Commercial Investment Real Estate

NOV-DEC 2017

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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COMMERCIAL INVESTMENT REAL ESTATE 28 November | December 2017 trend in downtown Los Angeles is that developers are building apartments with some of the frame- work in place, such as condo subdivision maps, which allows the developer to shift from apartments to condo sales depending on what the market dic- tates, she adds. Baton Rouge, La., also has an ample pipeline of projects underway, mainly focused on luxury, Class A apartments, and student housing markets. In 2016, about 770 market-rate apartments and 380 student apartments were delivered. The pipeline for 2017 and 2018 includes 1,800 market-rate apartments and about 1,000 student units, according to Chris Gremillion, CCIM, an investment sales specialist at NAI Latter & Blum in Baton Rouge. There is a lot of money chasing the student deals, but those owners and developers could face a tough market in the next few years due to concerns about oversupply, he adds. On the market rate side, developments that have timed the market right and have Class A locations are leasing very well. "Baton Rouge is becoming more pedestrian and biker-friendly," Gremillion says. "Projects that are located in areas where peo- ple can walk to bars, restaurants, and other con- veniences are in favor. Looking ahead to first and second quarter of 2018 when more supply is due to hit the market, it will be interesting to see how those units are absorbed." Narrower Window of Opportunity In some markets, the low hanging fruit and best development opportunities have already been snapped up. Some developers are looking to get in — and out — of the market before the cycle winds down. Lenders are already starting to pull back on financing for new construction. "We have seen nearly a dozen projects drop this year throughout Florida, and financing is a key component of the projects not being able to move forward," says T. Sean Lance, CCIM, ALC, found- ing partner of Vertica Partners in Tampa, Fla. Some lenders have stopped lending altogether, while others are requiring bigger equity commit- ments. In Florida, loan-to-cost ratios on construc- tion loans have dropped from about 65 percent to 55 percent, according to Lance. "Lenders also are very concerned about the pipeline in virtually every market," he says. "As a result, they are being much more selective on deals." There are multiple new projects in the northern New Jersey market that are proposed and are work- ing toward approvals, and some that are being built, says Chris Cervelli, CCIM, owner of Cervelli Real Estate and Property Management in North Bergen, N.J. There is a push to get those projects sold early, because there is a lot of new product that has been built and is coming online. Developers are starting to put projects on hold. "Even though there are a lot of projects that are entitled, they are not all being built," he says. In Florida, the first wave of development was focused on urban infill and the downtown core markets. Once those areas became more saturated, construction shifted more to the suburbs. That sec- ond wave of suburban development is just starting to deliver completed projects. "There is a last wave now as people are back- filling space and scrambling to find projects to get going," Lance says. Some proposed developments have started to drop out for a multitude of reasons. Lenders have tightened the access to capital for new construction, which has provided a headwind to new projects getting off the ground. Absorption has gone well for those projects that have been delivered to date. That said, projects that are coming online in the second half of the year and into 2018 will start to test how deep the market is, especially at the high end, according to Lance. For example, how many renters in Tampa can 5.0% 5.7% 5.8% 5.5% 5.1% 5.1% 4.7% 4.6% 4.8% 4.8% 5.0% 5.1% 6.5% 7.1% 2005 2006 2007 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 Actual Forecast 20-Year Avg. (5.4%) 5.2% Apartment Vacancy Rates Sources: 1997-2016 (Q4), CBRE; 2017-2019 (Q4), ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 5.2%, 5.3%, and 5.4%, respectively, for 2017, 2018, and 2019.

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