On the road to recovery
The ongoing recovery is key to the post-COVID matrix, he suggested: “That recovery at a base, fundamental level, continues on,” he said. “This actually draws into an interesting point overall: When we look across the spectrum of commercial real estate – when we get to the sources of pricing – there’s a difference between operating distress and financial distress. In real estate, when you go back to the GFC [Great Financial Crisis] period, we had both. Today, you have absolute distress in the form of everything that’s going on. Is the banking system going to collapse again? Lenders are just tight – they’re not lending. The spreads are high, interest rates are high to borrow for commercial real estate. This is all inserting financial distress on the market, absolutely. And that’s what’s leading to a lot of the price declines you’re seeing – specifically in multifamily and industrial, and also some drag in retail and hospitality.”
And now, for the good news: “But for the most part, the operating fundamentals are mostly in place,” Formigle said. “Industrial fundamentals are still strong – 96% occupied nationwide, rent growth that was 9% last year. Those are strong numbers. You look at the state of the market, if you didn’t know there was financial stress going on, you would say it looks like a great market. Buildings are occupied, they’re getting leased, people are showing up, they’re paying rent, rents are increasing.”
Multifamily isn’t faring as well, he noted, but still fundamentally strong: “Multifamily is slowing down. It had an insane year in 2021 – rents up 12% to 13% nationwide, rents up 25% to 30% in some fixed markets like Miami and Orlando. So it had this boom coming out of the depths of the pandemic. It’s definitely come back down to Earth, but we still see roughly 3% to 4% rent growth nationwide. Occupancies are starting to tick down a little bit but we are still in the 94% or so occupied range. And what I would say about multifamily is yes, there’s some supply coming to the market. We’re delivering at a rate we haven’t done since the 1980s. But overall, the market is still functioning; it feels well. When we look at the pricing, the pricing we’re seeing is definitely a function more of financing stress than operation stress. So that’s why we see the potential for relative value in stepping back and taking a long-term perspective.”
Investor sentiment is mixed
So how does all this square with investor appetite?
“I would say it’s fair to characterize that investors are looking for deals, they’re looking for bargains,” Formigle explained. “They want to see that stress in the market creating mispriced opportunities that could be capitalized on today to then potentially realize gain in the future if everything more or less goes back to a more normal state of operations in the out years. And because real estate is something you invest in for multiple years – you are typically buying into business plans anywhere from three to 10 years, it’s a multi-year investment – you step back and look at it from the perspective of if this asset feels like a good deal today, with all things known.