Fewer Bidders, More Selective Opps For Capital Markets Investors
With Brexit, a presidential election the likes of which we've never seen and the constant threat of an interest rate hike looming, is it time to for capital markets players to panic? Or is it still a bull market for debt and equity?
A crowd of 250 packed the University Club of Chicago, the world's first Gothic skyscraper, to learn at the feet of our expert panelists. The main takeaway: as with most things involving real estate, slow and steady wins the day. That's especially true with the capital markets at this stage of the cycle.
HFF senior managing director Mike Kavanau (left), who moderated our debt and lending panel, is shown talking to our panelists, Hunt Mortgage Group managing director Greg Cazel, KeyBank Real Estate Capital SVP John Hofmann and Newport Capital Partners managing principal Derrick McGavic, through the rules of Cards Against Humanity. In what may be a first for a Bisnow event, Mike—a rabid fan of the popular party game—asked the panelists to answer his questions using the game, which resulted in some laugh-out-loud moments.
Once the laughter died down, Derrick stressed the importance of matching borrowing on a property to the business plan in place. If you're looking to capitalize a generational asset, Derrick says it's wise to pile on as much debt as you can, de-risking the asset and transferring that risk to the shoulders of others. If you're holding onto an asset for a shorter term, Derrick suggests locking into a floating-rate loan.
JPMorgan Global Real Assets managing director Kim Adams (right, chatting with NGKF Landlord Advisory Services managing director Karin Kraai in our postgame) says her firm is a net seller right now, and it isn't alone. There is a thinner bidder pool than there was 18 months ago for pure core product because of debt fears, and Kim has pulled some assets she was looking to sell off the market. Kim adds there are real opportunities in real estate for regional players seeking to be high-yield investors, and there is growing competition for value-add; investors are strategizing to make the best deals.
Zeller Realty president Ari Glass (right, with Wright Heerema Architects principal Roger Heerema) says Zeller's $74M purchase of Woodfield Preserve Office Center is a sign the firm is seeking more opportunities in the suburban office market. The fear when seeking debt partners on a deal like this, Ari adds, is that the suburbs are painted with a wide brush when it comes to the overall strength of the market. The higher-profile moves of larger companies to downtown Chicago have many investors wary of putting capital into suburban real estate, and Zeller is reviewing the details of this and future suburban plays with a fine-tooth comb to overcome investor objections.
Ari says Woodfield Preserve met all the checklist parameters the firm asks when determining the strength of an asset, and that placing the asset with the debt fund used to buy it was a perfect fit.
Although there's a tightening bidder pool, Wrightwood Financial CEO Bruce Cohen (left, with Mauge principal Carmen Maugeri) says he's amazed at the size of the checks being written. In the previous cycle, investments in the low eight figures were news. Now, Bruce says larger institutions are underwriting deals in the mid-nine figures and demanding a greater degree of control over the assets. Bruce predicts this institutional investment will continue, with a focus on high-end retail.