Jim Gray, was pleased to attend the Urban Land Institute , ULI,
Conference, Real Estate Finance and Investment 2013; Strategies and Trends
Driving Real Estate Investment. The
conference was at the Mission Bay Conference Center in San Francisco.
·
ULI Real Estate Consensus Forecast, Conference Agenda
- New Directions/New Strategies in Real Estate Investing
- Real Estate Debt Capital: A Shifting Landscape
- Financing Development in 2013: What, Where, and How
- Institutional Investor Perspective on Real Estate Investing
- Mezzanine Capital and Recapitalization Strategies
- Financing Smaller Real Estate Deals
- Repositioning Assets and Value-Add Investing
- Private Equity Investment in the West
- Investing in Single Family Residential Today
- Tech/Media/Energy Tenant Trends and Real Estate Investments
- Public Private Mixed Use Finance and Investment
- Managing Real Estate Investment Risk
In the Conference Materials they indicated that there were
“four reasons that someone needed to attend”. They were:
- Find out what’s next for the market
- Make new connections and close deals
- Get practical examples of financing structures that work
- Build strategies for finding new partners
To me the conference was energetic, insightful
and provided a lot of value. Here are a few take-aways from the ULI Finance and
Investment Conference.
The conference itself was very well attended nearly 200
folks were present. The venue was the
UCSF Conference Center in the Mission Bay Campus of San Francisco. First take home impression after
participating in this June 4th
and 5th event ; “there is optimism" almost “a modest bullishness”
that a recovery is underway and the real estate cycle still exists.” I hadn’t
felt that optimistic of a vibe in 6 to 7 years. Right
now “that recovery is only strong in gateway and tier 1 cities” and the jury is
still out on how much it will spread to secondary and tertiary markets. Importantly the fundamentals of real estate
were driven home; location, physicality and condition of property, proper and
changing amenities, strong professional teams, clear strategies related to real estate assets. It is also very important to Know when to sell and when to buy. Investing in communities with strong
economic fundamentals and real job growth will increase the probability of success.
The conference was particularly bullish, I suspect in great
part because the venue and participants were heavily weighted to participants
from San Francisco and Silicon Valley.
But much discussion was given to investing in secondary and tertiary
markets.
The first presentation was the review of the Urban Land
Institutes and Ernst and Young’s Real Estate Consensus Forecast. That report is a 3-year forecast of 27 Economic and Real Estate Indicators made
by 38 different economic forecasters and real estate analysts. Here is a link
to that forecast.: http://www.uli.org/wp-content/uploads/ULI-Documents/ULI-EY-Real-Estate-Consensus-Forecast-April-2013.pdf
In a nutshell what I got from the presentation ULI/E&Y
Real Estate Consensus Forecast for April 2013; There will be continued improvement over the next three
years for the U.S. economy, considerable strength in the real estate capital markets,
continued improvement of commercial real estate fundamentals, and significant
growth and improvements in the housing sector.
This forecast is considerably more optimistic
regarding commercial property transaction volume, commercial mortgage-backed
securities issuance, and the single-family housing sector. Overall Cap Rates
down in 2013 to 5.8%. Transaction volume
up. Rents in most product types will begin increasing , lending will be back in
the Collateralized Mortgage Back
Security Market- CMBS or CMBS 2.0, funding up to $70 Billion this year and it
is expected to increase in 2015 to $100 Billion. ( That is compared to a high of as much as
$215 Billion prior to the downturn.)
The presentation of the Consensus report was made by Dean
Schwanke, Senior Vice President of the Urban Land Institute. I would encourage
you to review the link to the Consensus Forecast Slides, they give a good breakdown for the major
commercial and investment property types.
After his review of the findings a panel discussion including
representatives of Ernst and Young, Cole
Real Estate Investments and Deutsche Asset and Wealth Management ensued.
Rick Singular, with Ernst and Young, one of the panelists
compared the current situation to the “old Clint Eastwood Movie” the Good, The Bad, and the Ugly.
"The Good" because the real estate market and the economy is
recovering in the United States. "The Bad" is indicative of the fact that Europe
and Asia are in trouble in the global economy.
The Ugly is the long-term situation that we face related to the amount
of government or sovereign debt as a percentage
of GDP around the world, including the USA, Japan, China, and Europe. Singular believes that servicing that debt is unsustainable .
He went on to say that he thought that global growth is
slowing in – Brazil, India, Asia, Europe and China and as a result additional
global capital is finding its way to the “perceived safety of the United
States”. He hopes that Congress and the Federal Reserve don't do anything drastic to raise fears.
If they don’t we will have improved and slow growth and he believes we will see
a continuation of “stimulus for some
time to come”.
Andrew Nelson – VP with Deutsche, reported that there are “ more positives than negatives". Many people look at the downside of
everything. Increasingly there is good
news in energy production…the consumer is in better shape—starting to spend
again. Jobs are still anemic but the trend is improving and growing slowly. All
in all he felt it was a pretty good environment for real estate investment. The
Debt side is very good and accretive.
Things can’t be at the bottom forever. The cost of capital is good.
States are in better shape. Local governments banding together for
infrastructure through joint powers and
learning how to work with the private sector for additional infrastructure
investment. He sees a 4.5% 10-year Bond
Rate in 2017. If that occurs then the 10 year Treasuries will be growing at
approximately 50 basis points per year for next 5 years.
He doesn’t believe that the US will be in a 200,000 jobs per
month growth environment and 2% Treasury
for much longer. His projection is for a 2.3% 10-year by the end of year. He believes that the Fed is going to be
accommodating and the Fed is going to be
“gradual.” Change is in line with the improving economy. Impact on CAP rates
will be gradual. Rent growth is going to
improve. Cap rates are not likely to
shoot –up but they will rise with interest rates.
Furthermore the panel indicated that the debt issuance- commercial mortgage market is
improving. That CMBS 2.0 is
growing. That fact is going to help in
the secondary and tertiary market leading to “broader real estate recovery” .
They went on to say that there are “very good returns” in Real Estate when
compared to the bond and other investment markets. Already in 2013 there has been the issuance
of $37 Billion in CMBS . Debt Originations are up. More discipline in
underwriting. Not big jumps down the
risk curve.
The panelists thought that we are “returning to more
normalized long term total returns” in the 8% to 9% levels. That there will
probably be a “lot less volatility” and that most investors would be
obtaining 80% of their “returns in
rental income and NOI and only 20% from Gains.
Here are a few comments about the various sectors of the
Real Estate Market .
NOI growth is about to become the “sweet spot” in Industrial
and Office. There is demand for large
and modern industrial and warehouse
space driven by trade, expanded ports and shipping improvements.
An important question that the panel offered is; “Where is
employment growth going to come from?”
We need to create almost 125,000 jobs to keep up with normal population
growth. Demographics plays the biggest
role in job growth. The housing sector
should create construction jobs and be fueled by “more household formations” moving out of mom
and dad’s , getting married, starting families and etc and that will be driven by
demographics. Also manufacturing is recovering and improving particularly
in technology and in energy. Also business investments are growing slowly again.
But we have become a more “unequal society” in the last 3
decades. Higher skilled workers have
very low unemployment but the unskilled worker will remain at risk and what jobs will there be for them? Population is growing and that will help fuel
demand, growth, and ultimately additional jobs.
Apartment Sector has been red hot! Multi-family will continue to be very
strong. There are 80 million “echo boomers” aged
16 to 34 and many of them, the great majority of them, are renters. Maybe many will remain renters because of
mobility and because home ownership has perils associated with it. Many are unable to raise a down payment. “We will
become more of a rental society” and that will be perceived “as fine and as a
choice”. The future will be one with
very low vacancy. Rents will increase.
But lots of new units are being constructed and the rate of rent growth will
moderate. Tens of thousands of new units
will start hitting the markets in 2015 to 2016
There is a shift in the apartment market. Smaller with better amenities. Good common areas. Fully wired with lots of technological
amenities. Apartment Rent growth in Bay Area and Silicon Valley is related to
“tech and medical” job growth. Rents
have really gone up where jobs are growing and supply is constrained.
Single Family Housing has turned on a dime. The majority of the Single
Family homes being bought were “tenant
occupied” or bought by investors who will seek tenants. The analysts were surprised that most reports
are that “the investors have done a pretty good job managing… and that they
have found relatively stable occupants…” Not particularly competitive with
apartments. Occupants of the single-family homes tend to be families with kids,
dogs and RV’s. Not really candidates for
apartments.
Also the panel pointed out that “rent growth” is higher than “income growth” and that it is
probably not sustainable. Also when you consider student loan debt service
requirements those facts will slow and mitigate apartment rent growth… The
apartments most in demand are in “the city” offering a 24-hour lifestyle. They seek
density and design , and they will attract tenants who want to be where
the action is.
In conclusion the first panel made a positive impression
about a recovering commercial real estate environment. It is a good time and an
improving time to be in commercial real estate investment.
More from the conference in future blogs.
If you would like to review or discuss please feel free to contact us. Jim Gray and Nahz Anvary at (916) 375-1500 or jim&nahz@ctbt.com
