Capital Markets Experts Are Being More Selective While Waiting For Details Of Trump's Economic Policy
President Donald Trump has promised his proposed economic policies will be a boon for the country. But as the administration's stumbles to pass the American Health Care Act showed, implementing policy is a harder task.
The debt and equity markets are taking steps to continue business as usual while waiting for the details of Trump's economic policies to be revealed and implemented, and expert panelists at Bisnow's capital markets event at the Loews Hotel Chicago Wednesday agreed there is still plenty of runway in the cycle.
Atlas Residential chief investment officer Leslie Andren said uncertainty was introduced in the marketplace at the midpoint of 2016. Rate increases were affecting the underwriting of Atlas’ transactions, and the firm’s capital partners told Atlas to ease off on back-end cap rates and aggressive underwriting assumptions, a concern that was echoed by debt groups. By Q4 2016, transaction volume slowed considerably and the first weeks in January were silent.
Andren said Atlas’ underwriting formula since mid-2013 has been to get all value-add deals done in an 18- to 36-month time frame, then apply for long-term fixed-rate loans with HUD during the second year. Atlas wants to hold these assets long term and the loan terms give Atlas flexibility to either stay with HUD or recapitalize and exit the deal. Atlas learned this lesson when it bought an 11-property, $250M Class-A portfolio in Texas from a public REIT — all of the assets had HUD loans attached that Atlas had to assume. The learning curve took Atlas a year to master, but Andren said it makes future HUD deals easier, and having a tranche of debt that can stay with an asset for as long as a firm wants to own it is a benefit.
KeyBank Real Estate Capital senior vice president John Hofmann said deal flow in early 2017 is brisk but there are signs of choppiness. Banks are cautiously optimistic about the Trump administration's pro-business tone, particularly with regard to deregulation.
While the banks take a wait-and-see approach to deregulation, it opens up ideal opportunities for private capital to fill the lending gaps. Sherpa Capital Group managing principal Rahul Shah said tighter regulations have been good for business. Even if banking rules are relaxed, the market will not change overnight, and Shah said there will still be some types of loans that banks will not touch that lenders like Sherpa can compete for. The only challenge is that Sherpa looks for value-add deals, which are becoming more scarce.
Hunt Mortgage Group director Dan Eibler said the cautiousness of banks has made FHA financing attractive again. Those are also selective and are taking a hard look at supply and demand, but FHA loans will make a nice stopgap.
Equity Commonwealth spent the past two years in disposition mode (capitalizing on high real estate prices) and is now sitting on $2.1B in cash. CEO David Helfand said the plan moving forward is to take the management that executed the disposition plan, marry that with the balance sheet it now has, and find dislocation in the market where it can create value.
In the short term, Helfand said Equity Commonwealth will continue to sell assets for two reasons. Some of its assets have been stabilized and there is no more value to be created, and it has some assets that Equity feels there is no upside to retaining.
Helfand is looking at what is in the construction pipeline. Nearly 90M SF of office will be delivered this year and the question is if net absorption will continue to be positive, or will there be some dislocation where Equity can swoop in and acquire properties?
There is $110B in CMBS debt maturing this year, but Walton Street Capital managing principal Jay Weaver said his firm is not licking its chops to obtain any of it. There are 36 debt funds actively raising capital. Weaver believes the majority of CMBS debt will be refinanced CMBS, and loan originators have returned to issuing floating loans on CMBS debt.
Weaver said Walton Street entered the debt fund origination arena because the commingled fund business has matured in the U.S., making value-add deals harder to get, so it had to find another way to compete. Walton Street transacts on 7% to 8% of the opportunities it sees annually. Several it passes on or loses the bidding on can work as a debt fund. Walton Street went from being a pure play manager to diversifying its portfolio.
Capri Investment Group CEO Quintin Primo III said 80% of his firm's assets are multifamily in gateway urban markets, and Capri is an active user of Fannie Mae and Freddie Mac, has firmed up bank lending, and uses portfolio lenders to source its debt. Capri weathered the storm of 2008 and 2009 and began selling in 2011. It has disposed of $3B in assets since, an astounding number for a firm with $4B in total holdings. Primo felt it was in the best interests of Capri's clients.
Primo now believes the market is in a correction. There is an oversupply of units, although long-term demand will remain strong. But Primo is asking what will happen when Millennials move on to buy homes. Capri is surgically buying in tight land-constrained markets like downtown LA and is turning to workforce housing and net-lease investments to grow its business. Primo said that workforce housing is a increasing concern nationally and there are tremendous needs for it, especially in the Trump economy. The net-lease market, meanwhile, is never overbuilt and is now in the sights of institutional investors, which are allocating funds toward acquiring net-lease assets.
