Monthly Archives: November 2022

Rising Energy Costs Impact on Commercial Real Estate in 2023

Rising Energy Costs Impact on Commercial Real Estate

2023 will see rising energy costs having an impact on Commercial Real Estate Markets. As the world continues to support a turbulent economy in the shift toward sustainable energy, all sectors of capital markets are feeling the effects. Commercial real estate specifically, isn’t just experiencing movements in price, but also a changing popularity in regions and sub-sectors.

As our own personal lives will continue to be impacted by climate change, so too will the real estate market. It’s currently estimated that 35% of global REIT properties are exposed to climate hazards – exemplified most recently in south Florida by Hurricane Ian. The severity of environmental disasters serves as an indication of the current state of climate change. This can therefor offer some insight into how energy production may change in the future.

The shift toward sustainable energy has undoubtedly procured an inflated cost of living across the board. There is no denying that rising energy costs will have some impact on commercial real estate, but how exactly will they affect the market? Well, current data has a lot to say for that.

Let’s take a look at the current dichotomy of rising energy costs and commercial real estate.

How does Climate Change Impact the Commercial Real Estate Industry

The primary objective of this article is to address rising energy costs in relation to their impact on CRE. First, however, we must address the cause behind the rising energy costs.

The very nature of commercial real estate encourages it to play a cat and mouse game with the climate. CRE – especially the industrial sector – contributes to climate change through a massive release of carbon emissions. On the other side of the equation, climate change can significantly impact the value of all commercial real estate with rising sea levels, natural disasters, drought, and other extreme weather events.

This paradigm has caused consumers, investors, and government officials to demand environmental responsibility from the commercial real estate industry. For this reason, there is currently a huge incentive for commercial developers to ‘go green.’ Let’s take a peek at a few of the numbers supporting this claim:

  • 85% of consumers have shifted their purchases toward sustainability
  • 25% are willing to pay a premium for sustainability

Economists also point out that going green can tremendously decrease maintenance and operating costs within the CRE industry. Crexi reports that sustainable buildings consume 29 to 50% less energy than typical buildings.

Energy Related Factors Impacting Commercial Real Estate

There are a multitude of factors impacting the rising energy costs we see in the Unites States today. Some of the more prominent revolve around the U.S.’s ability to both import and create its own energy. As far as which sectors are being hit the hardest, analysts report the commercial office space as being the most vulnerable. This is likely due to net-lease agreements where the tenants are paying for the spikes in utility expenses.

CBRE, a company that specializes in real estate services, conducted a survey recently that may give insight into how energy prices are currently impacting the market. Their study found that 12 of the major U.S. markets are undergoing a “flight to quality” currently. According to the report, “Office users are paying higher rents to move into smaller, better-quality spaces that are more energy efficient.”

Utility costs have long been a major consideration for investors and operators of office buildings. It’s currently estimated that utility costs account for around 33% of operating costs in most urban areas. Considering the trajectory of current energy costs, that number is only expected to increase.

Once again, this places an increasing amount of importance on developers in commercial real estate to make the shift toward sustainable energy. It’s no longer just the consumer who wants to see CRE make the jump; now the numbers back the claim too.

Sustainable Opportunities in Commercial Real Estate

There is no denying that the majority of the market is a bit behind the ball in terms of sustainable energy. With that being said, there is still plenty of opportunity to take advantage of the shift in energy sentiment we are currently seeing in the market.

Tax Credits

Tax credits for those willing to make the jump towards sustainability are quite incentivizing. The current business investment tax credit for renewable projects is at 26%. That number has equated to $15 billion in new renewable energy project investments each year, for the past several years. Current estimates expect this trend to continue in the future, as more legislation around the push toward renewables is expected to soon pass.

It should be mentioned that the majority of renewable projects currently underway are headlined by solar. Developers in residential real estate are also enjoying a similar tax credit in that regard.

The current opportunity in solar is vast and includes both rooftop panels and one-thousand-acre solar farms. States like California, Utah, Arizona, and Colorado are already seeing dramatic improvements in the electrical grid through an increased production of solar power.

Future opportunities for sustainable energy within CRE will revolve around a lot more than just solar. Market experts are currently advising CRE professionals to embed considerations of sustainability into their decision making and strategic planning moving forward.

Those leading the development of new commercial projects will have both the responsibility and burden of finding more efficient ways to build, manage, and operate. Investors, lenders, developers, and even tenants and employees will all require to be engaged in the mission towards sustainability. Without such cooperation, all parties will feel the effects of the tomorrow’s rising energy costs.

Looking for more information on the current state of today’s Commercial Real Estate Market?

The inflationary effects that stem from rising energy costs have consumers weary – and for good reason. As energy costs continue to rise, we will all be paying for it at the pump, on our utility bills, and in the grocery store line.

With that being said, there are still a number of opportunities exposed in the market today by those who’ve already invested in sustainable energy solutions. Our team at ICRE Investing is well versed in the Phoenix market and has connections across the globe. Whether you are looking for a more energy efficient office space to lease or are hoping to find a sustainable investment for the future, we’ve got you covered. Feel free to reach out any time!

2022 Commercial Real Estate Recap

2022 Commercial Real Estate Recap

As we quickly close out 2022 and approach the new year, many investors find themselves caught in-between 2022’s impressive gains and the looming concerns of a financial recession. For commercial real estate, 2022 proved to be a positive year across the board.

The industrial and apartments sectors led the way, climbing a respective 28.6% and 23.3%, measured year-over-year in May. Retail grew 18.8% year-over-year while commercial office rose 12.2%. While the office sector stood behind industrial and apartments, it still posted its fastest annual gain since 2014.

2022’s impressive trends have many professionals in the investment real estate space expecting more of the same this new year. There is a lot to cover in regard to the current and upcoming state of the market. Let’s dive right in.

2022 Commercial Real Estate Interest Rate Hikes

A pinnacle of 2022 was marked by the Fed’s raising of interest rates by three quarters of a percentage point. As the Fed pumped the brakes in response to startling inflation rates, many investors were left wondering what the future would hold for capital markets.

Lenders, investors, and consumers all around prepare for the impact of continuous rate hikes in the year to come. The Fed’s latest move has officially taken borrowing costs back to the pre-pandemic levels of 2019. As consumers anticipate further rate hikes well into 2023, we are all left facing questions of uncertainty. When will the markets react and how volatile will the reaction be?

2022 Sentiment Index Report

The CRE Finance Council – representing the entirety of the $5.1 trillion commercial and multifamily real estate industry – recently announced the 2022 Sentiment Index.

The official report showed overall sentiment dropping sharply by 12% so far in 2022. Quarterly, this has been the third-largest recorded drop, following a 31% decline in early 2020 and a 23% decline in the Q1 of 2022. On the surface, the numbers are startling. However, given rising inflation, rate hikes, and larger spreads, most CRE professionals had already anticipated the decrease in sentiment.

It’s important to take a look at the sentiment facing the broader market as a whole as well. The CRE Financial Council reported several other statistics in 2022’s Sentiment Index:

  • 83% sentiment saying the U.S. economy will perform worse over the next 12 months. This contrasts sharply to the 35% reported only a year ago.
  • 60% of CRE professionals believe there will be less demand for CRE and multifamily debt in the next 12 months, as compared to only 33% a year ago.
  • Only 6% of those surveyed felt that capital availability would have a positive impact on CRE finance-related businesses. In 2021, more than 31% felt capital availability would positively impact CRE finance-related businesses.

Possibly the most startling statistics gathered in the Sentiment Index were those surrounding CRE finance businesses as a whole. For the first time since the pandemic, quarterly sentiment overall shifted negative. 53% of CRE professionals held an unfavorable view on the market; only 9% held an optimistic outlook.

The Board of Governors that oversees the Sentiment Index reported that, “this most recent survey reflects the caution in the market. Markets react to macro risks, including the Fed’s actions and its ability to minimize the economic impact of higher rates.”

The current numbers are undoubtedly cause for concern heading into 2023. At the same time, the Board’s statements have left many feeling as though the market sentiment will shift back to positive as the Fed halts interest rate hikes sometime next year.

Impact of a Bear Market on Commercial Real Estate

The stock market has taken a beating in 2022. The S&P has taken over a 25% beating in the last year. The good news, as Yahoo Finance executive, Brian Sozzi points out, is that “the S&P 500 has been higher three years later in eight out of nine cases, in which the index has fallen 20% or more.” Sozzi also noted that in those same instances, the market has rebounded sharply in only the next 12 months seven out of nine times.

Historical patterns may point towards an optimistic future. However, with the stock market officially plunged into bear market territory, many investors are left wondering where to put their capital to capture the best ROI.

Transitioning back to CRE, many investors are finding benefit in today’s volatile markets. As sellers continue to take advantage of the 1031 exchange tax advantages, real estate still provides lucrative long-term investment alongside a reliable hedge against the market’s current state.

CREXI reports that commercial real estate is likely to see continuous trading, only at a slower clip than we’ve seen in the last 12 months. Despite larger economic concerns, the buying and leasing activity in industrial, multifamily, and office assets has proved CRE can weather the storm.

Here are a few statistics that show the trends heading into 2023:

  • Average Asking Price per SF: $236.82, down from $278.49 in Q2.
  • Median Closed Cap Rates: 6% flat, up from 5.8% in Q2.
  • Average Occupancy Rate: 80.45%, down from 83.31% in Q2.
  • Median Sale Price: $323k, down from $357k in Q2.

Overall, market data is trending down quarter-over-quarter. However, CRE is still positive on the year with the average asking price per SF up over 14%. Offers are still increasing substantially, with nearly 30% annual gains in deals going under contract.

Looking for more information on the Commercial Real Estate Market in 2022 and 2023?

Current economic uncertainty may have slowed the market, but it hasn’t brought it to a halt completely – nor is it expected to. Major metro areas, like those surrounding Phoenix, are still commanding record sky-high prices. Paired with the stability in the commercial real estate market overall, this brings opportunity for both buyers and sellers.

Our team at ICRE Investing has a diversified and lengthy experience in commercial real estate in Phoenix. We also have access to commercial properties across the globe. Feel free to contact us for more information today!

 

 

Best Ways to Invest in Healthcare Real Estate

Best Ways to Invest in Healthcare Real Estate

Like most of the niche commercial real estate markets, the medical office space has found stability in the post pandemic era. Many signs are pointing toward lucrative growth in the healthcare real estate market.

In certain markets, investors in medical office buildings are reporting rent growths upwards of 10% or 15%. With a combination of strong financials and the growth expectation around the healthcare industry overall, it’s no wonder as to why investors are flocking to the space.

In today’s article, we take a deep dive into why healthcare real estate has become so prominent amongst investors. We’ll also cover why more and more of today’s medical professionals are investing in medical office spaces of their own.

How does the Healthcare Real Estate Market look in 2022?

Investment in the healthcare space struggled to keep pace throughout the pandemic – as did most capital markets. With that being said, the necessity of the industry allowed the market to recover faster than expected. On the subject of rent, 95% of medical facilities continued to pay their rent throughout the pandemic, as compared to only 85% across renters in other markets.

Diving into some more specifics, it isn’t hard to see why investors and economists alike are finding a positive outlook for healthcare real estate.

  • 16% projected growth for employment in healthcare between 2020 and 2030.
  • 47% of healthcare companies in 2022 have already put plans in to expand their physical facilities heading into next year.
  • 61% of high growth companies report prioritizing capital allocation for the healthcare space.

A certain amount of this expected growth can be attributed to the need for more medical infrastructure, as exposed during the pandemic. However, a deeper reason fuels much of the positive speculation in the space.

As more and more of the baby boomer generation requires advanced access to healthcare, providers will be forced to make accommodations. In 2000, the Medicare-eligible population in the U.S. numbered only 35 million. By 2030, that same demographic is expected to number 70 million. Costs around the medical industry as a whole will increase, but likely so will the rate of growth for investments in medical office buildings (MOB).

Is Investing in Healthcare Real Estate a good idea in 2022?

Investors and medical professionals alike have been prioritizing capital allocation in healthcare real estate. In addition to the statistics mentioned above, the healthcare market has a couple of key factors backing its lucrative growth projections.

Healthcare Technology

Headlining technology in the medical field is telehealth. Medical professionals across their respective fields have made telehealth an intricate piece of their practices. According to one source, the usage of telehealth is nearly 40 times higher than it was before the pandemic.

Contrary to what the word may imply, telehealth doesn’t simply allow medical professionals to conduct business over the phone. Telehealth appointments currently require offices or flex spaces that are outfitted with appropriate technology in order for physicians to virtually converse with their patients. The expansion of telehealth explains much of the investment buzz around medical office buildings.

Biotech and Life Sciences

The biotech and life sciences space has become a major portfolio piece in the majority of today’s investors. From Elon Musk’s Neuralink to TMRW Life Sciences, there is no denying the excitement and anticipation for growth in new innovations.

To meet the demand for new technologies, investors and medical professionals are outfitting more medical office buildings as premiere laboratory spaces. Vacancy rates in the biotech/life science laboratory space has been reported to be as low as 1.7%, which explains much of the excitement in the investment area.

Healthcare Real Estate for Medical Professionals

Investing in Healthcare Real Estate isn’t left only for experienced investors. More and more medical professionals, especially those who own or operate a private practice, are benefiting from investing in the building(s) they operate in.

There are a few different options all medical professionals should consider before investing in a medical office building.

1. Direct Ownership

Many private medical practitioners will find value in the direct ownership route. Owning your own medical office building comes with the obvious management/oversight advantages. It also offers a unique opportunity for healthcare professionals to expand their investment portfolios into real estate while staying in an industry they are familiar with.

For those who desire to own and operate their practice, it’s essential to consider the location, access to utilities, parking, common amenities, and any other factors that could influence the risk of the investment.

Benefits of direct ownership in healthcare real estate:

  • Equity – Why pay rent to someone else when you could own the building yourself?
  • Fixed Costs – Owner/operators of private practices won’t be exposed to changes in operating costs unless it’s by their own accord.
  • Improved Recruitment – It’s possible to weave in liquidity events into recruiting for retiring physicians.
  • Financial Benefit – Owning your practice’s building adds immediate value to the business as a whole and allows medical professionals to access lucrative appreciation in the field of commercial real estate.

2. Partnerships

A partnership with real estate experts or a group of other medical professionals is a fantastic option for those looking to diversify their portfolio outside of their own practice. By partnering with other individuals in the space, you’ll gain access to more capital, which can expand the type of medical office space you are able to invest in.

Benefits of partnerships in healthcare real estate:

  • Diversified Investments – access to biotech space, advanced laboratories, increased office space, etc.
  • Liquidity – While the ownership is only partial, investors will have more access to cash flowing assets.
  • Appreciation – Better yet, diversified appreciation across different niches in healthcare real estate.
  • Reduced Risk – Partnering with experts in the industry can do a lot for your confidence in the investment, not to mentioned reduced liability through refinancing options.

Are You Ready to Invest in Healthcare Real Estate?

Whether you are an owner/operator of a private practice or are simply a healthcare professional ready to diversify your portfolio, it can be difficult to get into healthcare real estate on your own. The good news is that the ICRE Investment Team is equipped with everything necessary to advance your investments in the space – no matter what direction you want to take them.

Are you looking for a smaller medical office building to invest in – something you could oversee yourself? Are you looking to take advantage of the benefits of a partnership? There is no denying the opportunity in the healthcare real estate market. If you are ready to find out more about how you can get involved in the space, feel free to reach out for more information. We’re happy to help!

How to Negotiate the Best Option Terms When you are the Seller

option

Sellers can use the Option as a tool to entice a prospective buyer or tenant. If you own a commercial tract of land and think it would be a great spot for a fast-food restaurant, you might be willing, or even excited, should a major fast-food restaurant come to you and ask for a 90-day free option to allow it to ascertain if your site was the best one. If you can understand this concept, take it one step further. Why not go out and find all the fast-food restaurant who are not in the immediate area and offer them a 90-day free look at your site. All you want is to make sure that they actually spend the time and effort to make a decision.

Getting Paid for the Option

There is a pint of time when you should not be expected to give the prospective buyer any more of a free look. At this point of time, which generally follows a reasonable due-diligence period, the contract should call for a deposit to go hard, and a timetable established that winds down to the actual closing:

It is important to both parties that there be a very clear understanding of the terms and conditions surrounding the option. Does the option money get to be applied as part of the purchase price? When is the buyer in default? Is there any other term in the agreement that might extend time periods, and cause dates to conflict? Very careful reading of a contract is essential. If it is not in plain language, as some lawyers seem to pride themselves in avoiding, then get the darn thing redrafted so that it is clear.

The Conditioned Option

Here the optionee has included in the contract some conditions that can cancel or change the contract. These conditions might be such that the price will change, or the time to buy will be increased or decreased, most importantly, the conditions may call for a full return of the option money if something doesn’t occur.

From the buyer’s point of view, the conditioned option is the least risky of deals. If you have an option agreement and can tie up a tract of land for period of time, and because of some condition in the agreement (which you may control) you can get your option money back, you haven’t’ risked anything.

Thirteen Conditions Used in Conditional Options Include:

  1. Soil test. Your right to test and approve the subsoil conditions.
  2. Survey certification. Your approval of the exact dimensions, and so on.
  3. Bering test. A more detailed subsoil examination.
  4. Site plan approval. Government approval of your planned development.
  5. Issuance of building permit. Actual and final stage before building.
  6. Partner’s approval. A clear-out if your partner nixes the deal.
  7. Corporate ratification. Similar to the above.
  8. Obtaining satisfactory financing. Necessary in many deals
  9. Government approval. This covers a wide range of conditions.
  10. Prior sale of a third property. When you need to sell something else.
  11. Prior development of a section 1031 exchange. You have to develop an exchange before you can close.
  12. Preleasing of to-be-developed space. Many lenders will demand this.
  13. Environmental inspections. Many lenders insist on this.

Of these thirteen items, you can see that some can be simply accomplished and would not normally take a long time, while others can take months or in some cases, such as governmental approval, years. In all cases you (the buyer) have control over these items and can make sure the conditions fail to be met.

When You Know You Are Going to Buy, Use the Option

You can see that when you are not sure about buying, the option gives you some time to make the final decision. It locks up the price and terms so that you know exactly what to base the decision on. But when you know you are going to buy, the option gives you added appreciation and reduces your carrying cost.

Using the Option to Sell

The seller likes the option because he is a gambler. If you were a seller and you didn’t have a buyer for your property and someone came along and said, “I’ll give you money just to let me decide if I’ll buy the property,” you might be inclined to take the deal. After all, if the option fails to be exercised, you still have the property. In the meantime, the investor has paid you for the time which passed, during which you might not have sold the property anyway. Options work because people like to gamble and options are a safe way to risk little from the seller’s point of view.

As seller you can use the option to help entice a buyer into your hard-to-sell property. If a buyer will pay your price if you accept his or her terms. In the case of a tough-to sell property, you may have to resort to some very creative selling techniques. There is nothing wrong with being creative, and moving a dog in a touch market may call for all the creativity you can generate. One of the problems of the real estate market is that there are times when value has little to do with the ability to sell something. The inability to finance a deal might cause a builder to shy away from your kind of land, or a potential user to decide not to buy your vacant building. Use the option to get interest. It’s like anything else. If you can get someone’s attention, then you can often create an environment that didn’t’ exist before. In dealing with builders and developers, getting them involved is often the first step in making the deal.

ICRE Investment Team has partnered with the most prominent businesses, banks, construction companies, and investors to provide the most up-to-date information on Phoenix’s market condition and opportunities.