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Uncertainty and Hesitancy Continue | May 2024 Newsletter

Real estate has had a “Let’s wait and see” attitude over the past 24 months as interest rates began to rise. A theme we have been consistently revisiting is the low incentive to buy real estate at today's price points due to increased operating expenses and high debt service that generate super slim cash flow margins. Prices have dropped 20-30%, but this isn't enough to offset the increased costs associated with owning real estate and the risk potentials in the market.


There has been minimal pain, primarily limited to the office sector and some overleveraged multifamily in secondary and tertiary markets, which would lead to better buying opportunities that everybody wants. However, if owners don’t have a true need to sell, they will willingly wait for the market to recover before liquidating.


Many have believed there to be enough looming distressed debt that would bring out these buying opportunities, but it hasn’t come to fruition yet. Banks do not want to take back possession of assets, so they have been implementing loan extensions to kick the can down the road in the hopes that interest rates will drop enough for owners to be able to refinance instead of handing the keys back.


This is definitely a different environment than what we saw over the previous 10 years, which requires us to be more nimble, rely on our strengths, and focus on downside protection and risk mitigation.


Areas we are optimistic:

- long term real estate upside and growth in desirable locations with growing rental demand

- buying opportunities at reduced pricing, which reflect today's market fundamentals

- ability to increase value of assets through strategic renovations


Areas of concerns:

- plateauing and/or declining rents, leasing slow down

- increased operating expenses (insurance, utilities, repairs & maintenance)

- higher interest rates


Update on the TGG Portfolio

The majority of the 30 buildings we own have been stabilized and refinanced into fixed rate debt that will remain fixed for the next 3-5 years. Overall, we have had strong rental collections, but that has also come with higher operating costs. Our focus for these assets is to maintain occupancy through tenant retention and find ways to reduce expenses through strategic operations while maintaining the quality of our assets.


We have 4 construction projects that are currently finishing, the latest by Q3 of this year, at which point we will have strong cash flow production. The entirety of our portfolio will be stabilized with 97-100% occupancy, putting us in a position of strength to ride this lower point in the market.


Our investors continue to see strong performance in the maintaining of their quarterly cash flow distributions with additional investments beginning distributions in Q3 and in our ability to execute the reposition business plans we set out to do.



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