Are You Ready For The Ooops?
For real estate investors and developers, it’s time to harvest gains and reassemble portfolios to defend against the next downturn—even though that may still be a few years down the road. The cycle has running room and low interest rates may be the new normal, say the experts at yesterday’s Bisnow Boston Capital Markets event at the Liberty Hotel.
It's time for the property industry to modernize its tools, many of which were created in pre-Internet times, Jameson Weber of Hightower, a real estate tech firm, said in opening remarks. Some companies—Beacon, Shorenstein, Vornado—are trying out Hightower technologies. Rather than just employ metrics for understanding past decisions, Jamie says these tools can analyze data for forward-looking decision making.
The debt panel—moderated by Davis, Malm & D'Agostine shareholder attorney Amy Fracassini—included Prudential managing director Melissa Farrell, Eastdil Secured director Sarah Lagosh and Blackstone principal Katie Keenan.
Boston, with its increasingly diversified economy, is seeing strong growth throughout the region, Sarah says. Demand for space is being driven by businesses competing for talent. Downtown, all asset classes are doing well, with investors underwriting growth and NOI. Also performing well are suburban markets with lower housing costs and strong companies establishing new HQs in amenity-rich locations—TripAdvisor, Keurig and Wolverine. In ’06, the capital stack was up to 85% debt. Now, since there’s much more equity in the market, it’s closer to 50% debt for core buyers, she tells us.
Boston’s historic wave of construction is still prudent; today’s rent concessions will burn off, says Melissa of Prudential. The questions are how long will it take and where will rents stabilize? Last year, the insurer did $15B in loan originations and was servicing an $85B property portfolio. Among suburbs, those that are close-in with transit hubs will do best, she says. Life companies, disciplined as they are, look for debt yield and long-term stabilized income. Given the abundant supply of debt, borrowers are getting more particular in choosing a financing product.
Harvesting 10 years of Boston investment and development work, Berkeley Investments just sold $300M of downtown properties and hopes to do another asset sale of similar size in the next six months, says president Young Park. He’s replacing them with long-term development plays that aim for an even split between office and multifamily product. In ’91, Berkeley started as an asset manager. More recently, it's been a developer/landlord. After targeting Fort Point, Young’s now focusing on Somerville, the Brooklyn of Boston. Among German banks and international foundations, there’s a tremendous hunger for US deals. Since many operate in cash, interest rates aren’t their greatest concern.
But to others, rates are critical. If the Fed raises rates this year, it will let air out of the somewhat bubbly property market, says Intercontinental Real Estate Corp CFO/COO Paul Nasser. The Fed hasn’t done that yet and probably won’t in December. If it did, it would send the message that the US economy is strong; give our lenders a little more yield, and they could disperse more capital, which would be good for the real estate industry, says Paul, whose funds have many pension fund investors with a long-term US focus. Foreign investors—well capitalized and advised—operate in a longer time frame than their US counterparts. If they want to get in on the hunt, they’ll need to operate with 30 days due diligence, 30 days to close, Paul tells us.
Once they do get up to speed, they can act quickly—like NTT—which has acquired three properties from Synergy Investments in the last nine months, says Avison Young principal Scott Jamieson (the panel moderator). German and other European investors are facing economic and political turmoil at home, and along with other countries that are facing currency devaluation, they want to get their capital out of their country into “safe havens.” In some US deals, investors are willing to buy 50% to 80% of the capital stack and leave control with the existing operator.
For Taurus Investments, 60% of its capital is foreign, derived mostly from high-net-worth individuals belonging to 500 families from Europe, the US, the Mid-East and Asia, says CEO Peter Merrigan. Canadian capital is making huge bets in Boston—think Bentall Kennedy, Oxford, Ivanhoe. But Peter has worked with sovereign wealth funds that have been too slow to act. That’s why he chased the Center Plaza deal but couldn’t get to the finish line before Shorenstein, he says. He’s glad the Fed is being cautious. Anything but a symbolic move could plunge the US economy into recession since it's doing OK, not great, Peter tells us.
A huge thanks to our sponsors; we couldn't have done this without them: Avison Young, Davis Malm & D'Agostine, EBI Consulting, Hightower, REIS, Trinity Building + Construction Management.
