Concerns about the state of the U.S. and global economies continue to mount while questions persist on how policy decisions in Washington may affect commercial real estate. However, while these concerns are casting a shadow over the sector and slowing activity, several C-suite executives speaking on a panel at the Strategic Real Estate Investment Conference held in New York this week highlighted that opportunities persist amid the chaos.
“What we’ve been doing is taking advantage of granular opportunities rather than going after large portfolios of small loans,” said Stuart Boesky, CEO of the Pembrook Group. The real estate investment management and development company provides capital to developers and owners of real estate on a national basis through the origination and/or acquisition of structured real estate debt and preferred equity. “We believe there is tremendous uncertainty in the market. … You don’t want to be the person taking a leap of faith on growth in secondary or tertiary markets.”
Boesky was joined on the panel by Alex Hurst, founder of Palatine Capital Partners; Tarak Patolia, chief investment officer with Sterling American Property Inc.; Brian Block, executive vice president and CFO of American Realty Capital and Arthur Mirante II, principal and tri-state president with Avison Young.
Jonathan A. Schein, practice leader for NREI set the tone for the discussion by talking about the different constituencies in the room--commercial real estate pros and wealth management experts--and how the two sides could improve their efforts to collaborate. "What we're trying to do is create a conversation between the commercial real estate industry and the wealth management industry," Schein said. "The two sides usually talk through an intermediary. ... Many wealth management pros see real estate as an alternative investment. ... We're trying to push the discussion further."
“We can make money in a rising market and a declining market. But uncertainly causes business people to stop,” Mirante said. “Right now we're in a little bit of a pause. I trace it back to [last fall] when our political leadership showed it could not lead [when faced with the debt ceiling debate]. ... It’s obvious that Washington is still broken. At this point an explosive recovery in real estate fundamentals that was manifested by declining vacancies and increasing rents has been put on hold.”
The recent slowdown in job growth hasn’t helped. And what that’s meant is that businesses are becoming more conservative again when faced with leasing decisions. Mirante said that many tenants are opting to renew existing office leases rather than move to new spaces. “It’s a safe decision. It requires less capital,” he said.
Finding opportunities
The panelists laid out how each of their firms is managing to find opportunities to generate returns given the current conditions.
For example, America Capital Realty Trust this week oversaw the listing of the shares of Healthcare Trust of America. The entity had been a non-traded REIT that had built a $2.5 billion portfolio of medical office buildings. It is now listed on the New York Stock Exchange. The listing didn’t raise new funds for the firm, but instead was aimed at providing liquidity to the REIT’s shareholders.
Pembrook, meanwhile, operates private equity funds and has been originated senior loans on assets in core markets. “We have an opportunity to help developers and owners recapitalize real estate that is inappropriately levered,” Boesky said. “We have the ability to do it rapidly and to take risks and are getting extraordinarily good returns on loans with average LTV ratios of 65 percent to 75 percent.”
Part of that strategy stems from seeing a senior debt position as a better bet than an equity position given the risks in the market place. “It’s a question of where do you play in the capital stack,” Boesky said. “We want to be the senior debt.”
Hurst, meanwhile, talked about how Palatine’s strategy has been to invest opportunistically in the multifamily sector and to operate a distressed debt fund. “It’s about looking for things on a block-by-block basis,” he said. “That’s the environment we’re in. Opportunities exist on the micro level. You have to kiss a lot of frogs to figure out where your princess is.”
The conference was held on June 7 and produced by National Real Estate Investor, REP., Trusts & Estates and the newly launched WealthManagement.com in New York City. More than 150 wealth management and commercial real estate professionals attended the event.