This is Engel’s best guess about how transactions will flow next
year for hotels: overall there will be fewer transactions, with few
sales taking place in the first quarter. But through the second
through fourth quarters, owners that realized real growth in the
bottom line will subsequently be looking to exit. And the buyers of
those assets probably won’t be US private equity, but rather, foreign
capital sources that can live with the lower cap rates.
While retail and hotels are going to nuanced, slow-burning
stories next year, they are not the only narrative for commercial
real estate. Industrial is firing on all cylinders, while another
perennial favorite—value add multifamily—can be expected to
attract reasonable amounts of investment as well.
“Right now, people are trying to get their portfolios weighted
more on those two asset classes,” says Mitch Paskover, president of
Continental Partners in Los Angeles. “That will continue in 2018.”
A NEVER-ENDING GROWTH STORY
Industrial is likely to show the most price appreciation in 2018,
says Green Street’s Mar. “Demand for industrial continues to
impress while new supply appears reasonable,” she says. “We
expect industrial market rent growth to continue to be healthy,
led by infill locations in urban areas.”
RCA and the Society of Industrial and Office Realtors recently
published a survey of SIOR’s members and found 51.8% of bro-
kers felt activity would increase over the next 12 to 18 months.
Another 39% felt activity would remain at its present high level.
Further, pricing is expected to increase over the same period.
Many survey respondents predicted a growth rate of at least a 5%,
and possibly twice that level.
There’s no dearth of buyers, with institutional investors, REITs,
private investors and many foreign investors all eager to take par-
ticipate. Jack Fraker, of CBRE in Dallas, noted in the report “that
many large deals are attracting more than 100 potential buyers.”
Demand is so great that JLL is predicting secondary markets
will continue to see heightened levels of activity in the coming
year. For the first half of 2017, the industrial asset class closed
$24 billion in sales with primary market activity accounting for
40.8% of sales—but it was the secondary markets at 43% that led
the way. Meanwhile, tertiary markets, with 16.2% growth,
showed significant momentum. Investors want to strike that bal-
ance between finding the right geography and getting the
return they need—and smaller markets allow them to under-
write that, JLL said in a recent report.
There is little secret what’s behind this demand; much of it is
being fueled by the growth of e-commerce. One nuanced change
that the industry may see in the coming year is a shift in last-mile
strategies by Amazon, now that it has acquired Whole Foods. The
theory is that Amazon will make use of Whole Foods’ distribution
channels for its own last mile delivery points.
A PERENNIAL FAVORITE
Multifamily is another asset class that should see a good bit of
action next year, with an emphasis on value-add properties. Simply
put, the numbers pencil in nicely for most locales.
Daniel Palmier, president and CEO of UC Funds, tells of one
property the firm acquired at a bankruptcy auction last year—an
apartment property that was well-located but under managed
and, as he put it, a little tired looking. “We were able to buy the
property much cheaper than we could ever build it,” he says.
Here is his reasoning: “If I’m buying a property at $200 per sf,
and it costs $400 per sf to build, I’m already way ahead of the game
with a $200-per-sf margin between me and my direct competitor.
“So then I put some investment in to compete more effectively—
let’s say that is $50 per sf,” he goes on. “So now my investment is
$250 per sf against my competitor, which built his product at $400
per square foot. Now we’re both getting the same effective rent
because even if the competitor is advertising a higher rent, it has to
give away higher concessions such as two months’ free rent.
“At the end of the day,” he concludes, “I am putting as much
money per unit in my pocket as they are at a return on investment
that is significantly better than theirs.” UC Funds has been invest-ing in multifamily for years relying on such numbers to make
their returns, Palmier says. But the environment right now is
particularly well suited for value add.
Indeed, analysts are expecting deceleration in rent growth
and, with that, in revenue growth as well for the upcoming year as
peak supply goes live. “While we expect renter demand to continue to remain robust, we are predicting vacancies to rise given
the amount of new projects that are coming on line,” Reis chief
economist Victor Calanog wrote in a recent study.
Those properties were planned and developed when the cycle
was more robust. The market has obviously changed since then,
but by precisely how much remains to be seen. ◆
We’ve been on a pretty
consistent roll now since the
debacle in 2009-2010 and
there’s no evidence we can
see that people will be in a
funk in 2018.
T.R. ENGEL Group
If I am buying a property
at $200 per sf, and it costs
$400 per sf to build, I’m
already way ahead of the
game with a $200-per-sf
margin between me and
my direct competitor.