Chris J. Murphy
Partner, Murphy Schiller & Wilkes LLP
Direct: (973) 705-7421
Email: cmurphy@murphyllp.com
While there is a sense of uncertainty in the market due to rising interest rates and the fear of a possible recession on the horizon, we have not seen a slowdown in deal activity; however, for the first time in years, it does appear that clients and others in the industry are taking a minute to breathe to get a better sense of necessary market adjustments. Since the onset of COVID, we have not had a normal summer in that the last two years have been nonstop deal flow year-round. This year, for the first time in a long time, we are seeing clients take a week or two to go on vacation and enjoy time with family. This is completely normal, and quite frankly, much needed.
Accordingly, we think that this summer will be a bit of a reset in that some time is needed for parties to truly understand the impact of higher interest rates, sellers may need to come down from the clouds and realize that the price of their property may require an adjustment to account for a higher interest rate environment, and then deal flow will pick up where it left off. We believe that the next few years will continue to be great for commercial real estate, especially with respect to the industrial and multifamily markets.
Where is there opportunity in the second half of 2022?
We believe that it will take some time for the market to adjust to higher interest rates, but there will be a greater level of certainty as we move into the fall. Quite frankly, rates couldn’t stay as low as they have been forever. The new rates — and even slightly higher rates — are historically normal. The market simply needs to adjust. In making this adjustment, there will be new and different opportunities for developers and funds that are well positioned to take advantage (and control) of deals that are overleveraged or too tightly underwritten. There will always be opportunities for smart, sophisticated and nimble operators in any market.
How are developers adapting in this current environment?
Developers want some level of certainty. Rising interest rates are clearly not ideal; however, the development community has been facing market- and COVID-related challenges in other ways for years. Construction costs as well as availability of materials and labor have been anything but certain, as have proposed changes to the tax code, and government shutdowns — but the commercial real estate industry still pushed forward. While developers have had to take a closer look at how deals are being structured to ensure a return, we have seen clients continue to address these challenges head-on in order to meet continued (and still growing) market demand over the past few months, despite some uncertainty in the market.
Is there anything local, state or federal lawmakers can or should do to help support economic development during this time?
On the local level, the most impactful thing that a local government can do to spur development is to streamline processes and create certainty. For developers, time is money and long delays in the entitlement and permitting process can have a significant impact on project feasibility.
In New Jersey, at the state level, the Legislature recently passed the Economic Recovery Act, which created multiple new incentive programs aimed at encouraging development throughout the state. The new programs will be administered by the New Jersey Economic Development Authority (NJEDA). The Aspire Program is a new tax credit program created to encourage redevelopment projects through the provision of incentive awards to reimburse developers for certain project financing gap costs. While the NJEDA has yet to award tax credits under the program, it is likely that the first awards will be approved in September.
On the federal level, the development community has many concerns, including rising interest rates, inflation, the cost of construction materials and taxes. Federal lawmakers should focus on all these issues, as each one greatly impacts new development, especially in high-cost states like New Jersey.
Chris J. Murphy, Esq. is a partner at Murphy Schiller & Wilkes LLP, a boutique law firm specializing in commercial real estate, with robust transactional, corporate, finance, land use, and litigation expertise. He leads the firm’s Incentive Advisory Practice Group, along with its Land Use, Zoning and Redevelopment Practice Group. Chris is the co-author of the Financial Incentives Chapter of Commercial Real Estate Transactions in New Jersey (2019, 4th Edition), published by the New Jersey Institute for Continuing Legal Education, a division of the New Jersey State Bar Association. His insight on the topic of real estate incentives has been featured in both regional and national publications, including NJBIZ, Real Estate NJ and The Wall Street Journal.
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