Will rising interest rates and surging inflation spell trouble for the sector? Not according to SparrowHawk

It’s a pivotal moment for the U.S. economy. Will surging inflation and geopolitical shifts spell trouble for the sector? Not necessarily.

Chicago Industrial Properties recently consulted SparrowHawk Founder Alfredo Gutierrez to discuss the current outlook, including how to parse truth from tale when it comes to investing in today’s market.

The Concern
Much of the concern has less to do with volatile economic factors, but the lack of clarity surrounding them, Gutierrez said. The economy is murky, and everyone seems to have a different opinion regarding what might or might not happen. It’s true that some of the traditional items the real estate industry looks to are in flux—like the 10-Year T—but no one knows for sure how things will play out. Still, whatever does happen will have an impact, and lenders, in particular, are widening their spreads to give themselves room if there’s an upward shift.

“Because of this, no one knows exactly how to underwrite a deal. From the matrix of traditional cap rate underwriting, if you only took a property’s first-year NOI, the majority of deals don’t pen out in terms of what they’re truly worth.  Meaning cap rates as a function may have moved up, due to what’s happening in the economy, but so have rental rates resulting in value to be captured in the future.”

Real estate values haven’t deteriorated, and much of the investment community has shifted their focus to three-year windows as opposed to 12 months because of rent inflation, which Gutierrez said is predicted to continue to significantly inflate as a result of low vacancy and limited supply of space. New buildings are quickly absorbed, as the sector continues to see positive absorption.

“Everyone’s predicting there’s going to continue to be upward pressure on rents, making way for a landlord’s market,” Gutierrez said. “But is that enough to justify the potential cap rate increase? There’s just not enough clarity. No one has a crystal ball, so there’s a little skittishness in the market but property values based on price per square foot continues to be maintained .”

What Sets Industrial Apart
Each sector is different, and thus, it’s fair to wonder if the above economic concerns will have different effects on each. That said, Gutierrez said no. It’s important to focus on the basics and fundamentals.

“Industrial continues to have legs to it,” he said. “It’s a favored sector. Commercial real estate traditionally has been  highly levered. Whether its 50–60%, the leverage is a part of the investment and in the low interest rate environment real estate values benefited.  We had almost zero cost of capital for many years and even with relatively flat rental rate escalation cap rates continued to decrease, and lenders spread decreased.  Now we are seeing the opposite situation and a lot of cash buyers who see the value due to extremely high rental rate growth and potential to add leverage later. Historically life companies and banks based their interest rates upon the 10-Year Treasuries.  The 10- Year Treasuries being a longer-term number and while the Fed fund rates have significantly increased the 10 year  doesn’t move basis point by basis point, it does move in tandem to some degree.  We did see the 10 Year Treasuries push 3.75%–4% with a 200 basis point spread on it for the lender, lenders are quoting 6% interest rates. A traditional highly leveraged buyer can’t buy deals at 4% yield because the equation doesn’t work with negative leverage. We have seen the 10-year rate pull back significantly even in the face of rising Fed Funds which have resulted in an inverted yield curve and the 10-year T currently at about 3.4%. When the lenders narrow the spreads, you will see debt at sub 5%.   With double digit rent inflation leverage deals will trade and strong returns will continue even if the CAP rate move up slightly.”

Now there is a cost, and Gutierrez said the short term objective is to get the industry on the same page. Unfortunately, it is like turning a big ship, it takes time, and slowly, it will turn.

Another thing worth noting is the Fed’s recent adjustment of interest rates but less aggressive, as they’ve scripted a 5% interest rate to offset the risk of flaring inflation.

“I think you’re going to see inflation quickly come into line,” Gutierrez said. “Current inflation isn’t an interest rate issue, but rather a supply issue brought about by the pandemic. It’s solving itself and as supply grows, you’ll start to see downward pressure on price of commodity goods.”

Information Overload
There is so much information out there—every article slightly different—contributing further to the previously-mentioned lack of clarity. When asked for insight by investors with regard to trying to navigate the space in the current market, Gutierrez emphasized patience. 2H2022 came with a lot of speculation and worry, but the fundamentals speak for themselves.   

“The fundamentals in the sector are stronger than I’ve ever seen them in my 35-year career,” he said. “Low vacancy, good product, the growth of e-commerce and reshoring are all positive for owners of industrial real estate.  We just have to step back. Those of us that have been in the business for long enough realize we need to do our job to increase NOI and, as a result, increase value. It’s important to be patient, pay attention to the fundamentals and remind ourselves that it’s still a strong market.”

“She certainly leads by example”: Meet Edna Meyer-Nelson, our 2022 Lifetime Achievement Award winner

The successes of Edna Meyer-Nelson are too numerous to list. It’d take this
whole issue of REDnews! She came up in the male-dominated banking
and real estate industries, making a name for herself and eventually
founding The Richland Companies, where she serves as President and
Chief Executive Officer.

“A lot of young people today look at someone like Edna and say, ‘She’s
so successful. I want to do that, too.’ They have no idea what she has done
to get here,” said longtime friend Laura Ward, who is President and
CEO of Houston Children’s Charity.

Those close to Edna can share a variety of anecdotes to illustrate her
work ethic, but a favorite involves The Richmond Companies’ first building, a shopping center on Mayde Creek off of I-10 and Fry Road. The parking lot needed to be striped and, trying to conserve resources, Edna got up before sunrise to do it herself.

Click to read more at www.rednews.com

DFW market continues to lead U.S. in construction, and leasing activity near all-time high

Industrial demand is bursting in many markets across the U.S., and Dallas-
Fort Worth is no exception.
In fact, DFW has proven itself as one of the nation’s leading markets, as both
tenant/developers and owner-occupiers continue to ramp up their demand
for space, and according to an Industrial Insight Report by JLL, realized
demand from move-ins and current demand from leasing activity are among
the highest on record.
Developers have been busy, to say the least, as they continue to kick-off new
speculative projects to meet demand. Delivery and kick-off square footage
(9.9 million square feet and 9.2 million square feet, respectively) keeping
construction activity over 60 million square feet in both Q2 and Q3 of 2022.
And though South Dallas and North Fort Worth have received most of this
activity, outlying submarkets like East Dallas and South Fort Worth are
being explored following their recent population and labor surge.

Click to read more at www.rednews.com

The New Class A Office: How to Reposition Assets to Remain Competitive in Today’s Market

As more people return to the office, we are seeing certain pandemic era
predictions come to pass. There is a renewed focus on wellness, hybrid work
in one form or another is here to stay, outdoor space is highly valued, and
experiential work destinations are winning tenants.
The flight to quality, or more appropriately, the flight to experience, where
tenants flock to Class A assets, leaving behind outdated buildings, is a
common theme in most of our cities. Owners of Class A assets cannot rest on
their laurels: empty downtowns have deprived even marquee assets of the
kind of vibrancy that made such destinations special.
Now more than ever buildings need to earn the commute, those 40 minutes a
day on average that people gain when they work from home. People are using
that time to connect with family and improve their health, so workplaces
must respond with amenities that deliver the comforts of home, foster
wellness, increase productivity, and nurture social connection. Click to read more at www.rednews.com.

Old Bones, New Life: How Office-to-Apt Makeovers Benefit Texas Towers

Looking at Santander Tower in the heart of the historic Dallas Main Street District , Will Pender saw opportunity where others saw deficiency. Many of the building’s 50 floors were outfitted as offices when it opened in 1982. Forty years on, Pender, Adolfson & Peterson Construction’s Gulf States President, is leading a change.

“AP has partnered with Dallas-based multifamily and mixed-use developer, Mintwood Real Estate, and building ownership, Dallas-based Woods Capital, to convert multiple floors in the 1.4 million-square-foot downtown high-rise tower to 228 multifamily units, along with amenity spaces,” Pender shared.

The conversion project plans include renovations on the first floor, as well
as floors 18-25 and 37-39.

“The project will feature one- and two-bedroom unit floorplans,” said Pender. “Project amenities include a swimming pool, dog park, fitness room, common gathering spaces and meeting space featuring a kitchen for entertaining.”

Slated for completion in Fall 2023, the Santander Tower rebuild is an example of adaptive reuse, a growing trend in today’s real estate industry.

“Adaptive reuse is attractive for developers, owners and investors as it costs a lot less than tearing down and building from the ground up,” Pender said. “I’m a believer in sustainability and the importance of preservation because when we clear lots in the middle of the city to build new buildings, we lose a lot of history. In this project, we’re not loading the landfill with discarded building materials that could be repurposed.” Office buildings are often an ideal candidate for such a makeover as remote and hybrid work models have created underused or vacant office space. Click to read more at www.rednews.com.

H-E-B Ventures Into the North Texas Market

The line started building at 6 p.m., about 12 hours before the doors of H-E-B’s first Metroplex store were slated to open. Jennifer Burnison knew she was going to have to stake out a spot early.

“As soon as they announced the release date, I was talking with my daughter and we said, ‘Alright, we’re going to be there,'” she shared. “We were trying to figure out how early was too early. Black Friday we’re used to 4 a.m., but we kind of had a feeling we had to get here even earlier for this.”

Burnison was right. By the time 5 a.m. rolled around, the line of eager customers was up to about 1,500 deep, a testament to the excitement surrounding the opening of the 118,000-square-foot Frisco store.

“I was in line with a lady who drove an hour just to get here from Sherman,” said shopper Kaleesa Johnson. Burnison got to be the first person through the doors, greeted with a gift basket, confetti and a marching band. The customers who followed behind her also got free samples and giveaways.

“We are so happy H-E-B is finally here,” said Millie Stussy. “There are so many things on my shopping list!”

The San Antonio-based company operates a handful of its Central Market stores in North Texas, but Frisco is its first H-E-B location.

“Opening our flagship H-E-B format in the DFW area has been an aspirational goal of ours for many years, and the company has a long-term commitment to serve a broad range of customers and communities across North Texas,” Stephen Butt, H-E-B board member, said in a statement. Click to read more at www.rednews.com.