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Abundance of Capital Continues to Reward Stabilized Properties, Gateway Markets
From the 2012 ICSC/NAIOP Real Estate Capital MarketPlace Conference September 13, 2012, Marriott Marquis, New York City
On the same day that Federal Reserve chairman Ben Bernanke announced QE3, at the 2012 ICSC/NAIOP Real Estate Capital MarketPlace Conference at the Marriott Marquis in New York City, economist Sam Chandan remarked that “monetary policy has moved from textbook into experimental.” He said that the goal of monetary policy has been to push investors, of all stripes, seeking better yields to turn away from Treasuries and toward other forms of investment.
“This is a challenge for us,” he declared, noting that some overpricing can be seen, such as in the multi-family sector, and that core properties in gateway markets are continuing to attract major capital because “when underlying fundamentals are uncertain, liquidity counts that much more.” Price momentum takes on a life of its own, with the sheer density of lenders exerting pressure on pricing, he observed, warning that “today’s interest rates and monetary policy are not the new normal. We are planting the seeds of future defaults in the loans we are making now.”
Although the backdrop for the conference was an anemic recovery and continuing uncertainty about Europe and Asia (not to mention political uncertainty in the U.S.), the economists, fund managers, lenders, advisors, equity investors and developers speaking throughout the day agreed on several points:
- There has never been a better time to be a borrower, because there is such an abundance of both debt and equity capital. (Of course, it helps to be looking for financing for stabilized assets in major markets.) Lenders are “clicking on all cylinders,” in the words of Michael Tepedino, senior managing director of HolFF, L.P.
- Underwriting is still conservative, focusing closely on current cash flow, lease rollovers and the competitive landscape. Debt yield is a key metric.
- While loan-to-value ratios have inched up, there is still a great need (and many sources available) for mezzanine, B-note and preferred equity financing. Panelists stressed that they were not in the “loan-to-own” business.
- Financing prospects are less bright for Class B suburban office properties and unanchored retail centers (the term “junkyard dogs,” used to describe such properties, quickly became a conference favorite).
- The CMBS market is making a comeback, after its two-steps-forward, one-step back behavior earlier this year. Spreads have continued to tighten.
- If you’re looking to do a joint venture with an institutional investor, pension fund or REIT, be prepared for more stringent contract documents that will enable your partner to quickly remove you from the partnership if you fail to do what you’ve contracted to do. Track record, execution capability, character and integrity count. As Paul Curcio of Prudential Real Investors observed, they are not interested in “three guys and a dream.”
- Opportunities to acquire distressed properties, or discounted debt, have dwindled and barely merited mention at the conference; barely mentioned, too, were the implications of loans maturing (and searching for refinancing) in the next several years.
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