INTEREST RATES UP. DEAL VOLUME DOWN.
It’s no secret the Federal Reserve has introduced unprecedented interest rate increases to quell inflation. With interest rates higher, debt service coverage (DSC) limits underwriting, restricting loan to value (LTV). Investors see not only higher interest rates on borrowed capital, but lower LTV on acquisitions and projects, limiting the investments that are feasible and the number of investments that can be pursued. Volatility in the banking sector has exacerbated these challenges.
With debt much less attractive than 18 months ago, many investors are waiting for debt and markets to stabilize, holding capital on the sidelines. This leads to lower transaction volume, a reduced development pipeline, and an uptick in cap rates, especially for lower-cap rate investments. Some highly leveraged owners of CRE with notes coming due will have trouble refinancing assets. These owners may have to choose between injecting additional equity and selling. In the sectors we service, asset prices are generally supported and inventory remains very tight, especially for smaller assets – although underwriting is limited by capital markets unlike we’ve seen in recent years.
SUPPLY IS CONSTRAINED. DEMAND CONTINUES.
Supply-side demand in retail and industrial real estate continues strong, although questions remain about the future of office. Demand for space continues, while bringing new product online via development is ever challenging with construction costs, debt/equity, and regulation as headwinds.
Rents for newly constructed product continue to rise, applying pressure on rents for second and third generation product. Many projects, particularly speculative industrial and multifamily, are slated to come online in the coming months. General sentiment is that this product will be absorbed, although the rate of absorption may slow. Meanwhile most developers are pulling back on new projects, citing capital markets challenges. Overall, the US economy seems to be resilient in the face of the Fed’s actions, and we expect disciplined CRE investments to prosper, despite immediate capital market dynamics.
IT’S HOT IN THE SOUTHEAST.
And it’s not just the summer weather; economically, the Southeast is on fire. As industry considers reshoring and strengthened supply chains, the southeastern states benefit – the ports of Savannah and Charleston are among the fastest-growing import gateways in the US. Byron Miller of SC Ports was recently quoted that “shippers will continue to route a significant portion of this cargo through the Southeast, not [only] to mitigate risk on the West Coast, but to take advantage of a growing population in the region and supply chain infrastructure around the ports.”
Add favorable quality-of-life considerations to a competitive business climate, and the Southeast is on the receiving end of a demographic shift. The Carolinas, Tennessee, and Georgia ranked 3rd – 6th in 2022 for net migration, behind only Florida and Texas. We in Greenville, SC know that people that have the luxury of choosing where they live are choosing to live here – as well as other midsized southeastern cities. Meanwhile, more South Carolinians were working in April 2023 than ever before, according to a recent Department of Employment and Workforce news release. The Palmetto State’s unemployment rate dropped from 3.2% in March 2023, to 3.1% in April.
Pintail is proud to call Greenville, SC home, and we enjoy working with clients throughout the Southeast to build and realize value in their operations, projects, and portfolios.