vided more of an impact. There was a lot of construction in the past few years and it’s slowed down some,
but that allows properties to lease up, and I expect that
will create upward pressure on rents again soon. As the
new supply is absorbed, it will fuel construction again.
SCHUH: We’re trying to be opportunistic in trying to
fill voids in the construction lending market. The
banks have pulled back prematurely, and that’s presented a lot of opportunities. We’re doing loans that
banks would have done 18 to 24 months ago. But
we’re being highly selective and we sort of have the
pick of the litter right now. Generally, we’re looking
for deals where we can get our money deployed very
quickly, such as redevelopment opportunities.
DESIATO: We’ve come to the final question that we
pose every year, and we have a lot of factors to take
into consideration today. What keeps you up at night, and what
drives you forward?
EHLI: The nice thing about working on a core fund is that we’re
very well balanced, with a low LTV ratio, good occupancy and
strong rental growth. By and large, the market can be frightening
because fundamentals have been so good for so long, which usually
means there might be something around the corner, but the fund
is very well positioned for those type of things.
On a macro note, it boils down to one thing: the unknown.
When asked this question a year ago my answer was that the
thought of Donald Trump becoming president seemed like such a
wild card and totally out of left field. But it happened. So the
changeover in the executive branch is definitely going to trickle
down to the other branches and agencies in the government. It’s
going to impact the judiciary, the Department of Labor, the
Department of Justice, tax and immigration laws—there’s going to
be a lot of change in Washington, DC and I don’t think any of us,
at this point, really know how that’s going to play out. But, by and
large, we feel pretty good about the fundamentals in the leasing
market outside of the Beltway. If supply continues to remain balanced, we expect another good year in 2017.
MALINOWSKI: I tend to agree with John that fundamentals are
great. I manage an infinite life core fund so we don’t have to sell—
that’s good. So from a real estate-specific standpoint, I’m not staying
up at night worrying. The global issues are what worry me. Having
grown up overseas, the protectionist rhetoric that’s taken over in so
many different countries is bothersome. And with a new administra-
tion in DC, we’re trying to predict the unpredictable, right?
There are certainly some risks we may have worried about six
months ago that a pro-business environment is going to alleviate—
easing regulations will help the capital markets and fundraising, for
instance. Healthcare is a resilient industry and whatever is done
there is not going to change the fact that our population is aging.
There may be some opportunities for private sector investment in
infrastructure, but again, we don’t know yet. So there will be positives
for business, which is good. But on the other side of that—free trade
is good, and it’s good for ports and warehousing. Restrictions there
may negatively impact the industrial sector, and changes in immigration laws will not be positive for the tech industry.
RUFRANO: Indeed, we hope that at least financial markets will
strengthen. If anything, enhanced profitability by banks may have
them expanding in certain markets like Midtown Manhattan.
Turning to real estate, there’s not a lot we need to be concerned
about in terms of our existing portfolio. From an acquisitions per-
spective, the challenge is coming up with assumptions as you’re
forecasting. We’re long-term investors, generally 10-plus years.
Sitting around a table with your investment committee and having
eight people try to figure out what’s going to happen in the next four
years is impossible. So we’re relying on long-term funda-
mentals, buying the right assets in the right locations.
A lot of markets are overpriced. If you talk to the
firms out there that are collecting bids, there are more
and more people at the top of the bell curve. But then
there’s one person that’s way out there on the pricing
spectrum, and they’re the ones winning the bid pro-
cess. I’m waiting for that one person to fall away. At that
point, pricing will return to more realistic levels. For a
lot of the transactions you lose, you kind of scratch your
head and want to know how someone underwrote it
and managed to get an acceptable return.
BONEHAM: Our portfolio is as solid as I’ve seen it in
a long time. So, the fundamentals of real estate are
not concerning. I think the biggest single wild card is
SCHUH: I echo a lot of those sentiments. One thing to
point out is that higher interest rates’ potential impact
on the housing market should definitely concern us.
“If we’re trying to put
out $1 billion a year for
industrial, we can’t sit
and wait for portfolio
transactions to come
across our desks.”
GARY E. RUFRANO
“In this cycle, if you
can execute your
business plan and
generate value within
two years, do it. Any
longer than that is too
J.P. Morgan Investment Management
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