Helpful Tips for Commercial Landlords

One of the first things a new commercial landlord learns is that renting properties to prospective tenants can get extremely complicated, but the most difficult task is selecting the right property. Investors and landlords need to consider a number of factors, including rental income potential, appreciation of the property, and the liability that comes with being a landlord. Above all, Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach says that selecting the right property is paramount to a landlord’s success.

“When looking for commercial properties, it really is all about location, location, location!” Nabors said. “It can sometimes be tricky to find a commercial rental property that will attract tenants and complement other business in the area. We steer our clients to properties located in busy areas with plenty of other commercial buildings nearby.”

Landlords must also research the rental regulations where the property is located, as regulations and codes often vary from city to city. If the property requires any renovations, they must be documented by a certified professional and performed by licensed contractors. Nabors added that construction type should also play a big part in making any property decisions.

“Restoration and upkeep is typically more expensive with older buildings,” said Nabors. “It’s important to weigh all of the potential costs associated with a building’s construction type and ultimately choose one that fits your budget and your plans for the property.”

Landlords must also factor in safety concerns, a huge liability with commercial rental properties. Older buildings will definitely need to be checked for asbestos, mold, lead paint and radon. There can also be requirements for handicapped ramps, electrical wiring, smoke detectors and other enhancements. A licensed building inspector can be helpful in pointing out safety issues and estimating the cost of rectifying any issues.

“Commercial rental properties represent a huge opportunity for generating income,” said Nabors. “We’ve been helping our clients choose the best locations for years and will continue to show them the best the Emerald Coast has to offer in 2016.”

 

CRE Investors Contemplate Federal Reserve’s Rate Hike

Commercial real estate investors are expected to be affected by the Federal Reserve’s recent decision to raise interest rates for the first time in nine years. For the last three years, commercial real estate investors have benefited from continuous price growth and returns of around 10% for buildings ranging from luxury hotels to office towers. Now experts are predicting that while prices may not actually fall, they are unlikely to increase very much this year.

“Some investors are seeing these predictions as a signal that it could be a better time to sell than buy as the rate of price acceleration is about to end,” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach.

Concerns are based largely on the slowing growth in China and falling oil prices, combined with a rise in borrowing costs. All of these factors are threatening to reduce the rate of rental returns. Statistics from the National Council of Real Estate Investment Fiduciaries shows real estate investments returned approximately 10% to the year ending September 2015, marking six years of double digit gains. By comparison, high yield bonds lost 2.5% during the same period and the S&P 500 posted a total return of 3.1% last year. Experts point out that it is unusual for commercial real estate to outperform stocks and bonds by such a large margin. Normally it is expected that real estate will have a return somewhere in between stocks and bonds.

“What we are seeing is that commercial real estate values have increased significantly, partially because of cheap debt and partly because of an increase in foreign investors who have been looking for a safe haven,” said Barrett. “Prices of commercial real estate have risen above the 2007 peak by 16% or more.”

Figures from Real Capital Analytics show that the value of commercial real estate transactions in the United States was about $546 billion for 2015, compared to $432 billion in 2014. This is still lower than in 2007 when a record high of $575 billion deals was reached.

 

Medical Sector Cap Rates Compress

Cap rates in the single tenant net lease medical sector compressed in 2015 with the median asking cap rate declining by 22 basis points from a year ago. According to research by the net lease advisory firm The Boulder Group, investors are drawn to this sector as 40% of the properties are tenanted by investment grade rated companies. Additionally, the lower price points associated with this sector have garnered interest from 1031 buyers who traditionally purchase net lease retail assets. The median price for net lease medical properties in the third quarter of 2015 was approximately $2.5 million.

“A lot of it can be due to more investor interest because of the aging Baby Boomer population,” explained Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “The net lease investors we are working with are encouraged by medical leases that have credit lease guarantees and rental escalations.”

The median cap rate for the net lease medical sector was 15 basis points below the overall net lease market as of the third quarter of 2015. An increase of new tenants to the net lease medical sector is continuing in 2016 as the shift from traditional hospital and on-campus office locations moves toward convenient and easily-accessible free-standing locations. These new locations are largely in areas traditionally frequented by retail tenants, including shopping centers, restaurants, and areas along primary highways.

The growth of the sector should continue to expand as the demographic makeup of the population continues to shift. According to the US Census Bureau, seniors over the age of 65 made up 13.4% of the population in 2012, however this same age group will increase to 22.1% by 2050. The aging demographic creates a strong outlook for this sector as seniors aged 65 to 74 and 75+ average 6.2 and 7.2 doctor visits per year respectively according to the US Center for Disease Control. The overall average across all age spectrums is 3.3 visits annually.

“We expect the single tenant lease medical sector to be very active this year,” said Barrett. “The long term prediction for healthcare related investments is very positive, so we are helping our clients by suggesting new locations in high traffic areas.”

Source: The Boulder Group

 

Commercial Real Estate Values Soared in 2015

Reports show that almost anyone involved in commercial real estate in 2015 ended the year with a champagne toast. Numerous brokers agreed it was a banner year, and the impressive recovery in commercial property values was reflected in the year-end release of the CoStar Commercial Repeat-Sale Indices (CCRSI), which delineate the broad price gains across property types and regions amidst record investment transaction volume in 2015. Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach said 2015 was also a prosperous year for CRE and investors on the Emerald Coast.

“We leased more space and closed deals on a record number of properties this year,” he confirmed. “The most interesting thing we noticed is that every single sector of the market enjoyed a boost. Investors were snapping up everything from apartment complexes to professional buildings and retail space. It was the busiest we have been in several years.”

Nabors noted that investors were pleased that CRE property values skyrocketed last year. Both the value-weighted and the equal-weighted segments of CCRSI’s U.S. Composite Index, which constitute the two broadest measures of aggregate commercial property pricing, continued to gain ground in December, the fourth quarter and for the year. Demand for core property assets was especially strong, with the value-weighted index rising 12.6% during 2015 to an all-time high of 19.1% above its pre-recession peak.

The report further indicated that December transaction activity remained true to its seasonal pattern observed over the last several years, spiking in the final month of the year as investors raced to close transactions prior to year-end. The December composite pair volume of nearly $18 billion was the highest monthly total on record, helping lift total 2015 volume to $128.3 billion, a 26.2% increase from the previous peak reached in 2014.

Nabors added that as the economy has improved in the last few years, investors have largely abandoned conservative options and have been willing to assume more risk in exchange for higher yields.

“Optimism reigned in 2015 with CRE investments,” Nabors said. “And from what we have seen in January, we expect this trend to continue throughout 2016.”

 

 

 

CRE Investors Warm to Affordable Housing

Affordable housing is coming of age, and investors who dismissed it as an unattractive in the past are now stepping up to the plate. Always researching disparities in supply and demand that could provide financial opportunities, commercial real estate firms and investors are ramping up their affordable housing resources. Intentionally overlooked just a few years ago as “the red-headed stepchild” of the multifamily market, affordable housing is now viewed as a promising area for financial arbitrage.

To no one’s surprise, federal housing policy is also helping to steer the private multifamily housing market. The Federal Housing Finance Administration, which oversees Fannie Mae and Freddie Mac, began imposing caps on total market-rate apartment financing in 2013. By midyear, the government-supported enterprise (GSE) agencies were already closing in on their $30 billion lending cap for 2015. However, there are no limits placed on GSE lending for affordable housing or for seniors housing projects. Experts predict more government spending is expected in response to the growing shortage of affordable multifamily housing units as apartment rents continue to climb.

“We’ve definitely noticed the market shift,” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “In the past, investors have not shown a huge interest in affordable housing investments, but now we are getting lots of inquiries. Investors want to capitalize on the fact that affordable housing is a constant need here with many young military families moving to this area as well as young professionals.”

In many metros, with the gap between demand and supply of available apartments continues to widen in what Fannie Mae economists describe as a “perfect storm” of escalating rents and a an increase of 1.7 million renter households since 2009, more than 10%, amid a shift away from homeownership. As a result, demand has been on the rise for market-rate as well as a limited supply of unsubsidized affordable multifamily rental housing, also known as conventional affordable multifamily, consisting mainly of often aging Class B and C-type units. Subsidized affordable multifamily, totaling about 5.1 million units, remains an important source of affordable housing in the country, representing about a quarter of all apartment rentals, according to the agencies. About 2.2 million units are subsidized with Low Income Housing Tax Credits (LIHTC) and 1.5 million are subsidized with Project Based Section 8.

What’s the profit motivation for CRE service providers and lenders to expand in the affordable housing space? Barrett said that largely it’s about accelerating transaction volume.
“For the most part, affordable housing portfolios have matured and become larger,” he said. “This has resulted in creating market demand for sales, refinancing and recapitalizations.”

Capital Earmarked for CRE Increasing

The volume of capital earmarked for commercial real estate is higher than it has ever been before, according to leading real estate experts. Despite successful fundraising efforts and an influx of capital, some investment managers are feeling pressure to put that capital to work in a highly competitive marketplace.

Having plenty of capital is a good problem to have,” said Jayme Nabors, co-founder of NBI Properties. “But placing capital can be a challenge, so we typically advise our clients to be patient and wait for the right opportunities.”

Experts agree the challenge of placing capital is likely to persist in the near term. The flow of capital into U.S. real estate continues to increase, with total acquisition volume for the 12 months ending June 30, 2015 at $497.4 billion, up 24.6 percent year-over-year, according to a recent Emerging Trends in Real Estate report. The report also predicts that the majority of investors will have capital available for commercial real estate investment in 2016 that is equal to or greater than 2015 levels.

One solution to satisfy that voracious demand is to simply make the pie bigger. To that point, investors are broadening their targets to include more options. The Emerging Trends report anticipates increased capital flows in 2016 to three key areas: 18-hour cities, alternative property types and older assets that could be good fits for renovation, redevelopment or conversion projects.

“Investors realize there is good economic and demographic growth occurring in numerous market, including here on the Emerald Coast,” Nabors said. “Overall there is a healthy supply of high quality real estate assets.”

Investors willing to consider alternative assets on the fringes of commercial real estate, such as cell phone towers, car dealerships or ski resorts, is something that’s occurring more on a case-by-case basis. Generally, investors are sticking with the four main groups of office, industrial, retail and multifamily, where they are more comfortable. However, more investors are willing to take on greater risk within these sectors, such as investing in new development or redevelopment opportunities.

Fed Hikes Not Expected to Hurt CRE

While commercial real estate investments continue to benefit from a range of positive economic trends, the prospect of an increase in the federal funds rate has raised concerns about asset values and sales activity. However, positive economic trends inching the Federal Reserve toward action are the same trends lifting commercial real estate performance, according to a real estate capital markets report recently released by Marcus & Millichap.

“While there’s global concern about various economies, the U.S. economy continues to do fairly well, although there is ongoing concern about how some of those large global economies may impact the domestic economy,” Marcus & Millichap Capital Corp. Senior Vice President Bill Hughes said. “As the markets prepare to digest a rate increase by the Federal Reserve, it is important to stress that long-term rates such as the 10-year Treasury are not directly tied to short-term rates, or the short end of the yield curve.”

According to figures, the 10-year U.S. Treasury ended the third quarter in the low-2 percent range, held down by rising demand for low-risk fixed-income assets. Craig Barrett, co-founder of NBI Properties in Fort Walton Beach, said he believes readily available capital and an abundance of active lenders will keep interest rates competitive in the coming months.

“The timing of the Federal Reserve isn’t expected to have a negative effect on commercial real estate lending as far as we can tell,” he said. “The Fed traditionally does not overreact to markets and so we think they will wait awhile longer before raising short-term lending rates.”

Barrett added that positive trends on the Emerald Coast include occupancy and rent growth I areas such as Fort Walton Beach, Destin, and Crestview along with the fact that none of the cities are over-developed.

“We have every reason to be optimistic moving into 2016,” he added. “Lenders and investors are finally seeing eye to eye on commercial real estate opportunities here.”

Shaky Global Economy Helps U.S. CRE

Falling unemployment and low interest rates meant good news for the owners of commercial real estate properties in the third quarter of 2015. However, in a recent report, CoStar revealed that uncertainty across the globe and shaky global economic conditions continue to send investment dollars into U.S. commercial real estate. Investors have taken note of how strong the U.S. commercial real estate market is and are limiting their investments in foreign markets.

“Investors are always looking for safe places to invest capital,” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “And right now the real estate market in the United States is considered one of the safest investment opportunities.”

CoStar reported a composite commercial sales volume of nearly $91 billion in the first three quarters of 2015. That number grew 32.8 percent when compared to the first three quarters of 2014. It also put 2015 on a record-setting pace for transaction volume in the CoStar Commercial Repeat Sale Indices. in addition, CoStar’s equal-weight U.S Composite Index — one of the broadest measures of pricing within the company’s recently released CoStar Commercial Repeat Sale Indices — jumped by 2.6 percent in the third quarter. This means that the value of U.S. commercial properties continued to increase during the quarter.

To no one’s surprise, CoStar pointed to multifamily as a top performer in the commercial sector. The Multifamily Index increased 3 percent in the third quarter and 12.4 percent for the 12 months that ended in September. This index is now 15 percent higher than its prior peak, a rather impressive accomplishment. On the Emerald Coast, Barrett added that the hospitality sector remained strong and enjoyed an uptick in the third quarter.

“Although hospitality suffered during the recession, there are signs everywhere that it’s booming again here,” he said. “Vacancy rates remain low at hotels and restaurants and retail are reporting healthy gains as well.”

Panel Predicts Commercial Lending Trends

What’s the latest buzz on commercial lending and financing? At a recent Realtors® Conference & Expo in San Diego, lenders and government officials on a panel called “Commercial Lending and Financing: The Ever-Changing Landscape” talked about trends in policy and technology that could change the way deals are funded in the future. Three of their top predictions included more online data, more lending options, and growth in the small business environment.

Elizabeth Braman, CCIM, chief production officer at real estate crowdfunding platform RealtyMogul.com, predicted that within the next five years, the increase in the amount of available data will make capital acquisition processes more responsive to the needs of borrowers and lenders alike. She said it will be easier for borrowers to provide data to lenders, because much of it will come directly from sources such as the IRS or commercial transaction databases such as CoStar. Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach, said his firm relies on big data to help determine property values rather than depending on strictly appraisals.

“Appraisers are limited to a specific data set,” he explained. “Big data can be forward-looking and help lenders and investors predict future valuations.”

The panel also predicted more lending options due to crowdfunding platforms and other opportunities. Realtors at the conference agreed that projects in first-tier markets building or redeveloping Class A commercial space don’t have the funding issues that Class B and C properties in less popular cities might face. However, both of the crowdfunding companies present on the panel said they are happy to be involved in such deals.

“We definitely play in the B and C space,” Braman said, noting that such investments often offer a higher yield for her company. She added that they’re more concerned with whether or not the people behind the deal are market experts who can accurately predict how a development will shake out in the long run. “We look for the guy or the gal who has a deep market knowledge and who knows how to execute on a business plan.”

All of the panelists agreed that the next five years would likely spell exciting growth for the small business environment. The consensus was that there may be more opportunities in the office sector coming soon due to a growing interest in entrepreneurship across the country.

“As the economy continues to improve, we’re working with more and more people who are interested in owning their own business,” said Nabors. “Luckily, there are plenty of opportunities available here on the Emerald Coast!”

Source: Realtor® Magazine

Real Estate Gifts That Last a Lifetime

While stores are crowded with holiday shoppers, investors are gifting themselves with real estate deals that will pay off for a lifetime. With numerous investment opportunities, the best gift of all is one that can create a passive income stream, guarantee a comfortable retirement, and allow you to take control of your financial future.

“It’s the perfect time to be in the real estate business ” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “Whether you’re interested in flipping houses or buying commercial properties, it’s an excellent time to be in the real estate investment business.”

After working with hundreds of investors throughout the years, Barrett said the key to investing success is having a strategic business plan. He helps clients plan for long-term success by taking advantage of what the real estate market is offering today and encourages investors to think big. For example, he said a common strategy for first-time investors is owning several single-family houses. While Barrett said this is a worthwhile goal for beginners, a much larger passive income is possible from owning duplexes, triplexes, and other multifamily properties, including small to medium apartment buildings.

“Some investors want to pursue opportunities that will make them independently wealthy while others are looking for a steady stream of income every month from multiple properties they own outright,” he said. “After assessing the capital they have available and personal preferences such as risk tolerance, we’re able to recommend the best properties for each investor’s needs.”

Barrett added that the marketplace is primed for landlords. Recent U.S. Census Bureau statistics revealed that homeownership is at its lowest level since 1996. Adding to the landlord advantage is that experts predict next year’s rents are expected to increase between four and six percent.

“Smart investors will let renters make the monthly mortgage payments while gaining the appreciated value and pocketing a monthly rent profit,” said Barrett. “These investors know that a secure financial future is the best gift of all!”