Why 2016 Is The Year Real Estate Will Slow Down
Over the last few months, capital markets have begun experiencing a lot of turbulence and volatility, causing a slowdown in activity in Q4, primarily as a result of the Fed’s rate hike. That was the consensus of the all-star panelists at Bisnow's San Diego State of the Market event this week.
Here's our very own SoCal business manager Lucas Netchert introducing our group of panelists.
Meridian Capital Group managing director Seth Grossman told the more than 300 attendees while the rate hike was a mere 25 basis points, it set off widening of credit spreads. “Everybody across the board is wider than a few months ago,” he said. “Treasuries, to their credit, came down 12 to 13 basis points, but then the spreads blew out even more."
Seth thinks there’s a slowdown because people are having "sticker shock," not because it’s big numbers, but they’re not used to these sorts of gyrations in the market, and it’s causing fear.
He predicted 2016 will see a drop off in opportunities for small investors that two to three years ago were buying and flipping, and an increase of business on the bridge side by value-add people. Three to four years ago, 90% of our of buyers were buying and flipping,” Seth added. ”Rather than buying and putting on first debt, we’re now seeing the complete inverse.”
Cypress Properties' Mark Wayne (left) caught here Allen Matkins' attorney Rick Miltimore and Casey Brown Co founder Casey Brown. They were panelists for the event's Office Outlook, which is coming next week.
Here's panelist Jason Wood (second from right), snapped here with colleagues Travis Wood, Andy Bell and Scott Potter.
MG Properties Group president Mark Gleiberman is concerned about how the influx of foreign capital is affecting cap rates and running up values. “I think the challenge for us now is to keep up the same volumes. Values are up significantly, and we’re seeing cap rates at levels never seen before."
Mark says the last couple of years have seen major revenue growth, major rental growth and low occupancy. There’s been a lot of new multifamily development, but supply has not met demand. At some point it will. According to economists and market researchers, the good times will continue in 2016, but maybe at a slower pace. "We expect reasonably good rent growth over the next two years, but not what we’ve seen over the last two years,” Mark added.
To protect against the possibility of rates moving up a full point, which causes values to drop, MG Properties is taking a conservative approach to debt, seeking 10-year fixed loans to provide a long enough run for the market to turn if values get too high and come tumbling down; ratcheting down debt-to-equity from 70% to 80% to 65%; and seeking interest-only loans to protect the downside, as values escalate, Mark explained.
“This past two years were very easy, but there’s another downturn coming,” he contended, advising members of the audience that to weather the next down cycle, they need to leave enough room on cash flow from debt to absorb losses and secure strong management. "I think that’s the key going forward.”
Here's SVP of the Downtown San Diego Partnership Daniel Reeves (center), who moderated.
Jobs and new construction are the two most important issues for multifamily investors, Reven Housing REIT CEO Chad Carpenter said in a discussion of the relevancy of China’s woes to SoCal commercial real estate markets.
From an investor perspective, Chad noted China’s economic issues also have Chinese investors anxious to put their capital in international markets. “The influx of foreign capital is certainly propping up the market, making it frothier," he said. “Foreign investors tend to partner with domestic operators, so they’re not coming in and buying directly.”