According to a very interesting post written by Jeff Levin in the Forbes Community Voice, trade wars are affecting commercial real estate investing.
Jeff Levin has 3 decades of experience in the real estate arena and what he has to say makes a lot of sense to me. Of course, it should. He is a senior-level executive of the Forbes Real Estate Council and this is his area of expertise.
I want to summarize the points in his post for you here because they are so relevant to us as private money lenders and investors.
Scarce Funding Will Bring More Opportunities to Private Lenders
He first points out that the trade war between the US and China presents opportunities for those in the business of private lending because as Chinese investment decreases in the US commercial real estate market for new projects, funding is scarcer.
Levin suggests that tracking where the Chinese investment was the heaviest is where to look for projects that might need capital.
China is Selling Assets Bringing Down Prices
Beijing has apparently also mandated a sell off of asset portfolios. This is lowering prices for some types of commercial real estate. According to Levin, “For sectors like office buildings, excess supply is depressing absorption rates, increasing vacancies and competition for tenants and squeezing rent growth.”
Levin advises that multifamily borrowers and office project borrowers refinance after construction is complete with a bank rather than relying on leasing income or sales to retire the debt.
Construction Prices Are Going Up
Construction prices are going up because the price of materials is going up due to tariffs on steel, lumber, aluminum and other materials from international suppliers.
Levin advise that borrowers put in contingency clauses that spread any unexpected risk due to the volatility of material prices among the investors.
Construction delays are being caused by the tight labor market, but also because of the lead time required to obtain building materials. Because delays increase overall risk, the number of new commercial real estate project starts are declining.
Levin says that despite more deals coming to private lenders because of the difficulty of securing financing, “Private lenders must stay on top of the collateral value in the cases where borrowers might not survive unforeseen project delays.”
I really encourage you to read this article on your own at https://www.forbes.com/sites/forbesrealestatecouncil/2019/06/04/four-ways-the-trade-wars-are-undermining-commercial-real-estate/#1c047a706957
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Levin, J. Four ways the trade wars are undermining commercial real estate. June 4, 2019. Post at https://www.forbes.com/sites/forbesrealestatecouncil/2019/06/04/four-ways-the-trade-wars-are-undermining-commercial-real-estate/#1c047a706957ways-the-trade-wars-are-undermining-commercial-real-estate/#1c047a706957