Higher interest rates help investors, but it’s a big unknown for developers. People are rushing to sweeping conclusions, and “We don’t know which way it’s going to go.”
CANANDAIGUA, N.Y. – Interest rates for mortgages have been moving up in recent months, which can be a welcome sign for investors looking for a good return. But the question of how it will affect actual lending rates to allow for future development and sales in the commercial real estate market is far from clear, in Joseph Brennan’s view.
“It depends. I mean, everybody’s pricing off the same index,” said Brennan, senior vice president and upstate New York market executive for S&T Bank.
That index is the U.S. Treasury’s 10-year notes yield, which is often used as a determinant in setting mortgage rates. And with multiple banks “flush with deposits, thanks to the Paycheck Protection Program,” it seems possible that there’s plenty of reason for optimism in 2021, even if it depends on “the risk of the project and the strength of the borrower.”
An unforeseen consequence of the COVID-19 pandemic that could stymie development in this sector is the rising cost of building materials.
“When you’ve got a contractor as a client, and the costs go up, it hurts their margin,” Brennan said, adding that the owner of a property under development also “is not keen to change their cost.” In his estimation, what takes greater priority now for developers is the “ability to very steeply escalate in price for building materials” – similar to the clauses in transportation and trucking industries, which factor in the rising price of gas.
“People are rushed to make sweeping conclusions, and we don’t know which way it’s going to go.”
Industrial properties in ‘high demand’
Aside from uncertainty over interest rates and the price of building materials, most experts agree that the pandemic hasn’t affected all commercial real estate equally. For instance, in Deloitte’s 2021 Commercial Real Estate Outlook, industrial real estate – which includes health care, data centers and cell towers – “have been positively disrupted,” although that isn’t the case for other types of properties.
The report went on to note that “offices, hotels and retail have felt the negative effects,” with 2020 prices revealing the total impact.
“For instance, U.S. retail and office price indices declined 4.1% and 0.5% year over year in August. In contrast, the industrial property index rose 7.4% year over year.” Given these findings, the report made clear how “the pandemic has resulted in tectonic shifts in the way people live, work, and play, which has put unique pressures on certain property sectors.”
Christopher Giunta, real estate salesperson for Pyramid Brokerage, said those findings apply on a more localized scale, noting that warehouse space is “in massive demand,” while office and retail are still “adjusting.”
“Just look at what Amazon’s doing across New York state. Even the retail model has shifted a little bit. If you look back over the past year, look at all the different sectors. Office, retail has issues, but the demand for warehouse space” has not, thanks to e-commerce and better delivery logistics, which “has gone through the roof,” with many people working from home and ordering necessities online. “That’s been the biggest positive result from COVID,” Giunta said.
Giunta also said properties close to transport hubs, including interstate highways, have seen an appreciation in value for investors, with the goal being to “shorten the supply chain.”
Another reason industrial real estate did better? There was less of an adjustment period for those facilities compared to retail and office spaces, which were both severely affected by the COVID-19 pandemic, Giunta said, with customer-facing businesses having to work “within [state and federal] restrictions as best as possible.”
Another big factor in retail-centered real estate being able to endure was technology, in Giunta’s view.
“From an official perspective, technology was a huge help. It opened up a lot of eyes that work could go on because of technology. Retail went on pretty well. Igloo pods were put outside of restaurants,” Giunta said, adding, “retailers worked to make it work.”
As for office space, Giunta said it was more of a wait-and-see approach, although there had been some movement: “Some companies are still determining the best model for moving forward. What is that going to look like? What kind of hybrid model works for your specific company?”
Homeowners associations support firms during lean times
Despite current signs from the U.S. Treasury yields and the promise of industrial properties, commercial real estate firms still require other sources of revenue to support themselves. For the Rochester-based SVN Realty Performance Advisors and Realty Performance Group, that means turning to not just handling the sales of properties, but managing them, according to Managing Director Cathy Barnum.
“It’s what keeps the lights on at the office. Property management is steady income,” Barnum said. “Transactions of commercial take so much longer compared to buying a house. It can take anywhere from six months to a year for a deal to come to fruition.”
Like many other businesses, Realty Performance Group shut down in early March due to the pandemic. Negotiations for several prospective businesses taking up residence at one Rochester property “completely died off because no one knew what was going on,” Barnum said. Given how most business around property management didn’t need to take place in the office, which included contact with snowplow services or landscapers, business largely proceeded normally without major disruptions, according to Barnum.
“Everybody took a pause for a while,” she added, noting that, now that vaccinations are happening, people are ready to come back.”
Barnum said she’s seen a greater demand for companies experienced in property management, especially when it comes to managing risk.
Barnum also speculated that if remote work becomes the norm, that could affect who owns the major commercial properties in the region. Unlike in larger markets, upstate New York properties typically circulate among several different local owners, including Buckingham Properties, although that could change with outside investors coming in.
“I don’t know, we’ll see. Only time will tell,” Barnum added.
Brennan also was hesitant to make firm predictions, citing the common view shortly after the September 11, 2001, attacks that most people would never feel comfortable working in an office building again.
“And then shortly after, at that time, that changed,” Brennan said. “It’s tough to say going forward it will absolutely be this or that, but there will be significant changes in how people live their lives.”
© 2021 Daily Messenger, Canandaigua, N.Y. This article originally appeared on MPNnow.
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