As of May 2024, the rise in quarterly demand in Boston, the Bay Area and San Diego has averaged 17%. Read on to learn more about the real estate life sciences market, including recent trends, the hottest markets and more.

What Is Life Sciences: Understanding One of Real Estate’s Fast-Growing Markets

Life sciences is the umbrella term for real estate designed and built to facilitate the advancement of medicine and healthcare. This market spans industries like biotechnology, pharmaceuticals, medical device companies, genomics and many more.

While most life sciences clients are engaged in medical research and development, individual needs, equipment and regulations vary significantly. For this reason, lease arrangements are rarely straightforward or interchangeable– a space built to suit one tenant might need to undergo months of modifications to suit another. Owners must also consider lab utilities, hazardous waste disposal, floor strength, landings, ceiling height, HVAC requirements, and mechanical systems, all critical considerations for tenants. Consequently, suitable space can be difficult to come by, and generally requires relatively high rents. The growth or funding stage of a company can also create barriers when it comes to space. 

As the general population continues to age, and concerns around health rise, the need for research–and the corresponding demand for life sciences space–will only continue to rise.

2021: A Record Year for Life Sciences Real Estate

Quickly rising on the radar of many opportunistic investors, 2021 marked a landmark year for the life sciences sector. In New York, leasing for life sciences properties climbed to a record high of 443k square feet, surpassing the previous 7 years combined. 

Before the first half of 2021 was over, life sciences real estate investment reached $17 billion, signaling that investors also have their eyes on growth. This growth didn’t erupt out of nowhere, though. According to a JLL report, life science real estate markets have grown by 63% over the past five years–meaning that the pandemic catalyzed existing growth, rather than a sudden spurt.

Growth on the Horizon

Following peak activity in 2021 and a cooldown over subsequent years, the life sciences market is already signaling a resurgence in activity, according to a CBRE report. This is driven in large part by a rise in research and development spending.

The number of drugs on trial in Phase 1 or 2 stages is 71.4%, the highest since 1998. The FDA has also made a significant number of novel drug approvals. Additionally, by the end of 2023, experts anticipate the number of novel drug approvals to rank in the top three years. A 7.2% increase in the request for funding from the national Institutes of Health would be the second largest ever, behind the increase in 2003.

For investors, momentum across the broader industry validates the growing demand for real estate to support these advancements.

The Real Estate Markets Where Life Sciences Is Booming

While life sciences has spiked in demand among tenants and popularity among investors, not all markets pose the same opportunity. In fact, according to the JLL report, much of this opportunity is concentrated across top markets, such as:

• Boston
• San Francisco
• San Diego
• Raleigh-Durham
• New York/New Jersey

This concentration has resulted from a few shared characteristics, which typically lead to a strong life sciences market, like:

• Academic institutions with strong research departments
• Proximity to capital sources like banks, VCs and others that contribute research funding
• A life sciences talent market 

As this segment of the market matures, investors can expect to see competition accelerate, and other metros climbing this ladder.

Unpacking The Opportunity for Investors

There are a few reasons that investors might choose to venture into the relatively fresh life sciences real estate market. Despite high barriers to entry, macroeconomic trends indicate a high potential for profitability. 

First, in a market where new trends have challenged the status quo of time-tested asset classes like office and retail, some investors might find an unknown–and yet thriving–sector promising. Like qualified multifamily opportunity zones, life sciences investments might also offer tax credits. 

Because tenants typically require tailored facilities to accommodate highly unique needs, there is also strong competition for development sites, particularly in Boston, the heart of the life sciences real estate market. Life sciences real estate developers can capitalize on build-to-suit opportunities.

In avoiding the many pitfalls of new development, such as permitting and construction processes, some investors have instead focused their efforts on converting other asset classes. With extensive and albeit costly modifications, existing office spaces can meet life science tenants’ needs.

Relying on a deal management platform to source, screen and manage new opportunities is the best way to ensure that new deals pencil out based on historical data.

17 CRE Investment Questions Your Data Can (Finally) Answer Expedite and Add Visibility to Your Industrial Real Estate Investing Process

To outperform the competition and move at digital speed, real estate investment managers must make decisions that are grounded in–not simply supported by–data. Download this guide to learn just a few examples of how CRE investment managers can turn data into answers with unprecedented speed, precision and scale with deal management software.

The post Life Sciences: Real Estate’s Hottest New Market appeared first on Dealpath.

Read on to learn more about the opportunities in the data center real estate market, including market dynamics, tailwinds, challenges and more.

Understanding the Real Estate Data Center Market

A data center is a facility designed to house and operate servers hosting data and web applications. Precisely controlled HVAC systems regulate the air temperature, among other factors, to maintain optimal conditions, minimize latency and prevent downtime.

Some data centers are owned by cloud companies, also called hyperscalers, such as Google and Amazon. To capitalize on emerging opportunities in the space, investment managers and operators have recently placed an increased focus on data center real estate investment and development opportunities. Tenants typically range from hyperscalers to smaller companies, including companies from industries such as B2B technology, eCommerce, online gaming, and more.

While not a new asset class in the CRE market, data centers have recently caught the attention of institutional investors seeking alternatives to core verticals facing headwinds, such as office.

Why Investors Are Pivoting From Core Real Estate Markets to Data Centers

From niche data center REITs to industry leaders, investors of all sizes are capitalizing on increasing needs across the software, technology and entertainment spaces. Data centers have proven their mettle by offering consistently high returns, similar to utility companies. Consequently, institutional investors have begun competing more aggressively with cloud companies in the quest for space. 

According to McKinsey, data center power consumption is expected to increase from 17 gigawatts to 35 by 2030, indicating a steep rise in demand. According to Newmark, demand for data centers is projected to double by 2030.

Blackstone, the world’s largest real estate investor, purchased QTS Realty, a data center operator with over 7m sq ft across the US and Europe, in 2021 for $10B. In the same year, KKR acquired CyrusOne, a data center REIT with approximately 50 data centers in its portfolio, for $15B. 

Data Center Real Estate Companies are Riding the Tailwinds of an Increasingly Digitized World  

Like the explosion of the industrial vertical, the data center real estate market has boomed in the wake of the pandemic’s increasingly digitized world. 

According to JLL, the global colocation market is expected to grow at a 5-year compound annual growth rate of 11.3% from 2021-2026, surpassed by the hyperscaler market’s projected growth rate of 20%. In fact, a recent Bisnow article showed that rent increases in some markets were already as high as 20%. Additionally, Arizton Advisory & Intelligence expects investment volume in the real estate data center market to reach $28B by 2028.

The rise of hybrid working has driven an increase in the need to store, manage and process data in real estate data centers. Companies introduced new software to meet changing needs as workers dispersed to remote locations, away from office infrastructure. Data centers also support the ongoing shift in consumer preferences from cable television to streaming services, which rely on expansive content delivery networks.

Rapid advances in artificial intelligence, which requires facilities to support data storage and computing, have already bolstered demand for data center real estate. This need will only increase, as labs experiment with generative AI and other data-heavy applications.

Advances in other technology verticals have also contributed to the rising demand for data centers, too. For example, 5G networks and increased smartphone usage have spurred the development and expansion of data centers, particularly in urban areas with heavily concentrated populations.

Real Estate Data Center Firms are Struggling to Deliver on Demand

Despite growing demand, the data center market is experiencing some friction when it comes to delivering on high demand.

Some of the most common real estate data center tenants include cloud companies like Microsoft and Google, but these players may actually pose a challenge to landlords. Due to their size, capital access and significant data needs, acquiring or building a data center may be more financially viable for cloud companies than renting space. As the market continues to develop, this trend could complicate an otherwise rosy outlook for institutional investors seeking large or NNN tenants.

Challenges in Developing Data Center Real Estate 

Like many other real estate verticals, the data center market is facing new construction delays due to supply chain challenges. While landlords and owners are struggling to meet high demand, preleasing has accelerated significantly. All the while, rising labor, construction material and other costs have increased capital expenditures. 

For some data center development firms, finding power sources compatible with the required semiconductors can be challenging, particularly due to shortages of required materials, such as neon. Additionally, utility companies have struggled to accurately predict the amount of power required to operate data centers. Northern Virginia, the largest data center market in the world,  fought power shortages to maintain sufficient energy for new and existing facilities. Some data center developers are also grappling with the challenge of facilitating sufficient cooling, while balancing these needs with ESG requirements.

According to JLL’s 2024 data center report, limited power availability has amplified supply constraints, increased demand and, consequently, driven pre-leasing activity.

Data center development has also suffered from a lack of skilled professionals equipped with the knowledge and experience to lead these projects. 53% of data center providers faced challenges in hiring in 2022, compared to 38% in 2018.

Breaking Down The 5 Types of Data Center Real Estate

Data centers are designed to meet varying needs based on the company’s data and hardware needs, as well as other factors, such as cooling challenges. The five main types of data centers include:

• Colocation: Sometimes called a “carrier hotel”, colocation facilities typically rent hardware and servers to smaller companies
• Managed data centers: Beyond renting servers, managed data centers also offer related services such as data storage, computing and more
• Enterprise: Enterprise data center facilities are owned and operated by companies to process and store their proprietary data
• Cloud/Hyperscale: Large facilities designed to store data for technology and cloud companies, such as Google and Amazon, which may house customer data through third-party hosting services
• Edge data centers: Smaller facilities that are strategically located near end-users to deliver optimal services with minimal latency

Real Estate Investors Are Acting Fast on New Infrastructure Opportunities

As market dynamics have shifted and capital costs have increased, data center real estate investors have turned to purpose-built real estate investment software to source, manage and execute deals with greater speed, transparency and precision.

By centralizing their pipelines in deal management software, data center deal teams can more nimbly respond to opportunities, without affording competitors a chance to gain an edge.

17 CRE Investment Questions Your Data Can (Finally) Answer Expedite and Add Visibility to Your Industrial Real Estate Investing Process

To outperform the competition and move at digital speed, real estate investment managers must make decisions that are grounded in–not simply supported by–data. Download this guide to learn just a few examples of how CRE investment managers can turn data into answers with unprecedented speed, precision and scale with deal management software.

The post Data Center Real Estate: Opportunity in The Age Of AI appeared first on Dealpath.

What Is Industrial Real Estate?

Industrial real estate encompasses any buildings that support or facilitate manufacturing, assembly, warehousing, storage and distribution. While not a daily destination for most people, industrial buildings play a role in the lives of all consumers. Industrial real estate is a crucial component of the logistics infrastructure that allows businesses to create, ship and receive goods.

Though they may lack the visual appeal of other property types and asset classes, like multifamily, industrial real estate is a practical investment that’s increasingly central to today’s economy.

How E-Commerce Is Driving Demand for Industrial Real Estate Investments

When the pandemic prevented the public from shopping at brick and mortar stores, people turned to eCommerce websites like Amazon, which were already growing rapidly. For many consumers, eCommerce has become the norm thanks to fast shipping, simplicity and convenience. Nonetheless, retail still holds an important place when it comes to consumer purchasing decisions, and in 2024, is experiencing positive signals.

According to eMarketer, 20.1% of all retail sales will be driven by eCommerce. Similarly, eCommerce sales increased by 8.8% in 2024, according to Forbes. Distribution, sorting and final mile delivery facilities underpin this transformation.

Demand for industrial real estate has surged as firms vie for opportunities to invest in the infrastructure powering eCommerce. 

Breaking Down the Types of Industrial Real Estate

Under the umbrella of the industrial real estate property class, there are several different types of properties:

• Warehouses: Buildings that function as storage facilities, distribution centers, and final mile delivery centers
• Light Industrial Manufacturing: Manufacturing facilities for production
• Heavy Industrial Manufacturing: Manufacturing facilities for production of both goods and parts, which are generally tailored to tenant needs and, as a result, not easily fillable
• Flex Space: Any industrial facility that serves more than one purpose, often the office of a manufacturing company
• Land: Undeveloped land parcels that can be developed for any of the above purposes

Like other property types, not all industrial real estate is created equal. Factors like the property’s condition, location, and profitability determine whether a given property generates the highest possible cash flow in Class A, toward the lower end of the spectrum in Class C, or in the middle, in Class B. Investors with differing strategies may choose to prioritize buildings in different conditions.

Pros and Cons of Industrial Real Estate

Compared to other asset classes, what are the pros and cons of investing in industrial real estate?

Pros:

• Asset types variety: From warehouses to manufacturing facilities, there are a variety of different niches to invest in depending on macroeconomic factors, your strategy and other considerations.
• Favorable lease length: Industrial leases typically favor investors by including long terms, creating a stable revenue stream, including NNN leases in some cases. Bespoke spaces fit to client needs also deter tenants from finding a new lease.
• Minimal upkeep: Industrial real estate leases tend to shift the burden of maintenance to tenants, leaving investors with minimal upkeep costs, particularly when there is a NNN lease.
• High demand: Due to the need for infrastructure to support eCommerce growth, industrial buildings remain critical for fulfilling shipping logistics needs.

Cons:

• Difficulty finding replacement tenants: Some industrial spaces are tailored to highly specific tenant needs, which makes it difficult for landlords to fill these spaces if tenants leave.
• Single-tenant income: Many industrial real estate spaces can only be occupied by one tenant, creating risk for landlords in the event that a tenant leaves.
• Competitive landscape: As a result of industrial real estate’s surge in popularity, these opportunities are highly competitive. Investment management firms may need to move quickly to beat competitors on new opportunities.

17 CRE Investment Questions Your Data Can (Finally) Answer

To outperform the competition and move at digital speed, real estate investment managers must make decisions that are grounded in–not simply supported by–data. Download this guide to learn just a few examples of how CRE investment managers can turn data into answers with unprecedented speed, precision and scale with deal management software.

The post Definitive Guide to Industrial Commercial Real Estate Investing appeared first on Dealpath.

The old adage rings true as much today as it did during the 2007/2008 Great Financial Crisis: real estate is a cyclical market. Despite short-term tailwinds, strong real estate fundamentals will ultimately prevail, but blanket statements rarely capture the full truth. Not all commercial real estate is created equal; various property types and market segments move in different economic cadences and supply/demand market cycles.

One of the primary reasons that commercial real estate, as an asset class, has endured and thrived throughout volatile market cycles is its diversity of property types, or sectors. Commercial real estate is a dynamic, diverse and heterogeneous asset class. In the US alone, there are 7 property type sectors that eclipse $2T in value, including office, retail, industrial, multifamily, hospitality, land, and specialty buildings.

While technically and practically part of the same asset class, performance in one property type sector is not necessarily correlated to others. Macro factors might influence various sectors in different ways. For example, job growth or remote worker dispersion in up-and-coming metros like Phoenix might strengthen opportunities for multifamily investors, while potentially reducing office demand in central business districts like San Francisco.

In the first blog post of this series, we will deep dive into fundamentals shaping the multifamily property type’s performance today, as of Q4 2023.

Leverage Supports Strong Real Estate Fundamentals

Before covering macroeconomic trends shaping the multifamily market, it’s important to understand the role of leverage in shaping return profiles and real estate fundamentals across all property types.

CRE is often a leveraged asset. When managed wisely, leverage can be a powerful and useful tool. While investment managers might have sufficient cash on hand to purchase a property outright, adding leverage (or debt) can boost the internal rate of return (IRR) of a real estate acquisition deal, which also enables that same investor to diversify equity capital across more investments or properties.

However, even the most lucrative or attractive properties can be negatively affected by too much leverage, changing interest rates or a lack of refinancing sources. Ultimately, debt payments must be made on contactually scheduled dates, regardless of market conditions, asset performance or financing rates and availability. Thus, equity investors that fail to generate the cash flow required to make contractual debt payments might be forced to find additional equity capital, refinance at unattractive rates and terms, or potentially even lose the asset to the lender. 

With interest rates at their highest level in 10+ years and debt capital more difficult to source, investors need to prudently manage their equity interests and debt levels. They also might need to plan to secure additional equity capital to preserve and protect their ownership interests in an asset.

How Housing Shortages & Demand Affect Multifamily Real Estate Fundamentals in 2024

Population growth, immigration, migration, changes in household formation and other factors have caused a material imbalance in demand for housing and housing stock across US markets. This housing stock gap has grown materially in the past 12-15 years due to a slowdown in housing unit construction following the Great Financial Crisis (GFC). According to Zillow, US housing stock is undersupplied by 2-4 million units as of mid-year 2023. The shortage developed in the years following the GFC, and was sharply yet briefly amplified by supply chains, rising costs and other factors at the pandemic’s outset. Even if demand slows, generating excess supply to chip away at the existing shortfall and rebalance the market will take significant time (years) and consistent effort.

For the 10+ years prior to the GFC in 2007, the U.S. saw total housing starts of 1.6 – 2.1 million annually, which includes single family residential (SFR) and multifamily units. Given actual demand at the time, these levels are now viewed as contributors to a supply excess that culminated in the GFC. For over ten years following the GFC, total housing starts were at approximately half these levels, resulting in today’s accumulated shortfall.

While SFR properties are distinct from multifamily assets, these two sectors are intricately linked. Prospective tenants often choose one or the other based on factors like market conditions, lifestyle, location, affordability and family formation status. In this sense, SFR and multifamily act as buffers for one another. It’s important to note that SFR generally accounts for 2-3x the number of new multifamily unit starts, meaning that SFR typically has a stronger impact on multifamily than multifamily would on SFR. For example, in 2021 and 2022, there was a double-digit percentage increase in the rental rates for multifamily as the supply shortfall particularly in SFR continued to expand.

The disparity between multifamily and SFR units varies significantly by region and sub-market, and while we won’t deep dive into specific geographic markets, we will address the broader factors distinguishing multifamily. In fact, even as the supply shortfall remains with the possibility for moderate SFR growth, the multifamily space in many markets will see significant or excess new supply hitting the market over the next 12-24 months, which many expect will keep rental rate increases at low, flat or compressed levels. 

Multifamily Long-term Fundamentals Remain Strong

Precise estimates are difficult to validate, but experts anticipate approximately 500k to 750k annualized new multifamily units will be delivered between now and the end of Q2 2025. These units are in various phases of the development pipeline today, but will all be new and available for occupancy during the next 6-8 quarters; in fact, net delivery has increased by 20% as of Q1 2024. In some markets, this means new supply bursts of 5-10% of total inventory will increase pressure on rental rates as the market absorbs the new supply. Regardless, we are excited about the long-term fundamentals of the multifamily sector.

With rent growth slowing, construction financing costs increasing and general economic uncertainty persisting, the new development pipeline for multifamily has largely also hit pause. In fact, we anticipate seeing a significant slowdown in new starts hitting the market in 2-3 years (and maybe 3-4 years) from today. However, it’s clear that active development projects have paid dividends; in 2024, the multifamily market saw a 120% YoY increase in absorption.

While the multifamily sector will face numerous challenges, such as economic uncertainty, cost inflation on services, taxes, insurance and interest charges, and challenging labor supply, experienced operators are equipped to mitigate these and other risks. We continue to remain optimistic about multifamily’s outlook as a high-conviction property type.

Government-Sponsored Lending Fosters Robust Choices 

The federal government’s interest in creating and maintaining affordable housing supply has proven advantageous for investors of residential properties in the form of sponsored lending opportunities. Government-sponsored entities like Fannie Mae and Freddie Mac are charged with creating conditions to foster a robust, liquid financing market. This reduces the friction that investors and developers might otherwise face when seeking the capital required to finance multifamily deals throughout the entire risk spectrum and at various points in the property lifecycle. Other than SFR, no other asset class benefits from this type of government supported financing.

 In 2023, Fannie Mae closed over $52B in volume, including $6.6B in multifamily and affordable housing.

Strong, Thematic Rent Growth Over the Long Term

Top-line revenues across multifamily are coming off consecutive years of record-high rental growth, and as previously stated, we anticipate that rents will likely stabilize for the near term as material multifamily supply hits the market.

However, the reality is the fundamentals related to population growth, housing formation, general inflation, and continued SFR supply constraints will result in long-term demand growth for multifamily units. Because developers view rent growth as a critical metric for evaluating the economics of new construction starts, supply will be somewhat constrained until rent growth–or the perception of it–emerges. Until then, all demand must be accommodated by existing supply and construction deliveries in the pipeline.

While we don’t expect predictable growth, we do anticipate rental rate increases will act as a hedge to inflation and rising housing costs overall.

Dynamic Lease Terms and Annual Rent Growth 

Multifamily landlords benefit tremendously from leasing standards, tenant diversity and the reasonably short-term nature of leases. While the end of summer and beginning of the year account for an over-allocation of lease starts, multifamily operators typically rent to individual tenants on a one-off basis (i.e. not large block of leases) for one-year terms. This creates exceptional fluidity in pricing and vacancy management opportunities. Turnover times are reasonably defined unless a unit needs major upgrades, creating certainty for landlords that a vacant unit can be rented quickly if properly priced for rent.

Short leases enable landlords to increase rent on an annual basis to meet market conditions, provided that these increases are in line with statutory or contractual lease rate rules. Additionally, landlords have also capitalized on new service revenue opportunities that supplement core rent revenue, such as trash pickup, delivery services, managed Wi-Fi, electric vehicle charging, and other smart home offerings. 

Perpetual Housing Demand Underpins Strong Multifamily Fundamentals

Despite present challenges, multifamily real estate operators maintain a confident long-term outlook. These high costs continue to limit developer deliveries, but the opportunity for owners remains strong.

The long-term appeal of multifamily is reinforced by the massive, ever-present demand for housing units. Despite higher capital costs skewing margins, financing availability also contributes to the market’s evergreen appeal. Historically low unemployment rates and the economy’s overall strength will continue to drive demand and underpin strong real estate fundamentals for multifamily, with resilience to tailwinds hampering other sectors.

While multifamily real estate demand may fluctuate due to certain macro factors, and today’s shortage may eventually pass, the basic societal need for housing will endure. We have strong conviction that multifamily will retain its status as a darling of the commercial real estate market, creating lasting value for years to come. Investors with a long time horizon and measured levels of growth should be rewarded for their patience and focus on the multifamily sector.

17 CRE Investment Questions Your Data Can (Finally) Answer

To outperform the competition and move at digital speed, real estate investment managers must make decisions that are grounded in–not simply supported by–data.

Download our white paper to learn just a few examples of how CRE investment managers can turn data into answers with unprecedented speed, precision and scale with deal management software.

The post Back to Basics: Multifamily Real Estate Fundamentals (2024) appeared first on Dealpath.

Deal management software has unlocked a vital competitive advantage for homebuilders in today’s digital universe. To manage risk and seize opportunities, homebuilders must be equipped to collaborate and make decisions in real time.

In this blog post, we’ll outline how deal management software supports homebuilders at every stage in the community development lifecycle by building operational efficiencies and enhancing data-driven precision. 

Manage the Community Development Lifecycle in One Platform

As projects enter new phases and change hands, the sheer volume of data and information to consider is overwhelming. Your firm needs an easy way to capture and memorialize information. 

Managing the complete process, from the moment you identify a potential site in the market to delivery, creates a hub for institutional knowledge. Consequently, your firm can rely on one source of truth to prioritize tasks and view the latest updates and track critical dates like the end of due diligence, PSA execution, target close date, actual close date, non-refundable dates and many more.

Capture Potential Sites for Land Acquisition Across Target Markets

If new opportunities for homebuilding communities are still in spreadsheet silos, then there’s a better way.

Deal management software acts as a repository for potential sites as you scour target markets. Adding each site you find creates an actionable proprietary database, supporting smarter, data-driven decisions and memorializing critical details. At any point in the future, your firm can surface every site you’ve historically considered in seconds, helping you to revisit past opportunities and act on market intelligence.

Streamline Processes in Lot Investment Committee Meetings

Capturing every potential site in one place yields decisive efficiencies when it comes time to pitch opportunities to stakeholders and receive approval. 

As you prioritize opportunities in lot investment committee meetings, your team can seamlessly point to data-driven evidence to support these decisions. Comparing apples to apples based on the unit count, gross margins, lot types and more eliminates the need to circle back. 

Instead, your team can present empirical evidence to support your thesis and drive real-time decision making. After making a decision, memorialize the details in Dealpath.

Simplify Feasibility Analyses

Projecting returns to ensure the deal pencils can be challenging when financials are siloed.

As your firm sources and aggregates this financial data, updated figures can be stored in a source of truth your entire team can trust. When it comes time to pull data like construction costs, community costs, insurance and other data for feasibility analyses, there are no doubts about accuracy. Centralizing historical data in a proprietary deal database also helps teams gain broader market context and enhance precision with relevant comparables.

When your feasibility analysis yields questionable results, deepen your analysis by comparing underwriting model scenarios. Teams rely on Dealpath’s underwriting model comparison tool to understand how return profiles change as market conditions might evolve based on various financial scenarios. With this lens as part of your evaluation, you can ensure the deal will pencil out even in the event of, say, a mild decline in job creation.

Never Drop Another Ball During Due Diligence

Regional investment strategies complicate firmwide operating procedures across disparate business units, but there are ways to enforce cohesion and rigor. 

Once a deal reaches diligence, checking every box must become a top priority. Automating, managing and tracking standardized, role-based workflows in deal management software creates accountability, preventing homebuilders from missing deadlines. With all your deals tracked in one place, you can better manage risk and always track ahead of targets.

Track Entitlement Requests Across Regions 

Before a single shovel hits the ground, each community site must receive the correct entitlement. Unfortunately, though, siloed communication with local governments makes this challenging to manage. 

That’s why Dealpath’s centralized repository simplifies how teams memorialize property details and files. After a deal closes, teams can track information like which sites have received entitlements, have been declined, and other details. Standardizing these requests creates a seamless, scalable process, eliminating logistical nightmares.

Creating Transparency From Site Selection to Delivery

Between prospecting for new opportunities and selling the first home, your entire organization needs seamless visibility into deal progress. The traditional method of working–emails and spreadsheets–won’t suffice in an increasingly competitive marketplace.

Centralizing all of this information in Dealpath’s deal management platform offers your firm the transparency modern organizations need for efficient, data-driven scalability. For example, after hearing about a lucrative deal, senior management may be eager to check in on entitlement progress. Or, once a deal closes, accounting teams might be interested in verifying details like the address, purchase price, and more. 

Whether you’re looking to verify details in the midst of the deal or more easily share information with downstream teams, deal management software acts as the centralized hub your team needs to collaborate in lockstep.

Boost Speed to Market With Deal Management Software

From comprehensive visibility at every stage to enhancing data-driven investment decisions, deal management software modernizes the homebuilding lifecycle. To learn more about how homebuilders and developers simplify, standardize and scale project management, download our eBook.

The post Optimize the Homebuilding Lifecycle in One Source of Truth appeared first on Dealpath.

Evolving conditions have forced investment managers to keep a close eye on global, regional and local trends. Falling valuations, high costs of capital and global volatility have left a lasting impact on the commercial real estate market. Even in the face of gale-force headwinds, data-forward investors have surfaced pockets of opportunity in burgeoning markets and sectors.

While many investors have kept their pencils down, others are taking now as an opportunity to amass market intelligence ahead of a turn in the market. Firms equipped with centralized, data-driven insights about lucrative sectors are positioned to identify commercial real estate trends and win as opportunities emerge.

Lenders have prepared to become increasingly active as players across the market anticipate a wave of maturities driving new loan demand, offering private credit investors a spotlight once held by banks.

Sectors like multifamily and industrial continue to drive strong performance relative to others, even as sector commercial real estate trends temper growth. Retail, which previously endured an eCommerce-induced slump, has rallied. Beset with declining demand, office continues to face new tailwinds.

Read on to learn more about trends across commercial real estate trends finance, lending, various market sectors and technology.

Jump to:

• Commercial Real Estate Financial Trends
• Commercial Real Estate Lending & Debt Market Trends in 2024
• Commercial Real Estate Market & Asset Class Trends
• Commercial Real Estate Technology (Proptech) Trends

Commercial Real Estate Financial Trends

1. Annual Commercial Real Estate Investment Volume Decreased by 47% YOY in Q4

Global volatility, the high cost of capital, banking turmoil and broader macroeconomic headwinds continue to hamper CRE investment activity, marking one of the most prominent commercial real estate trends. According to CBRE, annual CRE investment volume in the US fell by 47% to $647B in Q4. 

From Q3 to Q4, global investment volume fell by 37% to $157B. On an annual basis, investment volume fell by 50% in the Americas, 46% in Europe, and 29% in the Asia-Pacific region. 

While some sectors experienced higher transaction volume than others, volume declined across all sectors. Despite a 60% YoY decrease in volume in the US, multifamily remained the strongest sector due to resilient fundamentals and the perpetual demand for housing, totaling $122B annually. Industrial investment volume fell by 40%, totaling $100B annually, remaining an attractive sector overall. Office investment volume totaled $55B annually and declined by 56% YoY, just below retail, which fell by 37% to $61B.

As fundamentals continue to stabilize and macroeconomic conditions improve, experts expect investment activity across the market to accelerate.

2. Commercial Prices Have Declined by 7% Year-over-Year as of April

According to Green Street’s Commercial Property Price Index, prices declined by 7% over the past year. Since the market’s pricing peak in March of 2022, prices have dropped by 22%. Peter Rothemund, Co-Head of Strategic Research at Green Street, believes investors may see little-to-no-change in the near future.

The RCA Commercial Property Price Index tells a similar story, while highlighting some areas of opportunity for investors, showing a 4% YoY price decline across the market as of February. Office prices plummeted by 15.2% YoY, including a 30% decline for CBD offices. While not significant enough to outweigh broader trends across the market, industrial prices grew by 1.9% annually. Nationwide, prices in major metros declined more than those in non-major metros, validating the importance of proprietary data in unlocking localized commercial real estate trends.

Measuring sales comps from July to December, the CBRE Cap Rate Survey H2 2023 showed an increase from 6.4% to 7% over this six month period, with expansion across multiple property types. According to this study, neighborhood retail pricing remained the most stable. Most of the 250 professionals believed that cap rates had peaked.

3. The Flight to Quality Continues

Activity in the office market has slowed significantly due to hybrid working, lifestyle factors and broader macroeconomic trends. However, the flight to quality–in which investors vie for high-quality assets, often leaving deals for lower-quality assets on the table–persists. 

Asking rents in gateway markets were 51.5% higher than other office spaces, according to a Cushman & Wakefield study. What complicates this real estate trend, however, is that Class A assets comprise only 10-15% of the total market inventory. In these high-quality buildings, direct vacancy is below 11%, an impressive benchmark compared to the broader market.

Elsewhere in the market, some investors report that the flight to quality real estate trend has diminished. Despite frequent reports of a flight to quality, some investors have claimed this trend is receding, with 2023 losses concentrated in higher-quality buildings. Less than 43% of Class A buildings sold for the listed purchase price, while this was true for only 19% Class B and 13% Class C properties.

4. Rental Growth Across Major Property Sectors

Despite a challenging pricing market, many of the major property sectors saw rental growth, according to the latest NAR report.

Multifamily rents increased by 0.7%, even while vacancy rates reached a 10-year high of 7.7%. Consistently high mortgage rates drove apartment demand, yielding net absorption of 120%. Absorption share grew for Class B properties, while it declined for Class A.

Industrial saw the strongest growth at 5.5%, proving its resilience even as pandemic-era consumer trends that drove eCommerce growth fade. Industrial did, however, see a slowdown in absorption rate.

Retail growth was 3.2% due to tight market conditions and limited supply. Nonetheless, a low 4.1% vacancy rate highlighted the sector’s resilience.

Unsurprisingly, office had the highest vacancy rate and lowest rent growth at 0.7%.

5. Some Investors Pick Their Pencils Back Up, While Other Investor Pencils Remain Down

As market dynamics evolved in 2022 due to high capital costs and inflation, many investors shifted to “pencils down” mode to weather the storm. Some firms continue to simply amass market intelligence in preparation for emerging opportunities, while others have already started to act.

Experts anticipate eventual rate cuts, fostering a prevailing sense of optimism that market activity will accelerate in H2 2024. While rate cut timing is uncertain, there are signals that the Federal Reserve will not implement further hikes.

6. CRE Valuations Dropped an Average of 42%

An analysis of 556 reappraised properties by CRED iQ highlighted that CRE valuations dropped by, on average, 42%. Valuations across the office sector declined by 50%, followed by retail at 49%, multifamily at 35% and industrial at 30%.

Of the 556 reappraised properties included in the analysis, the top 25 were either delinquent, transferred to special servicing, or both.

7. Investors Endured a Tight Fundraising Environment

According to McKinsey, managers across capital markets faced one of the toughest fundraising environments ever; real estate was no exception. Global closed-end fundraising declined 34% to $125B. However, the largest CRE fund ever closed at $30B, marking a noteworthy outlier to this commercial real estate trend.

The report also noted that the trend toward economies of scale persisted. Investors continue to allocate their capital toward platforms spanning multiple sectors managed by large institutions. 37% of aggregate closed-end real estate fundraising was attributed to the top five managers.

8. Commercial Real Estate Investors Prioritize ESG Criteria

ESG has transitioned from a commercial real estate trend to critical investment criteria for investment evaluations. 

ESG, or environmental, social and governance-related considerations, have come to the forefront. A PGIM trends report from 2022 highlighted that over two thirds of investment managers have adopted ESG standards in their investment criteria, with a particular emphasis on environmental factors. New data, however, suggests a strong correlation between ESG and growth.

Cynthia Adams, co-founder and CEO of Pearl Certification, which provides investment data on home performance features, recently cited a study that revealed companies making ESG claims grew by 28% YoY, compared to 20% for those that did not. And, reporting on ESG considerations may soon become a requirement, according to NAR. The US Securities and Exchange Commission recently proposed a rule requiring publicly traded investors to report on climate risks, emissions, and net-zero transition plans.

OSCRE is a corporate member organization committed to standardizing real estate data, one of its goals being the fulfillment of ESG standards.

9. Investors Audit and Strategize Around Lender Exposure Amid Banking Turmoil

The woes of 2023’s worrisome banking turmoil appear to have passed, but CRE investors have learned their lessons–most importantly, to maintain real-time visibility into exposure.

Firms that were exposed to institutions like First Republic Bank, Silicon Valley Bank and Signature Bank wanted to act immediately as these institutions hit the headlines. However, siloed data and disparate information made managing exposure harder than it should have been. Centralizing pipeline and portfolio information in a source of truth creates the visibility required to react on the spot to market fluctuations as historic market events play out in real time.

For example, Dealpath offers firms the efficiency and precision required to act with agility by reporting on exposure to lenders, sponsors or tenants, rather than waiting for an analyst to pull a report while the dust settles. 

10. Creative Solutions to Interest Rate Cuts and Exploring Emerging Opportunities

Nearly all experts believe that rate cuts are certain, but often disagree on exactly when investors should expect calmer waters. Many, however, have retained a positive sentiment as market optimism prevails. 

In light of this trend in commercial real estate, investors have adjusted their near- and long-term strategies to find new opportunities. For example, some firms are reducing leverage and moving up the capital stack to improve seniority and secure favorable terms to minimize risk. Similarly, investors that are overweight on certain assets can take steps to alter their portfolio composition.

Commercial Real Estate Lending & Debt Market Trends in 2024

11. Lenders are Capitalizing on Opportunities as $2T in CRE Debt Maturities Come Due

Another increasingly popular strategy for firms to remain active despite stormy conditions is launching a debt platform. Joining a significant number of players in the existing CRE lending space, a groundswell of equity firms have pivoted into debt. Beyond seeking out lower risk investments as equity markets pick up, debt platforms afford these institutions a chance to invest opportunistically.

According to a recent Newmark report, banks will face a $2T wave of CRE loan maturities over the next three years. When these loans reach maturity, equity investors will face the choice of either selling the asset to a new buyer or borrowing even more money to pay down maturities and retain their equity. In either scenario, an equity investor must borrow more money, creating ample opportunities, particularly for private credit investors willing to incur this level of risk.

To learn more about opportunities driven by the wave of maturities, watch our recent webinar.

12. Total CRE Loan Origination is Down 25% YoY

While CRE loan origination volume in Q4 of 2023 increased by 13% from Q3 in 2023, Q4 totals saw a 25% YoY decrease from 2022, according to MBA. This trend was led by the office sector, which saw the steepest decline at 68%, followed by healthcare at 39%, multifamily at 27%, and industrial at 7%. Retail and hospitality, on the other hand, increased by 50% and 81% from Q4, respectively. 

In Q3, the total loan volume dropped by 49% YoY.

13. Percentage of Delinquent CRE Loans Backed by Office Properties Rising

Another area in which investors are seeing underperforming office assets come to light is loan delinquencies. 

According to MBA, 6.5% of office loans were 30 or more days delinquent, an increase from 5.1% in Q3. These loans can also have a substantial impact on the office outlook. 30% of outstanding CMBS notes are backed by delinquent loans, creating a lasting mark on the sector outlook.

Commercial Real Estate Market Sector & Asset Class Trends in 2023

14. Retail Remains Resilient and Continues to Evolve

E-commerce was rapidly growing prior to the pandemic, but months of quarantine only accelerated this growth. By 2027, e-commerce is expected to account for 23% of retail sales–however, retail growth has now exceeded pre-pandemic growth.

According to an Altus Group report, retail has recently rallied as consumer spending has increased. In Q1 of 2024, retail had the lowest vacancy rate at 4.1%. The Q1 NAR report highlighted a 3.2% increase in asking rents. 

Net absorption, which decreased by 33% YoY, remains higher than pre-pandemic levels. Houston, Texas, Chicago, Illinois, Dallas-Fort Worth, Texas, Austin, Texas and Atlanta, Georgia all ranked in the top five cities with the strongest net absorption over the past year.

Among the commercial real estate trends resulting from these conditions is the evolving role of retail. The purpose of physical stores is changing. Future-facing retail strategies prioritize an omnichannel approach to sales, engaging customers in-store, online, and via mobile. 

Physical stores will continue to play the role of distribution centers, pick-up locations and showrooms, which will grow more sophisticated as augmented reality technologies help customers match products to their spaces. Customers may place orders online, but brick-and-mortar buildings will deliver an irreplaceable experience that drives brand loyalty.

Grocery-anchored retail continues the trend of outperforming other segments of the retail sector, driven by a customer base that has not defaulted to eCommerce.

15. Mall Declines in Popularity As Repurposing Continues

Like retail, malls also suffered a decline in foot traffic as e-commerce surged. Despite the shrinkage, opportunities within this sector still exist. Strip malls in densely populated residential areas are outpacing traditional malls, especially in terms of rent. Among other factors, mixed-use strip malls can attract a diverse range of tenants, such as grocery stores, salons, eateries and professional services. 

According to the Q1 2024 NAR report, net absorption in malls was 1.82M, with only the “other” category ranking below it–a steep decline from 11.15M in 2016.

As firms continue to shutter malls in the wake of eCommerce’s boom, a commercial real estate trend toward commercial redevelopment has emerged. Blending residential units with other asset classes eases housing woes, while offering the all-important amenity of convenient shopping. According to the ULI, targeting existing malls for multifamily space also boosts sustainability by avoiding construction on greenfield sites.

16. Industrial Is Past Peak Performance, but Remains Strong

The e-commerce boom has set in motion many commercial real estate trends, most notably a strong boost in popularity for industrial properties like warehouses and final-mile fulfillment centers. While industrial continues to outperform other sectors based on the NAR March 2024 report, there are signals of slowing growth.

Net absorption dropped by 69% YoY in Q1 2024 as vacancy rates rose to 6.1%, an increase from 4.1% in 2023. Industrial rents grew by 5.5%, a steep fall from the previous 10% figure, while still surpassing other sectors.

Within the industrial sector, logistics spaces led the pack with a 6.5% increase in rent. Specialized spaces saw a 4.4% increase, while flex spaces saw a 3% increase in rent.

The top five cities with the strongest 12-month absorption were Dallas-Fort Worth, Texas, Houston, Texas, Chicago, Illinois, Phoenix, Arizona and Savannah, Georgia.

Healthy fundamentals underpin industrial’s relatively strong performance. Logistics will play a perpetual role for businesses of all sizes, including retail and eCommerce. That means building a network of distribution centers, spanning cities, highways, and even rural areas, is key to abiding by delivery time windows.

17. Slowing Down from Peak 2021 Growth, Multifamily Benefits from Strong Fundamentals

The multifamily sector continues to benefit from strong fundamentals, the perpetual need for housing and prohibitively high home mortgage rates. However, a rise in vacancy rates has slowed rent growth as the sector approaches equilibrium. 

Compared to 2023, the net delivery of multifamily buildings has increased by 20%. This influx of supply has contributed to the 7.7% vacancy rate, a 10-year high. Consequently, rent growth across the sector has dropped to 0.7%–but not all markets have seen a decline. Rockford, Illinois, Kingsport, Tennessee, Salinas, California, and Youngstown, Ohio are breaking this multifamily real estate trend by delivering rent growth over 5%. Markets with the strongest 12-month absorption included New York, New York, Dallas-Fort Worth, Texas and Washington, DC. 

18. Life Sciences Booms in a World With New Priorities

The pandemic exposed the need to devote more proactive attention toward medicine development, paving the way for life sciences to shine even brighter. After overcoming short-term challenges related to VC funding and resulting tenant demand in 2023, the life sciences market is already seeing positive signals in 2024. Overall, the sector may continue to moderate through 2024, following a post-pandemic boom.

Life sciences investors will continue to benefit from analyzing not only regional trends, which often miss nuances like submarket pricing, occupancy, funding, human capital, and other factors, but also hyperlocal trends, based on a JLL report.

According to CBRE’s report, average asking rents across the top 13 US life sciences markets increased by 4.1% to a record-high $70.07 per sq. ft for NNN space. The top 13 markets, including San Diego and Seattle, also showed positive net absorption in Q4. Life sciences also saw an increase in vacancy rates, largely due to a delivery of 4.3M square feet in vacant new construction.

While VC funding increased in Q2 and Q3 of 2023, it showed a downward YoY trend in Q4, despite being on par with rolling four-quarter-totals in early 2020. Nonetheless, ongoing drug development has shaped a promising market dynamic for life sciences investors.

19. Office Demand Low Amidst Ongoing Headwinds

Perhaps the most enduring commercial real estate trend sparked by the pandemic is the transition to remote and hybrid workplaces. Demand continues to decline YoY, with Q1 net absorption totaling -66.5 million square feet. In February, the amount of vacated office space surged by 119% YoY, causing the vacancy rate to reach a decade high of 13.8%.

Cities with the highest vacancy rates in Q1 of 2024 included San Francisco, California, Houston, Texas, Dallas-Fort Worth, Texas, Austin, Texas and Chicago, Illinois. The two cities with the lowest vacancy rates, Wilmington, North Carolina and Savannah, Georgia, are, notably, both located in the South. 

20. Operational Real Estate Like Senior Living & Student Housing Are Trending Upward

While not a traditional focus for most investors, operational real estate in niche markets like senior living and student housing and life sciences have gained momentum. From 2020 to 2021, the percentage of total CRE investment on operational spaces doubled to 12.3%. 

As the share of older Americans needing living facilities, this commercial real estate trend will likely gain steam. Rent growth in senior housing hit 6%, according to a report from Cushman & Wakefield. In Q4 of 2024, average senior living occupancy in primary markets rose to 85.1%, marking the tenth consecutive quarter of an upward trend since the pandemic, according to JD Supra. 

According to RealPage Analytics, the student housing sector is experiencing the hottest pre-leasing season ever. Across 175 universities that were part of a RealPage analysis, 49% of beds had already been leased for the 2024 academic year. Additionally, these beds were leased at rents 6.7% higher than the previous year.

The best-performing universities included the University of Tennessee, Purdue University, the University of Arkansas and Virginia Tech, which all posted pre-lease rates of 80% or higher as of January.

21. The Rise of Single Family Home Rentals (SFR)

Amid a nationwide shortage of housing, single family home rentals help fill a critical gap in residential markets. They’re also catching the attention of some of the world’s largest institutional investors. 

In early 2022, Blackstone made headlines for announcing it will dedicate another $1 billion on top of its existing $6 billion single family home rental portfolio. MetLife Investment Management closed a $390M SFR fund and made its first investment in August. By some projections, it could be the fastest-growing sector of the American housing market.

After weathering a demand slowdown in 2023, single family rental is back to a solid pace of rent increases. In February, SFR saw the highest annual appreciation since April, 2023, according to the CoreLogic Single Family Rent Index (SFRI). This data also signaled that Americans are migrating back to expensive coastal metros like New York, New York, Seattle, Washington, and Boston, Massachusetts, in contrast with 2023’s less expensive metros, which were St. Louis, Missouri, Charlotte, North Carolina, and Orlando, Florida.

Investors are increasingly noticing ample opportunity in this sector, especially as rents rise nationwide. High mortgage rates are also increasing demand for rentals, as many would-be homeowners push off purchases until interest rates ease.

Commercial Real Estate Technology (Proptech) Trends

22. Technology & Software Remain a Top Priority for Organizations of All Sizes, Across Verticals

When it comes to technology adoption, commercial real estate is pacing behind adjacent capital markets, like the equity market. The past few years have catalyzed the ongoing proptech revolution, during which firms gradually took on technologies that simplified outdated processes, particularly as AI-powered technologies have come to the forefront. 

Many firms saw this phase of the market cycle as an opportunity to consolidate data and build efficiency across disparate systems. For example, centralizing pipeline and portfolio data in Dealpath enables firms to make smarter data-driven investment decisions, build cross-department efficiencies, and manage risk with real-time visibility into their portfolios. Other new technologies help property managers find ways to optimize the tenant experience using the IoT (internet of things). 

The rapid and forced transition to remote work in March of 2020 only added fuel to the fire. Facing the new challenge of collaborating from remote environments, without the option for in-person meetings or casual conversations, commercial real estate firms recognized the immediate need to move to the cloud. 

According to a Deloitte survey, 56% of respondents indicated that the pandemic exposed digital shortcomings. The pandemic created new urgency, and having recognized the value of modern technology, achieving full tech enablement has become a priority. 53% of respondents have a roadmap of where they’d like technology to take them, and 32% are restructuring internal processes based on technology and tools. 58% of surveyed REITs and 45% of developers said that they wanted to partner with technology companies, showing that firms are responsive to the evolving landscape.

23. Data-Driven Precision Will Determine the Winners of the Market’s Next Phase

In response to this proptech revolution, the market is also seeing a paradigm shift in which investors have the visibility required to make faster, more precise decisions. Global, national and regional data insights are arming firms of all sizes with enhanced data-driven precision, enhancing their competitive advantage.

From global institutions managing tens of billions in capital across numerous strategies to boutique investors dedicated to a specific space, centralization offers limitless opportunities, driving economies of scale. A proprietary deal database enables firms to uncover emerging real estate trends and seize opportunities before the competition. 

24. Standardized Workflows Unlock New Operational Efficiency 

Investment workflows, traditionally managed via Excel checklists and shared via email, created significant hurdles for firms operating in an increasingly digital world. As executives and investors alike prioritize operational efficiency, digital collaboration is becoming the new norm.

Centralizing standardized, role-based deal workflows in a single source of truth like Dealpath creates the efficiency teams need to collaborate in lockstep. Teams can spend time they previously spent on error-prone admin work tackling higher priorities, like deeper analysis. Consequently, they can make faster, better-informed decisions.

25. Cybersecurity Takes Center Stage as Data Security Comes Into Question

Data has always stood as a central pillar of the commercial real estate industry, but the new tools available have increasingly emphasized its value. Increasingly frequent data breaches, however, have highlighted the urgent need for a stronger focus on cybersecurity. To protect against ransomware attacks, firms need to take additional measures, using modern standards as the benchmark.

According to NAREIT, BDO USA LLP, a professional services firm, identified that 92% of the 100 largest publicly traded REITs considered cybersecurity a threat, up from 63% in 2015. 96% of office-focused REITs considered it a threat, as well as 93% in hospitality, and 92% in multifamily. From a financial standpoint, data has already more than proven the importance of increasing security measures. Kaspersky found that, on average, an enterprise-level breach cost $1.41 million in 2019, which increased from $1.23 million in 2018. 

Throughout the lifecycle of an asset, data might flow through multiple systems as it is handed off through various departments. To sufficiently protect data at every touchpoint, firms must ensure that every platform data flows through meets required standards. From providing role-based access to platforms, to tracking user activity on those platforms, and sophisticated network controls, the need for an advanced approach to cybersecurity is stronger than ever. 

As you audit existing platforms and add new ones to achieve these goals, look for best-in-class security standards, particularly SOC 2 Type 2 compliance, the industry standard in data security. With investors’ best interests in mind, the commercial real estate trend toward advanced cybersecurity will only become increasingly prevalent. 

17 CRE Investment Questions Your Data Can (Finally) Answer

To outperform the competition, real estate investment managers must make decisions that are grounded in–not simply supported by–data. Download this guide to learn just a few examples of how CRE investment managers can turn data into answers with unprecedented speed, precision and scale with deal management software.

The post 25 Commercial Real Estate & Technology Trends to Know in 2024 appeared first on Dealpath.

What Is the Loan to Value Ratio? (LTV)

For commercial real estate lenders, the loan to value ratio (LTV) determines a loan’s risk. Lenders calculate the loan to value ratio by dividing the loan amount by the property’s appraised value. Consequently, lenders can assess the loan’s alignment with their target risk profile and set terms.

The value of the LTV ratio is one factor that helps determine the lender’s risk in a debt investment. When an LTV is low, lenders fund a lower percentage of the total cost and take on less risk, as the borrower will own a relatively higher stake in the property. Conversely, a higher LTV indicates a riskier loan with a relatively higher percentage of capital at stake, often requiring higher interest rates or more strict terms for the borrower.

How to Calculate the Loan to Value Ratio (Formula)

How do you calculate the loan to value ratio?

Determining the loan to value ratio is a straightforward calculation. Simply divide the loan amount by the appraised value. The result is a percentage representing the amount of the purchase price that is secured by the loan. 

Loan Amount/Appraised Value=LTV

LTV Calculation Example

Now, let’s walk through an example of calculating the loan to value ratio. In this example, let’s assume that we’re underwriting a loan for a class A multifamily property in downtown San Diego.

Appraised value: $50 Million

Loan amount: $39 Million

Based on these assumptions, we can find the LTV by following the formula.

$39,000,000/$50,000,000=0.78

In this example, the LTV is 78%, which means the loan covers 78% of the property’s value. The remaining 22% is covered by the equity investor’s cash outlay, or possibly, another source of funding.

How Do Commercial Real Estate Lenders Evaluate LTV?

Lenders rely on the loan to value ratio as one of the primary factors to analyze risk. Much of this risk hinges on a key insight: identifying the degree to which the property is leveraged.

Most directly, this value helps lenders to understand a deal’s leverage. A lower LTV ratio indicates that borrowers have a more significant stake with a higher cash outlay. From a lender’s perspective, this is often favorable, suggesting that borrowers have more skin in the game, and are therefore less likely to foreclose or walk away from their obligations. Consequently, lenders can offer better terms and lower rates.

On the other hand, a higher loan to value ratio indicates that there is more leverage, presenting additional risk. Because the borrower has a lower equity stake, they have a higher likelihood of foreclosure. Borrowers typically must accept stricter terms, and potentially, more stringent approval processes.

While critical for underwriting and decision making, the LTV is only one of numerous metrics that lenders consider. 

Other key metrics that lenders typically consider when evaluating a loan include debt service coverage ratio (DSCR), debt yield and loss given default. Debt service coverage ratio measures whether or not the borrower can make monthly loan payments. Debt yield, meanwhile, indicates how quickly the lender can recoup their investment if the loan defaults. Finally, loss given default simply measures what the lender’s loss will be if the borrower defaults.

What Is a Good LTV?

So, what is a good loan to value ratio?

There is no clear-cut answer to this question; the answer hinges entirely on the lender’s target risk profile. Conservative lenders typically accept a lower LTV ratio of under 70%. Lenders with a higher risk appetite, on the other hand, might specifically target LTVs on the higher end. Many view an 80% LTV as prohibitively risky, but some lenders might approve the right situation. 

Ultimately, a good LTV will be aligned to the debt fund’s target risk profile, which can vary significantly.

Digitize Loan to Value Ratios for Streamlined Analysis

As you evaluate, pass on and pursue new deals in your loan pipeline, centralizing critical mass in a proprietary deal database can supercharge your firm’s data-driven precision. 

With deal management software that supports lenders’ unique needs like Dealpath, debt teams can capture more relevant data to better inform future decisions. As you record the LTV for a given pipeline deal, digitizing this information ensures that teams can tap into it for benchmarking and analysis.

For example, if you come across a similar deal in the same market, anyone on your team can easily surface the comparable to assess how these values align. One common way that debt teams act on their proprietary loan database is checking comparables to surface appraised values, which can help inform your team’s assumptions as you calculate the loan to value ratio.

Beyond individual deal evaluations, another significant advantage that lenders gain by managing their pipeline in deal management software is trend identification. With loan to value ratios from every deal you’ve evaluated in the past two years centralized in one platform, you can learn a lot about market dynamics. 

Start by analyzing the loan to value ratios in each market or submarket you’ve targeted to see how LTV ratios have evolved over time, or certain markets with a higher or lower value. If you’re planning to launch a new debt fund that targets low-risk investments, for example, then you can prioritize geographies with lower-risk deals that are more likely to close. Elevating your data-driven strategy ensures that your firm is well positioned to outperform the competition.

3 Ways To Supercharge Your Debt Origination Pipeline

Tech-enabled speed, precision and efficiency could be your secret weapon for seizing opportunities before the competition. Download our eBook to learn why debt origination teams have adopted deal management software to evaluate, underwrite, and close more deals.

The post What is Loan to Value Ratio ? [LTV Formula & Definition] appeared first on Dealpath.

From scaling data analyses to automating simple work to predicting performance, the possibilities are endless. But where should CRE investment management professionals even start?

In this blog post, we’ll review five simple tips that you can leverage AI as part of your day-to-day workflow, as well as relevant tools and helpful prompts to get you started.

1. Extract Property or Lease Data With ChatGPT 

Tool: ChatGPT Plus
Goal: Reduce time spent on data extraction
Sample Prompt: Extract property metrics, tenant names, and lease expiration dates into a table

For many professionals, one of the simplest and most effective AI use cases is reducing friction when it comes to data analysis. Streamlining these manual stages creates more bandwidth to prioritize impactful work.

ChatGPT Plus can be used for extracting key property details from documents. You can upload offering memorandums, lease agreements, appraisal reports or another document with data you need. Then, enter a simple prompt like “Extract property metrics, tenant names, and lease expiration dates into a table.” 

ChatGPT will generate a table containing all of this information, saving you hours that you can allocate to deeper analyses. 

To learn how to extract deal data directly into your deal pipeline and build a proprietary deal database with AI-powered Dealpath Data Ingestion, schedule a meeting.

2. Summarize Document Reviews During Due Diligence

Tool: ChatGPT Plus and Google Gemini
Goal: Surface most important information from diligence
Sample Prompt: Create a bulleted summary of key risks, dates, and how they will be mitigated

No matter the deal’s complexity, sifting through mountains of due diligence documents to find what you need quickly becomes a time-consuming nightmare. Instead, rely on AI to summarize key information from diligence findings.

ChatGPT and Gemini can generate summaries of documents such as environmental reports, financial statements, legal contracts and more documents to highlight key points–which might otherwise take hours to find. After uploading the document, submit a prompt like “Create a bulleted summary of key risks, dates, and how they will be mitigated”.

Consequently, you can find the information you need without disrupting your workflow. Before acting on these summaries, though, be sure to validate the underlying facts within the documents.

3. Craft Investment Committee Memos With Quillbot AI

Tool: Quillbot AI
Goal: Draft investment committee memos
Sample Prompt: No prompt required

While only a skilled professional is equipped to pitch a deal to the investment committee, AI may be able to play a role in packaging compelling arguments. 

Quillbot AI is a tool that can elevate investment committee memos, helping your team make the strongest case possible for any given deal. With only an investment thesis, Quillbot can paraphrase existing copy, suggest revisions and generate summaries. 

After editing Quillbot AI’s output, you’ll be on your way to delivering a winning pitch to the investment committee.

To learn more about how to automate collateral creation based on centralized data in Dealpath, click here.

4. Analyze Markets With Google Gemini

Tool: Google Gemini
Goal: Identify recent market trends
Sample Prompt: Provide an analysis of the current market conditions for commercial real estate in the area surrounding the property. Include data on supply and demand, average rental rates, occupancy rates, and any trends in the market.

Your proprietary deal database may be the ultimate tool for market analysis, but AI can also aid in surfacing recent trends that may impact your decisions or priorities.

Somewhat overshadowed by ChatGPT, Google’s Gemini is another powerful generative tool that, notably, can interpret real-time information. For CRE professionals, one use case to consider is relying on this tool to analyze changing markets, trends, news, and data in specific geographies alongside proprietary information.

Whether you need a quick overview of retail vacancy rates in the San Francisco Bay area or a summary of CBRE’s North America data center trends report, Bard can help you factor current events into market analyses.

To learn how investors surface market trends based on proprietary data in Dealpath, click here.

5. Always Specify a Persona  

Tool: All
Goal: Ensure the AI understands the goal of the task and adopts the correct lens
Sample Prompt: You are an analyst at a CRE investment management firm

In many ways, AI tools are fulfilling the role of a member of your team. Across all your pursuits with generative AI, one helpful tip to ensure the AI can execute your exact requirements is to define its persona.

Instructing the AI to take on a specific role within a CRE organization empowers the AI to better tailor its response to your needs. For example, when underwriting, you might instruct the AI to be an acquisition analyst. Or, in the case that you’re writing a summary of recent loans for investors, you can tell the AI to take on the role of Loan Originator. 

Consequently, the AI will be able to adopt that unique lens to best execute on your requests.

What Does the Future of AI in CRE Look Like?

For real estate investment professionals, these recent developments are only the beginning of AI-driven disruption.

While delivering powerful capabilities at scale, AI is still a relatively new technology that carries inherent risks related to data rights, accuracy, data privacy, and other considerations. Before implementing AI tools across your organization, be sure to consider risk mitigation strategies.

The reports, insights and text generated by AI can only be as strong and compelling as the underlying inputs. If dirty data is clouding your digital systems, then reports and insights could result in costly, preventable errors.

As you scale your AI strategy, prioritize trusted, proven software adopted by leading institutions to drive your investment strategies in the rapidly evolving digital age.

How to Evaluate AI for Real Estate Investment Management

With just a few strategically written prompts in your toolkit, you can leverage AI to extract data, draft memos and pace ahead of market trends, all while maximizing efficiency.

As investor expectations for data-driven decision making and team efficiency rise, though, firms with purpose-built AI technology will be best positioned to outperform the competition.

Download our white paper to gain practical, actionable insight into how your firm can evaluate AI-powered technologies to build operational efficiencies and enhance data-driven precision.

The post 5 Simple Tips for CRE Investors Getting Started with AI appeared first on Dealpath.

This blog post was last updated on October 11th, 2023.

One lens through which investment managers evaluate a new deal is calculating its commercial real estate cap rate. The commercial real estate cap rate of a property offers a glimpse into the risk and return. This helps investors to understand the deal’s risk profile compared to other similar opportunities in their real estate acquisitions pipeline. In other words, the cap rate illustrates the deal’s potential ROI.

In this blog post, we’ll explain what commercial real estate cap rate means, how to calculate it, and how to amass competitive intelligence in a centralized deal database.

What Does Cap Rate Mean in Commercial Real Estate? (Definition)

The commercial real estate cap rate, or the capitalization rate, is one metric that CRE investors rely on to gauge the risk and potential return rate of an asset or property. Similar to multiples in equity markets, cap rates are measured as percentages, typically from 3-20%. This risk is a measure of the amount of time it takes for an investor to recover their initial investment.

When a cap rate is low, the property has a relatively higher value and lower risk. High cap rates, conversely, indicate that the property’s price is relatively low and will potentially yield high returns—albeit with added risk.

While cap rates offer one perspective on the property’s potential, they won’t necessarily provide value in a vacuum. Instead, cap rates are best used as a comparison metric against similar properties. Tracking cap rates from target markets in a deal management platform also allows your firm to develop competitive intelligence for future benchmarking and decision making. 

While cap rates are invaluable, they are not the sole metric investors should rely on. Commercial real estate cap rate doesn’t take mortgage or financing arrangements into consideration, instead assuming a cash purchase. This figure is based exclusively on current rents, without considering external factors like: 

• Leverage
• The time value of money
• Improvements or renovations

For this reason, cap rates don’t necessarily capture the property’s full market potential. To make these analyses more holistic, investors also consider other metrics, like the internal rate of return.

Because net operating income changes as rents increase, additional tenants sign, or operating costs fluctuate, cap rates are not fixed. 

How to Calculate Cap Rate for Commercial Real Estate (Formula)

How do you calculate the commercial real estate cap rate for a property?

The most common way to calculate a commercial real estate cap rate is:

NOI/Current Property Value= Capitalization Rate

To convert this figure to a cap rate expressed as a percentage, simply multiply by 100.

You can calculate the net operating income by deducting management-related expenses from the annual income generated by the property. These expenses can include both standard upkeep and taxes. The current market value is simply the property’s value given the current market conditions, which you can calculate in a few different ways:

• Cost approach appraisal
• Income approach appraisal
• Price per square foot

Commercial Real Estate Cap Rate Example

$500,000/$5,000,000=10%

For example, if the property generates $500,000 in income after expenses, and the current value is $5,000,000, then the cap rate is 10%. In other words, the investor is earning 10% of their investment on an annual basis. Because the cap rate is 10%, it will take the investor ten years to recover their initial investment.

While you can also find the cap rate by dividing NOI by the purchase price, this method is less reliable. Purchase prices are often out of touch with market trends, especially if the property has undergone significant renovations. This also eliminates considerations about market conditions.

Fortunately, surfacing cap rates doesn’t require extensive research or digging for spreadsheets. Real estate investment management software like Dealpath enables deal teams to slice and dice analytics from a reportable deals database based on cap rates and other data points. The more deals you screen via automated deal ingestion, the more intelligence you can amass for informed decision making.

What Is a Good Capitalization Rate for Commercial Real Estate?

Naturally, the goal of calculating cap rates is to determine whether or not a deal aligns with investment goals. So, what’s a good cap rate?

Unfortunately, there’s no easy answer. Cap rates are best used for market comparisons, rather than isolated evaluations. There are many moving factors that can influence whether or not an investor considers a cap rate “good”.

Rather than examining cap rates in a vacuum, investors typically compare pipeline property cap rates against historical cap rates to determine if the deal pencils. Ultimately, the cap rate will help your firm to understand how the deal aligns with your target risk profile.

For example, a high-risk investor might consider a 15% cap rate in San Diego ideal. Conversely, a low-risk investor might shy away from higher cap rates, opting instead for deals with 5% cap rates that yield lower returns aligned to investor risk profiles.

Average Cap Rate By Property Class

While there may not be a magic number you should strive for across the board, there are benchmarks depending on the property type, class, and location, among other factors.

There are three basic property classes: A, B, and C. While the distinction is subjective, the bottom line is simple. Class A properties are the most expensive and carry the lowest risk. Class C properties, on the other hand, are the least expensive with the highest risk. Finally, class B properties sit in the middle. These distinctions are subject to interpretation, but help create a baseline for evaluation.

According to First National Realty Partners, average cap rates by property class are:

• Class A: 4-8%
• Class B: 6-9%
• Class C: 7-10%

As previously mentioned, though, these figures can vary significantly based on the location and the asset class. For example, multifamily properties may have lower cap rates than office buildings on average, as they are generally lower-risk investments.

Why Is a High Cap Rate Riskier Than a Low One?

Despite offering the potential for higher returns assuming ideal conditions, high cap rates are riskier due to greater volatility. This risk, or the perception of risk, can stem from a less-than-ideal location, low demand, high operating costs, low income, and other factors.

What Are Cap Rates In 2023?

It’s impossible to generalize on cap rates in 2023, as this metric is informed by factors related specifically to a particular asset.

However, many property types and markets have seen an increase in cap rates due to ongoing turbulence and high interest rates. According to an H1 CBRE report, multifamily and retail cap rates are trending upward, while office saw the most significant increase.

What Factors Affect the Cap Rate?

Overall, the commercial real estate cap rate is a representation of the property’s potential risk and return. Some of the factors that influence the cap rate are:

• The length and rate of existing leases: Unlike properties with short-term leases, properties with long-term leases are guaranteed to generate consistent income for a longer period of time. Properties with shorter leases may lose income streams sooner, which results in higher risk. On the opposite side of the coin, leases below market rent value that are set to expire soon may be increased to meet current market standards, raising NOI.
• Credit scores: Tenants with lower credit scores are typically at a higher risk of defaulting on their lease. For this reason, portfolios with higher-credit tenants face a lower risk of default, lowering cap rates.
• Location: Properties that are located in larger urban centers, like New York and San Francisco, generally have higher prices than properties in smaller cities like Minneapolis. Given the higher selling prices, cap rates in larger cities tend to be lower.
• Replacement cost: When a building is valued at or below the cost of developing a comparable property, it generally has a lower cap rate. Conversely, properties valued above the replacement cost have a higher cap rate.
• Property type: Various property types have different levels of risk associated with them. Filling vacancies in multifamily properties is often easier than those in other asset classes like office buildings, meaning cap rates are lower.
• Property class: As outlined above, property classes are broken down based on the building’s state, implied risk and location. Class A buildings, which are more valuable and carry lower risk, have lower cap rates than class C buildings, which are less valuable and carry higher risk.
• Market conditions: A price dislocation can create turbulent market conditions, lowering property valuations and increasing cap rates. 

Understanding The Purpose of Cap Rates: What Do They Tell You?

Cap rates provide investors with insight into the risk they take on in purchasing it, as well as the return it could generate. Most importantly, cap rates act as a crucial benchmark for investors to compare against other assets on the market.

Comparing Purchase Prices on Pipeline Acquisitions

All investment decisions must be grounded in data. Commercial real estate cap rates provide tremendous insight into risk and return, as well as market trends. Comparing cap rates in the same market prior to an investment helps investors understand how a property stacks up against historical comps, too. 

Low cap rates indicate that properties will generate healthy income streams relative to their market value. High cap rates, on the other hand, indicate a higher-risk acquisition, without as much income compared to cost. However, one isn’t necessarily better than the other–investors with different strategies act on unique criteria based on their risk profiles.

Considering Refinancing Options on Existing Assets

Because cap rates provide an (albeit limited) indication of a property’s value, they can be useful in considering refinancing. When investors are looking to save money by restructuring mortgage agreements, cap rates can indicate the property’s value through the loan-to-value evaluation. This offers visibility into if refinancing is possible, and the extent to which it can offset repayment costs.

Understanding Terminal (Exit) Capitalization Rates: Projecting Sale Value

Beyond immediate operating income from rents, investors also consider the long-term return of a property. Financial models can help investors predict a property’s value at the time of sale, or disposition, after development or at the end of the holding period. 

While terminal cap rates accomplish the same basic function as standard cap rates, the formula is different. Instead of using the current market value, you can divide NOI by the expected sale price to calculate the exit cap rate.

Tracking exit cap rates in one source of truth is critical for delivering risk-adjusted returns, particularly in an uncertain market.

Cap Rate Vs. ROI

Both the cap rate and the return on investment, or ROI, are valuable financial benchmarks that guide investment decisions. Where cap rates indicate relative risk levels, though, the return on investment actually quantifies the return that you can expect. For this reason, ROI is more valuable when projecting annual or quarterly returns, while cap rates are better for comparative benchmarking.

17 CRE Investment Questions Your Data Can (Finally) Answer

In today’s AI-powered market, investment managers must move at digital speed and make informed, data-backed decisions.

Download our white paper to learn how your firm can rapidly answer questions about cap rates, lender exposure, and more to outperform competitors with data at its fingertips.

The post How to Find Commercial Real Estate Cap Rates (Formula) appeared first on Dealpath.

Thoughtful investment decisions call for thorough, diligent screenings to ensure that the deal pencils out. Naturally, the profit a property or portfolio generates is top of mind for institutional investors evaluating deals. Among others like IRR and cap rates, one of the most critical metrics investors use to gauge the profitability of a deal is net operating income. 

Read on to learn more about what net operating income is, how to calculate it, and its role in real estate pipeline management and investment decision making.

What Is Net Operating Income in Real Estate? [NOI Definition]

Net operating income (NOI) is a real estate valuation method that measures the profitability of a real estate property based on revenue and expenses.

NOI is calculated by subtracting all operating expenses a property incurs from the revenue it generates. The NOI of a real estate property is typically included on its cash flow and income statements. 

What Is Not Factored Into Net Operating Income?

While net operating income provides an indication of a property’s profitability, it does not offer a complete picture of the property’s value relative to market trends or risks. The NOI formula fails to consider a few crucial costs, such as: 

• Loan payments
• Capital expenditures
• Depreciation
• Amortization
• Taxes

Because NOI does not reflect financing costs, this metric assumes an all-cash purchase, which is rarely the case.

What Does NOI Mean in CRE?

NOI is a metric that helps real estate investors project the income a given property will generate as a means to measure its value and better understand the investment’s risk profile. Ultimately, this helps investors to analyze how returns compare to the costs of owning and operating that property.

Understanding The Net Operating Income Approach 

Rather than a variable model that factors in year-to-year changes, NOI assumes that revenue and operating costs will remain constant. To account for annual fluctuations, some investors may choose to defer or accelerate certain expenses or income. 

Net operating income is most valuable as a comparative metric and stepping stone toward others, like cap rates and yield on cost. This holistic perspective provides investors with the data and information they need to determine whether or not a deal aligns with their investment strategy.

A property’s net operating income also factors into the debt coverage ratio (DCR), helping investors and lenders alike understand if revenue will cover debt and operating expenses.

NOI Formula: How to Calculate Net Operating Income

The formula for net operating income is straightforward. To calculate NOI, simply subtract a property’s operating expenses from its total revenue:

Net Operating Income = Revenue – Operating Expenses 

As an example, let’s assume an investor is considering purchasing a multifamily building.

While the bulk of the property’s revenue will come from rents, there are other income streams to consider, such as parking fees, laundry and more:

• Rental income: $5,000,000
• Parking fees: $250,000
• Laundry machines: $50,000

Based on these assumptions, the building would generate $5,300,000 annually.

Now, let’s assume the building’s operating expenses are as follows:

• Property management fees: $500,000
• Property taxes: $500,000
• Repair and maintenance: $250,000
• Insurance: $250,000

Combined, these costs equal $1,500,000.

Lastly, we can determine the NOI by subtracting the operating costs from the total revenue:

$5,300,000-$1,500,000=$3,800,000

In this case, the net operating income would be $3,800,000. 

How to Determine a Property’s Cap Rate Based on Net Operating Income

Investors rarely stop after calculating the net operating income–their next step is often to determine the cap rate. To do so, follow the formula below: 

Capitalization Rate= NOI/Current Property Value

For this example, let’s assume the following values:

• NOI: $1,500,000
• Property value: $13,500,000

$1,500,000/$13,500,000=11.1%

In this example, the cap rate would be 11.1%.

Analyzing NOI as a Commercial Real Estate Investor 

Let’s consider how an investor might use NOI to evaluate and compare deals.

In this example, Deal #3 offers the highest NOI. At a 10% cap rate, though, it may present more risk than the investor is seeking.

Deal #2 carries the lowest cap rate, meaning it will provide the most stable revenue of all three deals. For core investors seeking low-risk assets, this may be the most lucrative opportunity.

Finally, deal #1 sits between the two, with a 8.5% cap rate.  

While none of these deals is decidedly the best, each may appeal to investors with different risk profiles.

Analyze NOI Alongside Other Key Deal Metrics to Make Informed Decisions

From NOI to cash flow models and beyond, centralizing relevant deal information in one source of truth–together with historical data– provides the clear visibility investors need to make holistic, strategic investment decisions.

Download our white paper, Real Estate’s Tech Boom: Why It’s Time For A Deal Management Solution, to learn more about why deal management software has become the new gold standard for systematizing data-driven decision making.

The post What is Net Operating Income in Real Estate: NOI Formula & More appeared first on Dealpath.