Ringo Starr probably wasn’t thinking about efforts to find good commercial real estate transactions in his 1971 hit “It Don’t Come Easy,” but despite historically low interest rates, good real estate deals are hard to find.
Treasury yields are the lowest they have been in four months and risk premiums continue to tighten.
That means commercial mortgage rates are low. Rates are in the 2.75% to 3% range for five- and 10-year loans backed by conservatively leveraged properties, according to the John B. Levy & Co. Inc. national mortgage survey.
Bank loan pricing varies depending on the credit of the borrower but is in the same range for those borrowers with good balance sheets financing a good property.
Not to be outdone, lenders of commercial mortgage-backed securities are pricing new deals aggressively and originating loans at a blistering pace.
According to Commercial Mortgage Alert, CMBS volume in the first half of 2021 amounted to $45.7 billion in the U.S.; by comparison, only one first-half of the year in the past 10 years was stronger, and that was 2015.
What do low interest rates mean for commercial real estate investments? It means prices are getting bid up as yield-starved investors look to deploy capital. So far in 2021, the recipients of most of this capital have been industrial and apartment property owners.
Year-to-date sales activity for industrial and apartment properties has outpaced the average year-to-date sales volume in the prior five years before the pandemic (2015-2019), according to a report by Real Capital Analytics.
On the other hand, sales volume for 2021 in each of the office, retail and hotel sectors has lagged that same five-year benchmark.
So investors are faced with limited options to get money to work in real estate. They can try to outbid other buyers on industrial and apartment properties, or they can take a little more risk and buy office, retail or hotel properties where the prices are not as frothy, but there are not as many sellers, either.
At least two huge real estate players made their choice recently when Blackstone Group and Starwood Capital Group formed a joint venture to take the Extended Stay America business private in a $6.29 billion deal. The takeover was financed with a $4.65 billion floating rate loan from JPMorgan and Citigroup that priced at about 2.65% interest only.
In the Richmond region, a notable office portfolio is on the market that will test the appetite of yield-starved investors.
The Glen Forest Office Park represents 567,000 square feet of office space spread over 11 buildings off Forest Hill Avenue in Henrico County that have an overall 86% occupancy rate.
The buildings are well-located near the Glenside Drive exit off Interstate 64. The buildings are owned by an affiliate of Brookfield Asset Management Inc., which had acquired them in 2018 as part of its purchase of Forest City Enterprises. Forest City had bought them from several Pruitt family companies in 2007.
The portfolio comes to the market just as businesses are deciding their long-term office needs, but also while interest rates and, as a result, cap rates are very low.
The buyer may get a great yield but must assume the risk that long-term office occupancy levels have not significantly changed in this post-pandemic world.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@ jblevyco.com.