We have received numerous inquiries from lenders hoping to get some insight on the commercial real estate market. This pandemic certainly warrants extreme trepidation. For the most part, though, deadlines are being extended and the buyers are not terminating. For now, buyers remain cautiously optimistic.
Thoughts on Existing Loan Portfolios:
- We said it before and we stress it again – focus on the tax returns and the rent rolls.
- Don’t just check the box. Tenant roll over in the next 18 months? Has the credit spectrum been impacted?
- Be proactive. Maybe a frank discussion about future distributions and cash reserves are warranted.
- Tenant improvement costs have almost doubled in the last 3 years. With the exception of the CBD, suburban office suites are now taking 10.5 months (on average) to re-lease.
- A number of property owners have not experienced these realities.
Future Loan Considerations:
- The office market for the CBD and inner suburbs will remain strong.
- Class B office in the suburbs will continue to struggle as companies continue to pay up for Class A buildings with all the amenities deemed necessary for hiring and retaining talent.
- In our opinion, suburban office rents have peaked. Beware of proformas with rate inflation.
- Companies moving east is not a temporary trend. It will take longer to backfill suburban vacancies.
- Multi-tenant flex buildings along I-495 now trade at $120/SF. Some tenants have a very high % of office space that was amortized into the rent. What is the market rate if they do not renew?
- Multi-family projects with a small retail component – can you attract credit retail tenant(s)?
We Are Bullish on the Following:
- Warehouse/distribution. We expect demand to continue to pick up in all submarkets. There is still room for rent appreciation. Just pay attention to clear height and having adequate loading docks.
- Lab space. Life science sector is growing exponentially. There is a severe shortage, and owners with the necessary expertise will be rewarded with lab conversions. Suburbs will be a big beneficiary of Cambridge’s success. Monitor VC funding.
- For now, we are still a fan of grocery anchored retail.
As usual, please continue to reach out whenever the R.W. Holmes team can be a resource.