Writer: Eleana Teran
2 min read August 2023 — As the landscape for real estate continues to shift, investors and industry experts are crafting innovative strategies to navigate challenges and leverage opportunities.
Invest: spoke with Diego Munoz, president of KW Commercial / ThisPropertyAvailable.com, and Amy Carroll, president and principal of TradeMark Properties, two prominent figures in the industry, who shared valuable insights into the intricacies of the market and their perspectives on optimizing real estate portfolios amidst a dynamic environment.
Munoz emphasized the critical need to secure substantial listing inventory, projecting a positive outlook while Carroll delved into the nuances of adapting office spaces to post-pandemic norms and highlighted the surge in demand within the medical office sector.
What are the significant challenges facing the real estate industry?
Diego Munoz: The key point for us is continuing to secure a greater volume of listing inventory, both public and off-market, to create a good opportunity for investors. A lot of what we’re seeing in the market right now has been anticipated in the past year and my feeling is that we are at or near the bottom of the U-curve. I would have preferred a V-curve recovery but right now we’re seeing the initial phases of recovery showing themselves. For one, sellers are more willing to test the market. They want to maintain valuations from six months ago but that just isn’t where investors are right now. In about three to six months, pricing will overlap where investors want to buy and so we are positioning sellers for that time period. The opportunity in our Triangle region has always been ahead of the curve compared to other markets in the country, so we want to position our listing inventory to prepare for investors from out of the area who are coming in. We are expecting 2024 to trend upward.
Amy Carroll: In our market, the biggest challenge we have faced in getting people back to the office has been in office towers, which are designed for high density. The HVAC systems and elevators are optimized for a smaller footprint, but post-COVID, people are less comfortable with such close proximity. While the amenities in office towers may be desirable, we have observed and experienced more success and higher occupancy rates in our suburban mid- to low-rise office buildings.On the other hand, we have a strong and experienced medical office team that has witnessed the sector’s surge post-COVID. There is a remarkable increase in demand for space, which is particularly interesting because there is a scarcity of available medical office properties. We are observing the entry of new service medical chains and service lines into the market, resulting in landlords repurposing conventional office spaces. It’s exciting to see how office buildings are adapting and expanding to accommodate the growing medical component.
What advice and innovative strategies do you have for those seeking to optimize their real estate portfolios?
Munoz: Industrial and retail are both still very strong. We are finding on the buy/sell piece, cap rates are starting to go up and that is attractive to investors in this marketplace. As long as the financing is well balanced on a return, it’s a great opportunity to buy in this market. I also expect 1031s to play into the recovery in the beginning of 2024. In terms of specific asset classes, it’s about what provides the best return. If it is a well-stabilized investment, even office, investors will gravitate toward that. Large offices are an area we are keeping a close eye on because absorption is a concern, where the sublease market has increased while development has slowed down. Long term, it will be a great investment but we are talking five or 10 years down the road because we will have a rebound in that segment, but it won’t be on short-term money.
Carroll: There are numerous creative ways to approach real estate optimization. For instance, I came across a fascinating podcast episode featuring a vacant 10-story office building that was transformed into a vertical farm. Each level of the building now houses a robotic farm cultivating various fruits and vegetables, with robots efficiently handling the fruit-picking process. This innovative conversion allowed the owner to maximize the potential of the property. Although this example may be extreme, it highlights the limitless opportunities available. Also, to address the significant growth in the Triangle, some investors are converting offices into multifamily residences. Additionally, landlords can utilize periods of lower occupancy to make necessary improvements/upgrades to aging building systems. Because of all of the opportunities, it’s crucial to collaborate with the right professionals who can provide guidance and expertise in navigating these possibilities.
What are some emerging trends you’ve been seeing in the real estate market?
Munoz: What we call the “halo counties” are seeing more growth than, say, Downtown Raleigh. While Downtown is still doing well, these halo areas like South Wake, Harnett, Lee, and Chatham are seeing a lot of growth potential. We have the benefit of the outer Beltline along I-540 and that will continue to drive more growth. We’re dealing with municipal timelines, for which you can’t expect a quick turnaround. So developers are doing their best to balance the combination of development timelines, permits and planning, financing, construction and a competitive land market. Regardless, it’s a great opportunity for any investor who is ready for it.
Carroll: We’re currently experiencing a surge in demand for retail and industrial sectors, making them the hottest areas in our market. However, supply struggles to keep up, creating a scarcity of available space. Finding suitable locations for retail and industrial purposes has become increasingly challenging. Unfortunately, uncertainty surrounding hybrid work arrangements and the future need for flexible office spaces have made it difficult for business owners to gauge the necessary office footprint. Consequently, investment sales in the office sector have been slower compared to other sectors.
Current market conditions are complicated by factors like higher interest rates, making financing more difficult. Banks have tightened lending practices, requiring higher capital investments and interest rates creating higher debt service payments, making it harder for investors to achieve their desired net operating income. Rising inflation and persistently high construction costs since COVID worsen the challenges in penciling out investment sales deals, not to mention new construction projects. Overall, limited supply, uncertain market dynamics, tightened lending practices and increased costs create a complex landscape for investment opportunities in various sectors.
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