Lenders On Caution Mode Due To World Events
You think some additional 20,000 apartment units coming to Atlanta is slightly chilling lenders' moods on real estate? Try China. Or Russia. Or Syria.
“I think there's a very real palpable and real fear today of not only a US recession, but a global recession,” Parkway Properties CFO David O'Reilly told our audience of more than 200 attendees at our 2016 Capital Markets Update at the JW Marriott in Atlanta this morning.
“I will absolutely echo the thought that [real estate] fundamentals have never been better,” David continues, adding that he takes no comfort in those stats. “Real estate fundamentals are a lagging indicator, not a leading indicator.”
His case in point: Five months after the oil price crash, Parkway was still doing top-of-market lease deals for its Houston properties. Those deals were carrying over from when times were great and looked by many to never end. But six months after the crash? “There was not a tenant to be found” and Parkway leased less than 100k SF in 2015 in Houston, down from multiples of that the previous year.
David says that means it will be harder for investors and developers to raise equity and debt to get things done. It's especially tough finding money for non-core or value-add plays, David says, as the cost of capital and debt has risen in the past six months, especially as the CMBS market has pulled back, which will have an effect on asset valuations. “I was no math major, but when I add those two things together, that tells me that values are coming down,” David says.
It's hard to imagine when metrics across all real estate sectors are as strong as they are today—record low vacancies in office with increasing rents, surging absorption in industrial, and strong overall occupancy rates among Atlanta's Class-A apartment stock as well as strengthening rents even as more apartment projects come online—that anyone can be bearish on the future.
But David wasn't alone in airing concern when it comes to capital's investment in real estate. For institutional, life and pension investors—who often lend financing to start projects or refinance for the long term—there's been one overriding question on their minds: “How much longer can this go?” says Patterson Real Estate Advisors' Lance Patterson.
He notes of the office buildings underway in Atlanta right now, more than half have significant pre-leasing. “And that kind of gets back to the caution that capital has. "They don't want to make the mistakes” made in the last recession, he says.
Lance and David were among a panel of high-profile commercial real estate investors and money men, including AGH's Wes Hudson, who moderated, North American Properties' Tim Perry and Ackerman & Co's Kris Miller. Luckily, there were some bulls among them as well. “It's not the end of the world,” Kris quips. With the balance and supply demand tipped in favor of office landlords the most in his 30 years in the biz, Kris says there's little that he sees that could derail the current state short of a “global catastrophe.”
And the malaise in global markets is only flooding more capital into US real estate as a safe haven bet. “If you're an investor and you're sitting in Europe, the Middle East, what are you going to invest in? Euros? You got to invest in dollars,” Kris says.
The investors that have purchased assets from Ackerman have viewed the investments as a form of debt financing with conservative growth estimates over time, Kris says. Even in multifamily, finding capital, while harder, is not impossible, Tim says. “If the deals work, they work,” he says. “We're bullish, regardless of the supply that's in Atlanta. We still think it's undersupplied with the demand in Atlanta.”