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What Drought Means for the Capital Markets

Los Angeles

Part 2 of last week's SoCal Capital Markets Summit in Santa Monica, a panel on equity, touched on pricing, risk, leverage, and even the drought. But there was no drought of opinion or info among our stellar panelists.

Colony Capital principal Kevin Traenkle has one word for the way pricing has moved the past couple years—amazing—underscored by the nearly $2B sale of the Waldorf Astoria. But there are structural reasons for the institutional appetite for core, including a shift from fixed-income investments. On the opportunistic side, it's unclear what your risks are and how to price it, like rising interest rates and the overhang that $1.3 trillion of debt maturities will have on values. Real estate's a huge asset class but it's one cog in a big machine, Kevin says. You have to consider it in the context of what's happening in the rest of the world.

To Clarion Partners director Bryan Crane, SoCal's a combo of seven or eight different cities that happen to sit next to each other; nuances abound. The key is to identify the changing dynamics that make secondary markets become primary markets, he says, citing Austin, Raleigh-Durham, Denver, Portland, and San Diego, and to get in front of the wave and catch it. San Diego has more job creation going on than some primary markets, he notes.

According to American Realty Advisors CEO Stanley Iezman, the challenge of secondary and tertiary markets is that you have to be a market timer and momentum player to get money in and get it out quickly. Otherwise you're going to be stuck on the bottom because the exit strategy is very limited. That said, secondary markets create secondary jobs due to a collateral effect. Amazon moved to Seattle to be near Microsoft, and Starbucks baristas in secondary markets make more in tips than other markets.

One question asked by our moderator, Pircher, Nichols & Meeks of counsel Phil Nichols, dealt with issues like the state's drought or global warming, and whether panelists mull them over in their shops. Kevin says those issues are explicitly discussed or implicitly understood. Take golf courses—if you can't water your fairways, how do you price that risk? Stanley says anyone buying on the East Coast should look carefully at flood maps; if seawater increases over the next 20 years even by one foot, you've got a lot of Boston and New York under water. On the other hand, lack of water is going to impact strategies in SoCal.

Where do our panelists feel is the best place to invest for their given assets? Kevin says there isn't any one market that you'd say invest everything here—the markets that have the best fundamentals also happen to be the priciest. According to Stanley, the best market is one with an active public that wants to stop development—you have an automatic monopolistic pricing model built into your investment. The corollary: Buy in the spillover market next to them. Bryan recently bought an office building in the Denver suburb of Glendale. When rents in the adjacent Cherry Creek neighborhood exploded from the high $20s FSG to the high $30s, the spread between the two markets shrank to $15 to $18/SF versus a historical difference of $70.

Before the program, we snapped Bolour Associates' Kristin Runyan, who tells us activity in the development and investment company's lending division has picked up significantly in the past few months. She's seeing numerous multifamily construction loan requests, both on ground-up development and land assemblage. Bolour's lending group works hand in hand with the development and investment sides.

We also snapped Lone Oak Fund's Lina Miller. The firm's recent deals include $5M in acquisition financing for the purchase of a 19k SF office building in Hollywood, and a $6M refi loan for three contiguous parcels in Beverly Hills for a borrower who ultimately plans to develop luxury condos.