Navigating interest rate disruption in CRE, bank and hospitality execs on the state of lending, Trepp’s April CMBS report, and office buildings are ripe for multifamily conversion

Navigating Interest Rate Disruption in Commercial Real Estate

The inflation rate has cooled some as mid-2023 approaches, allowing the Fed to slow the pace of its rate hikes. But for many, the damage is done, with the fallout still reverberating, especially in commercial real estate (CRE).

An ebook from PwC—“Navigating interest rate disruption: How real-time data can facilitate better CRE decisions amid volatility”—provides an overview of the CRE market and some advice on how to manage through.
The report looks into a combination of factors, including economic and geopolitical forces, the ripple effects of Covid, increased construction costs, inflation, and more. Sections of the 9-page report (with excerpts) include:
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• Workforce trends and logistics push companies to curb spending—“Remote work, inventory logistics, and labor shortages are forcing businesses to tighten their budgets and reevaluate their real estate footprints. In fact, 45% of businesses are planning real estate reductions.”
• Managing inflation-related challenges—“Higher capital costs—rising interest rates—are widening the bid-ask pricing gap for buyers and sellers, signaling a weakening economy.”
• Weathering an uncertain cash flow storm—“Soaring costs have led to a slowdown in the pace of construction since cost instability combined with rising labor costs make it challenging for businesses to bid on projects.”
• A proactive path forward—“To remain adaptable and competitive, commercial real estate professionals need access to relevant, tech-enabled, real-time data.”

Six Bank and Hospitality Executives Discuss the State of Lending Amid Bank Failures

Lenders and hospitality executives at the 2023 Meet the Money national hotel finance and investment conference commented on the current state of the banking crisis. Six of their comments were published in Hotel News Now: Ash Patel, president and CEO, Commercial Bank of California; Alan Reay, president, Atlas Hospitality Group; Matt Mitchell, vice president, Hall Structured Finance; Bruce Lowrey, managing director of investments, CIM Group; Matt Bailly, vice president of real estate, Prospera Hotels; and Keegan Bisch, vice president of originations, Stonehill.

Read their comments here.

For more from the conference, see this article from CoStar: “Five Key Takeaways on Hotel Investment from Meet the Money Conference.”

For more on how bank failures could make hotel financing harder to find, click here.

CMBS Delinquency Rate Holds Steady in April, But Office Rate Continues to Rise

This is an excerpt from Trepp’s Delinquency Report (May 3).

To access the full report, click here.

“The Trepp CMBS Delinquency Rate held steady, but the segment that everyone continues to watch closely saw its rate move higher again in April 2023.

The Trepp delinquency rate was unchanged in April at 3.09%.

​Declines in the retail, lodging, and multifamily rates offset a small increase in industrial loans and a bigger increase for offices.

“Office remains the most heavily watched part of the market as firms look to aggressively reduce space. Sublease space is at or near record highs in many markets as demand from big tech firms has eroded sharply. In addition, many companies are letting leases expire or are renewing for smaller footprints.

“Last week, Microsoft announced it would offer up several hundred thousand square feet in Seattle. The tech bellwether has already announced plans to relinquish more than two million square feet in that city.

One in Three Office Buildings in Major North American Cities Could Be Ripe for Multifamily Conversion

The combination of 1) companies (especially tech firms) continuing to lay off people by the tens of thousands, 2) the ongoing shift to working from home, and 3) the current U.S. housing shortage has caused landlords across the country to seek innovative ways to fill their millions of square feet of empty space.

“Up to 34% of office buildings in 14 major North American markets could be potential candidates for adaptive reuse. Looking at more than 26,000 buildings, office to residential conversions could open the door to potential housing for thousands of families in as many as 8,996 properties,” according to global commercial real estate advisor firm Avison Young.

“Adaptive reuse is an important conversation we are having around the art of the possible, to demonstrate how this potential solution contributes to placemaking and to the revitalization and vibrancy of our neighborhoods—particularly our downtown cores,” said Sheila Botting, Principal and President, Professional Services, Americas at Avison Young. “We must reimagine how we want to live, work and play. Adaptive reuse is one of the key components of how we do that as a community.”

For more, click here.

​Kaufman development’s massive Franklinton development project, Gravity, has a massive new acquisition to its name.

The Idea Foundry, a 65,000 square foot former factory located at 421 W. State St. billed as “the largest makerspace in the world”, will be purchased by Kaufman, to become part of the Gravity community. Gravity’s second phase, which is currently under construction, is located across State Street from the Idea Foundry.
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Created in 2008 by Alex Bandar, the Idea Foundry moved to its current Franklinton location in 2014. Today, it houses more than 500 entrepreneurs and makers, and is home to a litany of state of the art tools like laser cutters and 3D printers.
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According to a press release, Kaufman will purchase the Idea Foundry from owners Nancy Kremer and Christopher Celeste. Bandar will continue to operate the space, which will now be backed by Kaufman’s resources.

“Kramer and Christopher took a scrappy, grassroots community of makers, put us in a rocket ship and launched us. Now, Kaufman is refueling us to take us even higher,” Bandar said in a press release. “There is already so much synergy between The Idea Foundry and Gravity, and this will allow us to amplify and accelerate our growth and impact in remarkable ways. This takes us from being a space for creatives to being a district for creatives, with opportunities that will be unique to any makerspace in the world.”
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Gravity tenants will have access to the Idea Foundry under the change in ownership, and the space could see a variety of potential new additions, such as building out the Foundry’s basement, rooftop and parking lot, creating an artist-in-residence and entrepreneur-in-residence programs, and creating pop-up spaces for artists and makers.

​Nation's Biggest Mall Landlord Steps Up Efforts To Diversify, Transform Its Retail Centers

Simon Property Group, the nation's largest mall owner, expects to spend roughly $1.5 billion building 2,000 multifamily units and hotel rooms as it looks to add density and expand some of its retail properties in new ways.
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The Indianapolis-based landlord estimated it will have construction of the projects completed over a five-year span, CEO David Simon said Tuesday on a first-quarter earnings call. He discussed the real estate investment trust's pipeline of apartments and hospitality properties while pointing to what he described as the company's successful redevelopment of Phipps Plaza in Atlanta, a mall that now has a Nobu hotel and restaurant and Life Time fitness center on its site.

Mall owners around the nation have been diversifying and adding density to their centers, bringing in nontraditional retail uses to help drive foot traffic and to take the place of vacant anchor tenant space and unused surface parking lots. And now Simon Property is stepping up its efforts on that front.

“We have several densification projects under construction and a pipeline of identified projects," David Simon, who is also the company's chairman and president, told Wall Street analysts.

"Now that’s not going to happen overnight, but that’s going to happen over the next few years," he said. "So that to us is a real opportunity.”

Simon Property expects to start work on several of these projects this year, but the CEO said the REIT is "frankly being a little bit cautious."

Simon said, "We’re still permitting some things in California and the Northwest. So we’re going to just see how the world is."

Plans for Texas, California and Florida​

Asked about the cost of the multifamily units and hotel rooms, Simon said it is hard to isolate them from overall mall redevelopment efforts.

"But my instinct would be probably about a billion and a half dollars. ... Somewhere in that range" for the construction, he said.

The CEO didn't offer too many details. But he said some of the residential units are planned for Austin, Texas; Orange County, California; and Seattle. In terms of hotels, they will be headed for Florida, as will some residential units, according to Simon. 

“It’s kind of where you would expect it to be, where supply and demand is in our favor,” he said.
The REIT is also considering building a hotel on Cape Cod, Massachusetts, because there would be a demand for it there, according to Simon. 

The CEO didn't specify which malls, if any, the 2,000 units would be built and added to. But Simon did refer to the reimagining of Phipps Plaza in the Buckhead section of Atlanta.

"As we give back real estate through our redevelopment efforts, the big focus is on where we can add some mixed uses, because we do think that what we did in Buckhead is having a tremendous impact on the overall value of that real estate,” Simon said.

Possible Joint Ventures

There are several ways the company could finance the construction, according to the CEO.

“I think we will do selective [joint ventures] on certain of the residential development," Simon said. "And it also may be that we could potentially bring in third-party equity, too. We’ll look at each deal individually. But that’s certainly a possibility.”

Last October, Simon Property acquired a 50% stake in developer Jamestown as it looks to expand and wring new revenue from its portfolio by diversifying its shopping centers. Jamestown has been involved in landmark projects such as Chelsea Market in New York City.

The CEO also said leasing demand is strong at Simon Property's malls and that the properties are getting a boost because tourism is coming back.

The 2.8 million-sf development will include 36,000 sf of restaurants, retail space. ​

​ $1 billion residential project, The District in Davie, will bring 1.6 million sf of new Class A residential apartments to the hot South Florida market. Located near Ft. Lauderdale and greater Miami, the development will include 36,000 sf of restaurants and retail space. The development will also provide 1.1 million sf of access controlled onsite parking with 2,650 parking spaces. 

The project, a redevelopment at the site of a dated shopping center, will be marketed as the new “front door to Davie,” targeted to young professionals. Amenities include a pool and 24-hour fitness/spa treatment room, a penthouse level Sky Lounge reservable for indoor and outdoor entertainment with kitchen and seating, and ground floor storefront spaces.

Planned lifestyle amenities include pet-friendly features such as bark parks and grooming stations, game lounges and children’s play suites, as well as multiple work-from-home accommodations including co-working spaces and meeting rooms.

The project’s five buildings will range from 20–24 stories, each level offering thoughtfully designed studio, one-, two-, and three-bedroom apartments, some with dens. Unit sizes range from 589 sf to 1,460 sf. Each unit will provide keyless entry, high-speed Internet, and smart thermostats.

Outdoor social spaces will include rooftop pools, outdoor kitchens, fire pits, and green spaces for outdoor yoga, games, and movies. Planned green elements include electric vehicle charging stations in garages, complimentary bicycle parking/storage areas, and LED lighting technology for energy efficiency.

Light-filled rental apartments include exceptional finishes, flexible layouts, and state-of-the-art appliances. Designed for the South Florida lifestyle, the rental units prioritize indoor/outdoor living with ample glass and private terraces on each floor. The apartments are complemented by a robust amenities package for multi-generational appeal.

​Phase one completion is expected in 2025.