we see lower cap rates are in markets or sectors, like industrial, and that have strong
fundamentals and rental growth, this is
where buyer demand is most highly correlated. Properties with flat income streams
are a little more difficult to buy because it
does represent purchasing a bond like
investment in a rising interest rate environment that typically carries increased risk. .
MALINOWSKI: We’ve seen the industrial
assets we’ve put on the market trade above
the brokers’ opinion of value, and office in
general has traded somewhat below BOV.
But industrial has shocked us. We’re seeing
4% cap rate trades in Atlanta, which we’ve
DESIATO: Secondary and tertiary markets have been increasingly sought
after as yields in primary locations have
declined. Where are you with these
JACOB WERNER: From an investment
perspective, one of the main factors we
focus on is economic growth. For the most
part, we are seeing stronger growth on the
West Coast as well as in technology-ori-ented markets like Boston, Austin and
Denver. In the case of some primary cities,
such as Washington, DC and New York, we
are seeing less material innovation and
therefore slower demand trends.
Conversely, while some of the markets
with outsized growth potential are deemed
more secondary or tertiary, we have been
buyers in these markets. For example, we
are buying apartments in Phoenix and Las
Vegas, where there’s healthy job growth
and limited new supply. Furthermore, we
tend to buy apartments that are more
affordable, allowing us to offer rents that
are materially below new construction levels and creating a barrier to new supply.
ERIC SHEPSMAN: We are definitely seeing secondary markets become more
crowded these days as a lot of people are
chasing yield on anything that’s labeled as
value-add. We’re identifying where there
are opportunities for growth, and trying to
pair upside risk with downside protection.
EHLI: There are certain product types that
tend to lend themselves to secondary and
tertiary markets. One is community-based
retail, like grocery-anchored shopping
centers. If you have the dominant grocer
in a secondary market, you probably feel
pretty good about the ability to keep the
center full. One can likely earn a stable
return and reasonable premium for the
location. Also multifamily tends to work
well in some of the secondary markets.
Particularly ones that offer a fair amount
of embedded job growth and provide
some type of geographic, economic or
municipal supply constraints.
PUMPER: Blackstone is very active on
the M&A front. How did 2018 look for
you with mega deals, and what are you
looking at in 2019?
WERNER: In 2018, we had a reasonably
active year for larger transactions, particularly in the public markets including the
acquisition of Gramercy Property Trust
and Canada’s Pure Industrial.
Looking forward, we believe that interest rate volatility is likely to continue,
which has historically led to increased
price movements for REITs. As a result,
this at times, leads to situations in the public market where stock prices do not reflect
the intrinsic value of a company’s underlying assets and where companies may
explore a sale.
PUMPER: A lot of lenders have been
tightening spreads so that the movement in the interest rates hasn’t been
HUGHSON: But there’s been volatility
throughout all product tied to spreads,
with ABS, RMBS, CMBS and in the CLO
market. Everything is wider and more volatile, and that will impact equity, the ability
to buy real estate on a going forward basis.
WATKINS: Higher interest rates might
bode well for real estate in that investors
looking to hedge against inflation often
move into real estate.
WERNER: In the past three interest rate
cycles, it is worth noting that real estate
values actually increased. The reason is
that real estate itself isn’t a bond; there are
a lot of factors that drive valuation, including cash flow growth.
HUGHSON: But in Q4, when you have
Fannie Mae and Freddie Mac at their targets and raising rates, raising their spreads,
it’s impacting 1980s vintage garden apartments and where those assets are selling.
MALINOWSKI: With the interest rate
hikes over the past six months, we have
We are definitely seeing
secondary markets become
more crowded these days
as a lot of people are
chasing yield on anything
that’s labeled as value-add.
We are identifying where
there are opportunities for
growth, and trying to pair
the upside risk with