by Neil A. Dolgin
As we enter the new year, the commercial real estate industry is in transformation and that’s creating unique opportunities for investors. As the New York City metro area continues to recover from the Covid-19 pandemic, we are seeing improvements in several commercial real estate market segments.
The industrial segment remains strong. Vacancy rates are low right now. The Motley Fool reports that demand for warehouse space drove prices to record heights and vacancies to record lows throughout 2021. They see e-commerce retailers — from Walmart and Kroger to craftspeople on Etsy — driving the growth of distribution facilities. While losses due to the Covid-19 pandemic and higher operating costs forced many businesses to migrate to lower cost buildings in Pennsylvania, New Jersey and Long Island, the industrial businesses that have stayed in New York City are committed to this mega-marketplace.
Multi-family housing is showing real promise. The National Association of Realtors projects that rent growth for multifamily units could remain at about 10% in 2022, depending on the market. They recorded double-digit rental growth in 127 out of 390 major metro areas, defined as having populations of more than 1 million. Tampa, Florida posted a 25.1% rent growth year over year in the fourth quarter of 2021.
In-store sales recovered well to above pre-pandemic levels, as many consumers still prefer the human touch and want to try things on for size, fit, and appearance. Over the past year, sales through both the online and in-store channels have risen, reports Forbes.
Where we are seeing continued weakness is in the office segment. TREPP reported that the CMBS delinquency rate increased for the first time in 18 months in December 2021, due to several large office delinquencies in New York City and elsewhere.
Investor activity is strong. ACORE Capital is planning to increase its commercial lending activities to around $10 billion in 2022 from $7 billion in 2021. Forbes notes that financing conditions for commercial real estate are good as long-term interest rates are expected to remain low. The Federal Reserve may begin slow, small increases in its target for short-term interest rates in the second half of the year.
Another thing to watch is rising OPX (operating expenses). This includes insurance rates, labor and repair costs, as well as materials costs. New York City raised tax rates on January 1st and they might do so again.
If inflation continues to rise this may trigger interest rate hikes. We need to see how the marketplace reacts to inflation and higher interest rates. It may cause building sale prices to decline.
And we bring this to the attention of every investor: nobody should borrow more than 60% on a building, max 65%. At 60%, your loan to value is secure and it protects you in a down market as well as when you have to re-adjust your interest rates at a later time, five years down the road.
The first half of 2022 is an optimal time to secure advantageous pricing on investment properties. At Kalmon Dolgin Affiliates (KDA), our 118 years of experience in New York City’s commercial real estate industry gives us a solid niche in industrial building investments in the $50MM and under price range. We combine this with our experience as building owners and managers.
We lay out a deal clearly for investors by painting a real-time picture that shows what your numbers are truly going to look like based on future growth in rents, income, and property value. We also look at whether leases, rents, expenses, and major repair expenditures are projected to increase or decrease. And we’re experienced in remaking older industrial buildings in ways that drive returns ideally with a 5.5 or 6 capitalization rate. We achieve this with investment properties whether they’re C-rated older buildings in less desirable neighborhoods or A-rated modern buildings in optimal neighborhoods. As my father taught me, “there’s a Jack for every Jill. A building isn’t built just for one individual, it’s built for somebody else who can also utilize it.”
In 2022, KDA is also expanding our building management services business. We have appx. 5 million square feet currently under management across 10 states, from trophy office properties to loft buildings and warehouse facilities, to specialized research and development complexes, small office buildings, medical office condominiums and industrial parks.
Reach out if you want to talk about the state of the investor marketplace.
Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.