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The CMBS industry is keeping a close eye on proposed regulatory reforms that coulddeal a harsh blow to its fragile recovery.
In the wake of the financial crisis, policymakers and regulators have introduced a slew of new and proposed rules and regulatory requirements aimed at banks and other financial institutions—most notably through the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Brokerage firm clients today want only one thing: more. They want more services, more expertise and more collaboration in more places. And they want all these things for less: less time, less money and less fuss.
So what’s a brokerage firm to do? Give them what they want.
Investors have put more money into commercial real estate private equity funds in recent quarters than any time since the crash. So why do so many private equity fund executives seem worried about raising enough equity to stay in business?
“There are six, seven, eight players that are basically acquiring all of the investment capital–60 percent to 70 percent of the investment capital,” said Gunnar Branson, CEO of the National Association of Real Estate Investment Managers, at the PERE Real Estate CFO Forum, held July 9 and10 in New York City.
Investors poured money into private equity real estate funds in the second quarter of 2013, helping to make up for a slow first quarter and continuing the strengthening momentum as fundraising strengthens. Closed-end private real estate funds raised $17 billion, close to three times the $6 billion raised in the first quarter, though less than the $27 billion raised in fourth quarter of 2012, according to Preqin.
The tight and highly competitive net lease market may see a slowing of activity due to a recent rise in interest rates, a trend that some expect to continue for some time to come.
The rate for the 10-year Treasury note has been rising since mid-May, swaying the dynamics of net lease transactions. In the past few decades, hikes in rates have been relatively rare and brief. The most recent increase “clearly impacts single-tenant net lease transactions,” says Bill Hughes, senior vice president and managing director at Marcus and Millichap Capital Corp. in Irvine, Calif. The impact is more pronounced on the pricing of investment-grade properties that have lower cap rates, Hughes says, though other properties may also see prices move.
“You may see a slowdown in investment grade for a few weeks until both sellers and buyers accept the new world,” Hughes says of the upswing in rates. “I think they will come back together.”
Colleges and universities are a boon to local economies in more ways than just providing a steady supply of students who fuel demand for beer and pizza joints.
Academic institutions are often the life blood for many “college towns.” In addition to hosting a ready-made pool of consumers, schools often serve as a major employer and a community partner who helps to seed innovation, research and business growth. That stabilizing presence is a quality that commercial real estate investors are valuing more highly these days. “The university is a key part of a larger whole that makes this an attractive area for businesses to locate, and by extension, keeps our commercial real estate market reasonably healthy,” says Jay Taylor, managing director for the Raleigh office of Sperry Van Ness.
Bond buyers have poured money back into the CMBS sector and the added investor demand is helping drive conduit loan issuance higher. And as investors gain confidence in the revived sector, underwriting terms and rates are becoming more favorable for borrowers.
“There is more than enough capacity for volume projections right now,” says Steven Schwartz, managing director and partner with Torchlight Investors, a longstanding investor in CMBS.
A select group of investors, including Torchlight, still buy the riskiest B-rated CMBS, earning themselves the right to set underwriting standards for conduit loans. Those standards have eased but are still much tougher than the go-go days of the last boom.
At a time when real estate investors still have concerns about the future performance of many traditional property types, including office, retail and multifamily, some have started to set aside capital for alternative assets. Such assets, including student housing, seniors housing and medical office buildings, among others, have broad demographic trends supporting their success, proved immune to the recession and offer higher yields than comparable properties in other sectors. As a result, interest in these types of assets is expected to keep growing.
Immediately after the downturn, active investors stuck primarily with the five core property types because they were wary of taking on any level of risk, notes Spencer Levy, executive managing director with CBRE Capital Markets. Yet the cap rates on the best multifamily, office and retail buildings have fallen so low lately that it has become difficult to achieve decent yields. At the same time, investors ranging from REITs to pension fund advisors to private equity groups still have to fulfill their capital allocations to commercial real estate, which is why they are increasingly eager to acquire more specialized properties.
To market commercial real estate products to high-net-worth individuals, you have to know exactly who you are marketing to, according to wealth management advisors and CPAs.
Investment objectives and appetites for risk vary widely among this type of investor. Experiences range from those who have made their fortunes in real estate and are capable of managing their own buildings to relative novices who may want to maximize their returns but need the guidance of a professional. Others look to real estate as an asset key to estate planning for transferring wealth to their heirs. As a result, there is no “one size fits all” approach for dealing with high-net-worth investors, although there are some guidelines that financial advisors and family offices keep in mind when dealing with these types of clients.
Regardless of the approach, today may be an opportune time to pitch commercial real estate products to high-net-worth investors, according to Christopher K. Cooper, principal and managing director in the Southern California office of Avison Young, a national commercial real estate firm. With the still-volatile stock market, real estate offers a stable investment alternative in the form of a hard asset. Plus, for investors who need additional sources of income, it can provide current cash flows, which many stocks do not.
“Given the state of the economy, everybody is looking for better, more consistent yields,” says Steve Cohen, executive vice president with Sabadell United Bank, a Miami-based bank that operates a wealth management division, Sabadell Bank & Trust. The institutional investors’ run on the sector in the years post-recession also gave people the idea that there are bargains to be had. “Real estate was value-priced over the past several years,” says Cohen. “There were good properties trading below replacement cost.”
The steady flow of capital moving into the seniors housing sector continues to gain momentum. the exclusive results of a first-quarter survey conducted by NREI and Senior Housing Global Advisors show an active pipeline on all fronts. A majority of respondents expect seniors housing activity—namely acquisitions, new constructionand financing—to increase in the next six months.
All told, 67 percent of respondents believe that sales transactions will grow in the coming months [Figure 1]. “The pace of real estate transactions in the seniors housing space is accelerating due to an increased focus on the part of both domestic and international investors who finally have found the industry,” says Mel Gamzon, president of Senior Housing Global Advisors Inc. in Fort Lauderdale, Fla. An overwhelming majority, 80 percent, anticipate a rise in new construction, while 60 percent believe financing will increase over the next six months.
The commercial real estate industry has seen its share of tumult in recent years. The credit crunch and Great Recession hit hard. And a world full of uncertainties and change has kept investors constantly on their toes.
In the face of it all, the industry has recovered. Fundamentals improve quarter by quarter. Lenders get more comfortable every day. Investors are increasingly buying non-core assets and taking on more risk. There are even the first signs of an uptick in development.
In this context, there are pros in the industry that are “positive disrupters”—people who are making changes in the industry and how it functions.
The NREI staff identified key ways that the commercial real estate industry is evolving and issues that will shape the coming years, and found people who are positioned to greatly influence those trends.
