Another lender announces slow down for CRE credit

Credit for commercial real estate (CRE) looks to be entering a crunch state in the second half of 2022 as a number of the big lenders announced in July that they were pulling back in that sphere.

The latest to make such an announcement are Signature Bank and M&T Bank. The former said it “expected to cut back on lending for multifamily and other commercial real estate assets”, and the latter laid the blame squarely at the feet of higher interest rates in its decision to make “fewer CRE loans this year”.

Construction slump

M&T’s CRE loan balances decline by 2%, or $830m in Q2 2022, as reported by the Real Deal, who extracted key takeaways from an earnings call hosted by M&T chief financial officer Darren King. King reportedly specified that construction loans declined, alongside a decline in completed projects and new developments coming online.

Interest rates and inflation

King said the rates moves were “affecting cap rates and asset values” and that they were “not seeing the turnover in properties like you might have under normal circumstances. And that will affect the pace of decline and our growth in permanent CRE.”

According to BisNow reporting, “Interest rates, raised in an attempt to beat back record-high inflation, have contributed to a drop in investment volume from the highs of 2021 and early 2022, slowing CRE deal volume”.

Global pressures

In broad term, these economic conditions are seen at varying rates around the world right now. As S&P’s recent update explains: “Economic growth is slowing. Interest rates remain stubbornly high. Estimates of the risk of recession or even stagflation creep upward and questions persist on whether central banks are under- or over-reacting in pursuit of monetary normalization.”

Additionally, on the residential side, their PMI research indicates “a steep contraction in demand for real estate amid tightening financial cost of living”.

Social: How is the rising cost of living playing out in your market?

FINANCIAL STRATEGIES: Get Smart

Alec J. Pacella

Growing up in a small town in western Pennsylvania meant that I wasn’t necessarily on the cutting edge of technology. Any new electronics took months if not years to trickle down and even then would usually mean a trip to bigger cities such as Youngstown or Pittsburgh to track down. A great example is the LED watch. It was initially developed in 1971 and became widely available by the mid-1970s. But it wasn’t until Darrell Knight showed up sporting one on his wrist right after Christmas break of 1978 that I actually saw one, live and in person.

The use of technology in real estate seems to follow a similar path, with innovations taking months, if not years, to be integrated into the industry. This month, we are going to discuss some ways, specifically in the area of smart buildings, that technology has finally begun to make a big impact.

Air quality

While certain sectors, such as medical and clean manufacturing, have been driving advances in clean air filtration and monitoring, the advent of COVID- 19 has placed a spotlight on this topic. The result is a whole ecosystem of products and strategies known as IAQ, or indoor air quality. The most common IAQ technologies revolve around higher-efficiency filters. Humidification and dehumidification systems have also become much more advanced, helping to control dust and mold while maintaining comfort. More advanced systems assist with heat and energy recovery ventilators to offset the increasingly “air- tight” nature of modern construction, as well as UV purifiers to neutralize airborne bacteria and viruses.

Voice-and touch-activated tech

Again, this type of technology received a huge boost in the wake of COVID-19. If you have ever used systems such as Alexa, Siri or Google, you are already well aware of the power and convenience voice-activation can offer. And while touch-activated technologies have been around for decades, the overwhelming popularity of smartphones and apps are leading to more advanced applications. In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing this type of technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone. And don’t look now but many larger commercial property owners are beginning to integrate these same technologies, offering them to their tenants as a standard building amenity.

Smart parking

This may seem like something reserved for only big cities such as New York, Chicago and Los Angeles.

In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing [voice activation] technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone.

And these cities certainly began adopting technologies years ago, with the advent of apps such as SpotHero and ParkWhiz, which allow parking operators to maxi- mize their occupancy through digital notification, reservation and even sub- leasing processes. But if you’ve ever parked in the decks at Hopkins airport, you’ve probably seen another, even sim- pler example that uses a small green or red light above each space, allowing potential parkers to quickly differentiate vacant spots from occupied spots

Energy efficient systems

This can fall into two categories:

1) systems that optimize energy via continual monitoring and 2) clean or renewable energy features. The former is the real heavyweight when it comes to smart building design and is mainly based on the autonomic cycle of data analysis tasks (ACODAT) concept. Basically, the HVAC systems have a central processor that continually monitors usage, time of day, outside air temperature, building occupancy and a host of other factors to not only be reactive in running the HVAC system at peak efficiency but also be predictive by learning patterns over days, weeks and months. The latter includes a host of advances in technologies such as heat pumps and geothermal systems as well as solar- and wind-enabled sources.

The most common acknowledgement of building technology is a certification known as Leadership in Energy and Environmental Design (LEED), through the U.S. Green Building Council. A similar certification is known as the Building Research Establishment Environmental Assessment Methodology (BREEAM) rating. Both of these involve achieving points related to set standards that address carbon, energy, water, waste, transportation, materials, health and indoor environmental quality. There are many examples of LEED-certified buildings in Northeast Ohio, including the Maltz Performing Arts Center at Case Western Reserve University, UH Avon Health Center and the Children’s Museum of Cleveland, among hundreds of others.

And there have been many noteworthy projects worldwide, including the following high-achieving facilities.

Oakland City Center (Oakland, CA)

Developed by Siemens, the build- ing contains a variety of dynamic and artificial intelligence to power its operation. A noteworthy feature is an advanced air volume system that can put the entire building into “green mode,” which is a setting that uses aggregated historical data to optimize humidity, air pressure and temperature. It also has a decontamination mode that raises the temperature to acceler- ate the decay of airborne virus particles.

Cisco Systems Canada HQ (Toronto)

This was the first building in Toronto to be rated as a LEED Core and Shell Platinum building. It links up Cisco’s business operations and helps to power Cisco’s Internet of Everything (IoE) while also streamlining all building data into a single network.

Mitie (London)

Arguably the most striking example of the IoE in smart buildings, the Mitie building uses automated alarms, remote systems management, machine learn- ing and data analytics to achieve a 95% accuracy rate for predictive main- tenance calls and a 3% improvement of energy usage by clients.

By the time we hit high school, Darrell Knight’s simple, push-button, red-hued LED watch had been eclipsed by a series of LCD watches that integrated features like alarms (with music, no less), stop watches and the ability to track multiple time zones. And while today’s smart buildings have shown great advances over the last two decades, the pace of technology promises to have an even greater impact on this sector.

Article from September 2022 Properties Magazine

Top Tech partner: Apollo Energies

Those keeping track of our ongoing Top Tech series will know that this regular blog is aimed at highlighting some of NAI’s key tech partners and the game-changing solutions they bring to the commercial real estate (CRE) space. These are not sponsored blogs, but rather a way for us to share tools, technology, and ideas that are changing CRE for the better and streamlining and improving the services we offer.

This month’s partner is Apollo Energies. Below we discuss their approach to creating carbon-free properties and helping clients hit ambitious Environmental, Social, and Governance (ESG) goals.

What does Apollo Energies do?

The starting point for Apollo’s commercial services is typically an energy audit that helps clients determine the best way to streamline their building’s operations and bump up energy efficiency. Apollo also advises clients on how to meet safety, health, and wellbeing requirements in line with today’s ESG standards.

Essential ESG

In recent years, there’s been an increasing push for corporate entities to meet sustainability commitments and to be able to show their progress. ESG criteria, which detail the goals these companies must meet, are also being used by investors and the public to evaluate the impact that company has on society and the environment.

With a focus on the ‘E’ of ESG, Apollo aims to help its partners meet the right goals, and lower their own energy spend in a clearly documented and reportable way. Their approach includes evaluating carbon emissions from a company’s operations, reducing carbon tied to power use, and assessing the carbon impact of the enterprise’s supply chains.

They also work with clients to meet benchmarks for Energy Star® certification, identifying their buildings as top performers in energy efficiency and ESG accountability.

Tangible results

The results of this focus and dedication are certainly impressive, and one of the reasons Apollo are a top choice among NAI brokerages across the country. At time of writing, the company has improved some 52 million square feet of building space and saved nearly 7.5 million kilowatt-hours (kWh) of energy across their client base.

For a breakdown of their approach to ESG, have a look at their article here, or visit their commercial energy audits page for details on the Apollo approach to carbon-free CRE.

SOCIAL: With the demand for energy-efficient real estate on the rise, what tools or consultants are your go-to when planning energy-smart initiatives?

What’s happening in… Hamilton, NZ?

New Zealand’s city of Hamilton – or Kirikiriroa in Maori – sits on the banks of the famous Waikato River which features heavily in its sights and site. In this city known for its beautiful greenery and walks, the most popular tourist attraction is the 54-hectare Hamilton Gardens.

With a population of just under 200,000 people, Hamilton is the fourth most populous city in the country. In 2020, it was named ‘most beautiful large city in New Zealand’. The wider Hamilton Urban Area includes Ngāruawāhia, Te Awamutu, and Cambridge, which collectively cover some 110 square kilometers of land. It is also the third fastest-growing urban area.

Leading industries and outputs

Hamilton’s economic heritage is as an agricultural services hub, particularly dairy cattle, and vegetable farming, but it also has thriving business services, construction, and health and community services. Additionally, R&D is an emerging sphere, given the city’s high tertiary educated population.

Residential market factors

New Zealand has typically seen high demand and low supply for residential housing in recent years which has kept prices elevated. There are, however, some movements in the markets, and new regulations around lending coming into play that could mean fewer residential buyers would qualify and those that do could be in for “bargains” in 2022 – according to a January 2022 report from Stuff.co.nz citing Mortgage Lab chief executive Rupert Gough.

Additionally, Realestate.co.nz recently reported new house listings in November 2021 were hitting their highest level in seven years, and Stuff.co.nz added that data from Infometric showing consent and permissions for new build projects were also much increased, compared year on year.

The latest CoreLogic Home Price Index (HPI) report shows that property values have declined in Hamilton, where housing values were down 0.9% in March.

Commercial property outlook

New property rating valuations from Hamilton City Council – released in April 2022 – put the city’s worth at NZ$ 71.4 billion.

Our Hamilton reports that the city’s “total property Capital Value (the total value of the land and any buildings on it) increased 53%, and Land Value 67% since 2018”. “On average,” the article continues, ‘Capital Values for commercial and industrial property have increased by 40% across the city”.

Insight from NAI Harcourts in the country suggests that industrial will remain “the darling of the three commercial property sectors”, but also that there is momentum in the Hamilton office market, which they characterized as coming from a “flight to quality” that was pushing local business in the central business districts to up their game.For more regional insight, contact NAI Global’s partners in Hamilton and surrounds.

Industrial CRE’s “strong fundamentals” mean resilience

A recent report – released in late May 2022 – shows the industrial commercial real estate (CRE) boom is far from over, even when the “headwinds” are accounted for.

The May 2022 Matrix Industrial Report, from Yardi Matrix, says that although the “economy hit a rough patch in the first quarter due to inflationary pressures and rising energy prices, […] demand for industrial space continues to be robust”.

The continued presence of market fundamentals like increased consumer spending and job growth are adding to the sense of resilience seen from the sector, which has made huge strides since the dawn of Covid-19 kicked online shopping and fulfilment into particularly high gear.  

Drag factors

CRE in general and the industrial CRE sector in particular do face a range of economic pressures as we look to the second half of the year. Slower economic growth in the first quarter, supply chain issues, and “persistent inflationary pressures” are not insignificant depressive factors, but the drivers of demand are not going anywhere either.

Boost factors

The boost factors, on the other hand, include “healthy consumer spending”, and “the need to bring the nation’s stock up to snuff to support modern logistics”.

Additionally, occupancy across most US metros remains high and “rents are growing well above historical levels around the country,” according to the report. Rental averages across the US have increased by 440 basis points year-on-year.

Industrial building supply chain

The report calls the new supply chain for industrial building “extraordinarily robust”, but, as Commercial Property Executive reporting on the report highlights, “[a]lthough the under-construction pipeline is ballooning, experts see the industrial market as severely undersupplied”.

This assessment, from Prologis, draws from several different data sources including the Purchasing Managers Index, retail sales data, and job growth statistics, to posit that the US has “16 months of available industrial inventory”.

Reportedly, over 640 million square feet of industrial space was under construction nationwide at the end of April. Including planned projects takes the pipeline to 650 million square feet.

Global trend

Far from being a US-only trend, demand for industrial is high among most developed economies – or almost anywhere with a strong consumer base demanding more and quicker online shopping and delivery.

As this Financial Times article shows, that’s the case even where Amazon space acquisition is slowing: “There has been record demand for UK warehouses in the past two years,” they write, “with take-up north of 50 [million] square feet compared with a pre-pandemic average of 32 [million square feet]”.

Social: Are you operating in a well-supplied industrial CRE market, or are people scrambling to find space? Tell us where in the world you are, and what the “pulse of industrial” is in your region?