because of the abundance of capital still
“I continue to think that the fundamen-
tals and the real estate market are still pretty
good,” DLA Piper’s Global Real Estate
Practice Co-chair John Sullivan tells
GlobeSt.com. “Leverage is relatively low. So,
I think that if we have a correction in real
estate, it’s likely to not be that severe.”
Those who are bearish about the next 12
months, cite the unpredictability of trade
policy, combined with the upcoming elec-
tion, which concerned 37% of the bears.
“The CEO and chief investment officer
of any business, not just real estate, will tell
you the one thing they want to know is
what the rules are,” Sullivan says. “Then they can make decisions.
The hardest time to make decisions is when there is substantial
Outside of political concerns, 30% of the bears were pessimistic
about nearing the end of the cycle. “I think that it [the end of the
cycle] is definitely playing on people’s minds and has been playing
on people’s minds for the last couple of years,” Sullivan says.
“There are lots of people that look back over 50 or 75 years of his-
tory, see how long cycles typically last and know that we’re already
past it [the typical end of cycles]. So, they’re getting nervous.”
Part of the problem for the CRE industry is continuing to match
the strong growth pace in previous years. With transaction volume
reaching $576.1 billion, 2018 was a record high year for deals. That
strong 18% growth will be tough to match this year.
As deal volume has risen, so have prices, which Sullivan says also
registers as a concern for the next 12 months. “In the gateway cities
and now in a lot of other places, the phrase that gets used in the real
estate industry is ‘priced to perfection,’” he says. “Assets have gotten
very expensive and that’s connected with where are we in the cycle.”
Any problems with those deals could set the stage for buying
opportunities beyond the next 12 months, which would give even
the bears something to look forward to.
“If you have a market correction and you have a decline in price,
you could see more activity by almost all investors,” Sullivan says.
“It’s been very challenging for the Opportunity Fund investors to
get the kinds of returns that they want. So, some of them are probably secretly hoping for some kind of correction to create more
buying opportunities.”—Les Shaver
For Non-Traded REITs, Closing Time
In today’s highly competitive multifamily deal environment with
buyers streaming in from around the globe, there are as many as 20
to 30 bids for a value-add asset. As many as 10 groups are usually
fighting it out in the best and final round of offer.
With that type of competition, buyers are seeking any little
advantage that can put them ahead of their competitors. The abil-
ity to offer hard money, of course, can always be a differentiator
among buyers, but the capability to close
quickly can also set a bidder apart.
“An ability to close quickly is a competi-
tive advantage because it moves the conver-
sation away from solely sticker price,” says
Evan Hudson, a partner at Stroock.
Non-traded REITs not only can close
quickly, they are motivated to do so. While
some buyers generally draw capital as
needed, non-traded REITs raise capital
first, and then try to deploy it before it
causes a drag on their returns. In fact, there
is a penalty if they don’t deploy capital
“The sponsor will want the non-traded
REIT to cover its dividend,” Hudson says.
“Even with cap rates as low as they are, the yield from commercial
real estate investments still exceeds the yield from cash equivalents.
Cash is like ballast in a ship. It adds stability, but having too much
will slow things down. Excess cash can quickly tank a dividend coverage ratio.”
Could this strong focus on closing fast lead to mistakes? It’s possible, but Hudson says a strong support team can help eliminate
“The deal team is focused on a goal, which is to deploy the capi-
tal quickly,” Hudson says. “But, with the right team in place, due
diligence protocols will still be followed even on an expedited
A non-traded REIT of any size will try to deploy capital expedi-
tiously to avoid a cash drag. But bigger non-traded REITs need to
invest money in larger chucks.
“If a REIT raises $100 million per month, it might try to put a
$200 million asset under contract each month,” Hudson says. “A
small REIT that raises only $1 million per month will be in the
market for much smaller assets. But either way, the incentive to
close remains the same.”
Just as deal size varies with non-traded REITs, so do the geographic
regions and asset classes they target. These REITs follow the invest-
ment policies described in the prospectus, according to Hudson.
“The locations vary from low-cap-rate coastal markets to growing
Sun Belt markets,” Hudson says. “They include global cities and
secondary cities. Some REITs try to acquire older assets that they
can bring up to date. Others focus on core newbuild multifamily,
buying directly from the developer.”—Les Shaver
CAPITAL MARKET VIEW
Debt Funds Overtake Life Cos.
This year debt funds hit a milestone: for the first half of 2019 they
represented a larger share of the commercial mortgage markets than
the life insurance companies, according to Real Capital Analytics.
Life insurance companies still represent a larger share of lend-
ing for core investment strategies than do debt funds, but the levels
are close, RCA notes: a 10% share for life companies vs. 9% for
debt funds. It is in the riskier investment styles, however, where
debt funds are more competitive, allowing them to capture more
market share than insurance company lenders this year. ◆
Services has recruited Ken
Smondrowski as vice president of its Healthcare Advisory
Services. Prior to joining
worked at Health-Pro Realty