{"id":9114,"date":"2023-05-12T22:03:14","date_gmt":"2023-05-13T06:03:14","guid":{"rendered":"https:\/\/bmcre.freewebsite.org.in\/wp1\/?p=9114"},"modified":"2023-05-12T22:13:56","modified_gmt":"2023-05-13T06:13:56","slug":"after-slowdown-in-property-sales-repricing-becomes-this-summers-dreaded-word","status":"publish","type":"post","link":"https:\/\/bmcre.freewebsite.org.in\/wp1\/2023\/05\/12\/after-slowdown-in-property-sales-repricing-becomes-this-summers-dreaded-word\/","title":{"rendered":"After Slowdown in Property Sales, \u2018Repricing\u2019 Becomes This Summer\u2019s Dreaded Word"},"content":{"rendered":"\t\t
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Rising Interest Rates, Other Economic Challenges Plague Commercial Real Estate Nationally<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Waterbridge Capital struck a deal to buy Union Bank Plaza in Los Angeles for $155 million after another buyer backed off a higher-priced acquisition of the 40-story office tower amid rising interest rates. (Jeremiah Unruh\/CoStar)<\/figcaption>\n\t\t\t\t\t\t\t\t\t\t<\/figure>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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By\u00a0<\/strong>Ryan Ori,\u00a0<\/strong>CoStar News\u00a0<\/strong>August 23, 2022 | 10:53 AM<\/span><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Summer lulls are nothing new in commercial real estate, but this year\u2019s slowdown in deals is more pronounced because of one word that has defined the season: repricing.<\/p>

Rising interest rates, inflation and worries of a recession have caused a reset on prices, prompting sellers to accept a less satisfying price or pull properties from the market in hopes of a better offer later.<\/p>

The result has been a drop in deals this spring and summer, with no clear timeline for when the market will recover.<\/p>

\u201cThe lender pool isn\u2019t as deep, the buyer pool isn\u2019t as deep and everyone\u2019s being cautious about making a move,\u201d said Jim Postweiler, a Newmark broker who sells office buildings in the Chicago area and throughout the Midwest.<\/p>

U.S. transaction volume fell in all three months of the second quarter after the Federal Reserve began raising interest rates, according to a CoStar report.<\/p>

Transactions involving real estate investment trusts fell to $11 billion in the second quarter, down from $16.7 billion in the first quarter, according to Nareit, a trade group for the U.S. real estate investment trust industry. That slowdown happened despite REIT-owned properties reaching all-time highs for funds from operations and net operating income.<\/p>

That separation of pricing from fundamentals has made recent months stand out from other periods of real estate volatility, such as recessions, according to property owners and investment sales brokers.<\/p>

Brokers say deals that are closing are frequently at a discount to the initially anticipated price. Postweiler said he\u2019s been involved in deals with price drops of 10% to 15% during the marketing process, and he\u2019s heard of deals being priced down more than 20%.<\/p>

Market Repricing<\/strong><\/h3>

Rampant repricing is a twist on the age-old real estate term of \u201cretrading,\u201d in which a firm tries to negotiate a better price after being chosen as the buyer.<\/p>

\u201cThe word retrade has a negative connotation, like they\u2019re being opportunists,\u201d Postweiler told CoStar News. \u201cThis is more a repricing of the market. It\u2019s not bad behavior by buyers. They have to deliver certain returns and they can\u2019t do that when interest rates are rising and there\u2019s inflation.\u201d<\/p>

Even small bumps up in interest rates can increase the cost of a deal significantly. Often, sharp upticks in borrowing costs have been coupled with a lower percentage of debt that a property buyer can take on, creating a double-whammy of needing to raise more equity for the deal and taking on less favorable borrowing terms.<\/p>

Deals have been affected from Los Angeles to New York.<\/p>

In one\u00a0dramatic example,\u00a0Innovo Property Group forfeited a $35 million deposit when it walked away from a deal to buy HSBC\u2019s headquarters in midtown Manhattan for $855 million, the\u00a0Wall Street Journal\u00a0reported in June. The seller, Landlord Property and Building Corp., turned its attention to\u00a0refinancing the office tower\u00a0after the sale fizzled, and Innovo didn\u2019t comment.<\/p>

Market conditions have affected deals in major U.S. cities including New York. (Getty Images)<\/p>

In Los Angeles, Harbor Associates\u2019 $165 million deal to buy the 40-story Union Bank Plaza\u00a0fell apart in June\u00a0amid rising interest rates. Owner KBS\u00a0struck a new deal<\/a>\u00a0to sell the office tower to New York-based Waterbridge Capital for $155 million, far below the $208 million KBS paid for the building at 445 S. Figueroa in 2010.<\/p>

In other cases, sellers are pulling properties off the market.<\/p>

\u201cI\u2019ve seen groups fall out of contract and then there\u2019s a new watermark,\u201d said NAI Hiffman industrial broker Adam Roth, who specializes in land sales and leasing in the Chicago area. \u201cIf a property was about to sell for over $50 million and now it\u2019s worth maybe just over $30 million, some owners are just deciding to wait before putting it back on the market.\u201d<\/p>

That was the case with a large development site Roth had a deal to sell in Chicago\u2019s northern suburbs before the buyer backed off.<\/p>

Higher Costs<\/strong><\/h3>

Rising borrowing and construction costs and shortages of construction materials are causing developers to be more cautious about buying land even amid historically strong demand for a completed warehouse.<\/p>

\u201cThere\u2019s capital out there, but it\u2019s going to be more selective, particularly if it\u2019s land that\u2019s not a true infill location,\u201d Roth said.<\/p>

Even for existing warehouses, one of the hottest sectors since the onset of COVID-19 in early 2020, pricing has cooled.<\/p>

\u201cInvestors were underpricing risk at the end of 2021 and early 2022 and now the market appears to be over-adjusting for risk,\u201d said Colliers industrial investment sales broker Gian Bruno, who is based in Orange County, California, and sells properties from Denver to the West Coast.<\/p>

\u201cThis is the first time we can really remember, especially in industrial, where the fundamentals don\u2019t line up with the capital markets,\u201d Bruno said. \u201cThe leasing fundamentals are very, very strong and there\u2019s a disconnect with the capital markets.\u201d<\/p>

Before the recent slowdown, there had been little difference in rates of return between top-tier industrial markets such as California\u2019s Inland Empire and secondary markets like Phoenix; Denver; and Portland, Oregon, Bruno said.<\/p>

\u201cNow you\u2019re seeing an outsize reaction where investors are pulling back substantially on those markets that haven\u2019t seen the rent growth,\u201d Bruno said.<\/p>

Multifamily Sales Affected<\/strong><\/h3>

Multifamily is another high-performing sector in which some sales have stalled despite rent growth and overall strong fundamentals.<\/p>

Even so, developers such as Crescent Heights say deals will continue to happen despite the challenges.<\/p>

\u201cThe positive fundamentals still outweigh the negatives of the interest rates,\u201d said Jason Buchberg, a Chicago-based vice president of acquisitions at Crescent Heights. \u201cCapital ultimately has to be invested.\u201d<\/p>

Miami-based Crescent Heights recently\u00a0sold the 39-story Echelon apartment tower\u00a0in Chicago to Canada\u2019s Morguard for $133 million. It was an off-market deal by the Canadian buyer, which already owned the neighboring Alta at K Station two-tower residential property.<\/p>

Strategic acquisitions, 1031 exchanges \u2014 transactions allowed by U.S. tax code in which an investor defers capital gains taxes from a property sale by quickly buying another property \u2014 and deals in which an owner has reasons to sell in the near term are the most likely to proceed, real estate professionals say.<\/p>

Permission to transfer a property\u2019s low-interest mortgage to a new owner also adds to a sale price and increases likelihood of a sale, Buchberg said.<\/p>

\u201cAssumable debt is now accretive to a deal,\u201d he said.<\/p>

Buyers on Sidelines<\/strong><\/h3>

One of the biggest challenges for sellers has been watching many big buyers stay on the sidelines, said Mike Condon, a Cushman & Wakefield broker based in Los Angeles who works on land, hotel, office, industrial and apartment sales.<\/p>

\u201cWe got to a point in the summer where it feels like a lot of institutional capital decided to take the summer off,\u201d Condon said. \u201cThere was a big vacuum of the more traditional buyers, who have put their pencils down and will be assessing the market after Labor Day. I think this will be one of the slowest summers for deals in years because of what\u2019s happening with rates.\u201d<\/p>

Condon is one of the brokers representing Waterbridge in the Union Bank Plaza deal in Los Angeles. That is one example of opportunistic buyers stepping into the void.<\/p>

\u201cThere\u2019s more activity and interest from the private client and private capital side, recognizing there\u2019s a vacuum of traditional investors,\u201d Condon said.<\/p>

Buyers that can still underwrite deals could come out on top years from now, he said.<\/p>

\u201cIf you\u2019re telling me I can buy a great asset in Manhattan or downtown San Francisco or downtown Los Angeles and I can buy it for hundreds of dollars per square foot and the replacement value is $1,000, there\u2019s intrinsic value in doing that,\u201d Condon said. \u201cThere\u2019s a tremendous opportunity to make money on the buy.<\/p>

\u201cBuy low, sell high. It\u2019s the oldest adage in real estate, but it\u2019s true.\u201d<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

Rising Interest Rates, Other Economic Challenges Plague Commercial Real Estate Nationally Waterbridge Capital struck a deal to buy Union Bank Plaza in Los Angeles for $155 million after another buyer backed off a higher-priced acquisition of the 40-story office tower amid rising interest rates. (Jeremiah Unruh\/CoStar) By\u00a0Ryan Ori,\u00a0CoStar News\u00a0August 23, 2022 | 10:53 AM Summer lulls are nothing new in commercial real estate, but this year\u2019s slowdown in deals is more pronounced because of one word that has defined the season: repricing. Rising interest rates, inflation and worries of a recession have caused a reset on prices, prompting sellers to accept a less satisfying price or pull properties from the market in hopes of a better offer later. The result has been a drop in deals this spring and summer, with no clear timeline for when the market will recover. \u201cThe lender pool isn\u2019t as deep, the buyer pool isn\u2019t as deep and everyone\u2019s being cautious about making a move,\u201d said Jim Postweiler, a Newmark broker who sells office buildings in the Chicago area and throughout the Midwest. U.S. transaction volume fell in all three months of the second quarter after the Federal Reserve began raising interest rates, according to a CoStar report. Transactions involving real estate investment trusts fell to $11 billion in the second quarter, down from $16.7 billion in the first quarter, according to Nareit, a trade group for the U.S. real estate investment trust industry. That slowdown happened despite REIT-owned properties reaching all-time highs for funds from operations and net operating income. That separation of pricing from fundamentals has made recent months stand out from other periods of real estate volatility, such as recessions, according to property owners and investment sales brokers. Brokers say deals that are closing are frequently at a discount to the initially anticipated price. Postweiler said he\u2019s been involved in deals with price drops of 10% to 15% during the marketing process, and he\u2019s heard of deals being priced down more than 20%. Market Repricing Rampant repricing is a twist on the age-old real estate term of \u201cretrading,\u201d in which a firm tries to negotiate a better price after being chosen as the buyer. \u201cThe word retrade has a negative connotation, like they\u2019re being opportunists,\u201d Postweiler told CoStar News. \u201cThis is more a repricing of the market. It\u2019s not bad behavior by buyers. They have to deliver certain returns and they can\u2019t do that when interest rates are rising and there\u2019s inflation.\u201d Even small bumps up in interest rates can increase the cost of a deal significantly. Often, sharp upticks in borrowing costs have been coupled with a lower percentage of debt that a property buyer can take on, creating a double-whammy of needing to raise more equity for the deal and taking on less favorable borrowing terms. Deals have been affected from Los Angeles to New York. In one\u00a0dramatic example,\u00a0Innovo Property Group forfeited a $35 million deposit when it walked away from a deal to buy HSBC\u2019s headquarters in midtown Manhattan for $855 million, the\u00a0Wall Street Journal\u00a0reported in June. The seller, Landlord Property and Building Corp., turned its attention to\u00a0refinancing the office tower\u00a0after the sale fizzled, and Innovo didn\u2019t comment. Market conditions have affected deals in major U.S. cities including New York. (Getty Images) In Los Angeles, Harbor Associates\u2019 $165 million deal to buy the 40-story Union Bank Plaza\u00a0fell apart in June\u00a0amid rising interest rates. Owner KBS\u00a0struck a new deal\u00a0to sell the office tower to New York-based Waterbridge Capital for $155 million, far below the $208 million KBS paid for the building at 445 S. Figueroa in 2010. In other cases, sellers are pulling properties off the market. \u201cI\u2019ve seen groups fall out of contract and then there\u2019s a new watermark,\u201d said NAI Hiffman industrial broker Adam Roth, who specializes in land sales and leasing in the Chicago area. \u201cIf a property was about to sell for over $50 million and now it\u2019s worth maybe just over $30 million, some owners are just deciding to wait before putting it back on the market.\u201d That was the case with a large development site Roth had a deal to sell in Chicago\u2019s northern suburbs before the buyer backed off. Higher Costs Rising borrowing and construction costs and shortages of construction materials are causing developers to be more cautious about buying land even amid historically strong demand for a completed warehouse. \u201cThere\u2019s capital out there, but it\u2019s going to be more selective, particularly if it\u2019s land that\u2019s not a true infill location,\u201d Roth said. Even for existing warehouses, one of the hottest sectors since the onset of COVID-19 in early 2020, pricing has cooled. \u201cInvestors were underpricing risk at the end of 2021 and early 2022 and now the market appears to be over-adjusting for risk,\u201d said Colliers industrial investment sales broker Gian Bruno, who is based in Orange County, California, and sells properties from Denver to the West Coast. \u201cThis is the first time we can really remember, especially in industrial, where the fundamentals don\u2019t line up with the capital markets,\u201d Bruno said. \u201cThe leasing fundamentals are very, very strong and there\u2019s a disconnect with the capital markets.\u201d Before the recent slowdown, there had been little difference in rates of return between top-tier industrial markets such as California\u2019s Inland Empire and secondary markets like Phoenix; Denver; and Portland, Oregon, Bruno said. \u201cNow you\u2019re seeing an outsize reaction where investors are pulling back substantially on those markets that haven\u2019t seen the rent growth,\u201d Bruno said. Multifamily Sales Affected Multifamily is another high-performing sector in which some sales have stalled despite rent growth and overall strong fundamentals. Even so, developers such as Crescent Heights say deals will continue to happen despite the challenges. \u201cThe positive fundamentals still outweigh the negatives of the interest rates,\u201d said Jason Buchberg, a Chicago-based vice president of acquisitions at Crescent Heights. \u201cCapital ultimately has to be invested.\u201d Miami-based Crescent Heights recently\u00a0sold the 39-story Echelon apartment tower\u00a0in Chicago to Canada\u2019s Morguard for $133 million. It was an off-market deal by …
Continue reading After Slowdown in Property Sales, \u2018Repricing\u2019 Becomes This Summer\u2019s Dreaded Word<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"elementor_theme","format":"standard","meta":{"footnotes":""},"categories":[44],"tags":[],"class_list":["post-9114","post","type-post","status-publish","format-standard","hentry","category-market-news-2022-q3"],"_links":{"self":[{"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/posts\/9114","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/comments?post=9114"}],"version-history":[{"count":8,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/posts\/9114\/revisions"}],"predecessor-version":[{"id":9125,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/posts\/9114\/revisions\/9125"}],"wp:attachment":[{"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/media?parent=9114"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/categories?post=9114"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bmcre.freewebsite.org.in\/wp1\/wp-json\/wp\/v2\/tags?post=9114"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}