Commercial Real Estate Loans & Investment Sales

Understanding how to unlock the value in today’s competitive acquisitions market

There is little doubt that we are currently experiencing one of the most heated sellers markets in recent history. Today’s investment sales market has been reduced to an e-bay like environment where retail brokerage houses simply put an asset up for auction and wait for the buyers to circle like hungry sharks.

Many will point to the increased flow of funds in the commercial capital markets creating a demand-side frenzy that is causing a compression in cap rates and escalating prices to all time highs as justifying current market tactics. However while there is an element of truth surrounding the logic contained in the previous sentence, I believe it is simply easier for many buyers to blame the market and follow the crowd rather than adapt their acquisitions plan. This is evidenced by the fact that many institutional buyers like REIT’s, TIC syndicators or foreign investors seem content to participate in the madness rather than seek alternate investment strategies. The need to place funds seems to be taking precedence over making good investment decisions for many in today’s market.

The real opportunities in today’s market are not found by following the herd mentality but can be found in the application of any of the following strategies:

1. “Off-market” transactions: Seek out assets that are not listed by retail brokerage firms. Hire an investment bank to approach principal owners on a direct basis negotiating with them on assets that are not publicly for sale.

2. Change Market Focus: Focus your acquisition strategies on secondary and tertiary markets where there will be less competition for assets. Additionally stay out of the hot markets and look toward markets recovering from downturns.

3. Change Asset Class Focus: Rather than chasing multifamily and retail properties look for opportunities in office, hospitality and industrial asset classes.

4. Stay Away from Traditional Trophy Assets: If you must buy big look for opportunistic plays that have higher vacancies, lease roll-over risks, of financing issues. An asset doesn’t need to be located in New York, Chicago or Los Angeles or be fully leased to constitute a trophy designation.

5. Look for Joint Venture or Recapitalization Opportunities: Many of the best opportunities in today’s market are not found in out-right acquisitions. Explore joint ventures that will allow you to co-invest with existing owners of assets in a fashion that will allow them to free up trapped equity or fund new developments.

6. Change Your Acquisition Process: Traditional acquisition time frames that were competitive 12 months ago will leave you on the outside looking in with today’s frothy market conditions. Be willing to make unsolicited offers, put up meaningful earnest money deposits and close quickly.

Mike Myatt is Executive Managing Director of Pacific Security Capital, a leading commercial real estate investment banking firm providing commercial real estate loans, structured finance, investment sales and advisory services. Contact Pacific Security Capital at 1-800-844-6085 or by visiting the company website at www.PacificSecurityCapital.com.

Tags: investment sales, commercial loans, structured finance

How to Gain an Edge in the Investment Sales Arena

It is not uncommon to hear industry pundits sum-up to the current investment market for commercial real estate assets as "too much money chasing too few quality transactions" resulting in a sellers market. While current market conditions are clearly favorable to those looking to dispose of assets and bode well for our sell-side players, there is no shortage of solid investment sales opportunities for those who are properly advised and represented in the identification, structuring and acquisition of investment grade commercial real estate.

One of the most important aspects of negotiating the current market is to select the proper advisor. Whether you are buying or selling there are typically two options available for representation:

1. Retail Brokerage Operations: This category is comprised of National, Regional and Local commercial real estate brokerage companies. The bigger the brand the more diversified the service offerings and footprint provided. The major brands will have good coverage of Tier 1 and Tier 2 markets but will often not have the same amount of inventory or market knowledge of smaller markets like their regional and local competitors.

2. Commercial Real Estate Investment Banks: This category is comprised of firms that will offer the broadest range of service offerings and generally a higher caliber of professional representation than offered in the retail brokerage houses. Investment banks will take a capital markets approach to acquisition and disposition services as opposed to just marketing captive listings.

Regardless of the service provider you choose in assisting you with your acquisition and disposition needs, you should consider finding a firm that offers as many of the following services as you can:

• Financial Services

• Capital Markets Services

• Advisory Services

• Appraisal Services

• Market Research

• Feasibility Studies

• Letters of Opinion

• Fairness Opinions

• Due Diligence Services

• Project Management Services

• Construction Management Services

• Owners Representation Services

• Asset Management Services

• Financial Engineering and Transaction Modeling

• Investment Analysis

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085

The Impact of Rising Interest Rates on Commercial Real Estate

There has been no shortage of conversation surrounding the topic of rising interest rates in the commercial capital markets over the last two years. The reason for all the column fodder is that interest rate movement has a direct impact on the state of capital markets supply and pricing and can have a very real impact on the overall commercial real estate market.

As a baseline for a deeper analysis it is useful to have a macro-economic understanding of what happens to property level supply and demand drivers and the resultant impact on Net Operating Income (NOI) in a rising interest rate environment. As a general economic principal when interest rates rise the cost of new construction increases thereby slowing the number of construction starts and depleting new supply of product coming online. This scenario in turn causes an increase in overall market absorption rates and creates a “landlord’s market” environment. The environment which favors the landlord creates an opportunity for property owners to increase rents thereby allowing NOI growth to keep pace with any escalation in interest rates. While this scenario is favorable to existing property owners and making the rise in interest rates less of a concern, the impact to developers and tenants is detrimental and can have a negative overall impact on the economy if a high interest rate environment lasts for any length of time.

At a more micro level some of the major issues surrounding the impact of increasing interest rates on commercial capital markets are addressed below:

Flow of Funds: In a low interest rate environment real estate provides a reasonable investment alternative to other low yielding asset classes. With rising interest rates the supply-side availability of capital marked for commercial real estate will constrict. The aforementioned contraction will be due to a combination of reduced demand for new supply as weaker developers are weeded out of the market and alternate investment opportunities in other asset classes begin providing a better yield while being perceived to have less risk when contrasted to real estate investments.

Loan Pricing, Sizing and Cost of Funds: The overall blended cost of capital will increase dramatically. This dramatic increase will come not only as a result of rising rates across underlying indices but moreover as a result of lower advance rates in the senior debt position shifting a higher percentage of the capital structure up in the leverage curve. The reduction in LTV and LTC advance rates will cause a borrower to rely more heavily on mezzanine and equity financing resulting in shift from the current “borrower’s market” climate to a “investor’s market” environment.

Investment Sales: Sales of investment grade properties will slow rapidly as many of the buyer’s in today’s low interest rate environment will move to the sidelines. Institutions and REITS will remain active buyers while many of the individual investors will be forced from the market. Default rates will climb and more distressed property will come onto the market as investors who leveraged up on floating rate debt during the low interest rate environment will have a hard time keeping control of property as their debt service obligations increase.

Commercial real estate owners who believe that interest rates will rise substantially and will remain elevated for any period of time should be looking to refinance short-term, floating rate debt with long-term fixed rate debt. Buyers looking to acquire investment property should look for assets with upside potential for NOI growth through improved management and upside pop in leasing opportunities.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085

Is the condo craze over, or just gaining steam?

Over the last two years there has been so much condo activity that many commercial real estate lenders are starting to express concern over the future stability of condo markets. Some lenders have recently found themselves over allocated in condominiums as a result of the recent activity and have therefore become wary of all but the best opportunities.

While the best opportunities (typically in Florida, Southern California and select destination markets) are still attractive, developers in smaller markets are finding condos much more difficult to finance in recent months.

The reality is that many of the lenders expressing concern over the current state of affairs in the condo market are the lenders that have been the least active and have less knowledge about the asset class. Lenders familiar with the condo market are not as concerned about the opinions of their peers, but rather with the fundamentals of the projects and sponsors they underwrite.

Projects that demonstrate that they underwrite according to the following guidelines should be able to find financing even with the caution currently being expressed by some in the lending community:

1. Sponsor Suitability: Sponsors that have a successful trackrecord of developing other condo projects will be looked upon more favorably than those who are building their first project. Having net worth and liquidity in reasonable proportion to the project size always helps as well.
2. Capital Structure: Projects that have a sufficient sponsor equity contribution will receive more interest than those projects looking to move aggressively up the leverage curve.
3. Entitlements: Projects that are fully entitled and permit ready will attract more interest than early stage projects.
4. Market Feasability: How many units are you building vs. how many competitive units are currently available for sale. How many competitive units are coming online during the time period that your project is being built and how many units does the market absorp each year? What are your per square foot sales prices,  how do they compare to the market, and is your location, construction quality and ammenity package in line with that of comparably priced projects?
5. Marketing: Who is going to sell your units and do they have a strong track record of selling condos within the market you are building in?
6. Presales: What type of presales have you been able to generate? The higher the percentage of presales, the more are lender interest you will attract.

The bottom line is that good projects from good sponsors will always receive interest from the capital markets.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085