With transaction volume of $4.7 billion and more than 300 deals closed in 2007, Transwestern Commercial’s Investment Services Group is a major provider of advisory services to institutional and corporate clients on acquisitions, asset sales and corporate finance. Client work covers a variety of property types, including office, industrial, retail, healthcare and multifamily.
Steve Pumper has led the group for the past 10 years, and is a member of Transwestern’s board of directors. He has more than 20 years of commercial real estate experience, including a stint at Insignia/ESG, where he was responsible for institutional business development. He also has served as an officer and vice president of the Real Estate Roundtable, formerly known as the National Realty Committee.
NREI caught up with Pumper in his Dallas office for the latest on how the company’s institutional clients are faring.
NREI: How are institutional investors competing with other investment players?
Pumper: There has been a huge flight to quality and safety. The institutions currently playing on the acquisition side are pursuing trophy assets that are well stabilized — assets where they don’t have to worry about the short-term problems or difficulties in the marketplace. These assets are 90% occupied. Since they are Class-A buildings, they are much easier to finance.
Overall it’s more difficult to finance deals above $75 million, a stark contrast from a year ago when the deal couldn’t be big enough. Right now, the sweet spot for lenders is in that $30 to $50 million range. When it’s above that, many lenders will end up doing club deals where they’ll have another lender help them get that deal done. Again, it’s regional too, with some lenders stepping up to lend on the coasts versus the central part of the country. Most lenders have much smaller appetites than they did 12 months ago.
NREI: What services are institutional investors demanding these days versus a year ago?
Pumper: We’re working with them more closely than ever to determine the undercurrents in the markets that they’re pursuing, in either increasing their leasing occupancy or for new acquisition or disposition strategies.
A lot of times you look at research and trends, but they are dated and they become stagnant very quickly. We’re giving them a comprehensive view to that particular market or submarket that helps them determine their strategy.
NREI: What is on the minds of corporate clients right now?
Pumper: You have to look at it regionally. Many markets in the country are under stress at this time, but Texas continues to do extremely well, and Denver is outperforming many markets. Washington, D.C. had a correction, but continues to do extremely well inside the Beltway.
When we sit down with our clients, we address issues to see if they are maximizing their portfolio. Are you pushing rents? Are you sitting there on the building waiting for somebody to show? Are you being proactive to lease it up? In a strong leasing marketplace, it’s easy to lease it up just by having the lights on and the phones working. In today’s tough investment climate, you must have a specific asset plan to outperform the local market.
There is a lot of wait-and-see attitude, and most of the news you see out there is bad. You’re trying to get your clients not to overreact to the barrage of negative news they are hearing.
NREI: Earlier this year, commercial real estate experts pointed to the second half of 2008 for a recovery in deal volume. Why has that line of thinking not panned out?
Pumper: People didn’t understand and anticipate the level of the damage that was going to be done by the subprime lending and residential lending marketplace and what that would do to the ability of both large national and regional banks to play. Now that impact has moved over into auto loans, credit card loans and student loans, and all of these are impacting lenders’ ability to play in the income-producing lending marketplace. They’ve all gotten much more conservative in their lending standards.
NREI: Your business is about evenly divided between office and apartments. How are apartment values holding up, and how active is that segment for you?
Pumper: The apartment segment is the second-least affected asset class behind industrial. But again, you have to go market by market and submarket by submarket. We continue to see strong pricing power in the mid-Atlantic. Although cap rates have bumped up 25 to 50 basis points in quality product in the Sunbelt, there is a strong interest in targeting acquisitions because the long-term demographics are very positive for job growth and population growth.
Given that the residential mortgage boom has hit the wall, there is going to be a hangover on the lending to first-time buyers. It will be harder for them to buy homes, so therefore it looks stronger for them to move into the multifamily residential market and stay there a lot longer. The key element we have to underwrite is the shadow market, the overhang of residential homes that now will be leased and that has to be worked through.
NREI: So are there deals out there to be had?
Pumper: Value-added properties [where the asset either needs to be repositioned or renovated] are the most difficult to sell today. You’ve got buildings that are 60% to 80% leased, and you just can’t get them financed. The de-leveraging of the industry is occurring big time right now. What once was 75% loan-to-value is down to 60%, and in some cases maybe 50%. The cost of mezzanine debt has risen a dramatic 300 to 500 basis points over the last six months to reflect the lack of capital out there, and to reflect the perception of additional risk being taken by the lender.
NREI: What will be the catalyst for a market turnaround?
Pumper: It’s important for Wall Street to get back into the game to some extent, not necessarily to the magnitude that it was in 2007 when it issued $230 billion of CMBS debt. But Wall Street needs to get back in some relevant way. We need Wall Street to help establish a more balanced lending environment for deals that make sense. Right now there is a huge void.
NREI: How long will today’s relatively weak sales market last?
Pumper: If you talk to the financial institutions, the conventional wisdom is we’ve got a ways to go. I’d tell you we have at least 12 months and possibly as much as 18 months before we restore the capital markets to some level of normalcy. That means the volume levels we saw in 2003 and 2004.
NREI: What recent examples can you point to that say, “This is 2008”?
Pumper: Having talked to some lenders in New York recently, where short-term loans are coming due, for quality sponsorship good judgment is being utilized and many extensions have been granted. I think that is the absolute right thing to be doing.
Where appropriate, sellers who help buyers finance the purchase is a huge positive in the current environment. It is allowing many deals to get done, and that is a trend we will see into the next year. It certainly does give those sellers a big advantage over their competition.