Too Much? Too Fast? (Part II)
Investors Digging Deeper for Best Potential Returns CRE Investors Still See Plenty of Opportunities To Be Had if You Know Where and What To Look For
By: Mark Heschmeyer
Date: April 1, 2015
While some commercial real estate investors are starting to voice concern over the impact of the glut of investment capital on prices and underwriting, for many others the question prompted by the flood of capital earmarked for CRE investment is what to do with it all.
As CoStar News reported in Part I of this two-part story last week, the grumblings mostly appear to be focused on escalating prices for large trophy assets in major coastal core markets and the multifamily markets where development activity has already heated up and is threatening to curtail pricing growth.
“Buyers are extremely aggressive in gateway and other primary markets, mainly in the multifamily, industrial and core-located office asset classes,” said Ryan Tobias, founding partner of Triad Real Estate Partners in Chicago. “It’s seemingly a seller’s market in those places and there’s almost certainly a bubble somewhere as the rent growth and associated pricing cannot continue forever.”
However, the aggressiveness and the easy availability of cheap money aren’t necessarily deal breakers, according to Tobias. Rather, he said the trend should cause investors to pay even closer attention to market fundamentals and understand conditions in each submarket down to the block.
For Part II of this story, we asked investors and brokers where they see the best returns available for the money. And while some are still concerned about putting more money into core markets and in certain multifamily markets, that doesn’t mean there aren’t good returns to be had in those products and places. Real wage growth is just starting to take hold and thus core office and multifamily product still have legs, many said.
Smart money seems to be moving to certain interior or secondary metropolitan areas, Tobias said, but not to every submarket within those areas.
Other factors also have to be weighed in the balance beyond location, said Don Guarino, vice president of valuation and research for Aegon USA Realty Advisors.
“Tenant retention, appropriate capital expenditures, proper leverage levels, technology upgrades and energy efficiencies will be largely responsible for outperformance in the coming years as cap rate compression nears the end of its course,” Guarino said.
In the quest for overlooked markets, investors can over extend, warns Guarino. Tertiary markets may be a “bridge too far” if there is not a well-founded exit strategy, no matter how good the tenant or value-add opportunities in a given market.
Benjamin B. Lacy, chairman of Lacy Ltd. in Washington, DC, agrees with the importance of maintaining investment discipline no matter the size or location of the market.
“I think there’s room to run in some overlooked secondary and tertiary markets. But you have to be very careful with your underwriting and due diligence and to make sure the market is liquid enough to project a realistic exit at the end of the holding period. I am getting strong pitches in Salt Lake City,” Lacy said.
Kevin McGowan, president of McGowan Corporate Real Estate Advisors in one of those tertiary markets (Allentown, PA), said plenty of opportunities still exist for disciplined investors. The key, he said is “to be flexible and really press their network for off-market deals. There is lots of lazy capital trying to chase down the heavily marketed product. (But) lots of really good corporate assets are out there if you are willing to dig.”
Brian Poitras, president, chief investment officer of Waldorf Capital Management, said his firm is pursuing a modified core strategy looking for overlooked opportunities in markets, such as where he is based in Boston.
“The asset class that I think presents the most opportunity righ now is well located Class B office space right around core markets, transit hubs and in growing urban infill locations,” Poitras said. “The demands of office users are changing. There will be many older, obsolete office buildings in great locations, but with poor lighting, poor air circulation, and inefficient floorplans. They could see a huge value boost through smart redevelopment.”
Link to article: Too Much Too Fast Part II