An 11 expert general session on capital markets and global capital flows moderated by Cia Buckley Marakovits and Ron Isana.
Panelists: Peter Ballon (CPPIB), Darly Carter (Avanath Capital Management), Franz Colloredo-Mansfeld (Cabot Properties), Mark Gibson (HFF), Greta Guggenheim (TPG), Cathy Marcus (PGIM Real Estate), Amy Price (Bentall Kennedy), Hilary Provinse (Berkadia Commercial Mortgage), Owen Thomas (Boston Properties), Thomas Toomey (UDR), Francois Trausch (Allianz Real Estate).
General Trends the group agreed upon:
- US investment real estate is fairly valued (not over- or under-priced), based on current economic conditions.
- US real estate is trading less often; big owners holding for longer.
- REITs being hit by interest rate fears (why many are trading below NAV) [In another private session, Green Street says it believes REITs are telling us private real estate over valued]
- US immigration policy a risk: a risk to occupancy levels in multi-residential and to labour supply.
- That trade uncertainty is driving up construction costs: steel, aluminum, lumber. This combined with labour shortages and rising costs will impact new supply.
Foreign Capital into the US:
- The panel generally agreed that surplus capital pursuing US real estate will continue to support these high values, even during a modest economic slow down or period of turmoil. Hard to see what drives a correction in real estate values.
- Chinese may pull back modestly, but already a big presence.
- Panelist from France says he anticipates more foreign capital heading to the US in the coming years. US has more growth potential than many other places from a European standpoint. Also more opportunities. Another panelist added that Scandinavia has several large funds with huge pools of capital looking to invest outside of Europe, for example.
- Peter Ballon (CPPIB) less sure about more foreign capital (maybe same level): said UK has uncertainty, Australia fully priced. But US dollar may be overpriced and foreign investors will look at currency risk in US investments.
The group was divided on the future direction of cap rates, with 6/11 thinking they will trend up, 4 saying flat, 1 down. However, in their comments several speakers noted that it depends upon which market and asset type. Industrial values and cap rates should hold steady or decline; properties in gateway markets similarly more likely to see flat or downward cap rates whereas other cities could see upward trends as investors become more nervous about secondary markets.
Debt. LTV ratios may have increased modestly (panel divided on this). More regulations have helped keep the industry in line, but lenders on the panel admitted there is strong pressure to place money and to be more creative in finding a way to lend.
- Workforce and lower income housing investments; one panelist in this area noted that European and Asian investors quite comfortable with the concept, whereas US investors are not.
- Retail – Peter Ballon thinks there are opportunities in US retail where malls with good potential are undervalued. CPPIB is apparently looking at them.
Amazon– Friend or Foe
Amazon today appears to be a good story for landlords. But they occupy so much real estate (office, industrial), what happens if they become more efficient and pull out? Or change their business model in other ways?
Written by: Wendy Waters, Senior Director, Research Services & Strategy, GWL Realty Advisors & ULI BC Chair of Mission Advancement