Are you involved in the commercial real estate industry? Are you looking to stay ahead of the game and make informed decisions? I've got you covered! I’m David Repka, co-founder of Bison Financial Group in St. Petersburg, FL. I was invited to be a panelist at The U.S. Real Estate Opportunity & Private Fund Investing Forum in Newport, RI presented by IMN. Approximately 700 industry experts gathered to discuss the current state and future of the commercial real estate market. After careful review of my extensive notes, I've distilled the conference's most critical points into this blog post. Whether you're a borrower, lender, investor, or developer, these insights are essential for navigating the ever-changing landscape of commercial real estate.
Will High Rates be the New Normal?
During a panel discussion, Wick Egan from credit rating company Egan-Jones raised the question of whether high interest rates will become the new normal. Panelists discussed the potential of a market reset on the horizon, and the significant disconnect between buyers and sellers. Borrowers need to focus on protecting equity and having a realistic plan to navigate through these challenging times. Many Sellers still think this is August of 2020 with the 10 Year Treasury Rate at 60bp and have not adjusted to the market reality of the 10YT at 3.85%. Investors need to factor the new rate environment into their financial models. Borrowers need to take a long term approach to their investments and ask themselves if they will be happy with the basis in a property 10 or 20 years down the road.
Borrowers Focus on De-Leveraging the Balance Sheet
John Lippmann from New York Life Investment Management emphasized the importance of asset management and borrowers de-leveraging their positions. As loans mature with no prospects of a refinance on the horizon, existing lenders need to realize they will be in positions for much longer than planned. Ideally lenders want to see fresh equity from borrowers to pay down the regulated capital portion of the capital stack. The art of asset management for lenders lies in gently coaxing borrowers to continue to invest in their properties, providing a solid foundation for future success with occupancy and NOI growth.
Multifamily Construction Lending Chugs Along
Sarah Miller from First Citizens Bank highlighted the bank's focus on multifamily lending and willingness to continue to provide construction financing in this environment. The bank is willing to provide financing for the right sponsors, with a proven track record of success, for the right deals, in the right markets, with strong job growth, and demand drivers. The bank has expanded its lending capacity from a max loan of $50 million to $100 million. Best in breed sponsors will be able to get their projects financed, but will need to bring significantly more equity to the table. Borrowers that were able to obtain low cost construction loans from regional banks at 75% LTC 1-2 years ago need to brace themselves for a max 50-55% leverage. Alternative strategies to fill the gap and obtain additional leverage may include more complex capital structures involving ground leases, C-PACE, mezzanine, preferred equity, and common equity.
Understanding Debt Markets and the Impact on Equity
Mukang Cho, the founder of Morning Calm which owns 10+ million sf of office and industrial assets, stressed the importance of understanding debt markets and how that impacts your real or perceived equity in your real estate portfolio. He made an insightful comment that if you have debt, you really don’t own your assets, you just have a call option on potential equity. I think that is a fascinating way to look at your real estate investments. He stressed the importance debt markets play in determining the value of an income producing asset. Cho's expertise in debt allows him to make informed investment decisions and mitigate risk for his extensive office and industrial portfolio.
Single-Family and Build-for-Rent Market
The panel on Single Family-Build for Rent (BFR) discussed various perspectives. Cyrus Shahabi from Lafayette Real Estate highlighted the concept of negative leverage in the short term and the need to focus on the long term value creation. Lafayette likes to focus on their long-term basis in their assets and has a conservative approach to leverage (55-65% LTV). Others, such as Ron Lamontagne from Partners Group, discussed buying brand new excess inventory directly from builders, capitalizing on market opportunities. He likes the risk profile of purchasing brand new homes in established subdivisions from national builders and having a low maintenance, under warranty investment.
Fund Structuring, Fees and Investor Alignment
The panel on fund structuring provided valuable insights for fund managers and sponsors. David Reintjes, Esq. from national law firm Polsinelli was the moderator of the panel. The discussed the importance of alignment of interest among investors and fund Sponsors. Alan Stanzler, Esq. is the chief investment officer of a family office. He stressed the importance of working with Sponsors that are experienced in specific investment niches and have skin in the game. John Hartman of Caliber has a series of equity funds including the creation of Opportunity Zone (OZ) Funds. Investing in an OZ Fund provides several benefits. Firstly, investors can defer and potentially reduce their capital gains taxes by investing in qualifying Opportunity Zones. Secondly, if the investment is held for a certain period, investors can enjoy tax-free appreciation on the new investment. Lastly, investing in Opportunity Zone Funds allows individuals to support community development and economic growth in underserved areas while potentially generating attractive returns on their investment. This is a way to add ESG exposure to your investments. Tom Wiese of Crown Global shared an innovative structure utilizing life insurance and annuity products that can defer taxes for certain investors and eliminate US taxes for foreign investors.
Evaluating Market Segmentation in SFR and BFR
Matt Johnson from Pretium has $50+ billion of assets under management. He emphasized the need to look beyond lumping all single-family rental (SFR) and build-for-rent (BFR) properties together. He made the analogy that a JW Marriott and a Fairfield Inn by Marriott are both hotels, but vastly different experiences. Understanding market segmentation, demand drivers, pricing power, and the specific characteristics of different rental properties is crucial for accurate analysis and effective decision-making. A $100,000 SFR rented to a Section 8 tenant is very different than a brand new $400,000 home in a suburban subdivision.
Developing Infill BTR Communities
Douglas Faron from Shoreham Capital discussed the importance of developing infill build-to-rent (BTR) communities in locations with easy access to employment centers creating well-paying jobs. Faron's focus on solid fundamentals and favorable location highlights the need to focus on the basics of blocking and tackling when making strategic decisions to real estate development. Howard Fife at Westport Capital Partners was buying SFR well before most investors caught on to the trend at 12 to 14 cap rates on homes around $100,000 a unit. Sadly, 8 to 10% of his tenants paid late. He pivoted his strategy to newer, nicer homes valued at closer to $400,000 a unit in value with rents more like $3,000 a month. The average income of his residents is now $75,000 to $125,000 a year. Why do people live in his homes? Because people want a pet and they want to have their own front door, and little patch of paradise. The panelists stressed Investors/ Developers need to have the capital to weather the storm. Developers need to shift how aggressive they get based on the amount and cost of financing. Key point: there is only a 3 month supply of homes in the market based on current absorption levels. The single-family market is far from being overbuilt.
Deal Structuring and Equity Partnerships
Russell Flicker from AWH Partners and Griffin Cotter from 29th Street Capital shared their experiences in deal structuring and equity partnerships. Flicker is a hotel investor running a portfolio with 8,000+ keys. He emphasized the value and benefits of rasing equity through a deal-by-deal approach. Cotter discussed the importance of alignment of interest. Cotter made the point that the members of his acquisition team must write checks and invest in all their deals. That keeps his acquisition team focused on the long term benefits, not just short term fees.
Attending conferences like the IMN has the dual benefit of confirming what you already know, and the added benefit of learning something new that can significantly improve your knowledge of your craft. I hope you enjoyed this report and the insights contained here. My name is David Repka and I have been an active member of the commercial real estate industry since 1985 when I earned my real estate license while attending college. I purchased my first investment property when I was 18 years old. It was a vacant, boarded up building in Buffalo, NY. From that one investment I went on to be part of over $2 billion in transactions as an owner, investor, developer, and advisor. With almost 40 years in the industry my niche has evolved to being the “finance guy” for deal junkie real estate developers and investors that constantly need access to capital. Our clients are middle markets players with portfolios valued between $50 and $500 million. We have experience in arranging funding at all parts of the capital stack: senior debt, mezzanine, preferred equity, and common equity.