This is not a typical cycle, a point was agreed at the Commercial Observer real estate investment forum for lenders and borrowers held April 18 at Santander Tower in downtown Dallas.
Katie Carmical, partner at Hunton Andrews Kurth, moderated a panel discussion on the changing investor landscape in the U.S. and spoke about what it means to work in today's market. Tony Fineman, senior managing director and head of origination at Acore Capital, said there is far more capital ready to be deployed than there are deals seeking funding.
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“We're flush with capital and we want to put it out there,” he said. “Sometimes there's a mismatch between where we want to put the money and where the borrower wants to put the money. But we're a little bit agnostic in that we just want the deal to happen.”
“I've been saying for two years that the problem in the lending business is that we need to be more accepting of the fact that interest rates are going to be the way they are,” Fineman added. “Interest rates affect value, and once a buyer and seller, or borrower and lender, agree on value, a deal gets done.”
Fineman said 2023 was a down year and that honest investors would say trading volume was 50% to 80% lower than normal, but he said trading picked up in the first quarter and he expects the market to improve for the rest of the year.
“I'm optimistic that at some point there will be a catalyst for a deal and the market will settle at some level,” Feineman said of asset values. “I'm not sure the market is indicating where value is yet. It seems to me that it needs to get to a point where buying and selling makes sense based on the current cost of capital.”
Being able to respond quickly to market trends and research is key, said Sondra Wenger, senior managing director and head of commercial real estate for the Americas at CBRE Investment Management. For example, she noted, the work-from-home trend has significantly reduced the frequency of trips to central business districts for errands and lunch. Instead, people are visiting neighborhood shopping centers at a much higher rate than they did before the pandemic.
“If you look at it from a bigger picture perspective, there's limited supply, high occupancy and a lot of below-market rents that make it a really attractive investment today,” Wenger said of the nearby retail properties. “Retail has been in a slump for the last nine or 10 years, so there's been very little construction going on. So supply hasn't kept up with demand. It hasn't kept up with population growth.”
She said despite the negative sentiment, CBRE is seeing the highest retail occupancy rates in the past 24 years and retailers are seeing increased consumer spending sales per square foot compared to recent averages.
“We expect this trend to continue for the next three to four years,” she said. “If you look at pre-pandemic levels, sales are up 33%. Rents have actually increased in market cap because rents didn't increase because people were afraid of retail. … It's also unique in that you're getting positive leverage on most retail transactions.”
Mark Roberts, managing director of research at Crow Holdings Capital and the SMU Cox Folsom Real Estate Institute, said while this isn't a typical cycle, there's plenty to be optimistic about. Investors are responding to financial market conditions by reducing exposure to the stock market and rebalancing their portfolios to target higher-yielding assets, he said.
When it comes to U.S. office real estate, Wenger said the market is polarized between the haves and the have-nots.
“That's a whole other story,” she says. “You have to split it into halves and call it a separate thing, because that half is in a totally different situation than the have-nots. And the difference between the selling price and the buying price is much larger between the have-nots and the haves.”
She said wealthier tenants in the office market have actually seen higher rents and lower vacancy rates.
“We're seeing a big trend of occupiers taking advantage of this and saying, 'We want to get into a good space that can really engage our tenant demographic and our employees,'” Wenger says. “We're doing this through offices with the right product, the right location and the right user experience.”
Roberts said it's a tenanted market, meaning more capital will be needed to develop these types of office amenities. “Part of the challenge is not every landlord has enough capital to be able to do it,” he said.
Wenger added that the first thing office tenants ask about when touring a property is financing.
“It's not, 'Where is the subway line?' or 'What amenities does this building have?'” she says. “Now they ask, 'What is the capital structure of this building?' Because it's really important for a tenant to know that this building has the promise that it's not going to be a zombie building.”
The panel's opinions on multifamily investing varied, but they all agreed that the fundamentals of multifamily operations are strong.
“Most of the distressed properties you see aren't distressed because there are no tenants,” said Jay Porterfield, executive director at PGIM Real Estate and another panelist. “They're distressed because there's financial engineering built into their capital structure. I make my living off apartments, so maybe I'm biased, but I remain bullish on apartments. But you have to pay the right price.”
Wenger said CBRE expects distress in the multifamily market due to the volume of transactions completed at very low cap rates in 2021 and 2022. “But the reality is, we're not there yet because this is a long-term investment asset class,” she said.
Fineman warned that the country is not out of the woods yet when it comes to the multifamily housing market's woes.
“if [U.S. 10-year treasury] “If yields stay at 3.5% to 4%, the multifamily crunch is on the horizon,” he said. “There's going to be capital that the current owners are going to give up on, or the next owners are going to give up on. I think there's a great opportunity and I'm very positive about investing in the multifamily market. But it's not right to say the crunch is over for multifamily.”
Collin Fitzgibbons, president of Hunt Realty Investments, is bullish on multifamily housing and said his firm is working on affordable and workforce housing projects. He noted that there is a lack of affordable housing in downtown Dallas.
“This is an issue that, if we don't find a way to address it, it's going to impact overall growth,” he said. “I'm someone who spends a lot of time trying to understand how the numbers work, but I'm very optimistic about the long-term outlook.”
Carmical closed the panel by asking for bold predictions for 2024.
“I don't think the Fed will act. [interest rates]”I expect the Treasury to stay where it is,” Porterfield said. Fineman predicted one rate cut this year “right before the election.”
Roberts predicts that cap rates will rise over the next few years and are unlikely to fall after that. Wenger said, “There will be a shortage of brand new responsive office space in 2025,” and Fitzgibbons predicted, “There will be more new office development than you think.”
Gregory Cornfield can be reached at gcornfield@commercialobserver.com