Ingram's May 2023

A: There’s not a lot of ground-up construction, not outside of projects like Bluhawk located on logical traffic nodes. We’re seeing a focus on older developments incorporating more entertainment, medical, or some type of office/housing mix. Retail is still trying to find the secret sauce there, but retail tends to be well-located so they are having success in redevelopment. Q: The multifamily boom, it was said, couldn’t last forever. But it sure seems to be trying. A: Multifamily is simple: When people are employed, they’re forming households, the population is growing, there is demand for housing. When mortgage rates go form 3.5 percent to 6 percent, though, fewer people can afford to purchase a house. The demand is there, but I think the rate movement will increase the number who decide to rent for a period of time. With our Class A properties, the biggest reason for leaving is purchasing a home. In 2022, our Class A renewal rate, typi cally about 55 percent, increased to 70 percent when the market mortgage rates changed. A: The mortgage rates changed, and a lot of people potential buyers are hanging on longer, maybe waiting for the market to soften. And sellers are probably sitting on a low-rate mortgage and reluctant to replace that with a higher-rate loan. If you refinanced three years ago, you’re not motivated today to sell, even if you need space or a change of venue. If looking for a small change, you really have to think about that. But given the cost of construction and low motivation from sellers who don’t want to lose those low rates, that’s restricting the availability of for-purchase homes. And that will, in some ways, create more demand for multifamily. Q: What’s the downstream effect of that on single family?

inflation with higher rates impacting all of those segments? A: Interest rates impact CRE in two ways. The first is your capitalized interest on new development. For example, if you assume during a two year construction period the rate would be 4 percent, but now it’s 7 percent, and the average loan balance over that period is $30 million, you just added 3 percent annually. That’s $1.8 million of additional project cost. So there’s a real up-front cost to higher rates. Q: That second impact? A: While nobody wants to pay $1.8 million more for the same thing, the more significant impact is on cap rates. Say you own a property and that cash flow is $400,000 a year at a 4 percent cap rate. With where rates were last year, that’s a $10 million property value. Using that same income, changing nothing on property operations, but now with a 5 percent cap rate, it’s now $8 million value. That 1 percent change in the cap rate reflects a 20 percent back end devaluation. That, more than the upfront interest carrying costs, is what has made developers really think about whether they want to move forward on a new project. Pricing on the back end is lower, so there’s less margin for error on the development side. Q: And on the operating side? A: Rates impact your ability to generate cash flow from existing invest ments. If you have a rate at 4 percent that matures next week and you go back to 5½ or 6 percent, you’re getting less cash flow. Your fundamentals might be great, especially in industrial and other sectors that are doing well, but you’re still getting less cash flow. Those are the impacts you see from chang ing rates. There’s a lot of anticipation about where rates will go, especially the federal funds rate. With the yield curve inverted today, it tells us that Wall Street is betting on rates coming down again in the future.

so they, along with many other tradi tionally online stores, are looking to add brick and mortar locations. Online retailers have recognized the need for that presence as a way to enhance the brands, but also to cover all the bases. The Warby customer buying glasses in person wants the exact fit and look; they’re not just after a pair of readers for the bedside. It’s something they find value in. Cushman Wakefield recently reported shopping center vacancies at 5.6 percent, their lowest levels since 2007, which indicates the strong corners are quite healthy. “My take is that there will be more changes (in office space trends), and a lot will impact the B and C space, partly because the cost of tenant improve- ment is so high.” — Aaron Mesmer, Executive Vice President, Block Real Estate Services

Q: So is the transformation there more adaptive reuse relative to new?

Q: How is the Fed’s move to fight

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I ngr am ’ s

Kansas City’s Business Media

May 2023