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Investors Are Still Finding Real Estate Opportunities, But Those Are Shifting With The Cycle

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Although there is an inevitable slowdown on the horizon that is causing capital markets to react with caution, there is still plenty of opportunity for those willing to wade in and take advantage of the current market.

IHP Capital Partners' Reneé McDonnell, Vanguard Properties' Alex Kolovyansky, Swift Real Estate Partners' Tommy Christman and HFF's Eric Kathrein
IHP Capital Partners' Reneé McDonnell, Vanguard Properties' Alex Kolovyansky, Swift Real Estate Partners' Tommy Christman and HFF's Eric Kathrein

"People are worried about the future, but they're still doing deals," Vanguard Properties Director of Investment Sales Alex Kolovyansky said at Bisnow's Bay Area Capital Markets and Real Estate Finance event Wednesday.

Case in point: Swift Real Estate Partners, which hadn't bought a San Francisco building since 2013, bought three in 2018.

"We're bullish on San Francisco," Swift Director of Asset Management for Northern California Tommy Christman said.

The company is seizing on the opportunities in the market, such as the strong demand from tech companies and others for office space while supply remains low.

All the fundamentals are still in place in terms of job growth and employment, but a correction is still on the horizon and top of mind for those in the industry as they watch other world economies slow.

Attendees network at Bay Area Capital Markets and Real Estate Finance
Attendees network at Bay Area Capital Markets and Real Estate Finance.

When it comes to foreign investment, the U.S. is still an attractive market for investors.

"Despite everything we see when we turn on the news every day, the U.S. is still seen as pretty stable ... and investors want stability," Madison Realty Capital Vice President Brad Ross said. The company just closed its fourth fund and foreign investors make up a significantly larger portion of that fund than its predecessors.

But the types of investment foreign capital is chasing have shifted. Chinese investment in the U.S., which was at about $16B in 2016, was at $7.3B last year and is tracking at a similar amount for this year, Cushman & Wakefield Senior Managing Director Xinyi McKinny said. Part of the drop is from Chinese policy restricting the movement of money out of the country, but it also has to do with what types of investments are being made, she said.

McKinny noted that Chinese investors in previous years sought out big trophy buildings in gateway markets. Now, the focus is on secondary markets with property that has moved from the luxury hotels and central business district office towers to include stable assets with good cash flow, such as senior and student housing, some multifamily and suburban office.

"Before, it was 'I would like to own a glamorous asset in the U.S.' ... Now, it's return," she said.

Of last year's $7.3B, more than $4B of that was for transactions over $1B. This year, there were none that broke the $1B mark, she said. And while Chinese investment was down in New York and the Bay Area this year, Phoenix and Reno had three times more investment and Washington, D.C., and Seattle had two times more.

Nebo Hotel Finance's Ned DeLorme, Cushman & Wakefield's Xinyi McKinny, PCCP's Bryan Thornton, Argosy Real Estate Partners' David Butler, Madison Realty Capital's Brad Ross and HFF's Peter Smyslowski
Nebo Hotel Finance's Ned DeLorme, Cushman & Wakefield's Xinyi McKinny, PCCP's Bryan Thornton, Argosy Real Estate Partners' David Butler, Madison Realty Capital's Brad Ross and HFF's Peter Smyslowski

PCCP partner Bryan Thornton said it will be interesting to see whether the movement of capital from gateway markets to secondary and tertiary markets is just reflective of the cycle or a shift in perception that will mean continued investment in those markets. He anticipates that domestic migration out of high-cost coastal markets will mean more people and jobs moving into low-cost states such as Texas, Florida, Georgia and the Carolinas — and will pull investment with them.

Argosy Real Estate Partners focuses on secondary markets and has been trying to attract more foreign investors to its funds.

"Asian investors generally want to do deals," Argosy Managing Partner David Butler said. "Our answer is if someone is going all the way to China to get money for a deal, it's probably not a great deal."

He anticipates the next wave of capital may bring more foreign investors to funds rather than individual deals.

Concerns in the coming year include what regulation may be put into place (even though it was voted down, the measure that could have expanded rent control in the state spooked some multifamily investors about buying and owning in California, Kolovyansky said) and concerns about anticipated slowing growth and a growing deficit.

Attendees network at Bay Area Capital Markets and Real Estate Finance.
Attendees network at Bay Area Capital Markets and Real Estate Finance.

A big challenge in the current market is the pullback from lenders, who are becoming more conservative as they feel it is growing later in the cycle.

In the hotel sector, most of the institutional money is focusing on the bigger brands, such as Hyatt or Marriott. There is still a lot of money available to fill the gap for the right deals, though, Nebo Hotel Finance Director Ned DeLorme said.

"People are looking for safety as opposed to shooting for the moon," he said.

IHP Capital Partners Senior Vice President Reneé McDonnell said IHP, which provides equity capital for for-sale housing, is starting a debt fund.

"That's the challenge right now — that the leverage isn't there," she said. The fund will provide another service to address that and help ensure better returns, she said.