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CRE Opinion: Striking When the Iron Is Hot

Investors will need more than conventional wisdom to navigate the remainder of this year’s unpredictable market.
Paul Smith of Velocis

For many real estate investors, the path for 2017 was based on conventional wisdom: interest rates would spike, the cycle would begin to top out, and debt availability would decline. Now, six months in, it turns out that much of the conventional wisdom has not played out quite as expected.

The year of the unexpected began with a slower-than-anticipated start when the post-election lull extended into the early months of 2017 as owners and investors paused to evaluate how best to approach the year ahead. But, that was just the calm before the storm. We are now in the midst of the storm when it comes to activity and property listings. Velocis’ deal pipeline is as active as it’s ever been—a statement I wasn’t sure we’d be able to make earlier this year.

Another unexpected fact is that lenders are out there and they’re active. Forecasters predicted that 2017 would see top of the cycle perception, out of order pricing expectations, debt tightening, and higher interest rates—pretty doom and gloom. However, that’s not how it’s panning out. Interest rate increases have been much more muted than anticipated. There is less bank debt available than in the past, but alternative lenders, like debt funds and life insurance companies, are filling the demand for loans. Ultimately, there is plenty of debt to go around; and while the terms are harder than they were a year ago, it’s certainly better than expected.

These aren’t the only surprises though. Servicer-sponsored activity is on the rise. Whether through auctions or broker listings, servicers are finally starting to bring their foreclosed assets to market, adding to the active pipeline of deals. On the flip side, the continuation of low interest rates means the wave of maturing CMBS (commercial mortgage-backed security) loans were easier to refinance than expected, cutting into a possible source of buying opportunities.

At the market level, job growth continues in the non-gateway markets where Velocis focuses its investments. In Raleigh, for instance, 70 people arrive on a one-way ticket daily. In Charlotte, that figure is closer to 100 people each day. This growth is apparent in the amount of multifamily development underway; in Raleigh, there is a site being cleared on seemingly every corner. The same goes for Charlotte, where they will deliver 8,000 apartment units for the second year in a row. Dallas, of course, is no different.

Across the board, there continues to be incredible demand from buyers for high-quality, stable assets. Excluding energy markets, like Houston and to a lesser extent Denver, tenant demand on the office side is still quite active. And, despite widespread retailer defaults, there continues to be demand for core retail real estate with top of the market pricing. Who says retail is dead? Certainly, not the investment community.

So, what does this all mean? In short, the market is incredibly unpredictable right now. Conventional wisdom isn’t always the right path. Savvy investors will navigate the second half of the year with a mindset of flexibility and a readiness to strike when the iron is hot.

Paul Smith is a principal at Velocis.