Say I inherit $25,000,000 and it has to be invested in Commercial Real Estate before the close of 2018; where should I invest in Commercial Real Estate?
LDCRE conducts a Roundtable discussion on the commercial real estate state of the market with three leading commercial real estate brokers, all of whom are all in the trenches every day. Nick Miner,CCIM is Senior Vice President at ORION Investment Real Estate, Sean Lyons is a Founding Partner at Triad Real Estate Partners, and Jeff Rowlett is a leading Investment Advisor at Marcus & Millichap serving private capital investors in Chicago, Milwaukee and nationwide.
LD: What are your predictions for the 2018 CRE year? What do you believe will be the largest influencers for 2018 (interest rates, tax reform, unrealistic seller expectations)?
NM: 2018 Should be similar to 2017 as far as transaction velocity. All fundamentals are positive and that should bode well for the coming year. The recent tax reform should be another positive for investors of CRE assets. There are still unanswered questions relating to the changes that as the answers become more and more apparent should fuel the transaction velocity.
SL: All indications seem to point to another strong year for CRE in 2018, especially where we play in Student Housing and Multifamily. From our perspective, there is still plenty of capital chasing deals in the market and the demand remains very high. I think Seller’s expectations have been the biggest challenge we will continue to face this year as that was the theme of the second half of 2017. We had multiple deals last year where we could not bridge that final value gap between Buyers Best and Final Offers and Sellers expectations and that was not happening as consistently prior to last year. I see that same theme continuing into 2018.
JR: I believe 2018 will be a stronger year than 2017 was in terms of total transaction velocity and property sales, likely similar to 2016. Interest rates certainly appear to be on path to influence the market this year. Tax reform uncertainty was definitely the largest influencer of 2017 and with that now behind us, we expect the market to gain momentum.
LD: Looking back on all the properties you sold in 2017, what types of debt did you see the buyers use, what was the most common form of financing (Bank, CMBS, Debt funds, Fannie/Freddie, Life Cos, etc.)? What do you think will be the leading acquisition debt instrument used on deals you are a part of this year?
NM: The majority of the transactions I completed in 2017 were low leverage or all cash transactions. The leveraged transactions ranged from life company lenders to local banks/credit unions. I believe that more local lenders will be very active the first half of this year, as they place debt and at the beginning of 3rd quarter they will be doing a lot of internal re-evaluation of the loans completed and then will implement a more specific loan target.
SL: Still a pretty good mixture on our deals but mainly Bank Debt and Fannie/Freddie. Access to debt in all forms still remains very available to qualified Buyers and they have several options of which option they would like to utilize. I continue to get cold calls from Lenders on a weekly basis asking if they can lend on our deals and that is something I have not really seen happen as often over the course of my15 year career in the business.
JR: A majority of the transactions completed in 2017 were financed with traditional bank debt from local and regional banks. Solid underwriting with a defendable NOI is the key to getting deals through committee and funded. For private investor acquisitions in 2018, bank financing and CMBS will likely be the primary sources.
LD: Where are cap rates today and where do you see them going over the next 12 months? What do you believe to be the key influencers (cost of capital, lower/higher supply of good deals, too much/little acquisition money on the sidelines)? Why?
NM: For the properties I work on, multi-tenant retail centers and NNN leased assets, I foresee the cap rates increasing modestly. Each asset will have to be analyzed individually for not only the financial performance, but also the location longevity should come into more light this year.
SL: Cap Rates have started to level out in our space (Student Housing and Multifamily assets nationally) as there really is not much more room for them to go any lower. We do see capital looking for opportunity in higher yield, higher cap rate secondary and tertiary markets that was not looking there two years ago. The appetite for sub 6 CAP deals in our space has started to level off outside of Institutional Capital and I believe that will continue to be a theme in 2018. Buyers have gotten smarter and stricter with their investment criteria so I do see some of these deals that are priced too aggressively not trading this year as Cap Rates continue to equalize.
JR: Cap rates increased slightly in 2017 and will hold steady in 2018 but are certainly subject to change depending on short term rate increases and the Ten Year Treasuries. Lack of considerable new development, improved operations and occupancies will impact values and velocity this year as well.
NM: My initial reaction to Crowd Funding was negative. I viewed it as TIC version 2.0. After further review and analysis, it is a good opportunity for smaller investors to participate in direct investment in larger, better quality commercial real estate opportunities. The key is going to be the sponsor. Investors should do a lot of due diligence not only at the property level but also at the sponsor level.
SL: Still too early from what I have seen on this front. I think that many hurdles continue to be jumped and that a ton of progress has been made in the space over the past two years. With that said, I think the market is still being educated about all of their options that exist within CRE Crowd Funding and that it will continue to gain market share at a slower pace as the industry adapts. I think we are still 2-3 years away from this platform playing a major role in how CRE assets trade are funded but the momentum is definitely building in a positive direction and I don’t see that changing in 2018.
JR: I believe Crowd funding will continue to grow and evolve in 2018 and beyond. It is such a great vehicle for investors to get involved with investment real estate and break down the barriers that would otherwise prohibit them from direct investment in commercial real estate. Forbes predicts The real estate crowd funding industry is projected to be valued at more than $300 billion by 2025.
LD: What deal stood out the most for you in 2017 and why?
NM: The purchase by JPM (Jerry Colangelo) of the new State Farm Campus for just under $1 billion dollars in Tempe. That sets a new high mark for a single asset sale in our market.
SL: We brought out a 6 property Student Housing Portfolio priced at just over $150M. It is s very diverse portfolio all over the country and it presents a unique opportunity for a Buyer to immediately gain scale in a very desirable product type. We are still working on it but it has been a really interesting deal to be involved with and the quality of Buyers that re interested in from across the globe is very encouraging.
JR: Rather than one particular deal that stood out, I was more surprised by how much of a pause the buyer market took in 2017. There was a noticeable easing of offer activity and appetite in the market.
LD: Next month you inherit $25,000,000 after taxes from a crazy uncle, but it all has to be invested into real estate by the close of 2018. How would you put that money to work?
NM: I am still looking to be adopted by this crazy uncle! Please make the introduction! All kidding aside, I would diversify the portfolio into probably 5-10 assets with a focus on mid-2000 construction in A locations. These types of assets should provide the stable cash flow I would be looking for with very little risk that would allow me to work on improving my golf game! Haha!
SL: I like the straight affordability play in our space at this stage of the game. Everyone has developed to an A with all the bells and whistles included in order to achieve the highest level of rents available in the market. I see a big opportunity in the B space by providing and affordable option that doesn’t really compete with the higher end of the market, which tends to be a more limited renter pool. It sounds boring, but the down-the-middle B play that is focused on provided a quality affordable option to tenants who are not interested in paying top of the market rents is a great place to invest your dollars right now. I see a bit of a reversion to the mean away from the Class A product once the dust settles on all of the new supply that has flooded the market. Betting on continued growth of top of the market rents year over year is a dangerous game to play at this point of the cycle, in my opinion.
JR: Well located grocery-anchored retail shopping centers in growth markets, industrial properties with a diversified mix of credit tenants and a few core long-term single-tenant net leased properties.
Nick Miner, CCIM (NM): Nick has been in the commercial real estate industry for 20 years. My career in commercial real estate began as an intern with the MEGA Corp., which became a partner office to CB Richard Ellis in Omaha, Nebraska. I became a licensed real estate professional in the state of Nebraska in 1998. Next Nick moved to Phoenix to begin working with Marcus & Millichap in 2001. Nick obtained his CCIM Designation in 2003. Nick later had an opportunity to run a brokerage company with two other partners for almost 6 years before moving to a CORFAC affiliated brokerage company. Most recently, Nick is the Senior Vice President of a boutique commercial investment firm in Scottsdale, ORION Investment Real Estate.
Sean Lyons (SL): Sean is a Founding Partner at Triad Real Estate Partners. He has close to 15 years of experience selling investment real estate, both in Chicago and throughout the country. Before starting Triad, Sean was a Senior Associate at Marcus & Millichap. As a Director of its National Multi Housing Group, He concentrated his efforts on selling apartment properties on the north side of Chicago and in several tertiary markets throughout The Midwest. He has also serviced his clients by diversifying their real estate investment portfolios and helping facilitate their 1031 Exchanges into other product types, including Single-Tenant and Multi-Tenant Retail, Office, and Industrial Investments. Sean has brokered the sale of more than $900 million of investment property, in over 175 transactions, including over 9,000 apartment and student housing units.
Jeff Rowlett (JR): Jeff Rowlett is a leading Investment Advisor at Marcus & Millichap serving private capital investors in Chicago, Milwaukee and nationwide. Mr. Rowlett is widely recognized as a leading investment properties specialist. His expertise is in understanding the capital markets, knowing and accessing private capital investors, as well as underwriting and developing marketing strategies for investment properties. Mr. Rowlett has represented numerous private investors in the disposition of their shopping centers and Single Tenant Net Leased properties.
Interview originally appeared in LDCRE Commercial Real Estate News