Capital Markets Experts: Don't Bother Looking For Opportunistic Buys
With so many headlines blaring that Houston’s in trouble, investors are starting to sniff around for opportunistic buys. But experts at Bisnow’s Capital Markets event last week say those aren’t anywhere to be found yet. On the contrary, core is still king.
Lionstone Investments SVP Tom Paterson (right, with Wood Partners’ Todd Gaines) says people are sensing there may be value-add opportunities in this environment, but we don’t have fundamental problems to create them. Instead, he believes core projects will do the best in this cycle. They’re getting repriced maybe 3% to 5%, but they’re lower risk assets, so that’s what most capital sources want to put their money in. Most banks and life insurance companies aren’t going for deals with higher risk (which have been repriced even more), and the spigot for land and development capital has turned off. Tom says Lionstone has been agnostic on property type and invests across the risk spectrum, but it’s focused on the best locations that are walkable and amenity-based. That’s clear in its recent acquisitions—Sugar Land Town Square, 712 Main and Greenstreet—and Tom says they’ve proven their muscle in the downturn. Most of its projects grew rents last year.
Avison Young principal Darrell Betts says he’s been getting a lot of interest from potential buyers, most of whom want core because it’s easier to get those deals approved by an investment committee. (That’s especially true of foreign investors, like the BBVA Compass Plaza deal not only closing in a down market but at record pricing and a 4.8% cap rate.) Although some institutions are stepping back, he’s regularly fielding calls from entrepreneurial buyers who want into Houston and want in now. Sales volume will drop this year; he estimates about $6B across property types, compared to $8B last year and $10B in 2014. Here’s our capital markets panel: moderator NorthMarq managing director Kerry French, Tom, PrinREI investment director Casey Miller, Weingarten CEO Drew Alexander, Darrell, Cousins Properties VP Fred Knapp and Hanover Co CIO Brandt Bowden.
While Darrell says Houston isn’t “shut your doors” by any means, office has one staggering fundamental problem: sublease space. He thinks we’ll hit 10M SF of sublease across the metro in the next two or three months. When you add sublease into the mix, Greenspoint has 40% office vacancy.
Fred (far left with Houston Group’s Arnie Azios and Lawrence Schanzmeyer) thinks opportunistic deals will eventually emerge—he predicts we’re in the third or fourth inning of the downturn and says fundamentals could erode some over the next 12 to 24 months. But for now, it’s mostly headline risk and the markets being punitive against Houston. Fred says Cousins’ local properties are in great shape—over 90% leased with an average 6.5-year remaining term and no significant rent roll until 2019. Even one deal that would’ve freaked investors out turned out well; a 75k SF drilling tenant in Greenway Plaza filed Chapter 11 in September, but then it restructured and kept its lease, so Cousins ended up with the same lease but a better credit tenant with a more stable company backing it.
Casey also sees strong fundamentals—he says for most properties, cap rates haven’t changed, rent rolls are stable, appraisals haven’t been changing and Houston’s actual value hasn’t dropped. He predicts the recovery will be U-shaped but should come back pretty quickly. His investors are watching Houston carefully because they realize there will be a sweet moment to swoop back in. Casey’s here, second from the right, with Holt Lunsford’s Patrick Connolly, Weingarten’s Marc Kasner, Holt Lunsford’s Kelly Landwermeyer and NAI Partners’ Rob Evans.
