The conference was very well attended with a broad range of the real estate industry present with coast to coast representation. Many of our clients on the banking and institutional fund side were present and on many of the panels. The diversity of the attendees and the panels brought a valuable prospective on current topics, investment markets, property sector discussions and broader economic trends. Some notes and takeaways from some of the sessions attended are shared below.
- Industrial demand drivers are not letting up and incredible demand for infill port related modern industrial.
- In the Bay Area opportunities to demo office buildings for industrial uses.
- Converting retail to last mile industrial use is very hard given zoning laws and city perceptions.
- Office sector outside of West LA, Seattle, and other tech markets is stalling.
- Seattle office rents will spike big over the 2 years from $40 to $60.
- Best NY office rents as high as $150/SF. Value of other high priced markets don’t look so bad.
- Construction costs are a rising problem.
- Watch for coming pricing gaps in office rents between best in class and former class A buildings.
- REIT stocks are now trading below net asset value.
- Public markets show a lower value for office and most asset classes from recent peaks. You can buy into the market below market value through REITS. This is attracting dollars that could be invested in other segments of the capital stack.
- Currently there are 1,100 malls in the US and there will be 600 in the next 10 years.
- Narrative is focused on low end. High end is a strong buy.
- Why buy office in NY? Why not buy SL green REIT shares below market at 80 cents on the dollar.
- Multifamily assets benefited from the spike in interest rates as it showed a clear decline in move outs due to affordability.
- There is a shortage of labor for warehouse and hotel workers.
- Foreign capital flow has dropped significantly
- Bridge debt has an oversupply of lenders.
- Debt costs is down 100 basis points from fall peak. Base rates went up but spreads declined.
- There is limited spread left to move so if rates move debt will move.
- Credit standards are loosening with covenants, IO, etc.
- Banks are projecting limited loan growth in 2019. Additional demand will be made up by the Private Money market. Many funds that are high net worth have equity sides and debt sides so they can participate in the market either side.
- Private money was at rates 10 percent plus but are now 8.00 percent.
- Weighted average remaining lease term is being looked at closely as it impact the lenders view of risk going into a possible decline You will see deal spreads with roll over exposure.
- A room survey was conducted on projected number of fed rate hikes in 2019. 2 was the leader followed closely by 1.
- Investors are starting to underwrite higher exist cap rates due to perceived rising interest rates.
- Cycles do not just end there is usually a driving event.
- There are no massive drivers down, this should be moderate downturn.
- 202o downturn projected by CBRE
- Equity real estate will fall 12 months behind public markets. We are well beyond this.
- Corporate debt is a big concern. This could trigger a broader economic collapse and should be watched.
- Asset classes are a good bet for the next few years. Large bifurcation in rates for office and retail assets best to worse.
- Most discussions are focused on rent growth and exit. rates.
- There was a shift in the buyers and market in the 2nd half of 2018. The market could not get what they wanted. Offers were down 20 percent for assets over $25 million and down 10% under $25 million. Brokers would argue that this means the value is down that much. But the sellers are not selling the better assets at these prices. They have dumped their non core assets which is now ending. The total buyer pool is smaller.
- Retail over $50 million cape rate up 10 points.
- Retail has been broad brushed and not all retail is bad. But all is discounted,
- Industrial is the new retail. We are only 1/3 of the way through conversion of demand from retail to industrial.
- Competition for core assets is increasing in this late cycle stage as quality of asset as well as income stream is getting most favorable underwriting.
- Medical office is getting allot of favorable interest from a broad range of investors.
- Opportunity funds are getting better deals now as compared to 12 months ago.
- Value add industrial is at historical low cap rates.
- Creative office repositioning continues to get attention. Returns are still sufficient to warrant it.
- Single family homes builders are building interest rate increases into their underwriting.
- International buyers have dropped off extensively.
- Robust demand drivers across the globe with Gateway markets incredibly strong and there is more demand coming.
- E-commerce and more traditional logistics firms are retooling their outdated supply chains.
- National construction will be lower this year
- Part of the cost structure of the logistics/retail market is retail purchases in a store will result in an 8 percent return rate. Purchases on-line result in a 15 percent return rate.
- Why buy So Cal industrial core assets? Better off buying ProLogis stock. Many REIT stocks are a better buy relative to risk now then the direct equity investment.
- In the typical logistics chain 5 percent or less of the total costs is the real estate costs. Labor is by far a bigger issue. Transportation costs are 50 percent of the supply chain costs.
- Shallow bay industrial is still strong with dwindling supply in So Cal.
- Core market cap rates will hold in a foreseeable downturn. Secondary markets are market to market will move up with supply increases.
- Multi story warehouses are coming. They are prevalent in Asia. ProLogis just completed a 3 story warehouse in South Seattle which includes a 5 story parking garage. They are building 6 stories in Japan. They are also looking at doing 1st floor logistics and office or other uses above in high land market like San Francisco, New York, Seattle, and overseas.
- ProLogis hears every day from their customers about being located where they can find labor.
- Most operators are seeing labor problems in Dallas, Inland Empire, and other core markets.
- Late cycle buyers are planning to hold through the coming recession. Watch the near term roll over risk. You have to have the ability to hold through a recession. Applies to all property types.
- Press has thrown all retail in the dumpster. Good and bad and investors listen.
- 80 percent of SF put on the market from store closings in 2018 was from 5 tenants.
- Vacancy has still remained low with tenant demand out pacing supply since 2009
- Retail investors are saying they think the grocery business is going to be disrupted more with smaller stores and delivery services.
- Co-tenancy due diligence is killing some deals due to backfilling language in leases.
- Class B mall caps are 10 percent plus.
- Class A mall rates are still strong.
- Much of the country is oversupplied by 30 percent to much square footage. We are under demolished.
- Green street thinks there are more than 1,200 to many department stores.
- Retail REIT stocks are way undervalued relative to net asset value.
- They have issues on raising more money.
- Some mall REITS will need to raise money to cover the capital costs of replacing department stores.
- There are opportunities in the small unanchored strip market. CBRE Investors has a fund buying these assets with the intention of rolling them up as a diversified investment grade asset.
- Late cycle investing is taking place.
- Playing more defense then offense. Many are positioning now for a downturn. But they need to get money out. They are ratcheting return requirements down and focusing on core and core plus assets. They have stopped buying repositioning assets.
- Not enough Infill industrial. This is the best asset class to buy.
- All funds are under invested in industrial.
- Last mile is a guaranteed winner with more spikes in rent coming in So Cal.
- More discussion of multi-story industrial
- Multifamily has legs left in this cycle. Way under building all housing relative to population growth.
- Some home builders are preselling some units in bulk to the single family rental operator. In order to secure a bulk sale.
- 50 percent of lending over the prior 18 months ending December 2018 were from non regulated lenders private equity and private debt funds.
- Hard money is now referred to as private money and is a much larger part of the market then in historical levels.
- Perception of real estate risk for high net worth is lower than the alternatives.