R.O.I. Real State – Commercial Newsletter – June 2023
Posted on July 24, 2023
With CRE Loans Maturing, It’s Time to Connect the Dots
A significant portion of commercial loans will be maturing in the Greater Phoenix market within the next few years. In many cases, they were riskier, shorter-term loans that were put in place with very inexpensive debt in the 3.5%-5% range. (Note that this is part of a national trend; a recent analysis by Trepp found that asset classes across the board have seen an uptick in securitized loans maturing by 2024 that are under the 1.25 debt service coverage ratio (DSCR) based on net cash flow (NCF) benchmark.) Now that they’re coming due, the owners of those properties have to refinance at higher levels or risk losing them. Higher interest rates can often mean a bump of 350 to 450 basis points—bringing with it a loan payment that provides for a negative return. In some instances, particularly in asset classes such as office and multifamily, we’ve already started to see a decline in value. The equity of a couple of years ago has basically evaporated, leaving many assets underwater. The placement of new financing at current rates may mean a negative return. Some borrowers are just giving the keys to the lenders on these properties, but lenders don’t want them back. Both office and multifamily are management-intensive asset classes, and for office, many of the assets will require adaptive reuse/repositioning.
Value-add investors who are sitting on cash and can acquire properties without financing will have a lot of opportunity. They will be in a good position, as there will be owners motivated to sell on or before loan maturity. Finding the right deals requires a team that can connect the dots: a knowledgeable advisor/broker/dealmaker who understands legal and lending issues, and has contacts and connections within the lending and legal communities. For property owners, the guidance is very much the same. An expert broker can help with creative strategies to maximize the value of a property, as well as an understanding of the issues confronting lenders and the lawyers who represent them, and how to forge win-win solutions.
A Quick Look at the New AZ Water Reform
CRE investors need to be alert to the new water reform that came down from the governor’s office on June 1. The new regulation impacts the availability of any type of subdivision activity on raw land—most notably, subdivisions that do not currently have a final plat with a certificate of assured water supply. Even in the early stages, it’s clear that development in far-flung areas without assured water supply will be halted. Logically, this will likely mean less development in more remote areas, and the potential for diminished values, and more concentrated density in infill areas.
R.O.I. Properties recently experienced the changes firsthand with an 8-acre parcel that went to market in mid-May in Queen Creek. Before the Reform, the property could have been rezoned for about 40 lots, but under the Governor’s Reform, the maximum is five. (Six or more lots triggers a subdivision requiring a certificate of assured water supply.) Fortunately, R.O.I. pivoted in its marketing efforts and was able to secure two buyers seeking family compounds, which would not exceed the maximum five lots, willing to pay the same price as developers who would subdivide pre-Reform.