Originally published by GlobeSt Cap rates in Q1 2023 represented the highest levels since Q3 2020 for both the single-tenant retail and office sectors, according to a new report from The Boulder Group. Decreasing transaction volume for the greater real estate market continues to limit 1031 exchange buyers transitioning into net lease properties, it said, as cap rates in the single tenant net lease sector increased for the fourth consecutive quarter within all three sectors in Q1 2023. New construction properties with recession-proof tenants including 7-Eleven and McDonald’s represent some of the lowest cap rates in the sector. “However, these tenants are not immune to upward cap rate pressure,” according to the report. “In Q1 2023, cap rates for new construction 7-Eleven and McDonald’s properties increased by 35 and 15 basis points, respectively. Furthermore, the spread between asking and closed cap rate increased for all three asset classes.” The spread rose to 30 basis points for retail, 40 for office, and 27 for industrial, according to the report. “Investors will continue to follow the Federal Reserve’s monetary policy,” The Boulder Group writes. “Investors largely believe there will be an end to the larger rate increases, of 50 basis points or more, in the near term.” Transactions will be driven by low leverage or all cash 1031 buyers for the highest quality product, The Boulder Group said. “However, given the overall uncertainty in the broader real estate market, the depth of the 1031 buyer pool will be limited when compared to historical standards.” Lower-Credit Assets ‘Back Where They Should Be’ Mike Philbin, Northmarq senior vice president, tells GlobeSt.com that “we are closely approaching the one-year mark of when we started to see the peak of the net lease investment market fizzle away. “Due to the repeated interest rates hikes, this was inevitable. However, not all net assets had as drastic of CAP rate shifts. The higher-credit, investment-grade tenants have had a maximum of 50 bps upward movement in this time. “The lower credit, smaller franchisee, in tertiary market tenants have seen closer to 150-200 bps. We did have a very frothy net lease investment market moving into Spring 2022. But relatively speaking, the lower credit assets are back where they should be and the investment grade net lease assets are back to the 2018-2019 range, which was a strong market.” Price Maximization Especially Difficult for Larger Transactions Alex Sharrin, senior managing director, JLL, tells GlobeSt.com that investment momentum persists for performing retail that can be acquired with positive leverage. “The net lease market sits at the crux of real estate and credit, but intrinsic fundamentals are trumping credit amidst volatility,” he said. “Private capital continues to lead the bidder pool for NNN assets across the country and is often winning deals due to the unleveraged nature of the capital/underwriting. “Capitulation has been faster than expected for liquidity and re-investment.” Sharrin said price maximization has been especially difficult for larger transactions (i.e. $75MM+). “Instead of making comparisons to early 2022, a more realistic pricing benchmark is 2018/2019 levels or, pre-pandemic and pre-stimulus,” he said. Transaction Volume Will Soon ‘Level Off’ Ryan Butler, managing director and senior vice president, Northmarq, tells GlobeSt.com that investors across all commercial real estate asset classes have been paying close attention to the responsive actions of the Federal Reserve and US Treasury as they work to address the ongoing regional banking crisis and continue the fight to tame record-high inflation. “As a result of the swift actions taken by both bodies, we are starting to experience a broad expansion in capitalization rates across the Net Lease sector,” Butler said. “However, it is important to note that this cap rate expansion cannot be painted with a broad-brush stroke. Investors in our space are still seeking well-positioned industrial and retail assets leased to ‘recession-proof’ tenants and, as a result, still transacting. “We anticipate a leveling off in the downward trend in transaction volume through the end of the year as investors make sense of this changing market. Realizing that the net lease asset class will continue to be a safe and stable investment vehicle within the real estate sector.” Bid-Ask Gap Widening Eli Randel, COO, CREXi, tells GlobeSt.com that cap rates on closed net lease assets have risen almost 5% YoY with transaction velocity slowing as buyer demand has cooled because of macro-market conditions. “The segment a year ago was at parity between asking and closed prices whereas now sales are transacting below asking prices illustrating a widening of the bid-ask gap,” Randel said. With increases in interest rates, both costs of capital have increased, and similar alternative vehicles are now generating attractive yields (for instance a liquid “risk-free” savings account at Marcus has a 3.75% interest rate), Randel pointed out. “Yet, net-lease real estate still has many benefits to passive investors and remains historically active and strong. Net lease continues to attract 1031 buyers and real estate investors looking for good yields with future upside and often buying in cash. “While slightly less active, higher-yielding, and with more discriminatory underwriting of terms (largely term-length and credit), net lease remains an important category and a great investment product for many in today’s environment.” Stale Assets on the Market, Decreasing Inventories Geoffrey West, senior vice president, MDL Group/CORFAC International, tells GlobeSt.com that amid the historic pace of interest rate increases experienced over the past year, single tenant net lease sellers have been reticent to quickly meet the increased cap rate market expectations resulting in decreased transaction volumes, stale assets on market, and decreasing inventories of available product. West said specifically in the California, Arizona, and Nevada markets, multiple surveys of available fast-food STNL assets (excluding ground leases) conducted over the past year in conjunction with maintaining market positioning of existing listings indicate an overall increase in average asking cap rates from April 2022 to April 2023 from 4.1% to 4.7% and a significant decrease in the quantity and quality composition of the available assets. And within that survey, secondary and tertiary market locations in those states appear to be adjusting to a higher cap rate environment more quickly while primary and core market locations lag as they seek to maintain historical premium cap rate levels. “The recent restabilization of the US 10-year treasury rates around the 350bps level appear to have put reduced upward pressure on asking cap rates as surveys conducted in February 2023 and April 2023 only reflected a 10bps increase in asking cap rate,” West said. “While prospective buyers with 1031 Exchange motivations cannot acquire treasury note assets and those don’t enjoy the benefits and burdens of real estate ownership, the yields being offered in those financial instruments, especially short-term yields, are often superior to core location yields being sought by sellers.” West added that, as such, investors without 1031 Exchange motivations and flexibility may look to temporarily park monies in these alternative investments and benefit from the premium yields being offered by the inverted yield curve until Seller expectations and the current bid-ask spread tighten and transaction activity levels rebound. © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by GlobeSt Investors seeking higher cap rates are finding them in industrial spaces that serve manufacturing, according to a new report from CBRE. Although e-commerce-fueled bulk logistics space is the darling of the current cycle, manufacturing stimulates industrial space demand for both factories and warehouses. CBRE pointed to Austin, Phoenix, and Reno as areas that benefit from new factories and capital stock capable of building high-value goods. “Interestingly, high-cost California has expanded its manufacturing as it retains a competitive edge in producing aerospace, chemicals, computing equipment, and other extremely high-value goods,” according to its report. Los Angeles is a notable outlier, it said, reflecting its heavy exposure to lower-value sectors, such as garment making. The Midwest accounts for just over one-third of U.S. manufacturing employment, just ahead of the South. Manufacturing Tenants More Imbedded in the Property Rob Gemerchak, vice president, investment sales, Northmarq, tells GlobeSt.com that net-leased industrial manufacturing properties remain a very popular asset class among experienced investors – particularly those whose underwriting considers the tenant’s use of the facility, their industry, the property’s infrastructure, and regional labor. “As opposed to some other asset classes, manufacturing tenants tend to be more embedded in the property due to their investment in process machinery and equipment, production lines, and use of a trained workforce,” Gemerchak said. “A successful manufacturing tenant is often more likely to renew a lease vs. relocate – due to the time, expense, and production challenges involved in a relocation.” Considering manufacturing facilities’ unique infrastructure that may include cranes, heavy power, reinforced floors, etc. – there is economic value in these systems which support and enhance the real estate investment, he said. “The tenant’s industry is also a factor that investors consider, as firms who are supplying growth industries such as computer and electronics, chemicals, pharmaceuticals, and automotive provide the strongest security,” according to Gemerchak. “Finally, the regional workforce that supplies the tenant’s operation is an important variable that investors consider. As onshoring and reshoring of the manufacturing base continue, industrial properties located in strong regional labor markets will continue to be considered very attractive as a long-term investment.” Economic Turbulence Might Have Inflated Cap Rates Shanti Ryle, CREXi senior content marketing manager, tells GlobeSt.com that overall, while the total sales comps for manufacturing buildings are trending down year-over-year (given overall pauses in activity due to rising interest rate/economic factors), valuations and transaction volume for manufacturing industrial properties are still on the rise. “There may be some pause in transaction velocity following pandemic-era construction delays and economic turbulence, and the delivery of multiple properties at the same time may have inflated cap rates, lowering total sales value in 2022,” Ryle said. Arizona, Texas, I-85 Corridor Ideal for Manufacturing Expansion Adrian Ponsen, national director of U.S. industrial analytics at CoStar Group, tells GlobeSt.com that labor shortages have been gripping most sectors of the U.S. economy since 2019, but because of an aging workforce, and a prevailing skills gap, manufacturing is one of the industries struggling most to grow and retain its headcount. “As a result, US regions doing best to attract both foreign and domestic in-migration including Arizona, Texas, and the I-85 corridor stretching through Georgia and the Carolinas, have had a huge leg up securing the largest manufacturing expansions in recent years, particularly those tied to electric vehicle and semiconductor assembly,” Ponsen said. “These are the locations where manufacturers feel most confident that local labor force growth will be strong enough to support staffing up new operations at scale.” © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by GlobeSt While early education centers may have been overlooked by many high-net worth investors in the past, the pandemic has reinforced just how essential these centers are as they are meeting or even exceeding pre-COVID enrollment. Throughout the pandemic, many centers stayed open for the children of front-line workers. Additionally, early education facilities have proven vital for children to have face-to-face interaction to develop social skills. And ultimately, parents need childcare, making the sector necessary. While the early education space has not been as well-known as some other single-tenant net lease sectors, it has taken off over the last couple of years and has become much more recognized as a secure investment. What Has Changed? Historically, early education assets traded for higher cap rates on average than other single-tenant net lease retail properties like dollar stores, banks, and quick-service restaurants. In addition, most of the investors were institutional groups like publicly traded REITS. In general, high-net worth buyers typically had a harder time understanding the early education business model or didn’t recognize the company vs something like a quick-service restaurant or a pharmacy. Most high-net worth investors are one-time buyers who are in a tax-deferred exchanges and being such tend to stick with businesses they know. It is much easier to feel comfortable with a McDonald’s vs. a KinderCare if you don’t know who KinderCare is, despite KinderCare being one of the largest corporate operators in the early education space with over 1,500 locations. This concept is demonstrated by the spread between single-tenant retail cap rates vs. single-tenant early education cap rates. On average, there was an approximately 120 basis point spread between early education and single-tenant retail. However, that spread drastically dropped to about 87 basis points in 2022 – an all-time, record low. That is clear evidence that many more high-net worth investors are aggressively pursuing the early education space. This robust high-net worth investor demand has been driving down cap rates and making this spread thinner. Early education cap rates were historically low in 2022, at an average of 6.44 percent, which is 71 basis points lower than the previous year average of 7.15 percent (this data includes all credits, lease terms, and locations).   © 2022 ALM Global Properties, LLC. All rights reserved. Surging Demand In 2021 and 2022, more high-net worth investors began looking at all types of properties to fulfill their 1031 exchanges including early education, due to a lack of inventory, and some of the most aggressive cap rates ever experienced in the single-tenant net-leased sector. Over the last two years, we started seeing unprecedented demand for early education assets. We saw cap rates drop below 6 percent, which was previously unheard of in this space, and Spector set multiple cap rate records at this sub-6 percent level. Typically, these deals were in strong locations with long lease terms and strong credit. For example, Spector sold a portfolio of two early education centers for $14 million at a 5.75 cap and had multiple offers. Spector also sold a multi-building property for $10.8 million, also at a 5.75 cap, which also drew multiple bids and closed all cash. Sales Volume Up Transaction volume for the early education sector in 2022 exceeded $681 million, up approximately $54 million over 2021. Both 2021 and 2022 nearly doubled the sales volumes of previous years, again a strong indicator that more buyers are attracted to the space. In 2022, there was a significant amount of investment from the “private client” or “high-net worth” sector, with approximately 89 percent of early education properties sold to this investor type. New listings are also on the rise. The increase in listings can be attributed to growing demand from investors, prompting more landlords to consider a sale, as well as more developers and operators looking to capitalize on the benefits of fully marketing a property. Outlook for 2023 This year unwavering investor demand will continue for early education properties. Buyers remain attracted to the sector’s e-commerce-resistant nature, high-quality real estate, long lease terms, and escalating demand. While the net-leased market has decelerated overall, it is by no means “dead.” While the market was in somewhat of a frenzy over the last couple of years, Spector anticipates strong sales volume again this year. Early education properties will continue to trade hands, as more 1031 buyers consider it a secure option with strong tenants. Like every other product type, however, today’s cap rates for early education assets are a bit of a moving target due to the rapidly changing economic environment and rising interest rates. While we may not be seeing as many deals trade in the sub-6 percent range that was seen in 2022, they remain extremely low relative to where the market was historically. © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by GlobeSt Experts wonder if the “next great buying cycle” for office could be now. Research by Revolution notes that when lenders tighten, the four-year forward price change vastly outperforms. “Think back to the early 1990s savings and loan crisis, the dot-com bust, and the Global Financial Crisis,” Colliers’ Aaron Jodka wrote. “Those who acquired assets during those periods saw strong outperformance in the years that followed.” Not everyone would agree. Indeed, office investment sales have plunged amid the sector’s uncertainty. Thomas G. Koelzer, partner, Tenant Advisors/CORFAC International, tells GlobeSt.com that office building values are declining, and that sellers and buyers are far apart in agreeing on values. “Many sellers have resorted to auctions to sell their properties since there’s not enough market data to support the normal sales channels.” Furthermore, “more bad news is coming for landlords because the full pain of the post-pandemic office market hasn’t been felt, since many tenants still have time left on their leases. As these leases expire, many tenants will either reduce their size or simply not renew their leases. This phenomenon means a long-term (if not permanent) reduction in the demand for office space.” Then again, Jodka may have a point. An informal survey of CRE experts suggests that there are some niche opportunities presenting themselves in certain markets and property types. Small-Office Buyers Have Opportunities Craig Tomlinson, Northmarq senior vice president, tells GlobeSt.com that office is out of favor with the investor herd, but that spells an opportunity for buyers willing to do their homework. “The ‘bad news’ is derived from increasing vacancy and sublet space surrendered by large corporations in urban office towers and in leased corporate campuses,” he said. “Large corporations, in general, have not mandated return-to-work, or have shifted to hybrid models that need significantly less space. Not so with the smaller suburban offices. Those buildings tend to be occupied by small or private businesses where the decision makers are onsite and want their staff presents too.” Tomlinson said that suburban office 100,000 SF and less also tends to have a rent roll without a dominant tenant, diversifying an investor’s rollover risk. “Smaller office buildings are more likely to be owned by private investors who may be more motivated to transact in a rising rate environment,” he said. “‘Big capital’ doesn’t like ‘small office’ because aggregation is a chore and so is management. That fact has created a real opportunity for buyers of smaller office buildings that will persist through 2023.” ‘Everything is Still Scrambled’ Manuel Fishman, shareholder, Buchalter who represents real estate developers and owners in the acquisition, sale, and financing of commercial properties, tells GlobeSt.com that when it comes to buying office assets today, the short answer is “no” for multi-tenant office and “yes” for single-tenant occupancy, triple net buildings, with a credit tenant. “There is too much uncertainty for multi-tenant office, office occupancy, office demand, interest rate climate, and return on capital,” Fishman said. “Everything is still scrambled, and assets are still not being written down to true value. Now is the time to fundraise for money and come up with a thesis for which segment of the market to invest in. The time to invest will be later.” The Next Buying Cycle ‘Has Started’ Ed Del Beccaro, EVP/San Francisco Bay Area regional manager of TRI Commercial Real Estate/CORFAC International, tells GlobeSt.com that the next buying cycle for office has started. “Higher interest rates, high vacancies are having various office ownerships receding their office portfolios both on the mom-and-pop and institutional levels,” Beccaro said. “In some cases, owners are just going to sell to cut their losses as loans become due or major tenant leases expire who are not renewing over next year. In other cases, opportunistic buyers will look at buying older class and B buildings to convert to life science or housing or just tear down.” Price Discounts Not Seen in 14 Years Chris Okada, CEO, Okada & Company, tells GlobeSt.com that today, select asset classes in New York City’s commercial real estate market, including office space, are experiencing a decline in prices, reaching levels last observed in 2009. “High vacancy rates due to remote and hybrid work models, high-interest rates, limitations imposed by rent stabilization and rent control laws, and economic uncertainty have led to this decline,” Okada said. As a result, the number of office-related foreclosures, mortgage defaults, and deeds in lieu of foreclosure negotiations have skyrocketed in 2023,” he said. “However, due to the problems this sector faces, we have begun to see some incredible price discounts not seen in 14 years. “With discounts ranging from 30% to 60% off-peak pricing, there are remarkable investment opportunities present in New York City commercial real estate, particularly in office space. Okada & Co. believes the next 12 to 24 months present opportunities for significant returns on real estate investments, possibly the most significant in a 25-year period.” Erik Edeen, director of operations, Tri-State Investment Sales, based in Avison Young’s New York City office, tells GlobeSt.com that the office sales market in New York follows the “tale of two cities” narrative prevalent in the leasing market. “Trophy/Class-A buildings with strong rent rolls can still be underwritten and financed while the lower quality buildings have a less certain future,” Edeen said. “While cap rates have expanded across the board, the more speculative and lower-end assets are finding difficulty in a market that’s sparse with price discovery.” South Florida Is Thriving Daniel Chaberman, Grupo Eco Developer, tells GlobeSt.com that South Florida is an attractive market for many forms of CRE. “While most of the country and cities in the world are struggling, facing a recession or dealing with the consequences of COVID-19, we are on the opposite side of the spectrum in South Florida,” he said. “The response to COVID-19 generated a large amount of migration of wealthy families from New York, Chicago, and the West Coast. We have been receiving a lot of businesses and many like Grupo Eco have relocated their headquarters to South Florida. “And we are still seeing important businesses and firms relocating into the state. We are very positive about the transformation of the market here that started with COVID-19.” Don’t Acquire Just Because Asset Looks ‘Cheap’ All that said, Mukang Cho, CEO and managing principal of Morning Calm Management, reminds readers of the volatility in the capital markets, which could make any purchase difficult. He said the financing environment for real estate is difficult with lenders of all types continuing to deleverage and stay on the sidelines as they deal with certain issues, such as problems with their legacy portfolios or an inability to effectively finance their positions. “Financing for office buildings as a whole remains dislocated if not broken,” Cho said. “This environment is different from the Great Financial Crisis and will reward the best ‘stock pickers.’ One cannot acquire office buildings indiscriminately just because they seem “cheap”; and just about everything will appear “cheap” compared to recent historic prices. “Market fundamentals, the relative competitiveness of the underlying asset versus the market, nature of the existing rent roll, a sponsor’s expertise in operating office buildings – these things will matter more than ever as the capital markets will no longer bail out underperformance.” © 2022 ALM Global Properties, LLC. All rights reserved.

According to WealthManagement.com, an increasing amount of investment managers are talking about putting together funds targeting opportunistic real estate investments. This is because of the cloudiness in the near-term outlook for commercial real estate performance due to rising interest rates and recessionary fears. But what are opportunistic real estate funds and how do they differ from funds targeting distressed real estate that proliferated in the wake of the COVID pandemic? BJ Feller, senior vice president/managing director in Northmarq’s Chicago Commercial IS office, shed light on the nature of distressed assess, noting that “When you’re talking about distressed, you’re talking about something that’s going to be above a 20 percent return on an IRR basis. If you’re jumping into the water and saving a drowning person, you have to be compensated for it.” When it comes to opportunistic funds: “The shorter duration, the more confidence I can have with projections, and that aligns with opportunistic strategies,” he said. Topics covered include: How the strategies differ What types of returns to expect How long do investors have to wait for a payout? Hopes for these types of funds don’t always pan out

Daniel Herrold, senior vice president of Northmarq’s Tulsa office, recently spoke with Wealth Management Magazine in a story focusing on how opportunities for investors looking for off-market acquisitions have opened up as sellers become more concerned about marketing a property that fails to sell. “Off-market deals have always been highly sought after because investors believe that opportunities that haven’t been widely distributed and/or marketed offer more attractive pricing,” he said. Herrold went on to note that that owners willing to sell their assets at a time when values are declining usually have a motivation to sell, such as personal financial need or an upcoming loan maturity, so they are looking for a qualified buyer who can offer speed of execution and transaction certainty. Other topics covered include: Federal Reserve’s impact on off-market deliveries Flexibility of 1031 exchange Remaining Challenges

Originally published by GlobeSt Nationally it appears that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption outpacing new product deliveries, according to Northmarq.  “This has put national occupancy rates for medical office at a historic high,” Colin Cornell, Northmarq vice president, healthcare investment sales, tells GlobeSt.com.  “We anticipate a steady stream of opportunities for investors in 2023, including newly developed facilities, new long-term leases on historically vacant MOBs, and retrofits of what were historically retail-oriented buildings.”  Cornell said that like most sectors, healthcare has been in the price discovery stage since interest rate increases began, but values seem to be settling somewhere between 2019 and 2021 levels.  “The investor demand is there, and the question is will owners be willing to meet that demand at the new return buyers requires,” he said.  These investors are best to focus on outpatient services, according to JLL’s most recent Healthcare and Medical Office Perspective, which shows that outpatient sites dominate healthcare services delivery compared to hospital admissions.  Additionally, according to Kaufman Hall National Hospital Flash Report, outpatient revenue rose 8% in 2022, while inpatient revenue was flat when compared to 2021.  JLL’s report said that up to a third of hospital revenue is activity shifting to ambulatory surgery centers, office-based labs, and other ambulatory sites.  “More sophisticated procedures can be done in outpatient settings than possible a decade ago.” Amber Schiada, head of Americas work dynamics and industry research, JLL, said in prepared remarks.  “Innovation in care combined with reimbursement pressures are driving a sustained shift to outpatient facilities, and consumer preferences for outpatient care have increased as well, as outpatient facilities are often more accessible or conveniently located,” she said.  “Furthermore, experience shows that outpatient locations are less expensive to build and operate, produce better-quality medical outcomes, and yield higher rates of patient satisfaction.  MOS and Health Care RE Producing Income  Allan Swaringen, President & CEO of JLL Income Property Trust, tells GlobeSt.com, “Medical office space, and healthcare-oriented real estate more generally, will continue to be a key piece of an income-producing, core fund such as JLL Income Property Trust.  “The extremely positive demographic trends driving tenant demand for this sector, combined with the often-long-term leases of tenants who look to serve their local population and often invest heavily in building improvements, create a scenario where owners can generate long-term, stable cashflow,” he said.  “That’s why we have continued to construct a geographically diversified healthcare-oriented portfolio that today is valued at nearly $635 million and totals approximately 1.4 million square feet.  The Continuum of Care  Andrew Salmon, chief future officer at SALMON Health & Retirement, tells GlobeSt.com that given the aging demographics, “it’s no surprise that we are seeing an explosion in need for outpatient facilities.  “What’s pivotal is the consideration for the continuum of care, as the 80+ population is forecasted to balloon nearly 50% in the next 10 years, and they will require both inpatient and outpatient opportunities as they age.  “Our goal is to establish the continuum of care across the aging population, to ensure that independent and assisted living opportunities exist with convenient, local access to major medical providers, allowing our residents to maximize the outpatient system while maintaining independence.”  Outpatient Services Leads to Higher Satisfaction  Doug King, national healthcare sector lead for Project Management Advisors, tells GlobeSt.com that healthcare providers have been actively positioning outpatient services closer to where their patients reside for at least a generation.  Outpatient facilities typically result in higher patient satisfaction, King said, and the challenges to outpatient facilities presented by telehealth and home healthcare are minimal as many clinical limitations and regulatory challenges exist for these two off-site methods.  “Decentralized ‘brick-and-mortar’ outpatient facilities will continue to grow,” according to King. “A vast majority of care will be occurring in outpatient settings, including urgent care centers, free-standing emergency departments, medical office/doctor offices, and ambulatory care facilities – outfitted to accommodate same-day surgical activities.  “In healthcare, we say, ‘follow the money’ and The Center for Medicare and Medicaid services are reviewing how reimbursement strategies can promote this model. An example is the growth of OBL (office-based labs) to house sophisticated surgical and imaging services performed on an outpatient basis.”  Developing, Rehabbing, Modernizing Facilities  Mitch Creem, principal of GreenRock Capital, tells GlobeSt.com that investors have always viewed medical office buildings as safe investments during uncertain financial times, primarily due to their historically proven resiliency during market downturns.  “But now, 75 years after the Boomer generation was born, we are expecting a ‘gray tsunami,’ fueling the need for additional healthcare services and many more sites of care,” Creem said.  “Physicians, hospitals, real estate investment funds, and individual investors are all keen on developing new sites or rehabbing and modernizing existing buildings to provide state-of-the-art care and attract new patients.”  Deliver Care in Outpatient Settings More Economical  Brian Edgerton, senior vice president, healthcare services team – NAI Hiffman, tells GlobeSt.com that after historic growth in 2021-2022, the sector is not without headwinds.  “It saw rising cap rates and fewer starts and deliveries at the end of 2022,” he said. “In 2022, healthcare real estate developers kept busy delivering modern medical office buildings to accommodate health systems and large multi-specialty practices, including those seeking to consolidate multiple specialties under one roof in highly visible, patient-proximate locations.  “At the same time, developers are feeling the squeeze of construction cost increases, supply chain delays, and interest rate hikes, all of which are reflected in the higher rental rates that must be charged to make these deals pencil out.  “Yet, even if they’re paying more today than they would have a year ago, it is still more economical and efficient for providers to deliver care in outpatient settings, many of which are located in close proximity to where their patients live and work.”  Edgerton said that like retail, healthcare increasingly follows rooftops, “so services are moving closer to the patient thanks to technological advancements that can more easily be implemented in newly developed and repurposed buildings, rather than the medical office building of 30 years ago.”  When Choosing Project Sites, Demographics Matter  Craig Gambardella, vice president at TSCG MD, tells GlobeSt.com that clients understand that their property, and a potential fit for an outpatient healthcare facility within that particular property, is crucial in their decision-making.  “You must look at demographic, psychographic and prevalence of diseases in certain trade areas, and 5- to 10-year projected growth of not only disease prevalence, but how that translates to outpatient demands to help health systems forecast potential growth,” Gambardella said.  For example, the owner of a large mall that is looking to repurpose a portion of it into medical must accurately forecast the demand in that area for an outpatient facility, what types of clinical services may be needed, based on disease prevalence and 5- to 10-year projected growth, he said.  A Continued Extension of Outpatient Services  Rich Steimel, senior vice president and principal in charge, healthcare, New York, at Lendlease said that throughout the industry, more procedures are taking place away from the main clinical facilities as there is a continued extension of outpatient services across metro areas and into the suburbs.  “This shift allows hospital campus operations a greater opportunity to expand and connect with a growing base of patients who require critical care but desire the convenience of off-campus facilities.”  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt It seems that inflation and a slowdown in the capital markets may have finally caught up with the single-tenant net lease sector, which has posted its fourth consecutive quarter of declining activity, according to an analysis from Northmarq.  In Q4, the single-tenant net lease market saw approximately $14.9 billion in sales, down nearly 16% quarter over quarter and down 66% year-over-year. The overall average cap rate also increased for the first time in three years. However, annually, the industrial market had its second strongest year ever with more than $40 billion in sales, while office and retail posted numbers in line with average volume years.  “The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs,” says Lanie Beck, Northmarq Senior Director, Content & Marketing Research. “There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities.”  Noting that it’s unlikely that investment activity in the sector will stop entirely, Beck also says “the market should be prepared to see conservative activity levels in at least the first half of 2023.”  “Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets,” she says. “An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.”  Multi-tenant retail has also seen a pullback, despite having previously been on pace in 2022 to hit a historic high. Fourth quarter activity slowed so much that the year ended as the fourth strongest ever as multi-tenant retail cap rates jumped by 10 basis points in Q4 and now sit at 6.78 percent.  “This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters,” Beck says.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt The past two years set the bar quite high for growth in the life sciences sector, according to Matt Gardner, CBRE’s Americas Life Sciences Leader.  “It’s natural for a red-hot market to cool a bit after such a strong run,” he said in prepared remarks.  A new CBRE report said metrics gauging the sector varied in the fourth quarter as the industry normalized after robust growth.  “Life sciences employment growth slowed from earlier rates but still progressed at a 4% year-over-year pace. Venture capital funding rebounded in the fourth quarter after three consecutive quarterly declines” it said, and “the market has normalized.”  CBRE puts Boston, Chicago, Denver, Houston, and Los Angeles as the top-performing life sciences markets in Q4, based on their combined market size, vacancy, square footage under development, and current tenant demand.  Life Science Relies on ‘Different’ Financing Sources  Kevin Kinigstein, partner, Cox Castle, tells GlobeSt.com that he anticipates 2023 to be slower, especially at the outset.  “External factors such as uncertain interest rates, the debt market generally, and inflation are already proving to have an undesirable impact on all commercial real estate, even in the hottest of asset classes,” according to Kinigstein.  That said, the life science sector is influenced by certain differentiating factors that are likely to make the industry experience less of a slow-down than many other asset classes, he tells GlobeSt.com.  “One primary differentiator is that the life science industry relies in large part on different financing sources than conventional commercial real estate,” Kinigstein said.  “Between increased government funds which are coming in 2023, and the continued industry reliance on venture capital, it is likely that life science will outperform other asset classes,” he said.  Additionally, the tie between life sciences and other external driving factors will also continue to differentiate this space.  “The often-cited aging population will continue to drive demand, but there are other outside factors such as the expected continued explosion of artificial intelligence in 2023, and the fact that executives have another year under their belt when it comes to navigating supply chain issues – both of which may prove to be more impactful for life sciences than for other conventional real estate classes.  “While it is fair to expect the market for life science transactions in 2023 to be significantly less hot than we saw in 2021-2022, we believe life science will be among the leading asset classes in terms of demand and growth, and that the slow-down may be less than expected.”  Pandemic-Caused Therapies Drove Growth  Jon Needham, vice president, investment management at BentallGreenOak (an investor in area life sciences real estate), tells GlobeSt.com, “The supply boom that took place in recent quarters certainly alters the calculus when making investments, but in general, a more balanced supply/demand dynamic is important for the health of the sector moving forward.  “While the US Life Science market was down in 2022 compared to the historic high of 2021, removing 2021 outlier data and comparing 2022 with previous years tells a story of health, sustainability, and growth.  “The pandemic fast forwarded approvals and implementation of novel therapies which will prove to be the foundation for growth over the next cycle. As the sector matures and adapts to the integration of new technologies, a continued emphasis will be placed on high quality, robust, and flexible real estate to assist in the advancement of the life science ecosystem.”  Leasing Activity Dropped 62%  Leasing activity across Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham are normalizing, according to JLL data.  On an aggregated basis, it dropped 62% from an industry high in Q4 2021 to Q4 2022, and, currently, leasing activity is on par with pre-COVID averages.  Tenant demand activity has slowed, as companies take a more conservative approach regarding space needs. Demand today is just about half it was at its peak in Q4 2021 across markets Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham.  Maddie Holmes, senior research analyst, Industry Insight & Advisory, JLL, tells GlobeSt.com that direct asking rents, which had been gradually increasing quarter-over-quarter since the onset of the pandemic, took a discount across those markets.  Kevin Wayer, President – Government, Education, Infrastructure and Life Sciences Industries, JLL, tells GlobeSt.com, “We are witnessing M&A and joint manufacturing activity continues to pick up, but an intense cost-reduction focus continues.”  Expect Slowdown Through Mid-Year  Craig Tomlinson, senior vice president at Northmarq, tells GlobeSt.com that after three high-profile sales (exceeding $250 million) of life science properties in 3Q 2022, RCM data reported none in the last quarter.  “These are very high basis properties, typically +$1,000 per foot,” Tomlinson said. “That, plus the lack of sale comps, explained lenders’ reluctance to fund such transactions.  “The slowdown is expected to continue through mid-year, with the exceptional sale-leaseback possible. Those are typically higher yield as compared to third-party transactions.”  After the Big Run, Normalization is ‘Healthy’  Nick Iselin, executive general manager of development for Lendlease, tells GlobeSt.com that few people presumed that the enormous trajectory in life sciences would continue unabated and ultimately, “this normalization is not only expected but healthy. We are happy to see that activity is still going strong in the top markets, such as Boston where we are co-developing FORUM, a 350,000-square-foot, best-in-class life science project.”  Boston is Still a Leader  Kristen O’Gorman, an associate principal at SCB’s Boston office leading its life science practice, tells GlobeSt.com that the Boston area continues to be a life sciences leader full of resounding innovation, with startups raising over $1.5 billion last year.  “Although tenants may have more options in today’s market, the evolutionary nature of young companies remains true,” she said.  “From a design and real estate perspective, this means a balance of prioritizing high-performing buildings that also offer maximum flexibility that can appeal both to startups and more established companies.  “Now that the marketplace has become more competitive after sustained growth, we see the life science market normalizing, with growing consideration of amenity programming as a way to differentiate.  “A few quarters ago, a potential tenant might have been less focused on this aspect, but now they have an opportunity to be more selective – we see tailoring this amenity programming as a key to adding value and a market edge.”  © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by GlobeSt Holidays and extreme weather conditions prompted a typical seasonal office demand slowdown in December, according to the VTS Office Demand Index (VODI). However, the year-over-year decline for the month was slightly larger than in previous years.  New demand for office space ended the year 31.3 percent below its May 2022 peak and fell 20.7 percent year-over-year to a VODI of 46 in December.  The report said that a tight labor market, layoffs, threats of another COVID-19 variant, and interest rate hikes have “given pause” to prospective office tenants.  Nick Romito, CEO of VTS, said in prepared remarks, “The reality is that the outlook for the U.S. economy is still unknown, and expectations of a recession continue to loom large in 2023. Where the economy heads will be the through-thread for office demand decisions as we head into the new year.”  Romito said a silver lining is a significant momentum in return-to-office trends. “Continued momentum in return-to-office will undoubtedly provide a tailwind for office demand in 2023 and beyond,” he said while acknowledging that “realistically, it seems unlikely to ever revert in full.”  A weekly report from Kastle that measures office worker occupancy showed the national average of 49.5% of workers were in the office compared to pre-pandemic. The Kastle measurement has not exceeded 50% since COVID-19 set in.  Tech Layoffs and Potential Recession Won’t Help  Doug Ressler, business manager, Yardi’s Commercial Edge, tells GlobeSt.com that office-using sectors of the labor market lost 6,000 jobs in December, according to the Bureau of Labor Statistics, only the second monthly decrease since the onset of the pandemic in early 2020.  Financial activities gained 5,000 jobs in the month, but information lost 5,000, and professional and business services lost 6,000. Year-over-year growth for office-using sectors has rapidly decelerated in recent months.  Office-using employment growth will further decelerate as tech layoffs bleed into 2023 and a potential recession loom. Between January 2021 and July 2022, office sectors added an average of 117,000 jobs a month. In the last five months, they have averaged only 25,000 jobs per month.  “Even as some firms become more forceful in bringing workers back into the office, many have fully committed to hybrid and remote work policies,” Ressler said. “This will be another year of uncertainty and change in the office sector as it moves toward a post-pandemic status quo. Significant change will depend on the duration of the recession, rising interest rate stabilization, and the acceptance of a hybrid or pre-pandemic work model.”  Remote Work Makes Office Leasing Picture is ‘Hazy’  Lanie Beck, Northmarq Senior Director, Content & Marketing Research, tells GlobeSt.com that the outlook for office leasing is a bit hazy right now, with many factors influencing tenant demand.  “Merger and acquisition activity, and the resulting consolidation of physical space that often occurs, can impact office demand,” she said. “Layoffs too can alter a tenant’s need for space.  “But the remote work trend has been one of the primary drivers in recent years, and for employers who haven’t mandated a return-to-office, they’re undoubtedly evaluating both their short and long-term needs for traditional office space.”  Desired Space Shrinks by One-Fourth  Creighton Armstrong, National Director, Government Services, JLL, tells GlobeSt.com tenants committed to leases in 2022 leased space that was, on average, 27% smaller than their prior lease.  However, despite the smaller average, the overall volume of space leased held steady between 2021 and 2022 due to a slightly higher number of deals closed.  Seattle Office Demand in Hibernation  Bret Jordan, president of the Northwest region at Ryan Companies US, tells GlobeSt.com that office demand in Seattle went to sleep in July of 2021 and hasn’t yet awoken from its slumber.  “We’re seeing the large layoff announcements oxygenating the smaller scale and start-up companies’ labor choices, so we are expecting office demand to awaken mid-year,” Jordan said.  “The caveat is that demand will be smaller in nature given the past cycle was full of giant demand deals. This is a reversion to our norm and not a fundamental shift in the underpinnings of our region.  One data point supporting this is the net new demand for residential, he said.  “While again lower in total than the heady pandemic years it remains resilient and in excess of the foreseeable supply,” Jordan said.  Minneapolis to Seek New, Amenity-Rich Assets  Peter Fitzgerald, vice president of real estate development at Ryan Companies US, tells GlobeSt.com that despite the downward trend of office demand, he expects an unprecedented flight to the newest and amenity-rich assets in the Minneapolis-St. Paul market.  He said that new construction is leading the market with several buildings 90%+ leased. One example is 10 West End. Ryan Companies sold the Class A office building in St. Louis Park, Minn. to Bridge Investment Group.  “The building opened in January 2021, in the thick of the pandemic, and experienced nearly 300,000 square feet of leasing activity until it was sold in November 2022,” Fitzgerald said.  Office Tours Increasing Significantly  Chicago-based developer Bob Wislow, Parkside Realty, tells GlobeSt.com that while winter months can sometimes put a damper on real estate tours, especially in colder climates like Chicago, he hasn’t seen a decrease in activity this year.  “Tour requests at all five of our office buildings have significantly increased this month, with one seeing the highest level of activity in years,” Wislow said.  “Companies that need new space because they are expanding operations or have a lease expiring are looking at all options available to them because they know their office space represents more than just a place to do work.  “With hybrid schedules becoming the norm, it’s more important than ever to offer a dynamic environment that promotes collaboration and engagement and provides the amenities and conveniences workers want in exchange for their commute. It also helps to be in an area that is buzzing with activity, as that energy and vitality can’t be recreated in a remote setting.”  South Florida Worker Office Occupancy 60% to 70%  Tere Blanca, founder, chairman, and CEO of Blanca Commercial Real Estate, tells GlobeSt.com that across South Florida, there is a “tremendous” return to the office, especially across the finance sector and it seems that three to four days a week has become prevalent in many industries.  “Because Miami, Fort Lauderdale, and Palm Beach (South Florida in general) is experiencing such constant, amazing migration, with the demographics very strong, many companies are moving here and whatever contraction we might see is mitigated by new buildings being created,” Blanca said. “There is quite a bit of new product in the pipeline to deliver over the next three to seven years; whatever is available right now is getting leased.”  She said buildings are seeing employee occupancy at 60% to 70% in most cases.  “The reality is, even before COVID, when a building was leased out, you still never had full occupancy, Blanca said. “This was from people traveling, being out for meetings, having a family situation, etc. This is why parking garages can oversell by 15% to 20%.”  Offices Need Tech Modernization  Katie Klein, North America Country director at WiredScore, tells GlobeSt.com that what people look for in an office has changed.  “To bring employees out of their homes and back into the office, office landlords must provide appealing properties and spaces. One way to do this is to provide the technology platform that modern office tenants require,” she said.  According to WiredScore North American Office report, only 38% of offices are considered advanced ‘smart offices,’ yet 80% of employees state they would be more inclined to go to the office if their building had smart technology.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt Logistics and parcel delivery remains No. 1 in million square feet requirements for industrial space but other industries have been making traction, according to a new report from JLL.  The report showed that the automotive industry has seen its demand increase by more than 156% since 2021 to serve an influx of electric vehicle and battery manufacturing endeavors across the country.  And demand for construction, machinery and materials companies grew by more than 41% this year because of the oversized pipeline of commercial and residential demand for housing.  JLL added that with companies reevaluating their existing operations and addressing the COVID-induced supply chain disruptions, demand will continue to increase for manufacturing and automotive users.  From a macro perspective, supply chain woes continue to create backlogs at the ports. The concept and practice of reshoring have come into play, and many occupiers have placed this at the forefront of their business operations.  Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region and to ports along the East Coast, such as Savannah and Charleston, which are seeing record TEU volumes.”  Industrial Outperforming Other Sectors  Meanwhile, investor interest in industrial continues to flourish. Northmarq’s Jeff Tracy, senior vice president, Tulsa, tells GlobeSt.com that while there has “obviously” been an impact on cap rates, “we continue to see the broad industrial sector perform well in relation to the other sectors.  “From an industry perspective, logistics and general light manufacturing continue to garner the most interest from buyers,” Tracy said. “Additionally, outdoor storage and assets that require quality outdoor yard space for operations are also popular amongst buyers at this point and seem to achieve the most aggressive pricing compared to other asset classes and sectors.”  Tracy added that the Midwest and Southeast are performing the best in relation to other locations around the country.  Robust Online Retail Sales Boosts Logistics Demand  Northmarq’s Rob Gemerchak, vice president, Toledo, tells GlobeSt.com that despite the challenges in the economy, there continues to be strong user demand across a range of industrial sectors, including logistics, technology, and manufacturing.  “Logistics demand is the strongest and is being driven by robust online retail sales and a national focus on supply chain efficiencies,” Gemerchak said.  “While the largest industrial markets such as Chicago, Dallas, Atlanta, New York, and Los Angeles continue to grow and thrive, there has also been tremendous growth in several notable markets such as Indianapolis, Kansas City, Phoenix, and Columbus.  “Looking towards the future, we expect that industrial demand and development will follow population growth in regions such as the Southeast and Southwest, as companies seek to locate near consumers and with strategic access to a growing employment base.”  Charleston, Savannah, Jacksonville E-Commerce Magnets  Avery Dorr, vice president at Stonemont Financial Group in Atlanta, tells GlobeSt.com that he’s seeing “a significant bump” in demand in port markets across the country, with the East Coast outpacing the West in recent years.  “The practice of reshoring is more important as supply chain woes continue to create backlogs at the ports,” according to the JLL report. “Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region.”  This year the Southeast region was the top market in terms of demand, accounting for 240 msf in requirements.  Dorr said that Charleston, Savannah, and Jacksonville have been magnets for e-commerce users and third-party logistics providers, and Stonemont continues to source out new speculative development opportunities in those markets.  “Florida and Texas have been at the top of our radar due to the tremendous population growth, deep labor pools, and overall business-friendly climates in both states,” Dorr said. “Investor appetite in these areas is particularly strong and we anticipate activity will remain healthy there in 2023 despite recent economic headwinds.”  High-Barrier, Major Urban Markets Should Thrive  Ryan Nelson, Managing Principal of Turnbridge Equities, tells GlobeSt.com that high-barrier-to-enter, major urban markets will see the greatest industrial growth in 2023.  “Businesses are striving to be as close as possible to the end user, and this has made urban markets with high population densities and land constraints a hotspot for last mile logistics,” Nelson said.  “Recently, Turnbridge topped out Bronx Logistics Center, the largest industrial development in the NY Metro Area, set to be complete in Q3 of 2023, which is one of a very limited number of new industrial projects that will be delivered in the market, given land scarcity, construction costs, and debt capital markets dislocation.”  Nelson said projects that will be delivered in 2023 will have been financed in the last cycle with the majority delivering pre-leased.  “New development starting in 2023 and delivering in 2024 or later will largely be limited to build to suit, as spec construction will be constrained by capital market dislocation,” he said.  3D Printing Shrinking Commercial Space Requirements  BKM Capital Partners’ CEO Brian Malliet, tells GlobeSt.com, “The small-bay, light industrial landscape has been transformed over the last decade and a half as tenant demand shifted towards dynamic growth industries such as e-commerce, technology & innovation, and advanced manufacturing.  “E-commerce demand has reshaped the supply chain, which has driven demand for industrial product to new levels,” Malliet said. “As consumers demand faster delivery times, retailers require well-located and highly functional light industrial warehouses to reduce transportation costs and meet customer needs.”  He said that new technologies are driving further use of chip capabilities, such as autonomous vehicles and robotics, that now utilize light industrial spaces for their operations since many of these spaces offer flexible zoning for multiple uses, including office, assembly, warehousing, and manufacturing.  Companies capitalizing on advanced manufacturing and 3D printing are also migrating toward smaller facilities, according to Malliet, with 3D printing allowing businesses to accomplish operations in just 10,000 square feet that would previously have needed five times the space.  Desire to Produce Goods Closer to Customers  HSA Commercial Real Estate recently broke ground on four speculative industrial warehouses totaling 1.9 million square feet along the Interstate 94 corridor between the Chicago and Milwaukee metros.  “We’re bullish on adding modern warehouse space along major logistics arteries,” Robert Smietana, vice chairman and CEO of HSA Commercial Real Estate, tells GlobeSt.com.  “Robust tenant demand for this space ranges from traditional retailers and e-commerce companies to third-party logistics firms, to manufacturers that are reshoring all or a portion of their operations. Across industries, there’s a desire to produce and store goods closer to customers as a means of mitigating future supply chain disruption.”  Logistics Firms Lessening Negative Impact of E-Commerce’s Pullback  Pedro Nino, vice president, head of Industrial Research and Strategy, Clarion Partners, tells GlobeSt.com that after some demand pulled forward in 2021, pushing net absorption to the highest levels on record, US industrial net absorption began normalizing in 2022.  “Despite some deceleration from e-commerce users, which accounted for most of the recent surge in” absorption, the industrial market still recorded its second-highest total for overall annual net absorption in 2022,” Nino said.  “This highlights the pent-up demand in the market as record low vacancies, limited supply, and an ultra-competitive leasing environment previously left some unfulfilled requirements on the sidelines.”  A combination of Clarion’s portfolio data, which includes more than 215 million sf and nearly 1,000 industrial properties across the US, as well as data from leading brokerage shops, show that third-party logistics firms and general retailers have sufficiently lessened the negative impact of an e-commerce leasing pullback.  “This makes sense as traditional retailers continue building out their modern/e-commerce distribution strategy, all while 3PLs offer comprehensive solutions, and ultimately, flexibility, in all things related to transportation and order fulfillment,” Nino said.  ‘Even a Recession’ Won’t Stall E-Commerce Demand  Contrarily, CommercialEdge said that e-commerce growth will continue to drive high levels of demand in the industrial sector for the foreseeable future, but it will not reach 2020 levels again.  “New supply has yet to match demand, and even a potential recession is unlikely to cause e-commerce sales volume to fall.”  CommercialEdge said that in-place rents have grown the most in the Inland Empire (13.1%), Los Angeles (10.7%), and New Jersey (8.9%). The lowest rates of rent growth were found in Tampa (2.5%), St. Louis (2.6%), Memphis, and Houston (both 2.8%).  The national vacancy rate measured 3.8% in November, falling 20 basis points from October. Despite record levels of new supply delivered in 2022, the vacancy rate fell throughout the year.  In-demand markets in the inner portion of the country also have low vacancy rates, including Nashville (1.2%), Columbus (1.7%), Indianapolis (2.5), Kansas City (2.5%) and Phoenix (2.9%). The abundance of space available on the outskirts of these markets for new development keeps rent growth lower than what is being seen in most port markets.  When Amazon Slowed Its Network, Others Stepped Up  Adrian Ponsen, Director of U.S. Industrial Market Analytics, CoStar, tells GlobeSt.com that as supply chain bottlenecks eased in 2022, imports into the U.S. surged to record highs.  To help process this increased flow of goods, “third-party logistics companies stepped up and increased their overall leasing in 2022 relative to 2021, helping to compensate for the fact that Amazon slowed its distribution network expansion,” Ponsen said.  He said that building material and gardening supply retailers like Home Depot and Lowe’s, which are some of the largest U.S. industrial tenants, also accelerated their leasing in 2022, mainly to increase the speed and scale of their home delivery offerings.  Additionally, industrial leasing by retailers like Dollar General, Rite Aid, and Target also accelerated in 2022, as these companies sell day-to-day necessities that have remained in high demand even as households feel the pinch of inflation.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by Wealth Management Investor interest in medical office properties registered a slowdown during the second half of 2022, but brokers and analysts say they expect a rebound this year as inflationary pressures ease and the Fed is expected to pull back on interest rate increases.  While investment sales figures for the fourth quarter of 2022 aren’t available yet, transactions in the sector have been trending down, according to the latest data from research firm Revista and real estate services firm Cushman & Wakefield.  In the third quarter, the market saw only $2.6 billion in investment sales involving medical office properties, excluding the merger of Healthcare Realty Trust and Healthcare Trust of America that was completed in July. That was the lowest volume since the first quarter of 2021, when only in $2.1 billion in properties traded hands. Investment sales in the medical office sector peaked at $7.3 billion in the fourth of 2021. Since then, they have been on a downward path each subsequent quarter.  Cap rates in the sector have also expanded over the past 12 months. They averaged 5.5 percent in the first quarter of 2022, but rose to 6.0 percent by the third quarter, according to Jacob Albers, research manager with Cushman & Wakefield.  “The impact of rising interest rates and inflationary pressures on medical office buildings and their expenses are having a cooling effect on what transaction volumes were at the end of 2022 and going into 2023 as well,” Albers says.  However, Albers calls this trend “temporary and recoverable” as inflation appears to cool down. In December, inflation in the U.S. declined for the six straight month, with an increase of 6.5 percent year-over-year and a 0.1 percent month-over-month decline.  In addition, the investment community remains broadly interested in investments in medical office because of the sector’s stability, according to Alan Pontius, senior vice president/national director of the office and industrial divisions with real estate services firm Marcus & Millichap.  “I expect the year to start off slow on a transactional level, but I expect it to pick up relatively soon as the year progresses because the market is adapting to the new underwriting standards with an interest rate environment that is different,” Pontius says.  The buy/sell gap  At the moment, the market isn’t as active as it has been because lot of sellers are slow to come to market if they don’t think they will get their desired price and buyers aren’t going to pay the same cap rates as they would have in a 3 percent interest rate environment, Pontius says. For example, class-A medical offices could have been selling at sub-5 percent cap rates at the peak, but today, it’s difficult to close transactions below cap rates of 6.0 to 6.5 percent because borrowing cost are unlikely to be below that, he notes.  “The only way you would have a cap rate below the cost of debt is if, for some reason, there was an immediate upside in the rental stream or possibly you have a long-term high-credit lease and an escalation schedule that will take you into positive leverage within the first year or two of that lease term.”  Still, there is broad interest in medical office assets across the investment spectrum, Pontius says. For deals valued above $20 million, the medical office REITs are the most prolific buyers. Private investors are more engaged in dealmaking if they find the right fit. Institutional investors, on the other hand, have been less active and are taking a more wait-and-see approach.  Albers says he’s seen more transactions involving private equity shops that are able to be nimbler in this economic environment. In addition, “We’ve seen more activity when it comes to smaller investors and HNWs that have less hoops to jump through and less committee review,” Albers said.  At the same time, he notes that because of the scarcity of available debt, the average value of stand-alone transactions has declined.  For his part, Lee Asher, vice chairman of healthcare and life sciences capital markets at real estate services firm CBRE, says his team is seeing a buyer pool comprised of groups who still have dry powder—portfolio managers looking to rebalance their portfolios away from traditional office properties and seasoned investors in healthcare real estate who are confident in the long-term stability of the sector. REITs, while still active, are struggling to rationalize paying prices that might view as too aggressive as they have seen their stocks dip and a corresponding increase in their cost of capital, Asher adds.  Who’s selling?  Sellers can be split into two different pools—maturity investors and business plan investors, Asher says. The first group is comprised of investors who face either a fund life maturity or debt maturity with unfavorable refinancing options. For the most part, investors with a maturing fund life are only selling if they have a low basis and have already created significant value for the property. Otherwise, they are choosing to hold, he notes.  The second group of sellers likely bought their properties before 2020, didn’t underwrite the cap rate compression that occurred after 2020 and so can achieve their business plan even under current interest rates, Asher says.  The bid-ask spread on medical office has widened significantly in the past nine months and it hasn’t yet closed enough to move the market, Asher says. There are a number of investor groups on the sideline waiting for more price discovery before they start to make deals.  The widespread belief among industry insiders is that the first half of 2023 will continue to be slow for medical office deals, but there will likely be a rebound in the second half of the year, says Shawn Janus, national director, healthcare services, with real estate services firm Colliers. Much of that optimism revolves around the Fed pausing on interest rate increases.  “Investors and developers in the sector make their living by investing in medical properties, so they continue to do so or want to do so,” Janus says. “Investments are also being looked at from a relationship perspective, with the hope that as the markets improve, those relationships will bear fruit in future deals.”  Investors that are able to be the most aggressive on deals today have access to a line of credit with spreads lower than those than what the banks are offering, or they are able to close on deals all-cash, says Asher. He points to vertically-integrated funds as the most active of these types of investors—they are viewing this as a buying opportunity while the institutions slow down.  There’s a backlog of investment managers looking to add to their portfolios, as well as new groups attempting to break into the healthcare real estate sector due to proven fundamentals and the recession-resistant attributes of the asset type, according to Asher.  “The majority of the established healthcare investors still have a pile of dry powder from the influx of capital over that last 18 months,” he says. “Portfolio managers and traditional office investors are looking for an alternative investment for their struggling office allocations.”  Expected returns  Returns on investments in medical office properties have tightened as expenses on NOI have risen across the board, particularly in higher cost markets. Leveraged IRRs on core medical office properties today are averaging from 7 to 9 percent, according to Brannan Knott, managing director, capital markets, with real estate services firm JLL. Leveraged IRRs on core plus assets are ranging from 9 to 13 percent and on value-add assets from 13 to 20 percent.  “Debt cost certainly are affecting near-term and overall returns in the sector,” Knott says. But “The price adjustments in transactions have helped bridge this return impact,” he adds.  But despite the current environment, Albers says the healthcare sector is in a good position because of rising demand for healthcare that should provide opportunities for investors. In 2022, healthcare spending has begun to rise again as patients continued to seek care that might have been deferred during the pandemic, he says.  “I feel volume will be down and pace will be slow for the first half of the year,” says Jeff Matulis, senior vice president with capital services provider Northmarq. “Eyes will continue to be on the Fed with what they are doing with rates. Employment is still strong and there is plenty of capital to be spent, both debt and equity. Anytime we see a glimpse of inflation calming, the stock market lights up and treasuries drop.  I think this gives us an idea of what is waiting on the backside of all this when the Fed stops their rate hikes.”