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Real Estate Investors Riding The Cycle: Why Some Are Still Bold And Others Cautious

Real estate investors are attacking the long real estate cycle differently — some choosing caution and others believing there is still time to be aggressive in the marketplace.

“I’m very concerned about where we are in the cycle,” said PMRG Investments President Roger Gregory, whose company will change its name to Madison Marquette in the fourth quarter. When he is evaluating a five-year value-add hold, there could very well be a downturn sometime during those five years, Gregory said.

“How is that project going to hold up?” he asked. “When you go into a down cycle, you have multiple things working against you … you need to make sure you have capital later in the hold period of the project.”

TIER REIT's Murray Jardine, Billingsley Co.'s Marijke Lantz, Kaizen Development Partners CEO Derrick Evers, PMRG Investments' Roger Gregory and HFF's Andrew Levy at BOLD South 2018.

But Dallas-based Kaizen Development Partners CEO Derrick Evers said he tries not to pay too much attention to the real estate cycle because his focus is on good real estate fundamentals.

“If you are looking at different combinations of those fundamentals … and you are choosing your real estate based on visibility and access and ultimately having a unique story that differentiates you from your competitors in core markets, then you are somewhat insulated from what’s happening in the market,” Evers said.

“In macroeconomic terms, Dallas historically has been better than most; we will be ahead of the curve,” he said.

If real estate investors had started reacting based on the pure number of years that the country had been in a real estate expansion mode — now nearly 10 years — they likely would have begun taking a defensive posture a couple of years ago, probably prematurely, Dallas-based Billingsley Co. Senior Vice President Marijke Lantz said. 

“Our activity hasn’t slowed down; we are still being pretty aggressive out there in how we are looking at the market,” she said. “We are very positive about it.”

Lantz, Evers and Gregory were among real estate professionals who spoke at a daylong office conference by Bisnow Nov. 29 in Dallas.

Yields available via new development are better than the cap rates available via acquisitions, so TIER REIT is building its asset base through development, Senior Vice President of Acquisitions Murray Jardine said. The Dallas-based publicly traded office real estate investment trust is taking down land in markets where it wants to be long term, such as Austin — where it has 2M SF and another 1M SF that will deliver within 14 to 16 months. 

“We want to make sure if we build a building and lease it up that we have the credit quality and the tenants who will be there through the long term,” Jardine said. “On existing assets, it’s hard to buy right now [due to cap rates] so if you are going to buy something you have to make sure it’s the best building in the best location because, look, rents may go up, rents may go down. If we are going to buy something, we are going to make sure we win on occupancy.” 

Now is a good time to buy land, Jardine said, and TIER REIT is looking at other markets for potential raw land purchases. In Texas, TIER REIT has holdings in Austin, Dallas and Houston. Nationally, it is looking at making investments in Nashville, Denver and Atlanta for long-term investments. The REIT partners with local real estate companies and typically holds its properties for 10 or more years.

“So yes, while there may be some clouds on the economic horizon, we are thinking way down the road,” he said. When it takes down dirt, TIER REIT will design a building for the property so that when conditions are good, it is ready to pull the trigger and build, he said.

“We are willing to spend those equity dollars today to make sure we are in a good position if things do soften and come back up that we are ready to ride that wave back up,” Jardine said.

Cypress Waters

Kaizen Development and Billingsley expressed positivity for Dallas for commercial real estate development, including its suburbs. Billingsley has one office building under construction in Dallas' Cypress Waters with two others that it will begin soon. All are speculative.

“We think we will keep going out there and building more,” Lantz said.

Kaizen has been developing in Allen and recently acquired a highly coveted property in Uptown where it plans to build a 300K SF office building while PMRG said it will continue to invest in value-add deals, multifamily and medical.

Gregory was the voice of caution.

“What am I focused on in 2019? I’m focused on not getting us in trouble,” Gregory said. “We are going to be very, very selective in what we do. We are still going to buy value-add, we are going to build multi[family], we are going to build medical, we are going to buy core and core-plus for our clients … we are going to do all those things. We just may not be as aggressive as we have been in the past.”

TIER REIT’s Jardin said the REIT will put shovels into the ground next year as long as the leasing pipeline remains strong.

“We are confident in the long-term horizon,” Jardin said.