5 Must-Reads for the CRE Industry [October 2020]

Posted by Alex Dimitroff on Oct 30, 2020 8:25:09 AM
Alex Dimitroff

1. Pricing Disconnect Weighs on Commercial Real Estate Investment Activity, CBRE Survey Finds

“The CBRE survey found that 61% of buyers are looking for discounts from pre-pandemic prices and only 9% of sellers willing to offer such discounts. Among buyers looking for discounts, nearly three-quarters were for office or retail properties. For suburban office, 95% of investors were looking for discounts, with no sellers willing to reduce their price.” (CBRE, 10/8)

What you need to know:

  • Two-thirds of respondents stated they are adopting more conservative rental income assumptions than practiced in Q1 2020. Around half of those with unchanged underwriting assumptions are industrial-focused respondents.
  • Cap rates for Class A properties (as of August 2020) remained relatively unchanged from rates at the end of 2019. The largest portion of metro markets reported flat cap rates, with other markets reporting nominal increases or decreases between 25-50 basis points.

Read the full article here.
Access the full survey here.brandon-griggs-wR11KBaB86U-unsplash

2.  Early October Indicators Point to Another Drop in Delinquencies

“In June, the Trepp delinquency rate came within two basis points of matching its all-time high of 10.34% registered in 2012. Starting in July, however, the number began to retreat as a sizable number of loans were "cured" through forbearances or by borrowers digging into their pockets to keep loans current. That trend continued through August and September and we are now seeing the trend occur in October, according to preliminary CMBS remittance data.” (Trepp, 10/23)

What you need to know:

  • In September, 8.92% of loans were listed as 30 days or more delinquent or non-performing. The preliminary rate for October suggests a decline of about 60 basis points, an estimated 202 basis point decrease from June.
  • A contributing factor to the decrease in delinquencies has been an acceleration in forbearances over the last few months. Real estate owners have been able to utilize reserves to keep their loans current. As of September, borrowers behind more than $30 billion in loans (5.5% of the market) had received financial relief, two-thirds of which was granted to hotel owners.

Read the full article here.

3.  Renters Flock to Suburbia, Upending Decadelong Urbanization Trend

“Apartment rents are rising in suburban markets across the U.S. as city dwellers look for bigger spaces in smaller towns. Many of suburbia’s new tenants say that this year’s shift to a work-at-home model removed a longstanding barrier to living in these neighborhoods, namely a sometimes aggravating commute to a downtown city office building.” (WSJ – subscription required, 10/13)

What you need to know:

  • The suburban rental apartment vacancy rate has fallen from 6.3% in Q4 2019, the last pre-COVID fiscal quarter, to 6.1% in Q3 2020. At the same time, downtown rents have risen from 7.3% to 9.2%.
  • Similarly, apartment rents in urban centers have mirrored this development. Since March, rents are down 17% in San Francisco, 9.2% in Boston, and falling about 1% per month on average. As work-from-home status remains widespread, many renters are leaving urban markets citing contagion concerns and a relatively inexpensive cost of living in the suburbs.

Read the full article here.

4.  Vaccine Expectations Create Cold Storage Boom

“Right now, there are nearly 400 vaccines for Covid-19 in development. When some of those are approved for widespread use, they’ll need to be stored and distributed from temperature-controlled spaces. Companies are already lining up giant cold storage facilities, also known as freezer farms, to securely store millions of vials of a vaccine, according to a new report from JLL.” (GlobeSt, 10/23)

What you need to know:

  • UPS recently announced it was building “freezer farms” in Louisville, Kentucky, and another in the Netherlands to assist in rapidly distributing the vaccine across the world. To store the vaccines, these freezer farms must be capable of maintaining -180 degrees Fahrenheit temperatures and be large enough for hundreds of customer freezer boxes.
  • The increasing and necessary demand for cold storage may result in a significant bottleneck: more than 78% of the existing cold storage product was built before 2000 and much of it is considered obsolete or inefficient. The significant cost and sophistication that comes developing a cold storage facility presents a real challenge for the necessary distribution of a COVID-19 vaccine.

Read the full article here.

5.  California’s Proposition 15 Would Undo Limits on Commercial Property Taxes

“More than 40 years after imposing severe restrictions on property-tax increases, California voters might begin rolling them back next week, sending shivers through the state’s commercial real-estate industry. A measure on the Nov. 3 ballot would make the most significant changes yet to 1978’s Proposition 13 by allowing local governments to begin assessing commercial property based on its current value, rather than capping increases from the last time it was sold. (WSJ – subscription required, 10/27)

What you need to know:

  • If fully implemented, Proposition 15 would generate between $6.5 billion and $11.5 billion in additional annual tax revenue for local governments. From the time Proposition 13 passed, through 2013, local government revenue per-person in California grew 36%, compared to the nationwide average of 69%. Despite this, per-person local-government revenue in California, at nearly $3,500, remained higher than the national average of $3,000.
  • If Proposition 15 passes, property owners who have held their buildings the longest would be among the most effected. Proposition 13 capped increases on assessed values to 2% a year for all properties and only allowed reassessments in the event of a sale. Opponents to the proposition note that the higher property taxes will hurt small businesses since, under most commercial leases, tenants are responsible for property-tax increases.

Read the full article here.

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Topics: Market Update, Investment

Alex Dimitroff
Written by Alex Dimitroff

As Financial Analyst, Alex supports RRA Capital's senior managers in property underwriting, loan closing, and fund administration. Alex is a CFA Level I candidate and a recent Finance graduate from Barrett, The Honors College at Arizona State University.