In a webinar last month, Thomas Byrne, proptech pioneer and Dealpath Executive Director, provided a firsthand look at how institutions are navigating and innovating in this volatile market environment. He also shared how investors are preparing for the inevitable transaction rebound, including strengthening their data-driven competitive edge to outperform the competition. 

The State of the Market in 2023

According to Real Capital Analytics, global CRE transaction volume for 2022 was $1.1 trillion, the second-highest year on record behind 2021. However, nearly all the activity occurred in the first three quarters. Q4 2022 took a sharp decline as global CRE investment volume fell by 60% year-over-year to $226 billion, reported CBRE.

The CRE market is currently logjammed due to sky-high interest rates, economic volatility, rising capital costs and constrained liquidity. Recently, the collapse of Signature Bank and risks among other popular CRE banking institutions has created a new element of turmoil. In the wake of this friction, investors have reset their expectations on returns. There’s significant price dislocation between buyers and sellers, which has driven many buyers to go into pencils-down mode and many sellers to pull properties off the market, bracing for clearer waters.

Despite this chaos, industry experts agree that this slowdown will be short-lived, positioning investors to succeed in a new growth cycle. Dry powder for CRE remains at record highs; investors are ready to deploy this capital when the timing is right.

Honing in on Long-Term Secular CRE Growth Drivers

While the macroeconomic environment for commercial real estate is fraught with challenges, secular trends are shaping unique opportunities in particular asset classes.

The housing/multifamily sector, for example, continues to shine and remains supply constrained. Strong U.S. housing fundamentals should keep occupancy rates above 95% and fuel 4% rent growth in 2023, CBRE reported. Also, construction debt is less accessible and more expensive, driving a slowdown in much-needed new multifamily starts.

E-commerce is booming and will account for a bigger share of overall consumer and business transactions and has a big impact on CRE, including industrial and retail. Industrial real estate is projected to continue its strong performance in 2023. Widespread demand, fueled by logistics firms and retailers, have pushed vacancies to record lows, reported JLL.

In the retail sector, digital-impacted retail sales are forecast to total more than $2.4 trillion and account for more than 58% of total sales by 2023, according to a report from CBRE. As e-Commerce continues to steal the spotlight, investors are looking toward mixed-use strategies as a way to further diversify revenue streams.  

In the office market, the persistent work-from-home trend continues. As many employees continue to push back on requests to return to the office, businesses are downsizing their footprints; vacating older, outdated office space; and pushing up vacancies in major markets. Green Street forecasts that office demand in the U.S. will decrease approximately 15% due to flexible work.

The secular growth trend toward technology and AI (artificial intelligence) will fuel massive change and efficiencies for every sector of the economy, including transportation, housing and education.

As the market continues to react to new tailwinds and obstacles, investors are carefully watching these trends and adapting or re-evaluating their investment strategies. 

Investors Look to Speed Up During the Slowdown

Investors are putting in the effort now to prepare for the imminent rebound, while also working through the current challenges. The “flight to quality” continues, in which some firms are shifting away from evaluating riskier assets toward higher-quality properties. Similarly, in a move to reduce risk further along in the investment process, investors are seeking more signals of stability among partners and tenants. Higher degrees of diligence now equates to lower risk in the long term. Diligence now 

Also, in the current volatile environment, the rising interest rates and growing cost of capital have significantly increased the risk of new deals. As a result of high interest rates, investors with the cash available to do so are allocating more equity, reducing reliance on expensive debt. When it comes to current investments, some investors are looking at reducing or eliminating leverage and putting more equity into their deals to de-risk long term.

Some Investors Capitalize on Pockets of Opportunity

All the while, some investors are looking toward lucrative property types like multifamily to pivot into resilience, while time-tested sectors like office continue to endure headwinds. According to Green Street, multifamily and industrial assets had a significant year of price appreciation in 2022, both experiencing more than 10% growth in asking rents, reaffirming CRE’s role as an excellent hedge against inflation.

Several other asset classes continue to outperform, including self-storage, data centers, lab/life sciences, digital infrastructure, and single-tenant net-leased (STNL) properties. Meanwhile, there are also opportunistic investors looking at the distressed asset category, seeking exposure to attractive properties but at better terms than the pre-downturn.

Organizations are Centralizing Data to Gain a Competitive Edge

Across the industry, firms are searching for simple and scalable ways to mobilize their data assets to strengthen their competitive advantages. The ability to slice and dice this data to more nimbly screen, underwrite and evaluate investments allows organizations to grow their pipelines faster, analyzing opportunities more efficiently and scaling deal flow without relying on new hires.  

Instead of spending valuable time digging through shared spreadsheets, investors have access to boundless deal data at their fingertips. When the market rebounds, firms that placed a greater focus here will be positioned to win.

Beyond pipeline evaluations, centralizing deals in a deal management platform allows organizations to derive stronger insights from dead deals. Looking ahead, that data can inform pipeline strategies, enabling investors to better understand pipeline performance in specific asset classes.

Some Firms Pivot Into Debt to Fill Vacancies Left by Risk-Averse Banks

As banks have shifted away from lending to now-risky equity investors, some CRE lenders have found opportunity in distressed situations. Investors are moving up the capital stack and investing in more senior securities or trying to secure more favorable terms on debt instruments, in an innovative move to de-risk in this current turbulent environment. They’re looking more at debt options, especially taking advantage of refinancing situations where traditional lenders aren’t as eager. For now, banks remain largely on the sidelines.

Weathering the Storm: How to Win in a Volatile Market Environment

Watch the webinar to learn even more about how industry leaders are weathering the storm and preparing to accelerate as opportunities emerge.

The post The State of the CRE Market in 2023: Webinar Recap appeared first on Dealpath.

Investors who understand why debt yield is important and how it’s calculated can better assess if the loan meets their risk/return profile. Read on to learn more about debt yield, what’s a good debt yield, and how you can use this information to help with origination decisions to avoid costly mistakes.

What is Debt Yield in Commercial Real Estate Lending? (Definition)

One of the most significant risk metrics for commercial and multifamily loans, debt yield can be determined by taking a property’s net operating income (NOI) and dividing it by the total loan amount. Lenders use this metric to determine the risk posed by a loan and how quickly it could recoup its losses if a borrower defaults.

Since it simply calculates the NOI and the loan amount, debt yield doesn’t include traditional loan parameters like interest rates, amortization periods, annual debt service, or market value. Consequently, it provides a measure of credit risk that’s less susceptible to manipulation and changing market conditions.

A debt yield can be a better way to gauge the true risk of a loan as well as quickly compare it to other loans on similar properties.

What is a Good Debt Yield?

While debt yield requirements vary, most lenders prefer 10% or higher. Keep in mind that in the eyes of the lender, the higher the percentage, the safer the loan. A lower debt yield suggests higher leverage, and therefore, higher risk for the lender, whereas a higher percentage indicates lower leverage, and therefore, lower risk.

However, the quality ultimately depends on the target risk and return profile carried by that lender. Risk-averse investors may steer closer to debt yields above 12%, while opportunistic investors may be more open to distressed debt at 7%.

How to Calculate Debt Yield (Formula)

Debt yield is a simple calculation measured by taking the property’s NOI and dividing it by the total loan amount. By examining this metric, lenders and investors can quickly and easily obtain an objective measure of risk with only the NOI and loan amount.

Debt Yield (%) = Net Operating Income / Loan Amount

Example: Debt Yield in Practice

To better understand how to calculate debt yield and leverage insights, let’s look at these two examples. 

Loan 1: Consider a property with $300,000 in NOI and a loan of $3 million. In this example, the yield is 10% ($300,000 / $3,000,000 = 10%).

Loan 2: In this example, a property has $300,000 in NOI and a loan of $3.7 million. The debt yield calculation is 8.11% ($300,000 / $3,700,000 = 8.11%).

Loan 2 has a lower debt yield, so it’s riskier within this vacuum. Both loans have the same NOI, however, the loan amount for Loan 2 is $700,000 higher than Loan 1. This equates to a wider cushion of safety for Loan 1, as the property generates the same cash flow with a lower loan amount.

Alternative Metrics that Lenders Also Consider During Evaluations

While a great indication of risk, debt yield does not paint a complete picture of an investment opportunity. In addition, lenders use several other more traditional metrics to evaluate the risk and return of a loan.

Debt Service Coverage Ratio (DSCR) measures the borrower’s ability to repay the annual debt obligations compared to the amount of NOI the property generates. However, since DSCR is based on the annual debt payment, it can be skewed by extreme interest rates and amortizations. To calculate DSCR, divide the NOI of a property by the total amount of debt obligations.

The Loan to Value (LTV) ratio is calculated by dividing the loan amount by the value of the property. Since LTV ratios depend significantly on the value of a property, this ratio is susceptible to large swings in property values. Lenders typically like to see an LTV ratio of 80% or less.

Cap rate, or the capitalization rate, also looks at NOI, but it’s based on the value of the property and is susceptible to some of the same swings as LTV. The cap rate is calculated by dividing the NOI of a property by its market value. This metric is more common in evaluating equity investments.

The commercial real estate debt yield is similar to the yield on cost, which is a similar metric for developers to assess a project based on cost and returns.

Tracking Loan Metrics in One Centralized Dashboard

As you source new debt origination deals in your pipeline, tracking real estate debt yield alongside other metrics and relevant information is vital. Quickly slicing and dicing these data points–so that you can reliably compare apples to apples with clear visibility for years to come–is critical for strengthening your firm’s competitive advantage.

Learn why CRE investors are forging a path forward with debt investments and more about the state of the market in our on-demand webinar.

The post What is Debt Yield for Commercial Lenders? (Definition Explained) appeared first on Dealpath.

As more institutions evaluate increasing volumes of deals, they’re centralizing that data to build “data assets” with compounding value and creating unmatched, competitive intelligence. For those that don’t digitize, they’re at risk of falling behind in the fast-paced, extremely competitive CRE industry.

The discussion has been edited for style, length, and clarity.

Journey of Deal Management Digitization

Byrne: Anvesh, you’re investing in exciting proptech companies. Talk about the journey of deal management digitization, and how we’ve gotten where we are?

Rai: Real estate transaction data is highly fragmented within organizations and sits in many disparate spots. There are multiple parties collaborating when transactions happen. There’s a huge need to centralize all these datasets in one platform to reduce inefficiencies, improve the approval process, improve the reporting process, and use the insights for better decision-making for your next transaction. Firms like Dealpath are addressing this by bringing all the different investment workflows together.

The second piece is real estate is a highly specialized industry with a lot of highly confidential information. There’s a big need to have purpose-built platforms catering to the industry and managing that in a highly safe and secure manner. Transparency, clarity, and security are key in the transaction management business.

Adopting Dealpath

Byrne: Mikal, share your experience and address why you chose to make a large investment in this category.

Lewis: We made a big investment in moving forward with the Dealpath platform and are looking to roll that out globally later this year. We had the typical challenge that large organizations have. We built our own in-house solution prior to moving forward with Dealpath, and it was very expensive to build and upkeep. As we continue to grow and deal flow increases, this is a growing challenge. You had data living in silos, people not knowing where data is, data entry errors, etc. We started thinking about how to make this process better. It was a little less about technology and more about process, process, process.

With Dealpath, we found this marriage of a great technology platform that would help us from a process perspective to input data and see it all the way through the investment process. Additionally, as we look backwards, we’re looking for true data to help us get a better understanding of pipeline quality: “Was this deal a great deal”? We can use Dealpath to see historical data and build upon that to make our investment and underwriting processes much more streamlined. 

Advantages of Dealpath’s Platform

Byrne: Mike, what are the value propositions for companies implementing this technology platform?

Sroka: We’ve been building out Dealpath and this category for deal and portfolio management for over eight years. There are pain points that have been felt by professionals throughout the industry, where they haven’t had tools that were purpose-built for their important work, and they’ve been cobbling together things to accomplish that. In decades past, that might be keeping pipelines in Excel documents; having Word document checklists of tasks, due diligence, and closings; and many emails and phone calls to communicate. While your investment teams are working hard underwriting deals, a lot of that information is instantly lost in emails, spreadsheets, or tools that weren’t designed for this work.

The opportunity now is for firms to operate at scale with speed and precision. We’re proud to support hundreds of institutional clients. We’ve supported more than $10 trillion of transactions. The largest, most sophisticated players in the market are leveraging these new solutions and proving that ability to scale their business including Nuveen, Blackstone, and Oxford Properties. This is translating into tangible value. Dealpath clients can evaluate 20% more deals than previously. They make 30% fewer errors in underwriting and due diligence. They see a 50% increase in weekly productivity and a 60% lift in employee satisfaction. These are big numbers that ultimately result in delivering optimal risk-adjusted returns.

Looking to the Future

Byrne: Looking out three to five years, what changes will the market bring?

Rai: In addition to improving the transaction management process, another piece is when you’re performing these transactions, there’s a lot of highly valuable data collected and used in evaluating those buildings or portfolios. That data can be used from a portfolio management perspective as well when the asset changes hands. There’s a large focus around using this data to better manage portfolios and properties, and even understand the risks related to them.

The other piece is how the buy-side teams collaborate. The holy grail lies in how we can integrate the buy-side and sell-side to almost integrated transaction management, where the sell-side can share deal flow with the buy-side. The buy-side can execute that on a platform and do reporting internally, etc. Those are two areas where the transaction management landscape is moving, and there are many opportunities.

Lewis: Everyone in this room knows that real estate tends to be a slow adopter of technology. We’re so, so early on that journey. However, we have natural tailwinds from COVID and remote work that’s forced some of this technology to move a little faster, pulling forward some demand.

When thinking about Dealpath and what we’re using it for, it’s really this technology underlay that connects many systems together, so our process is more streamlined. We’re not losing data in silos. There’s also room to take that deeper as we think about other systems – like vendor management systems and ledger systems — and how Dealpath can potentially integrate those systems.

Also, to Anvesh’s point, now that we have data historically in a place where everyone can easily and efficiently access it, maybe we build an algorithm on top of that, and that underwriting process is a lot faster. It’s about connecting as many pieces as possible to make the best investment.

Sroka: Investment decision glory is when you can see the performance of your portfolio in real time overlaid with every opportunity in the market and the comps of every asset and deal you’ve ever looked at or worked on. That’s what we want to bring to investment management firms. The longer-term future of real estate investment management and capital markets is more programmatic portfolio management and transaction execution.

But it’s going to take work to get there. The first steps are to organize and structure all the data that firms have access to, and start visualizing it, so that they can be more data-driven in their decision-making and automate steps along the way. That’s our journey, to ultimately create where the built world can transact digitally. There’s massive opportunity ahead of us.

Initiating the Digitalization Process

Byrne: Mike, what are key takeaways if someone’s thinking, “How do I transform my company and bring digital automation to bear?”

Sroka: In terms of some best practices, it’s pretty simple, logical stuff; however, change management is hard. There needs to be very clear value to making a change in your business. Having that understanding of what the big pain points are, what the opportunities are for your business, and having alignment and commitment to solve those is step one.

Step two is, as you’re evaluating solutions, they need to replace or do something much better. It can’t just be extra work for people. Third, is being thoughtful about resourcing for implementation and the ongoing management of solutions. The good news is companies like Dealpath are supporting hundreds of institutional clients and are managing the solution.

Nuveen’s Global Rollout

Byrne: Mikal, Nuveen is in the process of a global rollout with Dealpath, starting in North America, what are early insights and plans for the rollout?

Lewis: What’s been fun to see over the past month or two as we’ve started to roll out Dealpath, is a lot of excitement and engagement around a solution that will make everyone’s lives better. Oftentimes, investment managers get bogged down doing things that they would rather not be doing that are more manual and take them away from higher, value-add strategies, etc. With Dealpath, you start to see things shift to make everyone’s lives easier.

As far as the global rollout, we’re not necessarily looking for any metrics, per se, on what it would take to pull the trigger. But what we want to make sure is that everyone is comfortable and knows how and where to access the system, and which users have which functions and responsibilities. We’re doing weekly sessions with Dealpath experts to ensure that everyone is sufficiently transitioning from our in-house-made system to Dealpath. Once we see everyone move off that current data management platform for upcoming deals in the pipeline, we’ll feel more comfortable rolling out to the rest of the Nuveen platforms.

Invest With Speed, Precision and Scale on Dealpath

If you’d like to see how Dealpath can help your firm systemize data-driven investment decisions, request a demo now.

The post Building a Digital Deal Advantage: CREtech Panel appeared first on Dealpath.