Berkadia sweeps $214 million in Midwest property run

In just the past eight weeks, Berkadia’s Midwest brokerage team has closed on $214.75 million in combined sales of fourteen properties.

“While overall activity in the multifamily investment sales space was down over 50 percent year-over-year, our Mid-Markets Group has remained busy with gross sales through the end of September of more than $725 million. We have taken an aggressive approach to assist those clients who needed to transact despite the difficult market conditions,” said Michael Sullivan, managing director of Berkadia’s Mid-Markets Group.

The properties include Oak Tree Square Apartments, Lakeside Village, Cold Storage Lofts, Citadel Suites and Apartments and Ames 6 Portfolio.

“The fourteen deals we’ve closed over the last eight weeks represent the last of those deals that we listed prior to the onset of the COVID-19 pandemic,” said Alex Blagojevich, senior managing director at Berkadia.

“When the full magnitude of the pandemic hit the U.S. in March, it reshuffled the market fundamentals of the entire multifamily sector, resulting in a disconnect between buyer and seller expectations. Overcoming this disconnect was our greatest hurdle to getting these deals closed, but we kept both sides communicating, and in the end, the average difference across all of those transactions between the final sales price and the price we quoted the seller was in the two-percent range,” Blagojevich said.

Transactions recently closed by the Berkadia Mid-Markets Group include:

·       Oak Tree Square Apartments, located at 12800 14th St. in Grandview, Mo. The 189-unit garden-style multifamily property was a Section 42 LIHTC affordable deal sold by Missouri-based Worcester Investments. Managing director John Schorgl of Berkadia’s Kansas City office secured financing for the acquisition on behalf of the buyer, a private syndicator out of Texas. The 10-year Freddie Mac loan includes three years of interest-only payments, and the deal closed on August 18, 2020.

·       Lakeside Village, a 75‐unit, garden‐style apartment community located in North Kansas City, Mo., was sold by Kansas-based Eighteen Capital Group to a private syndicator new to the Kansas City market. This off-market, direct sale was completed in just 45 days, as the buyer was rushed to complete this final piece of a larger 1031 exchange. Senior managing director Chris Blechschmidt and director Emily Stang of Berkadia’s Chicago office secured the acquisition financing. The deal closed on August 19, 2020.

·       Cold Storage Lofts is located at 500 E 3rd St. in the River Market area of Downtown Kansas City, Mo. Sold by a locally-based Kansas City firm, Maxus Properties, this 224-unit, adaptive reuse, midrise apartment property was ultimately purchased by a New York-based investor. After launching in late March, just weeks after the start of the shutdown, the Mid-Markets Group utilized the power of their extensive network and virtual touring to show the deal to more than 150 buyer groups. After receiving 10+ formal offers, they were able to get the deal across the finish line on September 23, 2020 at the agreed upon contract price, equating to a trailing 12-month cap rate in the low four percent range.

·       Citadel Suites and Apartments, located at 5113 N Brookline Ave. in Oklahoma City, Okla., was sold by a private family trust. The 114-unit garden-style multifamily property was purchased by a local, Kansas City-area firm after beating out more than 18 formal offers on the property, many of which had non-refundable money at execution of PSA. The deal closed on August 10, 2020.

·       Ames 6 Portfolio features six multifamily properties totaling 296-units, all located in Ames, Iowa. After launching the deal in early January, the Berkadia sales team pushed more than 150 interested buyer groups into the data room despite the oncoming pandemic and huge amount of uncertainty surrounding the student housing market. The portfolio was sold by Iowa-based Professional Property Management to a private, Chicago-based firm who closed the deal on September 7, 2020 at an in-place cap rate in the mid five percent range. Properties in the portfolio include: Colleen Crest, Delores Apartments, Gateway Hills, Maple Glen, Phoenix Apartments and River Burch.

The Berkadia Mid-Markets Group is led by Sullivan, Blagojevich and managing director, Ralph DePasquale. The team also includes senior directors Patrick Jordan and Chris Bruzas, directors Parker Stewart, Chris Gentry and Brett Meinzer and associate directors Dominic Martinez and Alex Malzone, who completed the sales on behalf of their respective sellers.

Separately, Berkadia’s Mid-Markets Group also recently completed the sale of Steeplechase on Maple, a 314-unit garden-style multifamily property located in Omaha, Neb., financed by Berkadia’s Blechschmidt and Stang; and the Wichita 5 Portfolio, a portfolio comprised of five multifamily properties throughout the Wichita, Kan. metro area.

Jobs key to economic recovery, commercial real estate demand

Last week KCRAR Commercial hosted its annual commercial real estate forecast to discuss the local and national state of the commercial real estate market as well as projections for what lies ahead.

Dr. Ted Jones, senior vice president/chief economist at Stewart Title Guaranty Company; Abby Corbett, managing director/senior economist at CoStar Group; and Danielle Grimelli, market analyst at CoStar; joined moderator Max Wasserstrom, CFA, senior vice president at Block Real Estate Services for the virtual presentation.

Looking at the big picture, as challenging as 2020 has been, the news is not all unfavorable. Jones began by pointing out that Goldman Sachs predicts 2020 will see a total drop in GDP of 4.6%, but that GDP will be up by 6.2% in 2021.

“Folks, that is a recovery that most of us would have only dreamed of when we shut down the country last March and April,” Jones said.

“Do you want to know where the economy and the demand for commercial real estate is going? It’s all about jobs,” said Jones.

In 2020, the country on average lost every job that was created since 2010 when the country started to pull out of the last recession. However, Jones said jobs are coming back at a much faster pace than anticipated.

As we know, job losses have hit the leisure/hospitality segment of commercial real estate the hardest, losing one-half of all their industry-related jobs in March and April. Although some of these jobs have been recovered, Jones said we will not get all leisure and hospitality jobs back for probably 3 or 4 more years. Citing Business Travel News, he said hotels won’t get back to pre-pandemic occupancies until 2024 and room rates until 2025.

On a local level, Missouri lost 11.9% and Kansas lost 10% of jobs in the early months of the pandemic, but Missouri since has recovered 58.6% of those lost jobs and Kansas 52%. Jones said it will be a few years until all the jobs are recovered.

Jones said one of the major factors helping economic recovery is cheap energy. The oil industry has increased production by nearly 40%, but it has cut jobs by 20%, which is why the oil industry continues to survive.

“I guarantee you every business in America right now is doing this exact same thing. And that’s why I think it’s going to be a year or two or three before we get all these jobs back,” said Jones.

Jones said the pandemic has accelerated trends that were already underway.

“We were already buying e-commerce. We were already mitigating and minimizing the demand for Main Street retail store front properties. But look what we’ve done. We’ve fast forwarded this thing. We actually zoomed it up,” said Jones.

“We’re selling more stuff than any time in history. But, what we’re buying is different, and where we buy it is different,” he said.

In May, the CEO of OpenTable predicted that 25% of all restaurants would permanently close due to the pandemic, but the American Restaurant Association’s Independent Restaurant Coalition forecast in June said that 85% of independent restaurants (which comprise 70% of all restaurants) may permanently close by the end of 2020, which would constitute a loss of 59.5% of all restaurants.

Turning to commercial real estate sales, Jones noted that the decline in U.S. sales in the third quarter of 2020 was 67%, almost the same decline experienced in the third quarter of 2008 (66.6%). Kansas City, however, has fared better. In the third quarter of 2008, Kansas City saw a 68% drop in sales; whereas, in the third quarter of 2020, the drop was only 50%.

“Kansas City is doing quite well holding onto sales,” Jones said.

Jones noted that, in our lifetimes, borrowing has never been cheaper, but commercial real estate has never been more risky.

“We don’t know what it’s worth because we don’t know who is going to pay rents. We know that we need less office space, and we know we need less retail space,” said Jones.

Jones predicted that the country will be out of its recession by the third quarter of 2021.

“The good news is that we entered this downturn with the best wage growth in ten years.  What’s helping us out are low interest rates and cheap energy unless you are in an oil and gas producing area,” Jones said. 

“I think office and retail demand are forever reduced.  It’s a track we were already on.  I think industrial is forever up.  We’re going to build a lot more stuff.  I think we’re going to build a lot more stuff in Mexico, Canada and the U.S.,” he said. 

Corbett said that as a result of pandemic job losses, personal consumption spending plummeted by 19% before rebounding in the second quarter.  Even so, she said, consumers are spending approximately 3.4% less than pre-pandemic.  In addition, spending on services, the larger component of total expenditures, is still more than 7% below February levels. 

Total retail sales may have bounced back, said Corbett, but not all categories have fared well.  E-commerce has grown 21.6% since February, while electronics and appliance stores, clothing and accessories stores, gas stations and food services and drinking establishments have seen negative growth.

Corbett said CoStar predicts that the country will get back to the end of 2019 GDP output level by about the end of 2021.

“But, we’ll remain smaller than we would have without the pandemic for quite some time,” Corbett said.

With respect to the employment outlook, Corbett said jobs will come back over the next couple of years and will recover to end of 2019 levels by the end of 2022 and then flatten out.

“And also never getting back on a pre-pandemic growth path,” she said.

Corbett said that CoStar’s forecasts assume no new virus outbreaks and shutdowns in the fall and winter and a fiscal relief package of approximately $1.5 trillion for this year. 

“Both those assumptions as of right now, do not appear very likely so the forecast is then sort of tilted to the downside,” Corbett said.

She added that the third risk to the economic outlook is the high level of corporate debt. 

“There are still millions of highly indebted firms who are increasingly seeking to avoid defaults either by undercutting cost cutting or reducing head count and capital expenditures. . . . We’re seeing that in retail obviously with retailers reducing their footprints, closing stores.  We’re seeing it on the office side,”    Corbett said.

Grimelli, a market analyst for the Kansas City market, discussed the state of Kansas City’s economy and employment.  She said job losses were so extreme that it ate away at the area’s five year growth. 

With respect to the metro’s multifamily market, Grimelli noted that there is still quite a bit of supply underway which has been absorbed well, depending on where it’s located. Multifamily properties located in downtown Kansas City, the Plaza area and midtown are suffering.

“We’ve brought on the majority of inventory there in recent years so that’s contributing to higher vacancy rates along with the fact that the live-work-play [tenants] are confined to their homes.  So now we’ve seen this exodus from the urban core areas out to more spacious areas in the suburbs like Johnson County,” she said. 

Grimelli said the multifamily daily asking rents saw an almost immediate dip when the pandemic hit, but they’ve recovered pretty well across Kansas City. 

She predicts that there will be slow rent growth through the end of 2020, with rent losses pushed off into 2021. 

However, that rent growth recovery is dependent on “how we handle this pandemic, how we’re able to socially distance, whether we get a vaccine, how we get stimulus deployed,” Grimelli said.

Grimelli said that the metro area has seen a reduced demand for office space, but that trend was already under way when the pandemic hit.  And, sublet space on the market for the office sector has increased dramatically, Grimelli said.

“We already have seen rent losses in the office sector.  We expect those to continue going forward before we would start any sort of recovery,” she said.

Grimelli predicts that the Kansas City area will experience a severe downside going forward in the retail sector, including in retail rent growth.   There is very little retail space under construction, and Kansas City retail investment was already slowing when the pandemic hit. 

Kansas City’s industrial market has the strongest outlook, and Grimelli predicts a moderate upside.  Vacancies are rising slightly because there is some significant inventory underway.  

Grimelli also expects a slight decline in industrial rent growth heading into the end of 2020 and early 2021 before a strong turn around.