Key Takeaways from MacKenzie Companies-Sponsored “What’s The Deal” Seminar

Those who attended the recent “What’s The Deal?” seminar on January 18th, sponsored by The MacKenzie Companies and held at L’Hirondelle Club of Ruxton, were treated to a lively and informative discussion that covered all aspects of the commercial real estate industry, including the current interest rate environment, anticipated leasing, and sales activity of all asset classes in 2024, and the state of the capital market. The discussion, which was led by John Black, President, MacKenzie Capital, LLC and Owen Rouse, Senior Vice President, MacKenzie Commercial Real Estate Services, was attended by nearly 100 professionals working in the local commercial real estate development, finance, appraisal, and legal industries.

Key takeaways from the wide-ranging discussion included:

• The Federal Reserve’s decision to raise interest rates last year was unprecedented by its speed
• Sales transaction activity declined 40 percent last year due to these increases
• Construction and leasing activity in the warehouse/industrial sector has slowed but remains robust
• Investors and owner concerns are focused on debt and equity
• Despite numerous increases, interest rates remain below or near historic averages

Additional message points included:

• All eyes are on the Federal Reserve to see when, and by how much, it will lower interest rates in the coming year. After peaking at 5 percent in October, the 10-year Treasury Rate is now in the 4 percent range, and though the Fed signaled a pivot point late last year, it has not yet implemented any decreases. The pandemic and its negative impact on the economy lowered interest rates to zero percent, but that was not sustainable and rates remain near historic lows. The speed of the increases caused the most damage and enacted the greatest negative impact.
• Sales transactions decreased 40 percent last year, which makes it difficult for owners and appraisers to use comparables to establish new pricing. Activity is expected to remain stagnant until the “sand gets out of the gears.”
• Approximately 20 percent of all commercial office space in the Baltimore City submarket is vacant, and approximately one-half of this total is already “chronically vacant.” Conditions are expected to get worse for a period before gradually improving, and certain properties are already in the process of “self-repair.”
• Nationally, more than 500 million square feet of industrial/warehouse space was delivered last year, which MacKenzie described as a sector traveling at 100 miles per hour. Decreasing demand will slow deliveries to about 480 million square feet of space, which MacKenzie says “is still 80 miles per hour.”
• The number one concern among developers and investors is the relationship between debt and equity. The Federal Reserve did its jobs to tame inflation, but it didn’t just tap the brakes a bit in its response. it put up a wall that brought transaction activity to a virtual standstill.
• What’s old is new again, and if investors simply take the time to step back and reflect on current conditions, they will realize how much opportunity awaits them. Especially for professionals under the age of 40, it is important to appreciate how low rates continue to be. MacKenzie executives see more investment sale activity occurring in the value-add and adaptive reuse sector, hospitality developments and troubled commercial real estate assets that have not completely recovered from the pandemic.
• Investors would not have touched the self-storage asset class many years ago, but today’s cap rates are even lower than multifamily product in some cases.
• Retail remains extremely resilient, and for every tenant that exits a shopping center, two more are in the parking lot, eager to take the available space. Retail centers, especially those anchored by grocery stores, hold value over the long term. There’s even good news for empty big-box stores: if a large tenant goes dark, owners simply cut the space in half or thirds and leases the space to multiple users – often at higher rents than previously.
• Warehouse/industrial building deliveries are slowing, but there doesn’t seem to be much to worry about. Industrial Outdoor Storage, an asset class that did not even exist six years ago, is in high demand, especially in areas around ports.
• The flight to quality trend continues among companies looking to renew their office leases post-COVID, as amenity-rich buildings have a distinct advantage over those that do not offer such attractions. Organizations believe that buildings with on-site food options, state-of-the-art fitness centers and other amenities encourage employees to return to work, which also benefits efforts to recruit and retain talent.

“The commercial real estate industry is reeling from a confluence of genuinely unique events, including rapidly escalated interest rates, constricted capital flows, work-from-home dynamics, falling values and thin transactional data,” stated Owen Rouse. “But the industry has survived difficult times in the past and there is no reason to believe it will not continue to do so.”

Utilizing a long-term investment approach and adjustment to the “new normal,” John Black reiterates that opportunities exist among all asset classes, especially for sponsors and developers that know how to create value. “We are operating in unprecedented times with rapidly-changing conditions, but we remain in a good place and everyone expects a more active 2024,” he said.

MacKenzie Commercial Real Estate Services is the real estate brokerage arm of The MacKenzie Companies, which operates six full-service divisions addressing all real estate asset classes, including MacKenzie Management Company, LLC, MacKenzie Contracting Company, LLC, MacKenzie Capital, LLC, MacKenzie Investment Group, LLC and MacKenzie Multifamily Management, LLC. The company provides customized real estate solutions for institutional owners, investors, private companies, and individuals. For additional information, visit www.mackenziecommercial.com