Preparing for 2021: Determining your CRE Strategy
There has been a historically low number of properties for sale in office, industrial, and retail product types, resulting in a small increase in property values as of August 2020. This has been a direct result of both investors postponing transactions and a government-imposed moratorium on evictions.
However, as we proceed into 2021, and as lenders begin to take their properties back following missed payments, we predict that the market will see an influx of properties. Lenders will be focused on liquidity rather than maximizing value, which will force investors to reconsider their positions.
Furthermore, given the potential changes — both economically and legislatively— that California faces, landlords must act strategically to ensure their position next year. It is time for investors to assess their investment strategy and decide whether it’s time to make a change. To help those seeking guidance during these tumultuous times, we have outlined numerous options investors can consider taking: Should they buy, sell, or hold?
Buying CRE in 2021: Taking Advantage of Low-Interest Rates
In March 2020, the Federal Reserve announced that it was dropping its benchmark interest rate to zero. As a result, interest rates declined, prompting qualified investors to pursue acquisition opportunities. Unfortunately, with many commercial tenants withholding rent or filing Chapter 11, landlords could not optimize their position.
However, since government-mandated shutdowns have begun to lift, we have seen an influx in commercial activity: Tenants are paying rent, and companies are moving back into their office spaces.
Recently, in September, the Fed announced that they anticipate interest rates to remain low through 2022; therefore, an investor with access to capital can leverage their position and acquire new assets moving into 2021, taking advantage of low-interest rates on commercial properties. As of October, commercial loan rates have been dipping down to almost 2%:
Average Commercial Loan Rates (October 2020)
|Conventional Loan Rates: 2.22% – 5.81%||USDA Rates: 3.25% – 6.25%|
|Private Banking Rates: 2.18% – 4.25%||Insurance Rates: 2.10% – 5.12%|
|CMBS Rates: 2.36% – 4.14||Bridge Rates: 4.22% – 13.22%|
|SBA 504 Rates: 2.55% – 6.79%||Construction Rates: 4.75% – 9.75%|
|SBA 7a Rates: 2.25% – 5.75%||Mezzanine Rates: 4.36% – 8.64%|
Obviously, rates will vary depending on the asset type and buyer qualifications – But if you are in the position, now is the time to start vetting out opportunities.
Should CRE Investors Sell?
Shifting trends in commercial real estate [AB1] are drastically impacting landlord’s strategies. Some are planning to sell to get out of real estate entirely, while others seek the chance to trade out of state. Here are what investors should consider if they are contemplating selling:
- Tenants are demanding more concessions to accommodate the recent economic downturn. They have less capital to utilize for new spaces in all sectors. Additionally, most tenants are currently seeking lower rents, bringing real estate values down.
- Office CRE trends have been changing since the pandemic. As individuals transition to working remotely, property values in previously highly desired markets are anticipated to drop. Office spaces in more suburban areas are expected to expand, raising values in less dominant markets.
- Retail CRE has declined in demand as businesses struggle to access capital to keep operating. Suppose a second wave of the pandemic causes another shutdown. In that case, more companies could be forced to close their doors, leaving investors in a worse position than they are now.
- Each state has handled the pandemic differently. While California has limited operations, creating lost revenue for tenants, other states such as Florida have almost wholly opened.
Determining to sell in a volatile market can be difficult. To best assess if selling now is a good time, work with a real estate agent to determine where your property would trade in today’s market, and identify how the future changes could impact your position.
If the plan is to hold, focus on CASH FLOW!
Moving into 2021, some experts have predicted that the coming year will bring economic challenges similar to those we have seen in 2020. Therefore, investors planning on holding onto their assets should focus on stabilizing those assets, even if it means reduced rent and shorter-term leases.
They should communicate and renegotiate terms with their lenders and equity partners to understand that proformas will be lower than expected. The goal should be to get through the upcoming years with consistent cash flow rather than achieve the same returns they predicted pre-COVID.
CRE Investors: Act Today!
We cannot emphasize enough that now is the time to assess your strategy. As the world slowly returns to normal, or what we called normal pre-COVID-19, CRE will begin to bounce back.
Investors need to know how their portfolios will rebound and what actions they should take to ensure a full recovery on their end. The investors who choose foresight and act now will be the ones who reap the benefits of a highly-opportunistic market.