Q3 2023 Quarterly Review

Parkview, Austin, TX

As Q3 closes and we approach the end of 2023, we continue to measure and weigh all data, reports, and market sentiments. This is a critical exercise as our commercial real estate business plans are a fluid process, always changing. Operationally, our portfolio continues to perform. Rental rates continue to rise, occupancy remains elevated, and tenants continue to seek out our properties. On the other hand, high long-term interest rates and stringent lending standards continue to pose headwinds for all asset classes in the commercial real estate space. 

During the third quarter, the Federal Reserve acknowledged progress against inflation, but noted more work needs to be done. 

  • Inflation, as measured by the personal consumption expenditures price index (PCE) reached 3.5%, and 3.9% excluding food and energy (Core PCE), in August 2023.

  • The Fed held interest rates steady at last month’s September meeting, after raising rates in July by 25 basis points to 5.25%–5.5%, the highest it’s been in 22 years.

  • The Fed messaged to the markets that interest rates will remain elevated for a prolonged period of time to reach the Fed’s 2% inflation target. 

The shift to prolonged, elevated interest rates is impacting business plans, reducing acquisition volume, altering future underwriting, and placing downward pressure on property values. Even though we have actively taken steps to minimize the impacts of these market conditions starting last year, there will be more work required moving forward. Every month we work to protect and maintain each property in the portfolio by understanding vulnerabilities, risks, cash management, and pricing in the current market. As we look ahead to 2024, we are preparing our portfolio for more financial adjustments and adapting business plans to account for what the financial markets believe will be a high interest rate environment.

When the general market moves the majority of investors to the sidelines, we know this is when we can take advantage of the most unique real estate opportunities. The coming year will provide unique acquisitions as market conditions drive sellers’ motivation. 

We have already taken advantage of this unique moment with the recent acquisitions of two multifamily properties, Parkview Terraces and Peoria Grand. Both Parkview Terraces & Peoria Grand were acquired at a significantly discounted basis compared to recent sale comparables and with fixed long term debt.

As an example, investors who were opportunistic, diligent and willing to buy when no one else was transacting during the pandemic, are now being rewarded. During the height of Covid, we purchased The Avenue at Murfreesboro, an 843K SF retail power center, at a time when many institutional investors, private investors, and much of the market moved to the sideline to watch what would happen. Three years later, as Than outlined during a recent webinar, the investors who recognized and invested in The Avenue as a unique opportunity have financially benefited. The property is 93.6% occupied, over 250K SF of leases have been signed or extended, and the property was recently appraised at $210M, an increase of 49% appraised value since acquisition. Management completed a refinance in September that included a 31.8% cash distribution to the Ownership Group. 

Just as we communicated during the pandemic, we want to message to you, our equity partners, to be prepared and take advantage of strategic investment opportunities that we will uncover and identify in the upcoming year.