Insights from Lee & Associates’ Leadership
As part of our sponsorship for the 2023 Lee Summit in Las Vegas on June 12-13, LightBox interviewed two industry experts and leaders from Lee & Associates, the largest broker-owned firm in North America. The firm provides an array of real estate services including commercial real estate brokerage, integrated services and construction services.
LightBox conducted these interviews with Jeffrey Rinkov, CEO of Lee & Associates since 2013 and Erik Binkowski, Principal of the Washington DC office for Lee & Associates and also the leader of the national debt and structured finance practice group for the company.
We asked them both to weigh in on:
- Industry and market observations in 2023
- Top challenges and opportunities in today’s market
- Investment transaction pipeline & volume
- Debt & equity financing for CRE properties
- Client concerns within the market
- Predictions for remainder of 2023 and 2024 outlook
Rising cost environment
Mr. Rinkov discussed how the overall CRE picture is affected by a number of economic factors, not simply interest rates, although rising rates have impacted financing for commercial real estate properties.
“We’re still seeing a rising cost environment where input costs are higher, for items such as labor or raw materials. Those higher costs are adding to the capital expense of an ownership opportunity and creating challenges in the capital markets area.” says Rinkov.
For example, tenants or would-be buyers are considering how they can completely stabilize their occupancy costs and secure a lease for a 5-to-10-year period instead of buying right now. Rinkov commented that “The increases in the rental rate may actually be a very good hedge against continued inflation and seen as a safer option rather than moving ahead with an acquisition.”
Positive drivers within the economy
Although transaction volumes are down right now, the consumer-driven economy is being supported by some manufacturing and assembly growth, as well as significant growth in the semiconductor area. Rinkov highlighted the massive Intel computer chip plant outside of Columbus, Ohio as a recent example of growth in manufacturing in the technology sector. The firm’s multibillion-dollar investment will boost the local, regional and national economy, creating significant opportunities for workers and small business owners, and fuel growth in the advanced manufacturing sector.
Rinkov added that consumers’ interest and willingness to travel and take part in new experiences is also driving omni-channel shipping opportunities. In response, retailers are doing a great job presenting in-person opportunities for consumers by the pairing of a cooperative online platform and effective supply chain strategy. “We’re seeing a return to shopping in-person, frequenting restaurants and bars, and, in general, making brick and mortar operations more a part of their lives now that COVID has been subdued to a degree,” he noted.
Opportunities for CRE Brokers
“The next 6 to12 months will present the greatest opportunity for commercial real estate brokers that we’ve had in a long time. There is a tremendous amount of capital that has sat on the sidelines while cap rates have become compressed and rental rates have gone up and markets have worked almost perfectly.” stated Mr. Rinkov.
Given a more negative market sentiment in recent months and challenges within local markets, the brokerage community is an important force to help owners and tenants navigate this environment. Rinkov believes brokers will be well-positioned to convey “boots-on-the-ground” information and equip owners and tenants with strategies for entering the market in a variety of asset classes. “With the normal cycle of ownership and anticipation of lease expirations and loan maturities, we will start to see an element of urgency on a transaction level. Brokers and real estate investors love urgency because it’s from that sense of timing that an opportunity emerges,” he added.
A unique market for financing
Through the debt and equity lens, Erik Binkowski shared the complexity of the market and the need for expert guidance on identifying lending opportunities. “The market is very unique right now and there are particular challenges in the debt and equity space. Over the last 15 years, people have typically financed projects with 50% to 60% debt, but this is very difficult to do right now given what’s going on in the banking sector.”
Binkowski commented that the bigger issue is how debt and equity challenges are affecting owners of real estate – over the last five to seven years buyers have received funding from banks for more than two-thirds of the money for commercial real estate loans they were looking to secure. They’re not the only lender, but banks are a significant lender and when there’s a pullback it spreads throughout the industry to all product types. With that said, he believes cash is king right now and if you don’t need a loan you or you have an equity partner, there are plenty of opportunities to buy assets at a discount and look for a long-term gain.
Multifamily and Retail
As LightBox shared earlier this year, the multifamily sector has remained a top asset class in commercial real estate; however, with market shifts it does face some near-term challenges. Binkowski shared with us that the multifamily asset class is under a tremendous amount of scrutiny right now. He stated that, “There is a significant amount of multifamily construction in this country, but a lot of these construction loans are not getting paid off in the normal progression toward conversion to permanent loans. Most of them are under water, which creates significant challenges in a constrained lending environment.”
Rental rates have been increasing over the last 2 years, but Binkowski believes this is not sustainable and that more affordable or moderately priced housing is needed. There is an imbalance between what is being built and what many renters can afford. With generational demands, we’re seeing a millennial preference of apartment dwellings near city centers that offer the “live-work-play” lifestyle. This includes a variety of retailers, which are right now very desirable properties but it’s a scenario of the haves and have nots.
Binkowski commented that grocery anchored shopping centers are in high demand, but big-box retail stores are not. “We have seen occupancies in centers with a strong grocer average 95%+. This makes these centers desirous for investors. The pandemic further fueled consumers’ need to see and purchase groceries, which is the lead reason their occupancies have gone up” he added. For big-box centers, there is valid concern over these stores (Bed, Bath & Beyond, Best Buy, etc) closing down their locations and experiencing challenges with attracting investment capital. For a list of more than 2,100 stores closing across the US in 2023, Business Insider profiles the shakedown here.
Financing for CRE properties looks a little different across the different property types and asset classes.
Binkowski noted the market shifts due to rising interest rates and the challenges securing financing. “Most investors have lost faith in the Federal Reserve and its ability to manage interest rates. Until there is some stability or belief in the long-term plan, they are going to remain in a pause mode. The Fed’s actions time and time again have not been in lockstep with what the market needed.”
Alternative options for investors are bypassing the loan process all together and paying the price at the right number or securing an equity partner.
2023 Sentiment Survey & Report
Wondering what’s ahead? Check back soon for the LightBox 2023 Mid-Year Sentiment Report, which will feature more details from these interviews along with additional insights from subject-matter-experts across our key industry segments. For a look back read our first-quarter report Early 2023 Barometers: Resetting Market Expectations.