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for us and we are getting a bit of a yield premium there compared to, say, making a loan on a CBD office in a gateway market. As a platform, we have a large subordinate debt program
and senior floating rate program that’s pushing more heavily
into the transitional bridge debt space, which can also generate
higher yields for our clients.
HALLIWELL: We’re not a large niche player, though we do have
some investments for diversification purposes. We’re becoming
fairly involved in student housing, with about $1.6 billion of assets
under management in this sector. As for markets, the line
between what’s considered primary and secondary is getting
blurred. Ask anyone on this panel whether they’d prefer to be in
Austin, Portland, Denver, Nashville, Charlotte or Chicago, and
I’m pretty sure Chicago would not be at the top of the list.
We recently acquired an attractive grocery-anchored retail center in Wilmington, North Carolina. With retail, we believe that if
it’s a truly unique property with great surrounding demographics, superior tenant lineup, great tenant sales and at a comfortable discount to replacement cost, there’s always liquidity as long
as the gross ticket size is reasonable.
AYGOREN: We’ve been living in a state of uncertainty for
some time, and there remain questions over interest rates,
tax reform and domestic and foreign policy, to name a few.
Where do you think we’ll be a year from now and what’s your
biggest concern for the market?
NORMAN: You’re right, there is a lot of uncertainty around the
administration’s ability to successfully push for regulatory and tax
reform, but I don’t think people are executing business plans
today around what may or may not happen. Low wage growth,
low inflation, slow growth—there’s always a flight to quality event
around the corner. Rates will go up eventually but we’re not seeing a lot of pressure there. A lot of money wants to be in commercial real estate in the US from both domestic and foreign sources,
and given that we’re later in the cycle, there are significant
amounts of capital looking to get into the debt space as well.
VERMIE: Yes, it’s important to just try to keep a level head about
everything that’s going on, not riding the exuberance nor feeling
like it’s the end of the world. It’s all about trying to filter through
the noise to find the right real estate and the right opportunities,
because we all like the asset class. It’s a good risk-adjusted return
relative to alternatives today.
HALLIWELL: It’s interesting that you mentioned the cycle. To
some degree, the cycle of double digit returns is dying right now.
If you take out industrial and analyze the overall first quarter
NCREIF return, it was 3.96% on an annualized basis. Hotels
posted a negative return in the first quarter and malls, which
many fear will start to post negative returns, comprise 12% of the
index. So, it seems clear the industry will be living with a different
return profile than it did in the previous six calendar years.
In terms of broader issues, what can really shock the system is
the rapid rise in interest rates. Over the brief period starting late
October, 2016 when interest rates went up 85 basis points in a
60-day time period, transactions came to a screeching halt and
buyers started dropping or retrading deals. Given this recent
experience, I worry about an event that could trigger another
rapid rise of interest rates. As transaction people, if that happens,
it would have a tremendous impact on our business as it could
cause a severe drop in volume.
REIGLE: I would add to that the concern about capital flows. In
the first six months of last year the open-end fund industry had
a high volume of redemption requests. All the open end funds
were basically waiting to see when the redemption requests
would stop. When that happens and you have both the public
REITS and institutions not buying, things do come to a standstill. Investors who have turned their value-add investments into
core and are ready to sell and redeploy their capital, aren’t dealing with the same market we have all become used to.
BONEHAM: In terms of capital flows and where we might be a
year from now, when we look at things that could impact interest
rates, we do not see inflationary pressures that would significantly
push rates up. We look at global demographics and global economic growth, and we just don’t see reason for significant
changes. Therefore, given that we see the US economy continuing to grow at a slow to moderate pace, we still could be in fine
shape a year or two from now.
REAHL: Green Street just put out a report on tax reform and
pointed out that one of the things in the crosshairs of tax reform
is the 1031 exchange. About 60% of transactions between $1 million and $20 million involve 1031 exchanges. A small portion of
our investments begin at the upper end of this range as we look
to invest in larger transactions, but if that segment of the market
goes away, it would definitely impact the overall market for the
smaller, private investors.
SHAW: I feel like we may be muddling through the middle,
where we’re experiencing a slow deflation of the asset bubble
we’ve created over the past decade. That creates challenges for all
of us that make our money via transactions. ◆
We have a large
program and a senior
floating rate program
that’s pushing more
heavily into transitional
bridge debt, which can
generate higher yields.
TED C. NORMAN
TH REAL ESTATE
We are experiencing a
slow deflation of the asset
bubble that we’ve created
over the past decade.
That creates challenges
for all of us that make our
money via transactions.
JOHN HANCOCK REAL