What Does It Take To Get A Deal Done Now? Where Some See Obstacles, Others See Opportunities

The last several months have given rise to one of the most volatile periods in commercial real estate history: Pencils are down, construction starts have slowed to a drip, and what was once a gold rush of activity has morphed into a maelstrom of turmoil.

One would expect these conditions to kill deals, and in some cases, they have. But in others, the opposite is true. While less optimistic than usual, many CRE professionals view the obstacles as opportunities and continue to push projects across the finish line. 

“Now is the time when the men get separated from the boys,” said Mike Bryant, a vice chairman and managing director of debt and structured finance at CBRE. “Experience is extremely important today because it’s not easy.”

The following stories highlight the grit, determination and innovation that emerge during periods of economic hardship.

Brokers, developers and lenders have forged unlikely partnerships, tapped into creative financing solutions and humbled themselves before societal stigmas to make deals work, even in the face of seemingly insurmountable odds.

What all of these deals have in common is the presence of a committed team. Amid a downturn, that is what separates the deal that lands from one that falls apart, Danny Baker, vice chairman and leader of CBRE's DFW multifamily investment sales team said.

“You can’t do anything alone in this business, that’s a fallacy,” he said. “Having the right team, hiring the right people, and having supreme confidence in your teammates, approaching every transaction as a team as opposed to an individual — that’s the key to success.”

Philadelphia Underdog Lands Chubb For New Office Tower

The odds were not in favor of Philadelphia-based Parkway Corp. when it set out to nab insurance giant Chubb as the sole tenant of its new 18-story, 438K SF office tower in Center City. 

Chubb could have saved millions of dollars by choosing a building just a few blocks away, in an area where corporations are temporarily exempt from commonwealth income tax. For a time, Parkway competed with office behemoth Brandywine Realty Trust, which reportedly also recruited Chubb to be the anchor tenant in its Schuylkill Yards development district.

Not only did Parkway have to convince Chubb of the value of its investment in Center City, but it also had to keep price fluctuations at bay — a seemingly impossible task as the economy hurtled toward a recession.

“As your business environment changes, you have to remain consistent. Otherwise, they won’t trust you,” Parkway Commercial Properties President Brian Berson said. “With a four-year cycle to get this deal done, because we took off so much time for Covid and given everything in our market that was changing, it was incredibly difficult to do that.” 

Parkway was able to maintain Chubb’s trust — and battle through a debilitating capital markets landscape — by keeping a conservative budget, knowing when to deploy dry powder and being transparent about risks, Berson said. 

Because of Chubb’s high creditworthiness, Parkway was able to use a credit tenant lease, which lowered the face value of rent by around 30% and helped secure a favorable interest rate. Even so, when interest rates spiked, so did the CTL market. Fortunately, Chubb had the foresight to get ahead of the jump.

“They paid to lock in a CTL rate pretty early, which we held for a few months until we finally got the deal done,” Berson said. “Even though rates had gone up further, the lenders still thought this was a phenomenal deal and were happy to close on the financing.” 

Berson compared finalizing the Chubb deal with the Phillies’ unlikely run to the World Series. As a legacy parking company still relatively new to commercial development, competing against the only remaining office REIT in Philadelphia felt like an impossible feat. 

But Parkway had no qualms about its role as the underdog, and like the Phillies, it ultimately triumphed.

“We just went at this with everything we had,” Berson said. “The world wrote us off; I had people saying you’re never going to get [Chubb]. I felt really proud that we had surprised the entire Philadelphia real estate industry.”

Dallas Firm Gets Creative To Finance Development Acquisition

The acquisition of Crockett Row by Dallas-based firm Younger Partners was akin to walking a tightrope. A single misstep could have caused the deal to come tumbling down, Managing Director Micah Ashford said.

The 282K SF mixed-use development in Fort Worth comprises office and retail space, and at the time of Younger’s purchase, the property was 75% leased. Through extensive capital repairs and renovations, the firm believed it could improve that number.

Instilling that same belief in lenders, Ashford said, was the goal. 

“You’re having to convince them why you would be able to pull something off that the seller wasn’t able to,” she said. “There’s a lot of faith in the repeat business you have with the brokers, the lenders and the sellers.”

To shore up confidence and limit risk, the firm increased its capital stack to pay for an interest rate cap, which protects against hikes for three years. This was essential, Ashford said, as Younger Partners plans to sink $11M into near-term improvements at Crockett Row. 

“Everybody saw where the market was headed,” she said. “We got to sleep at night during this deal knowing that we were going to be able to pay our investors the returns we had initially underwritten.” 

A combination of reputation, location and fortuitous timing held the project together even as the market was caving in. Younger Partners sealed the deal in August, 60 days after launch, which Ashford described as “quick as heck” given its complexity and market turbulence. 

“It had to all come together,” she said. “Had it not been that seller, had it not been that lender, and had we not taken the risk of spending millions of dollars on the cap rate lock, we could have never pulled this thing off.”

Affordable Housing Developer Bucks Stigma To Keep Wisconsin Project Afloat

When North Texas-based Hope Housing Foundation embarked on a project last spring to bring an affordable complex to Kaukauna, Wisconsin, President Alvin Hope Johnson knew it would be a tall order.

Financing these types of projects is complex, even in the best of times. Add in the Fed’s aggressive plan to tame inflation and making the numbers work felt next to impossible.

That is, until Johnson decided to forgo conventional financing and look to tax-exempt bonds instead.

On its face, it seemed like the obvious choice. The program helps finance affordable housing endeavors that set aside 50% of units for families making less than 80% of the area’s median income, which is also the goal of Hope Housing Foundation. 

But the stigma associated with an official affordable/workforce housing designation had previously discouraged Johnson from using the set-aside program. Better to avoid the pitchforks that usually come out when nearby residents hear the words “affordable housing,” he said.

In this economy, though, Johnson said he had no choice. He either tapped into the program or high interest rates would snuff out the deal and a community of residents in desperate need of attainable housing would go without. He chose to proceed unabashedly.

“The biggest pivot was coming to the realization that the set-aside was good,” he said. “We are passionate about our mission of providing safe, decent, sanitary housing for economically challenged and workforce communities of America. Right now, everybody is economically challenged.” 

The structure is also beneficial for investors since 100% of the project’s returns are tax exempt. Johnson said the Kaukauna project was such a success, he plans to not only replicate it as a means of continuing his work during a recession, but use it as a template for projects moving forward. 

“This has given me a new lease on life,” he said. “This is the safest investment I’ve ever put together … This is a great way to help build up other communities around the country and around our area.”

CBRE Races Against The Clock To Sell Large Multifamily Portfolio 

When CBRE’s multifamily investment sales team in Dallas was tapped to market a 2,766-unit, eight-property portfolio in North Texas, it knew it had its work cut out for it.

The sheer size of the portfolio meant the pool of potential buyers was already small. But as spring turned to summer and the Fed aggressively pushed rates, the debt markets began to freeze up and the situation became more dire.

“The market was falling apart on the financial side,” said Mike Bryant, vice chairman and managing director of CBRE debt & structured finance department, which arranged the loan on behalf of the buyer. “Costs were going up, lenders were getting nervous. The volatility hit roughly when [the deal] hit the market, and then every week thereafter, there was just not good news.”

The team was forced to go the extra mile in convincing sellers this was a portfolio worth buying, even as the economy deteriorated, rental rate growth slowed, and reports of widespread negative leverage emerged. 

Danny Baker, vice chairman and leader of the team, said the team was able to do so by showing the portfolio was profitable despite rising debt costs.

“Without the performance to offset the increase in the cost of the debt, the economics would have been significantly more impaired than they already were,” he said.

The seller of the portfolio was a global private equity firm required to meet certain environmental, social and governance guidelines, Baker said. While not the highest bidder, the seller ultimately chose a buyer who agreed to preserve the property as workforce housing, which satisfied ESG requirements for both parties and helped put the seller at ease.

“There was a belief that in a turbulent economic environment, the buyer that was investing capital for specific reasons would have a higher probability of a successful outcome than a purely economic buyer,” Baker said.

The buyer was equally committed to ensuring a successful outcome. Several lenders came forward, but growing economic turmoil led the buyer to choose a single lender with a relatively conservative loan-to-value ratio.

“We had a few quotes materially above the winning quote,” Bryant said. “At the end of the day, they were driven to a lender with less loan proceeds but the highest certainty of execution.”

The deal closed in September, months after launch, and having withstood numerous interest rate hikes that could have derailed the project. Baker and Bryant stopped short of expressing relief; rather, they said they were proud.

“I felt a sense of pride, certainly, that we got something of this size done in an environment where nothing of this size across the country was getting done,” Baker said. “I didn’t know exactly how the pieces were going to fall at the end of the day, but I knew it was going to get done.”