just beginning, as are the opportunities for well-capitalized buyers. Either way, clarity and increased activity represent a meaningful step toward the industry's new normal. Chart detail: One large apartment REIT's FFO yield vs. market cap rates since the Covid recovery. The significant gaps shed light on pending winners and losers.

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“One of North America’s largest independent commercial real estate valuation and consulting firms (IRR), has released its highly anticipated 2024 Mid-Year Commercial Real Estate Report. The report highlights the sector’s resilience and the stabilization in property prices amid significant economic shifts.” See what else these experts had to say regarding the state of commercial real estate https://lnkd.in/g6siHZ5t. #commercialrealestate #realestate

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