Due diligence has always been an important component of commercial real estate ownership and development. Lenders vetted developers. Developers vetted tenants. You know the drill. But now more than ever, that attention to detail has become absolutely critical to navigate the increasingly tricky world of CRE.
To shed light on the evolving legal landscape within the industry, REDnews turned to Blake Royal, shareholder and real estate group chair at Houston-Based BoyarMiller Attorneys at Law. He’s spent his career representing clients landowners, developers, investors and municipalities in their joint ventures, development and property management agreements, acquisitions and dispositions, leasing and financing.
One overarching theme that Royal highlighted going into 2024 is the increasing importance of due diligence across all levels of the industry. Both landlords and tenants are now more meticulous in their scrutiny, each vetting the other to mitigate potential risks. Landlords, in particular, are taking a closer look at the financial stability of their tenants, wary of inadvertently assuming the role of a financial institution.
On the flip side, tenants are carefully evaluating landlords to ensure they are not dealing with entities that might pose financial risks down the line. In this era of heightened caution, there is a group maneuvering with ease.
“My clients who are well-capitalized have been able to win high-quality deals because they can move swiftly,” shared Royal, who has a background in both real estate law and corporate transactional law.
He also emphasized the significance of due diligence in the context of sellers scrutinizing potential buyers. Even when deals seem promising, sellers are approaching transactions with a discerning eye to ensure that buyers have the capacity to close successfully. This trend again underscores the critical role that well-capitalized clients play in the current market, as their financial strength positions them to emerge victorious in negotiations and transactions.
Among 2023’s standout cases for Royal, whose practice includes all facets of real estate development in Houston and beyond, was the successful closure of a development loan for the first phase of a multi-building industrial development. Despite facing delays related to permitting issues, the collaboration with a patient and supportive lender proved invaluable.
“It really exemplified the value that great partners provide,” Royal stressed, noting that strategic alliances contribute significantly to successful outcomes.
Looking at the year ahead, Royal anticipates a potential make-or-break scenario for property owners. While not necessarily a new issue, the challenge lies in the timing of refinancing. Owners fortunate enough to delay refinancing until the end of 2024 may find themselves in a more favorable position, securing decent refinancing rates or attracting potential buyers, especially as interest rates trend downwards.
“But others will find themselves without a chair when the music turns off,” said Royal.
Speed, he predicted, will be rewarded in 2024. In an environment where quick decision-making and execution are paramount, sellers are inclined to favor buyers with a reputation for closing deals swiftly. However, this urgency comes with its own set of challenges, as commitments to accelerated timetables may limit the luxury of extensions. As interest rates decline, sellers may become more willing to terminate deals if they believe they can secure a higher price, introducing an additional layer of complexity to an already fast-paced and competitive market.
With due diligence, strategic partnerships and timely decision-making, Royal suggested CRE professionals will find success in the opportunities 2024 may bring.