From legalized marijuana to the new federal opportunity-zones program, commercial mortgage brokers have some emerging niche opportunities to close deals in 2020. Capitalizing on this potential, however, also means learning where the best opportunities lie and doing the extra legwork to understand the nuances of these specialties. By digging deeper, you can turn a market niche into a rich opportunity.
Commercial real estate sales volumes were stronger than anticipated in 2019. In the market for large properties valued at more than $2.5 million, for instance, deal volume remained solid for many property types through this past September, although buyers in general have become more selective, according to Real Capital Analytics.
Investor interest in smaller properties also remained robust last year, according to reports from Boxwood Means and First American DataTree. And even though the office and apartment segments will likely continue to represent the lion’s share of overall sales, there are a number of niche categories that might outpace the rest of market.
For mortgage professionals looking for big-ticket options, the industrial sector is a niche commercial real estate segment worth mentioning. This property type has seen explosive growth over the past few years, which is driven by three primary factors. First is the demand for space created by legalized marijuana, which will be further explored below. Second is the rise of cloud computing, which requires massive buildings to house the server farms that are needed to deliver this service. Third, there is a need for warehouse and distribution centers that allow online retailers to make shorter and quicker deliveries to their customers.
It’s nearly impossible to attend a commercial real estate industry event without getting bombarded with lucrative opportunities in the world of legalized cannabis — and with good reason. States like Colorado and California, which were among the earliest to legalize cannabis for recreational and medicinal use, saw an almost immediate impact from the legal marijuana industry on their residential and commercial real estate markets.
The effect on the commercial real estate market has been especially widespread and probably broader in scope than most people anticipated. Legalization has created a need for massive indoor growing facilities, spurring ground-up construction projects for new facilities, as well as major renovations to existing warehouses. The demand for space to grow marijuana has contributed to numerous sales and escalating prices of industrial properties.
There also is a need for multiple other types of manufacturing plants, distribution centers and retail outlets. The rise of legalized marijuana is likely one of the reasons that sales of retail assets have been stronger than the so-called “retail apocalypse” doomsday predictions that were forecast.
Of course, the challenge for mortgage professionals is that most banks — for obvious reasons — won’t fund loans to companies involved in this industry until cannabis is legalized by the federal government. Nevertheless, billions of dollars are being poured into this market segment by private lenders, private equity companies and other institutional investors. For mortgage brokers who have relationships with these lenders, there are ample opportunities ahead.
It’s nearly impossible to attend a commercial real estate
industry event without getting bombarded with lucrative opportunities in the world of legalized cannabis.
Another major new niche area is the federal government’s new qualified opportunity zone (QOZ) program, which is designed to draw investors into underserved and underdeveloped areas in exchange for significant capital-gains tax savings. These taxes can be deferred until 2026 under certain conditions, and up to 15% of the taxes can be forgiven if the property is held for at least seven years.
There are some restrictions. For example, 50% of the revenue generated by a QOZ property needs to be generated within the opportunity zone itself, and investors are required to significantly increase the value of the investment property. Despite these requirements, the program has generated high interest among investors, particularly in the apartment and retail segments.
Some large institutional investors are putting together multibillion-dollar funds for potential QOZ deals. Opportunity-zone tax incentives are only made in exchange for equity investments, but there are ample opportunities for mortgage professionals to work with small and midsize investors who are interested in this program. Investors and mortgage brokers would be well advised to partner with a local attorney that specializes in the QOZ program to ensure they’re in compliance with all the various legal and regulatory aspects.
Senior housing is another investment-property segment that is growing in popularity and in potential, due to the so-called “silver tsunami.” It’s true that baby boomers are aging in place longer than expected and are staying in their homes much longer than previous generations.
According to First American Financial Corp., the average length of time a homeowner stays in the same house has more than doubled since 2000 — from less than five years to a little more than 11 years. As boomers age and their adult children gradually begin to move out and establish their own households, however, there will be unprecedented opportunities for entrepreneurs and investors to provide senior- living facilities.
Unlike previous generations where the primary choices for seniors were to move in with adult children or go to a nursing home, older adults and retirees now have multiple options. These include co-living facilities with other ambulatory seniors, adult daycare centers, assisted living communities and medical facilities with varying degrees of professional care.
Mortgage professionals, especially those living in regions with a higher-than-average number of older adults, should have a wide variety of senior-housing lending opportunities. Although this is still a relatively small segment of the commercial real estate market, senior housing and care is one of the fastest-growing sectors.
It appears that the long-rumored predictions of a ‘retail apocalypse’ have turned out to be only partially correct.
It appears that the long-rumored predictions of a “retail apocalypse” have turned out to be only partially correct. It’s undeniable that a number of well-known and long-established big-box retail entities — including Sears, K-Mart, JCPenney, Toys R Us, Macy’s and Forever 21 — have either shut down or have dramatically reduced the number of stores they continue to operate.
It’s also true that the suburban shopping mall has fallen on hard times, especially in communities with stagnant or declining population growth. But all is not doom and gloom in the world of retail. Sales of retail properties have grown as fast as those in any other segment, despite the fact that retailers are leasing fewer square feet per location and that online sales continue to account for a higher percentage of overall retail sales.
What’s driving the sales of retail properties? There has been a move to repurpose existing retail locations into mixed-use facilities. In urban areas, this often means transforming space that was once strictly stores into a mix of retail, restaurant and entertainment businesses. In suburban areas, malls are being converted into offices, entertainment centers, retail stores and restaurants. In some cases, stores are repurposed into apartments or senior housing.
• • •
All of these niche opportunities seem likely to continue to be growth areas, but they also require mortgage professionals to do the necessary homework to find out which are most relevant to their locale. These niches require some degree of expertise, both in finding funds and executing these specialized transactions. For the diligent and creative mortgage broker, however, there’s most definitely a chance to create riches from these niches.