Jerald Turboff, the president of Prime Capital Corporation, began his real estate career in 1971 and is a well known and respected real estate broker, investor, and developer. Apart from providing brokerage, consulting, land warehousing and asset management services, during his career Jerald Turboff has invested in a diverse portfolio of commercial and residential real estate projects.
Commercial real estate (CRE) typically consists of buildings and other vertical improvements used for retail or various commercial enterprises. Because businesses intend to use these buildings for their physical locations, business operators (such as restaurants, dry cleaners, retail stores, medical professionals, etc.) want to take out relatively long-leases, usually lasting between three and 10 years. And for more expensive spaces, such as grocery stores and large department stores, the lease terms are even longer: 20 years and more. For building and leasing such improvements to various tenants, CRE investors and owners receive rental payments, and, with the longer lease term, there are usually periodic increases in the rental payments. In addition to rent payments, most tenants also pay common area maintenance ("CAM") costs, and their prorata share of the property's real estate taxes and insurance. Some CRE investors tend to hold their CRE for very long periods of time, and others prefer to be "merchant builders" who build a building, fill it with tenants, and then try and sell it for a profit. In today's market, the capitalization rates ("cap rates") for a seller aren't as attractive as they were just a year ago. In the Spring of 2022, Class "A" properties were often sold at 3.5 - 5.5% cap rates. Today, those same projects are being sold in the 4.5% - $6.5% range. And for older or non-Class "A" properties, the cap rates are even higher.
Residential real estate (RRE) presents different risks, challenges and benefits. RRE can be divided into two distinct categories: (i) homes built "for sale" to individual homebuyers; and (ii) homes and apartments built "for rent" to tenants. The major new homebuilders are experiencing somewhat of a Renaissance in their industry because through their mortgage subsidiaries and ability to "buy down" interest rates, they can sell homes for more attractive (i.e., lower) interest rates than those available in the marketplace. If you call Rocket Mortgage or any of the major banks that offer home loans, they'll offer rates in the 7+% range. If you buy today from a major homebuilder, they offer rates starting as low as 4.7%. As a result of this imbalance, re-sell homeowners are often finding it more difficult to sell their homes at prices they'd anticipated.
As for the apartment industry, it's experiencing some difficulties today because of: (i) the increase in bank interest rates they're being charged; and (ii) the higher cap rates their projects are experiencing upon a sale. If they started a new project in 2021 or 2022, their occupancy didn't occur as quickly as they'd anticipated; their bank interest rate has likely doubled; and their cap rate has also moved in the wrong direction. So, in many instances, they've had to hold or drop rental rates to increase occupancy; negotiate loan extensions from their banks since the ability to obtain attractive, long-term financing has declined; and/or sell their projects at lower prices than expected because of these current market conditions.
Those real estate investors and developers with "deep pockets" and the ability to wait for market conditions to improve will continue to profit from their CRE and RRE investments. However, those investors and developers who planned to get-in-and-get-out quickly, are unfortunately in for a bumpy ride for the next few years.
Commercial real estate (CRE) typically consists of buildings and other vertical improvements used for retail or various commercial enterprises. Because businesses intend to use these buildings for their physical locations, business operators (such as restaurants, dry cleaners, retail stores, medical professionals, etc.) want to take out relatively long-leases, usually lasting between three and 10 years. And for more expensive spaces, such as grocery stores and large department stores, the lease terms are even longer: 20 years and more. For building and leasing such improvements to various tenants, CRE investors and owners receive rental payments, and, with the longer lease term, there are usually periodic increases in the rental payments. In addition to rent payments, most tenants also pay common area maintenance ("CAM") costs, and their prorata share of the property's real estate taxes and insurance. Some CRE investors tend to hold their CRE for very long periods of time, and others prefer to be "merchant builders" who build a building, fill it with tenants, and then try and sell it for a profit. In today's market, the capitalization rates ("cap rates") for a seller aren't as attractive as they were just a year ago. In the Spring of 2022, Class "A" properties were often sold at 3.5 - 5.5% cap rates. Today, those same projects are being sold in the 4.5% - $6.5% range. And for older or non-Class "A" properties, the cap rates are even higher.
Residential real estate (RRE) presents different risks, challenges and benefits. RRE can be divided into two distinct categories: (i) homes built "for sale" to individual homebuyers; and (ii) homes and apartments built "for rent" to tenants. The major new homebuilders are experiencing somewhat of a Renaissance in their industry because through their mortgage subsidiaries and ability to "buy down" interest rates, they can sell homes for more attractive (i.e., lower) interest rates than those available in the marketplace. If you call Rocket Mortgage or any of the major banks that offer home loans, they'll offer rates in the 7+% range. If you buy today from a major homebuilder, they offer rates starting as low as 4.7%. As a result of this imbalance, re-sell homeowners are often finding it more difficult to sell their homes at prices they'd anticipated.
As for the apartment industry, it's experiencing some difficulties today because of: (i) the increase in bank interest rates they're being charged; and (ii) the higher cap rates their projects are experiencing upon a sale. If they started a new project in 2021 or 2022, their occupancy didn't occur as quickly as they'd anticipated; their bank interest rate has likely doubled; and their cap rate has also moved in the wrong direction. So, in many instances, they've had to hold or drop rental rates to increase occupancy; negotiate loan extensions from their banks since the ability to obtain attractive, long-term financing has declined; and/or sell their projects at lower prices than expected because of these current market conditions.
Those real estate investors and developers with "deep pockets" and the ability to wait for market conditions to improve will continue to profit from their CRE and RRE investments. However, those investors and developers who planned to get-in-and-get-out quickly, are unfortunately in for a bumpy ride for the next few years.
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