Is Real Estate Capital Drying Up?
If you're expecting the large volume of capital washing over real estate to pull back anytime soon, relax; it'll be a while, according to experts at Bisnow's Capital Markets event at the Fairmont Copley Plaza yesterday.
Boston may be cantankerous but investors like Prudential managing director Melissa Farrell want more exposure here to our office, retail, and multifamily properties. On Tuesday, she looked at five assets in the area, urban and suburban. Prudential also has been traveling farther afield; it has offices in London and Tokyo. Compared to the prior up-cycle, Melissa says leverage is creeping up the capital stack but is still more moderate; 70% LTV for industrial, 60% to 65% for office. If Pru were to allow mezz loans behind its first mortgages, who the mezz player is and whether they have the wherewithal to operate the asset—if necessary—would be critical.
Boston get ready to see record pricing because so much capital is focusing on The Hub’s growth and solid fundamentals, says CCRE co-founder Peter Scola, a panelist and an event sponsor. With the equity market high and interest rates so low, it’s an amazing time to sell and refi, according to Peter whose firm just opened a Boston office. So far in ’14, CCRE has done several hundred million in Boston deals. Across the country, he sees gateway markets as a top draw, the Southeast office market strengthening and the shale boom highlighting North Dakota. Debt capital is “hyper aggressive”; there’s a market-based arbitrage. It’s time to borrow, especially for long-term holders.
What's important about pricing is to determine how long it takes to get a stabilized cap rate to cushion the risk of rising interest rates, says AEW managing director Marc Davidson (far left). For the past 12 to 18 months, his team’s been focusing on how to play the economic recovery. It’s acquired 8M SF of industrial; and in Boston is buying office and building multifamily (New England Executive Park and Inkblock South End respectively), including senior housing. Those investing in the US are using 15% foreign capital and 85% US, he estimates. In the past, single-family and multifamily housing was built mostly in the 'burbs. Now in Boston, it's being built in urban areas targeting the 10% that can afford $60k/year for rent.
Given the stage of the market—and of his own life—New Boston Fund director Jim Rappaport is selling $1.2B in real estate assets. He’s very pleased with the results but says he doesn’t get the aggressive pricing. In our region, some pockets are awesome (downtown Boston, East Cambridge); but others are in depression (Rte 495). With their activity, pension funds are setting up the next deals; they generally buy high, sell low, Jim says. Foreign money racing in reminds him of ‘80-vintage Japanese investors; 20 years later their economy is in a morass. Fifty years ago, the Rappaport family built big apartments for families. Jim's last project, One Greenway, is for Millennials and empty nesters. The middle class is priced out.
The big development problem with multifamily: not enough of it, says JLL SVP Travis D’Amato. Of Boston’s 176,000 rental units, half are pre-1940, he says. The city is transforming—new residents are moving in and we're finally building the housing they need. The Millennials among them often don’t have a car or children and are able to pay higher rents. Empty nesters are filling up The Arlington at $6/SF. At Millennium Place, condos purchased for $950/SF just a year ago are reselling at $1,200/SF. Jim confirms that rents are still rising. At the $170M One Greenway, NBF pro formas were around $2.85/SF; they’re now up to $3.40/SF and he suspects they’ll go higher by next summer when occupancy begins.
HYM managing director Tom O’Brien whose team is handling 9M SF of potential development says they’re benefiting from big investors that want to invest directly into projects rather than indirectly through funds. After decades of rent control and low housing production, he isn’t worried about an oversupply of multifamily. Now, developers are making up for the shortfall. Even during the worst years of the recent economic slowdown,’08 and '09, apartment building owners were only offering two months of free rent. The multifamily boom has running room and a burgeoning condo market is taking shape.
One fear for investors is that much growth has already been priced into the market, says Equity Resource Investments' Bill Andrews (right) with event sponsor Sullivan & Worcester partner John Balboni, who was a moderator as was colleague Lou Monti. Bill tells us that ERI looks for investments that not everyone is chasing; deals where he can find arbitrage, efficiency, and an operator with local market knowledge. The company recently invested in a 400-unit affordable housing property in Mississippi with a cap rate close to 9% and an interest rate of low 4%. For an investor, it’s all about your basis. If you overpay, Bills says, you have heartburn from Day 1.