PUMPER: The investment market has
certainly experienced some shifts during
this cycle. What about the business surprised you this year?
WOOD: I thought we’d be more successful
getting money invested with listed offerings, and we would show up at a lot of these
auctions. There was pricing surprise in the
major metros, we were breaking toward the
key gateway markets and cap rates continued to fall. It was surprising how low multifamily cap rates got pushed in the markets
in which we wanted to invest; for example,
cap rates are solidly below 4% in Southern
California and New York City. As a result,
we found that we were looking at more off-market transactions. We were doing venture transactions.
We recapitalized a portfolio of apartments in Center City, Philadelphia—not
one of the top five or six gateway markets—
but Center City was a submarket with a lot of
barriers. To get into the investment, we did
a 90/10 joint venture structure. We’re happy
that we found it and the yield is probably 50
basis points higher because of the structure
While you
may look to
tertiary areas
to pick up
yield, the
risk-adjusted
returns aren’t
there, unless you’re prepared
to take on additional risk in
the form of market vacancy
and leasing challenges.”
CRAIG TAGEN, Clarion Partners
alone than we would have achieved. Those
kinds of investments surprised me.
Then there was the mezz deal we did on
an industrial portfolio. Our core clients are
very sophisticated and were asking how
they could find better-than-average yield.
We introduced the notion of mezzanine,
and we invested $40 million into an industrial portfolio. We comprised 75% to 80%
of the capital stack. Then we got 800 over
LIBOR, with a 50-point floor, floating for
three years, and that got us a very strong
yield— 8.5% or better. To buy that real
estate, your cap rate would be 7%, at best.
There are
certain
markets—
Atlanta,
Phoenix, Las
Vegas—we
considered
momentum markets. We’re
not sure that’s still the case.”
JOHN LAMB, BlackRock
LAMB: All our funds are looking for yields.
What I find interesting at this point is that
people are not going to secondary and tertiary markets, or secondary products. One
of our surprises was the price differential
between core investments, say, in New York
or a Kansas City office building.
TAGEN: We kept to our strategy of investing in the primary markets throughout
2012. The suburbs continue to trail the
CBD in almost every market, and while you
may look to the tertiary areas to pick up
yield, the risk-adjusted returns clearly aren’t
there, unless you’re also prepared to take
on additional risk in the form of market
vacancy and leasing challenges.
COPPOLA: Both on the debt and equity
side, we’ve been in the very core markets.
It’s virtually all coastal, bi-coastal, with the
addition of Texas. We did one deal in
Chicago, on the debt side. We’re in
Manhattan, DC, Boston, San Francisco,
Seattle, Los Angeles—sticking very true to
the core mandate we’re trying to build out.
At the same time, we’re trying to deliver a
little bit of yield. So on the debt side, I’m willing to go to markets we can still underwrite,
with the 55% LTVs in Minneapolis or
Chicago. Frankly, in the past couple of
months, I’ve seen more institutional investors going to Houston and Minneapolis
looking for acquisition financing. What
they’re saying is, “I can buy it at 6% or lever
it at 3.5% or 4%.” All of a sudden, that makes
a lot of sense. We’re not there yet, but I’m
starting to see some big names do that.
DESIATO: That’s interesting, Richard.
This is a difference from the past few
years we’ve had this conversation, where
representatives from your respective
companies have all said they’re staying
away from secondary markets for the
most part. It seems like some of you are
becoming more comfortable with moving away from the primary markets.
LIKER: We’re actually much more active in
the secondary markets than the primary
ones. It’s very difficult for us to make the
math work and achieve opportunistic
returns when large core and core-plus insti-
tutional investors are chasing major deals in
the primary markets. If you’re looking for
opportunistic type returns, you need to pick
your shots and be willing to pursue transi-
tional or capital-starved assets as well as play
in out-of-favor markets like Atlanta, Orange
County or Phoenix. Those are markets
where you don’t have as much competition
for assets. You can generally get better pric-
ing because those are markets that were
much more acutely distressed in the down-
turn. So we’re finding deals we think are
attractively priced and will produce attrac-
tive returns, even without a full market
recovery to historical peak. That’s the inter-
esting thing about pricing in these markets.
You don’t necessarily need to have a robust
economic recovery to make the math work.
A moderate recovery and/or a good leasing
strategy can yield attractive returns, and if a
robust economic recovery occurs, you’re
going to do exceptionally well.
LAMB: Multifamily has done well virtually
everywhere in the country, so we do play in
the secondary markets for that. But from
the commercial side, particularly in office,
we’re seeing very few markets recover. I
think the employment issue we’re all deal-
ing with in our investment criteria is really
driving a lot of our decisions. We’re very
selective in terms of where we go. There are
certain markets we considered momentum
markets—Atlanta, Phoenix, Las Vegas.
There’s a lot
of demand
for yield, so
fixed-income
investors
have flooded
back into the
CMBS space. Because of
that, banks have greater
confidence that if they origi-
nate loans, they’ll be able to
profitably sell them into
securitizations.”
