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MarketSnapshot
At Northmarq, we are committed to offering our clients the latest trends and expert analysis to power their decision making. Our MarketSnapshot suite of reports contains critical market data covering a variety of commercial real estate property sectors. In each report, you will find: Investment sales volume data Average cap rate information Buyer distribution analysis... and more! Single-Tenant Overall Market Single-Tenant Office Single-Tenant Industrial Single- Tenant Retail Multi-Tenant Retail
Latest Publications
Orange County 4Q23 Multifamily Market Insights report: Rents trend higher, supported by continued demand
Highlights: The Orange County multifamily market recorded an uptick in vacancy and rising rents during the fourth quarter. The pace of deliveries has quickened since the second half of 2022, after almost no new supply was added a few years ago.Vacancy rose 10 basis points in the fourth quarter, after the rate held steady throughout the middle part of 2023. This year marked the first annual vacancy increase in the market since 2018.Asking rents rose in the second half of the year, ending 2023 at $2,527 per month. Rents advanced 1.5% in 2023 after steep increases in the prior two years.Local multifamily investment activity slowed in 2023, with limited activity during the fourth quarter. Prices have remained elevated for the past three years; in 2023, the median price reached $376,400 per unit.Read the report, or engage with our Irvine office to learn more.
March 5, 2024
San Diego 4Q23 Multifamily Market Insights report: A few more properties sell as 2023 comes to a close
Highlights: The San Diego multifamily posted a modest vacancy increase and minimal rent decline to close 2023, after mostly steady performance during the first nine months of the year. Heightened delivery totals outpaced demand in 2023, although local construction levels have peaked, and future inventory growth is on pace to slow beginning in 2024.Local vacancy trended higher in 2023, including a modest increase during the fourth quarter. Despite the recent rise, the current vacancy rate is only slightly higher than the market’s five-year average.For the first time in nearly three years, asking rents in San Diego inched lower in the fourth quarter. Average rents dropped 0.7% during the period, ending the year at $2,333 per month. For the full year, rents rose just 0.2%.Sales velocity in the region slowed in 2023, but more transactions closed in the fourth quarter than during any other period of the year. Cap rates have trended higher, averaging approximately 5.1%, while the median price dipped to $296,000 per unit.Read the report, or engage with our San Diego office to learn more.
March 4, 2024
Drop-and-Swap Case Study: One Member Cashes Out, Second Does a 1031 Exchange
Our 1031 exchange experts are frequently asked how members in an LLC or partnership can choose different paths in a real estate transaction. For example, what if one wants to cash out of the investment property entirely and the other wants to reinvest their proceeds and defer taxes by executing a 1031 exchange?A version of drop-and-swap can be used to address this situation.The SituationJohn Rosen and Mary Link were college friends. After graduation, they decided to invest in real estate together, pooling their money. They formed JRML LLC, and shortly afterward, acquired their first rental property – an apartment building in Pittsburgh, PA – that cost them $310,000.Over the next 30 years, they maintained the property well, and it brought the two friends significant cash flow, but Mary recently decided she no longer wanted to own the property; instead, she would like to use her share of the sale proceeds to retire. However, John wants to continue investing in real estate. After consulting a local a real estate agent John and Mary learn that they can sell the property for $1.6 million.The ProblemJohn quickly realizes that the sale of the apartment building would result in them owing capital gains taxes on $1,290,000 ($1,600,000 minus their initial $310,000 investment), plus depreciation recapture tax on $310,000. Taxes on the gain would be $258,000, plus $85,000 in additional depreciation recapture tax, as well as state taxes (3.07% tax rate of PA) of roughly $39,603, and net investment income tax of $49,020 at a rate of 3.8%.In other words, the $1.29 million profit would be reduced by at least $431,623 due to associated taxes. John is personally not willing to incur that taxable event, so they need a different solution than an outright sale.The SolutionAfter consulting with tax professionals, John and Mary set up a variation of the drop-and-swap strategy. Mary will withdraw from the LLC according to state laws. In exchange for her 50% stake in JRML LLC, she will become a 50% tenant in common owner of the property, owning a share alongside JRML LLC.At the same time that Mary withdraws from the LLC, John’s brother, Robert, will become a 1% JRML LLC member, allowing its partnership tax status to remain intact because the entity will continue to have multiple members. The LLC will sell the Pittsburgh duplex, and Mary will get her 50% share of the proceeds in a taxable event to her only.At the end of the year, the LLC’s CPA will issue documents that allow Mary to recognize her fair share of the depreciation recapture and capital gains. The financial results for Mary will be no different than if she remained in the LLC and the property was sold without an exchange.John consulted with additional professionals and learned that JRML LLC would need to identify a Qualified Intermediary (QI) to help facilitate his involvement in the 1031 exchange transaction and successfully defer taxes. The QI requirement is necessary as neither John nor the LLC can be in possession of the sale’s proceeds at any time during the exchange. The QI will handle the preparation of all required exchange documents and hold onto the LLC’s portion of the proceeds from the sale.After the sale, JRML LLC will have 45 days to identify an appropriate replacement property or properties. Using the exchange proceeds held by the QI, the LLC will complete the acquisition of their new property or properties worth at least $800,000, exchanging equal to or up from their share of the original property and maximizing the value of the 1031 exchange.The ResultMary was able to cash out of the original investment property, pay all the required taxes, and retire to Florida. John and Robert, as the two members of JRML LLC, continue to own investment property in the Pittsburgh area.John was able to defer the taxes from selling the original investment property by using a 1031 exchange. Those taxes will remain deferred until John completes a real estate transaction without using a 1031 exchange.Taxpayers are encouraged to discuss their plans with their legal and tax advisors before they move forward with the sale of an investment or business-use property, and they must engage the services of a QI as part of a real estate transaction that includes a 1031 exchange.
February 27, 2024
Inland Empire 4Q23 Multifamily Market Insights report: A mixed outlook leading into 2024
Highlights: Operating conditions in the Inland Empire cooled during the final months of 2023. Vacancy has remained within a very tight range, but rents declined. Construction is accelerating, which should result in another vacancy rise in 2024.Local vacancy inched up 10 basis points in the fourth quarter, ending 2023 at 3.4%. The rate rose 40 basis points for the full year, following two consecutive years of declines.Rents dropped in the fourth quarter after remaining fairly flat through the first nine months of the year. Asking rents fell 2.5% to $1,773 per month in 2023.The number of sales transactions in the multifamily investment market slowed throughout the year, with an additional decline recorded in the fourth quarter. The median price in 2023 was $240,600 per unit, with Class C properties accounting for the bulk of the transactions.Read the report, or engage with our Irvine office to learn more.
February 23, 2024
The Impact of Higher Interest Rates: Opportunities and Strategies for CRE Investors
Over the last two years, interest rates headed in one direction: up. Back in January 2022, the Federal Funds Effective Rate was 0.08%. Fast-forward to year-end 2023, and the rate was 5.33%. The question is less about the “what” and more about the “why” and the “how.” Specifically, why are rates rising, and more importantly, how does this impact commercial real estate investing?Why Interest Rates Have Been RisingInterest rates have gone up because the Federal Reserve has been trying to curb inflation. Inflation sat at 8.2% in November of 2022, which was more than quadruple the Fed’s target of 2.0%. So far, the Fed’s strategy has worked. Consumer prices only went up a relatively mild 3.2% through October 2023, which is welcomed news for those waiting to see prices drop. However, higher interest rates can also bring good news for commercial real estate investment strategies.Rising Interest Rates Can Produce More Purchasing OpportunitiesRising interest rates can result in opportunities to purchase properties from distressed sellers — particularly those with variable interest rates. No one can foresee the future, so even prudent investors may have agreed to a variable rate and now find themselves unable to make their payments. Some property owners may be willing to part with their CRE asset for what they owe on their loan — or maybe even less — just to get it off their books. It may also be possible to find good deals in the foreclosure market as banks look to offload properties they’ve reclaimed. At the same time, rising interest rates also make it easier to get better deals in the traditional CRE market because there may be less competition.Higher Interest Rates May Present Negotiation OpportunitiesWhen interest rates rise, fewer people compete for commercial properties, which puts an investor in a better position when it’s time to negotiate prices. When interest rates were low, it cost much less to borrow money, which encouraged many buyers to make sizable offers on properties. Now that interest rates are higher, many of those investors are staying on the sidelines. Without several buyers vying for their property, sellers may be motivated to agree to a lower price. When in front of a motivated seller, a buyer has more power at the negotiating table.Rising Interest Rates Can Strengthen CRE as a Hedging ToolCRE owners may be able to realize better-than-average returns due to higher rental rates during an inflation-driven economy. As is the case in the current economy, interest rates rose because inflation was on the way up. When inflation rises, it often takes rental prices along with it. For instance, while inflation peaked in the summer of 2022, rental rates in many sectors of CRE have continued to grow. For CRE owners, this could mean short-term gains that offset other assets that may have sub-par performances during inflationary periods.While it’s impossible to tell for certain if or when interest rates will reverse course, those investing in commercial real estate can take advantage of the opportunities this presents. If investors have the financing they need, now may be a good time to purchase CRE assets, especially if they can find good deals in the distressed or foreclosure market. With fewer buyers throwing their hats in the ring, it may be possible to negotiate better deals and build a more robust CRE portfolio. hbspt.cta.load(7279330, '7efe8b9e-e5f7-4927-9bb0-4b88cd1bff4d', {"useNewLoader":"true","region":"na1"});
February 22, 2024
2024 National Multifamily Outlook report: Supply-demand imbalance likely in 2024
We're pleased to present our 2024 National Multifamily Outlook, highlighting key economic trends, forecasts for property performance metrics and more.
February 20, 2024
Net Lease CRE Investing: Understanding Credit Ratings in CTL Finance
Net lease investing — purchasing a commercial property that is net leased to a single, creditworthy tenant — is a unique way to profit from commercial real estate (CRE). It offers predictable cash flow and all the benefits of ownership yet requires a minimal level of landlord responsibilities that can vary depending on the type of net lease. When properties and tenants are selected carefully, net lease investing can be a relatively low-risk way to own income-producing properties and enjoy significant tax benefits.How is Net Lease Investing Different from Conventional Real Estate Investing?Net lease investing differs from conventional CRE investing in several significant ways. One of the most unique aspects is the financing. Net lease deals can be funded through a highly specialized finance method called credit tenant lease (CTL) finance. Unlike conventional CRE mortgages, which are backed primarily by the equity in the building being financed, CTL uses the lease that a tenant signs (the income the lease produces) as collateral. In other words, CTL finance depends on the tenant’s ability to pay the rent rather than on the value of the building. A tenant’s credit, therefore, is a critical aspect for success in net lease CRE investing.Understanding the Importance of Credit RatingsCompanies and other corporate entities that lease real estate have credit ratings that are analogous to the individual credit score that most people are familiar with. Professional rating services such as S&P, Moody’s, and Fitch Ratings analyze companies and routinely assign corporate ratings. Each service has its own proprietary methods that differ somewhat, but ratings are typically assigned on a letter grade basis, with “A” being higher than “B” and “B” being higher than “C” and so on down the scale. They will also use capital letters or lowercase letters to emphasize relative strength and will add modifiers such as pluses (+) and minuses (-) or one-digit numbers.The highest credit rating any entity can receive is “triple A” (AAA). A firm or other institution with a AAA rating can be trusted to meet its financial obligations on time and in full. The lowest ratings are “C” and “D.” Low-rated firms represent a high risk of default.Investment Grade vs. Non-Investment GradeWhile there are many gradations in credit ratings, there are only two main categories. They are “investment grade” and “non-investment grade.”Companies, institutions, and governments with an investment grade rating are comparatively low risk. Non-investment grade entities carry more risk for investors, especially debt investors. Investors demand a higher yield from weaker companies. Thus, AAA-rated firms will pay less interest on bonds, and often less rent on real estate, than BBB-rated firms will.How is CTL Finance Structured and Who Qualifies?For accounting and investing purposes, a real estate lease is seen as a debt obligation. CTL finance looks at a lease very much as it would a corporate bond. CTL bankers collateralize the lease and make a loan to investors or purchasers based on the creditworthiness of the tenant.It’s important to understand that only corporate tenants with an investment grade rating from a major rating agency can qualify for CTL financing. In practical terms, that means a BBB- or higher rating from S&P and Fitch Ratings of a Baa3 or better from Moody's.The significance for net lease investors is clear. Non-investment grade and unrated tenants can be financed by other means but should be avoided by investors looking to use CTL finance. Investment grade tenants should be sought out, but with the realization that higher rated tenants, while offering a higher measure of safety, tend to pay somewhat less in rental income.There is no need for CRE investors to be intimidated or confused by the technicalities behind credit ratings and CTL finance.Each major rating agency has only 10 investment grade levels, and Fitch’s levels are the same as S&P’s, and they’re fairly straightforward and simple to understand. While CTL finance is a very sophisticated type of CRE investment banking, from the investor's perspective, the process is practically indistinguishable from conventional financing.Ready to Get Started?Connect with our experts today for more information about net lease investing opportunities or to learn more about CRE financing options, including CTL financing.
February 19, 2024
Raleigh 4Q23 Multifamily Market Insights Report: Class A properties likely to continue to change hands in 2024
Highlights:Following a fairly strong first half of the year, operating conditions in Raleigh-Durham softened during the fourth quarter. The vacancy rate rose while asking rents dipped lower. Supply-side pressures pushed vacancies higher despite healthy renter demand.Vacancy rose 50 basis points in the last three months of the year to 7.5% and the rate pushed up 170 basis points for the full year. The market’s long-term average vacancy rate is between 5.5% and 6%.Asking rents trended lower in the second half of 2023 after posing healthy rent gains in the opening six months of 2023. Apartment rents inched higher by 0.1% in 2023, closing the year at $1,573 per month.Although annual sales in 2023 lagged levels recorded in 2022 by 50%, sales activity began to build some momentum in the second half of the year. With several new construction properties changing hands, the median price was $251,900 per unit in 2023.Read the report, or engage with our Raleigh office to learn more.
February 15, 2024