Well into 2023, many of the trends anticipated at the start of the year continue to shape the real estate market.
Rate increases and economic conditions are still forcing developers to be strategic about their projects to ensure they get the capital they need. And new guidance on energy credits and creative options for mitigating longer hold periods are providing new opportunities for capital.
Developers will also need to continue working on their digital evolution.
Technologies like AI are changing operations across industries. Business owners risk falling behind if they’re not upgrading their current tech capabilities so that they can have access to real-time information to make important, timely decisions.
To keep pace with all these changes, here are three real estate industry trends to potentially leverage in the latter half of 2023:
1. Solar energy credits
New guidance on the transferability of solar energy credits has made it easier for developers to use credits as additional incentives and for generating new capital.
But developers looking to use credits in their deals still need to implement the right structure. Challenges occur in finding the best way to use credits while ensuring that the legal documentations for transferring them are prepared correctly and that the right people are at risk for the right things.
Transferability also opens the possibility of a new market for these credits. Because of this, it will be important to be cautious with dealing with third-party vendors who are connecting investors with credits.
Your best interest may not be aligned with theirs. Therefore, it’s important to seek guidance in ensuring you are getting the credits you are paying for or that you will be able to find investors for your credits through these vendors.
As the energy credit market continues to develop, it’s important to be wary of the companies you partner with and increase your understanding of the requirements for transferability.
2. Value funds and crystallization events
High interest and prices to exit are decreasing or at unfavorable numbers, causing more real estate owners to look at holding their properties rather than selling them.
Often, the expected hold time for a property would be three to five years. But with these changes to the interest rate, that period can extend to 10 to 15 years to get the same return as before.
If you want to mitigate the impact of a longer hold period, here are two strategies to help you accelerate your ownership as a sponsor:
- Crystallization events: Rather than selling the property, you get it appraised and adjust the ownership to reflect a hypothetical waterfall as if the property had sold by crystallizing that value. This allows you to accelerate your participation without selling the property.
- Value funds: Creating a value fund allows you to group assets together into a fund in one portfolio that may allow for an opportunity for additional recapitalization. It can also trigger a hypothetical waterfall so that you can accelerate your ownership while providing optionality for investors to leave or new equity to join.
If you’re interested in these strategies, it’s important to keep a realistic outlook. Both crystallization events and value funds take substantial time and effort. There’s also a possibility that they’re not allowed under your current operating agreements, so consider adding optionality for either strategy to agreements moving forward.
3. Data and AI
The AI revolution is already here. If you want to take part with your business, you need to make sure your processes and technology infrastructure are ready.
Streamlining your back office, accounting and investor relations will help you be prepared for the latest API or additional ways to leverage your good data.
You also need to evaluate how your organization is already using technology. You may have implemented tools such as Yardi or AppFolio, but are you taking full advantage of them?
With any solution, it’s important to consider your organization’s goals and your current processes as a starting point to identify new ways to use your technology. You may also need to engage change management services to help your staff transition into full adoption.
What’s on the horizon
Two other areas may provide new opportunities for developers in the future:
- Debt maturities: The market will continue to see significant debt maturities that could provide price reductions or ways for more capital that's been on the sidelines to be deployed into distressed assets.
- Office conversion credits: If the proposed legislation on office conversions is passed, developers could potentially see a 20% federal credit for redeveloping office spaces. However, this legislation is still in its early stages.
Although these opportunities aren’t likely to occur until late in 2023 or into 2024, being aware of them will help your business be ready to benefit as they develop.
How Wipfli can help
Find growth in any market conditions with Wipfli. Our team has extensive experience in the industry, helping you find the efficiencies, tax savings and solutions you need to stay profitable. Contact us to learn more about how we can help support your business.
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