STEVE PUMPER: There has been a significant falloff in transaction volume on a year-over-year basis. This was initially due
to a decline in large portfolio sales, but lately there’s been a
falloff in single asset sales. Has this trend influenced the way
you’re looking at deals?
PAMELA BONEHAM: Barings has also seen less transaction
volume. That’s partially because portfolio managers have really
been working on portfolio construction, so funds and separate
accounts are at a point where their assets are well-positioned for
the next several years, especially in the event of a downturn.
Certainly we know it’s a mature cycle. Underwriting is more
cautious because of the projected moderating growth. Market
participants are also well heeled, so if they’re conservatively
levered and want to sell, but they don’t like the bid-ask spread,
they’re willing to wait until that spread narrows to a point where
it’s comfortable to sell. That’s contributing to the transaction
volume decline over the past year or two. Having said that, in the
case of high-quality assets, there’s plenty of interest. It’s just that it
seems we’re all bidding on the same opportunities.
JOSEPH SHAW: I don’t know if I agree. About 18 or 20
months ago we were chasing a deal. It was a $50-million high-quality facility by the Miami airport that, at the time, was being
marketed at a price that would have put it at a 7% cap date.
They were taking bids on that asset very recently and the pricing was at a 6% cap rate, despite the amount of product for sale
in South Florida. So we’ve seen significant price compression,
although this particular deal was a high-quality asset in an
At Hancock, we recently took took second round bids for 150
N. Michigan, also known as the Diamond Building, here in
Chicago, and we’re shocked at the depth of buying field. We
had over 20 parties that submitted bridge and on-deck offers.
We expected to get 10 initially, and then end up bringing seven
or eight into the second round. We ended up bringing 11 prospective buyers to the second round. The level of bidder aggression is an indication that people see far more value in the asset
or opportunity than we saw.
TED NORMAN: If you look at transaction activity from a debt
perspective, certainly in the first quarter following the election,
there was a general uncertainty around policy. After rates
spiked up significantly at the end of last year, we all knew
spreads were going to narrow and the cap rate discussion would
come into play. There was a lot of “discovery” going on through-
out the first quarter and the market froze a bit. Then rates
started to settle down and the concerns ebbed a bit, and people
have started to come back to the table. There just aren’t
enough quality deals to satisfy the capital chasing them.
DAVID REAHL: And to put this into perspective regarding
spreads and cap rates, the 10-year Treasury rate in June 2006 was
5.25%. So even though cap rates have remained very low, com-
paratively, there is still a healthy spread to treasuries today. There
is some space for interest rates to move up slightly without cap
rates having to moving accordingly.
SULE AYGOREN: Let’s talk about your investment allocations for 2017, now that we’re halfway through the year.
Where are you in terms of meeting your target goals, and
how does it compare to last year?
JAMIE VERMIE: We’re on target and are probably consistent
with where we were at this point last year, but we’re pretty selective. We look at many deals but move on very few of them. It’s
been very competitive. Just last month, we were looking at a deal
we thought we were going to get it, and we were prepared to be
competitive in what we were offering. By the time the bidding
got to the best and final round, however, the pricing grew to be
10% higher than it was at the first round. It’s a difficult environment right now.
There’s a lot of value-add money looking at core-plus product, yet trying to approach it as a value-add opportunity. That
was the case in this situation. For core product, we have a nominal floor in terms of yield. A lot of the core product is too expensive today, so core-plus has been an interesting space now that
we’re getting crowded out of the value-add arena. I don’t know
how long that could continue.
We’re really looking at getting the best relative value rather
than trying to fill a bucket. There are years in which we end up
under our allocation and there are years that we go over. It
really comes down to finding good deals in the right markets
and rounding out our portfolio.
JIM HALLIWELL: In terms of annual targets, we generally
expect to complete between $1.25 to $1.75 billion in acquisitions. In 2015, we were about $2.5 billion total. In 2016, it was
about $1.1 billion. Those numbers are down this year.
In the fund world today, two things are very important. One,
you’re not going to buy a property that you believe will be an
index trailer. You may love it, but you aren’t going to get money
from clients if you trail your benchmark. The concept of
remaining in your style box is much more important today with
clients and consultants. If you deviate from your strategy and
make a mistake, it’s frowned upon with these constituents.
Therefore, the strike zone is smaller, resulting in fewer properties being bid upon.
Secondly, most funds, including ours, are full on their office
allocations and are being much more selective on those investments. As office properties tend to be the largest in terms of
average deal size, if you’re buying less office product, then your
overall production volumes are likely going to go down.
SOULTANA REIGLE: As a firm, we ended the first quarter at a
lower gross acquisitions level than what we’d consider a normal
first quarter. I very much believe we’ll see more sales volume
over the balance of the year, as we’re seeing a lot of interesting
opportunities. Last year, we closed about $5 billion in overall
investments, which gives you a general sense of our firm’s appetite for real estate.
Even though cap rates
have remained low, there’s
still a healthy spread to
treasuries today. There is
some space for interest
rates to move up slightly
without cap rates having
to moving accordingly.
USAA REAL ESTATE CO.