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How CRE Deals Are Changing: Insights from DLA Piper

CEO Khai Intela
Acquisition and disposition activity as percentages from 2019 to 2023. Image courtesy of DLA Piper. Last year was marked by uncertainty in the commercial real estate industry. Rising interest rates, a cooling economy, bank closures,...

Acquisition and disposition activity as percentages from 2019 to 2023, DLA Piper Acquisition and disposition activity as percentages from 2019 to 2023. Image courtesy of DLA Piper.

Last year was marked by uncertainty in the commercial real estate industry. Rising interest rates, a cooling economy, bank closures, and overall volatility made it challenging to navigate the landscape. However, by analyzing the trends that shaped 2023, we can gain valuable insights into what lies ahead.

Shifting Asset Class Activity

According to DLA Piper's year-end real estate trends report, multifamily assets remained the most active asset class in terms of acquisition and disposition activity in 2023. They accounted for 39 percent of overall sales, followed by industrial properties at 22 percent.

On the other hand, office space only represented 7 percent of total deals, while retail experienced significant growth, making up 10 percent of the investment activity compared to previous years. Mixed-use developments recorded increased investment activity, while life science properties saw a decline from 6 percent in 2022 to 1 percent in 2023.

John Sullivan, chair of the U.S. real estate practice and co-chair of the global real estate sector at DLA Piper, attributed the uptick in retail investment to the continuation of hybrid work arrangements. With people spending more time in their local areas, there is a higher demand for amenities in those neighborhoods.

Consistency in Survival Periods

The DLA Piper report found little change in the survival periods for sellers' representations and warranties from mid-2023 to the end of the year. The most common period continued to be 270 days, followed by 180 days.

Average liability caps and baskets for a breach of sellers' warranties and representations also remained relatively stable between mid-year and year-end, despite a less active market.

Increasing Financing Contingencies

While financing contingencies were not common in 2023, the report shows an upward trend. Nearly 92.5 percent of agreements did not have financing contingencies, but there was an almost 2 percent increase in frequency from mid-2023 to the end of the year, primarily in the form of loan assumption conditions.

Sullivan explained that financing contingencies favor the buyer and gained popularity due to the economic circumstances that created a buyer's market in 2023. With debt being more expensive and harder to obtain, buyers were reluctant to risk losing their deposits if they couldn't secure financing at acceptable rates.

However, Sullivan expects financing contingencies to remain the exception rather than the rule, as the market stabilizes and the buyer's bargaining power decreases.

Property and Construction Management

The DLA Piper report analyzed 300 property management agreements and found no significant changes in property management fees as a percentage of the property's revenue from mid-2023 to the end of the year. Construction management fees also saw little change over the same period as a percentage of the cost of the work.

For different asset types, the most common property management fee range was 3 percent to 3.99 percent, with data centers and mixed-use developments falling in the range of 2 percent to 2.99 percent. Senior housing, life science, and medical office buildings often had property management fees higher than 4 percent.

Regarding construction management fees, multifamily and mixed-use properties most commonly represented 5 percent or more of the total cost of the work. Data centers, medical office buildings, and life science assets fell in the range of 2 percent to 5 percent. Industrial and senior housing properties frequently had construction fees in the 2-2.99 percent range.

One noticeable change in property management trends was the decrease in the frequency of a liability cap, which dropped from 9.28 percent to 6.23 percent from mid-2023 to the end of the year. Additionally, more fees negotiated by DLA Piper limited the rate to hard costs only.

Sullivan attributed this change to the decrease in construction activity, which increased competition for construction management work and gave owners more bargaining power.

By analyzing the past to understand the present, the commercial real estate industry can navigate the future with more confidence. DLA Piper's insights shed light on how CRE deals are changing and provide valuable guidance for industry professionals.

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