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Rising interest rates in 2023 will drive up borrowing costs and could slow new construction projects and existing property sales, but some real estate segments can expect growth, according to a panel of commercial real estate professionals leading the Auburn CityBuilders Outlook 2023 event held January 12 at Auburn University.
Auburn CityBuilders Outlook 2023 participants included (left to right) Greg Winchester
(standing), Earnest Johnson, Joe Bucher, Rob Boyd, Sims Garrison, Jonathan Broadway
and Paxton Hollar.
Six commercial real estate professionals provided their industry forecasts at the annual CityBuilders event, which is intended to help real estate professionals identify key trends to watch during the coming year.
CityBuilders is an outreach initiative of Auburn’s top-ranked Master of Real Estate Development (MRED) program, which is run jointly by the Harbert College of Business and the College of Architecture, Design and Construction (CADC).
Individually, the panelists identified headwinds and tailwinds unique to their specific sectors.
Paxton Hollar is senior vice president of SunCap Property Group, a national developer of industrial and multi-family properties. According to Hollar, the debt markets are the biggest headwind his firm faces.
“The biggest challenge is how to price risk,” said Hollar, whose firm primarily does build to suit development for companies like FedEx, as well as for manufacturing and pharmaceutical clients. “When we price these things, the [bond] markets are literally moving daily. It’s challenging not knowing what the proverbial new normal will be. Understanding where that puck is heading and trying to skate to that point is the challenge.”
Auburn alumnus Jonathan Broadway (BSBA marketing 2000) had a slightly different take on 2023 as his firm, LHT Commercial Real Estate LLC, is the largest developer of Dollar General Stores in the country. Because everyone is looking to save some money on their purchases, he said, demand for new Dollar General Stores remains strong.
“Selling stores to investors across the country with cap rates where they’re at—it’s a good time to buy stores especially if you’re buying with cash,” said Broadway, who co-founded LHT a decade ago. “If you’re getting financing [to buy a store] it gets a little tricky, but it’s not impossible.”
On the other hand, the policies that emanate from Washington D.C. create headwinds for the commercial real estate industry.
“No matter what party is in office, the decisions they make really affect the average person and a lot of times—no matter the party— they forget about that,” Broadway said.
Sims Garrrison (BSBA accountancy 1993), who is executive vice president and CEO of Fairway Investments, a real estate investment company with retail, industrial and multi-family properties in nine states, said his firm’s diverse portfolio presents unique challenges.
According to Garrison, last year their retail portfolio was 95% leased, but rising interest rates may negatively impact some of their tenants this year. However, debt is probably the biggest challenge his firm and industry sector face.
“There were a lot of deals built and construction loans that weren’t based on where the construction loan rates are today,” Garrrison said. “We put a lot of debt on individual properties and those loans mature and we move to higher interest rates. [That’s] an increased debt service now that we have to meet over the next five years.”
The only lender on the panel, Rob Boyd (BSBA finance 1987) is managing director and co-head of commercial loan production and mortgage portfolio management for New York Life Real Estate Investors. His company doesn’t face any headwinds, as they reap the benefit of higher interest rates.
However, he has seen some disturbing trends in the office building real estate market, where “the top 20% of tenants like Amazon and Google will pay rent for gleaming new places,” but that’s not necessarily the case for regular tenants, he said.
“For office, I’m not saying it’s going away and some of you [fellow panelists] have done some beautiful deals,” Boyd said. “There will be some winners, but there are a lot of people with mid-block buildings in D.C. or post-war buildings in Manhattan and they are in trouble. I don’t know that you can renovate your way out of them.”
An architect by training, alumnus Joe Bucher (bachelor of architecture 2003) is director of strategic design for Southwest Value Partners, a private equity real estate firm with multi-family, hotel, and office developments and investments in 19 states.
Bucher anticipates a huge reset on what people will pay to occupy space this coming year and beyond. He also sees a golden opportunity for developers as the workforce continues to return to the office after the pandemic lockdowns.
“People leaving that say if we are going back to work, what does that look like and I want to be in the best thing available,” Bucher said. “There’s this huge gap in the market—a huge opportunity probably for a lot of people in this room.”
Bucher suggested that developers should consider political risk in their investment philosophy, as he described the Responsible Hotel Ordinance that the Los Angeles City Council put on the ballot for voters to decide on in 2024. Under the ordinance, hotel owners would be required to submit the number of vacancies in their property to the city housing department each day so they could then fill the rooms with homeless people.
According to Johnson, there is a severe housing shortage in parts of the country, which combined with rising mortgage rates bodes well for residential complexes.
“We don’t think rents will collapse,” Johnson said. “The multi-family fundamentals are still really strong. In our industry [now], we’re 95-97% occupied and our rent collections are up and higher than they’ve ever been.”
Johnson added that mortgage payments are up 70% from 18 months ago. Further, he said, in Florida, people can live in one of his apartment complexes with amenities like a pool, gym and pickle ball courts for less than $2,000 per month versus purchasing an overpriced home that needs renovation and might have a $6,000 monthly mortgage payment.
As for where real estate development will likely continue to flourish, the panelists agreed that the Southeast and Southern United States are the best regions.
“Any markets you see with declining population, that’s an erosion of labor force and in the industrial space that’s a problem,” said Hollar.
The CityBuilder panel discussion was moderated by Greg Winchester, CEO of Summit Investors and an MRED instructor and director of the program’s industry and alumni relations.