R.O.I. Real State – Commercial Newsletter- March 2023
Posted on April 10, 2023
Mitigating Risk in an Uncertain Market
The Greater Phoenix commercial real estate continues to experience some nervous tension—with particular concerns about the office market and how problematic it will be down the road.
Last month, we described the state of the market as somewhat frozen, and the arrival of warm spring weather has not changed that dynamic. The exception is for well-capitalized buyers who can come into a deal with all cash, or those who can negotiate a creative financing solution. The mid-March sale of Aventura Apartments, a 408-unit complex in Avondale, serves as an example of how some deals are structured. The buyer assumed financing from KeyBank, $45.8 million that terms out in 2031—at a 3.97% interest rate that is remarkably low by today’s standards—plus an additional $17.8 million in Fannie Mae financing from the same lender to bridge the gap, plus a healthy down payment of almost $40 million.
Buyers seeking value deals with the potential of stabilized earnings are returning to the market; it’s an interesting trend, although not yet widespread. These buyers need to do some heavy lifting in renovation and re-tenanting before they get to stabilized income. The most notable action is in smaller (under 25 unit) multi-family, multi-tenant retail and, to a lesser extent, smaller multi-tenant industrial properties. In a market where companies are facing uncertain headwinds, buyers are trying to spread the risk across multiple tenants. After a long stint as the most favored asset classes, larger unit (100+ unit) multifamily, and industrial activity, has slowed.
In addition, we are not seeing as much activity on the single-tenant front. Triple net lease properties are still popular, but they’re becoming more difficult to find—and during due diligence, tenants are being vetted far more closely to assess their potential as a good long-term play. Investors are having to digest a lot of information, and it doesn’t always feel like they can know for sure what qualifies as a safe asset.
Of course, the overall uncertainty is also happening against the backdrop of the Silicon Valley Bank collapse just a few weeks ago. In the early going, it’s difficult to know where the situation is headed, other than companies scrambling to spread their risk at different institutions. Banks’ lending ability will be impacted, likely with a more highly regulated environment—which could be externally imposed or with banks choosing to adopt guidelines for less leverage and increased scrutiny on loans.