More from Our Capital Markets Summit
At a time when there's so much liquidity chasing real estate assets, it's more important than ever to do smart deals, according to the equity experts at Bisnow's third annual Boston Capital Markets Summit last week. Good thing we're in the Athens of America.
We snapped Seyfarth Shaw partner Andrew Pearlstein (our moderator), Novaya Real Estate ventures prez Scott Tully, WinnDevelopment VP for acquisitions Rachel Edwards, The Davis Companies managing director Cappy Daume, AEW managing director Mark Davidson, and Intercontinental Real Estate CEO Peter Palandjian. In some ways, capital flows have outpaced the leasing market says Scott, a one deal-at-a-time guy who doesn't work off a fund. When he was growing up in the business, real estate was a bond-like product. (And we all had to walk to school barefoot, uphill both ways.) And now investors' expectations are for equity-like growth returns over short-term holding areas. But Novaya is leaning toward five- to 10- year holds in part to insulate from rising interest rate risk.
As a tax credit investor in this highly competitive market, it's challenging for WinnDevelopment to find product to buy for rehabilitation in its sweet spot, emerging tertiary markets, Rachel says. It's working in new locations and with new capital sources, like the funding for Sandy recovery, which she says presents a "huge opportunity." In its deals, Winn uses debt for 10% to 50% of TDC and usually holds for at least 15 years. (That way you really get to know your buildings on a personal level.) Public subsidy programs, which are integral to its funding model, are becoming more restrictive by imposing artificial caps on how much can be spent to renovate each unit.
As a value-add fund, The Davis Companies looks for a 15% to 18% ROI when it's a buyer. It finds inefficiencies to fix, which may be found in the capital stack. In Fund 1, often JV partners will co-invest 25% to 30% into a deal, but TDC requests decision-making control, Cappy says. It's averaging less than 65% LTV, and for the most part, is using bank financing. At times, it may go into an asset with one plan but after getting to know the propety will adjust by investing more and enhancing the value. But lenders can have a tough time upsizing a loan after the fact, as recently happened with one DC asset, she says.
Interest rates will be low for the long term, says AEW's Mark Davidson. Why? Baby Boomers will be working longer; labor participation will be lower than ever; and wages constrained. He's in the business of raising money and can only do that when he produces returns. Now his team is working on an approximately 650-apartment multifamily project in Santa Monica. (Not a bad gig when the Boston winter rolls around.) Some investors would like AEW to hold it for the long term, but he can't, Mark says. That can only be done for a few separate accounts, not for fund investors. For assets with the most stable cash flow, debt can be 30% to 50%, and AEW is keeping debt mostly at floating rates.
Rates will be low for a long time, Peter agrees. He points out that in InterContinental's JVs, he seeks some protection from construction-cost overruns; especially these days when some developers start without completed design drawings. Over time, the company has gone from its early closed-end funds to open-end funds since leases don't always track to fund terms. That leads, therefore, to a hold bias. Once assets carried debt of 70% LTV; now they're at 45% to 50% making them a "darling" borrower, Peter says. (That's very sweet of you... they think highly of you as well.) Now, for an asset the company's working on in Cambridge, he's seeing a lot of competition among lenders. He prefers realizing 6% to 6.25% return on multifamily projects he's building in Chicago and Hoboken than buying at sub-5.5%.
