After another successful year in 2018, the coming year is ripe with opportunity, but those of us in the commercial real estate industry would be wise to approach 2019 with patience, diligence, caution, and an eye toward relationships.
When it comes to buying, selling, and borrowing, we’ve seen a lot of changes recently, and this year will require further adjustments as the market continues to evolve.
We anticipate that underwriting acquisitions will become even more critical at this point in the cycle as buyer and seller expectations for outcomes continue to change. As a result, assets that have more cash flow and depend less on reversion at sale to achieve target returns should be attractive. We’ve purchased assets in the last 12 months that we believe will deliver some of our best results, indicating to us that there are fantastic opportunities out there. How do we find them, though? Truly understanding market – and more importantly, submarket – dynamics, expert due diligence, and relying on long-term personal relationships are keys for successful acquisition sourcing. This rings true in the DFW market and across the country.
We expect properties to take a bit longer to sell and the pool of buyers to be somewhat more shallow than previous years as people are being more cautious given the perceived position in the market cycle. Instead of 8-10 qualified offers on an asset, one might expect five to six offers. Currently, it appears there is more interest from buyers for properties. Offering value-add and opportunistic returns rather than those looking for core or core-plus returns. Return expectations across most asset types have come down in recent months, but many investors continue to search for Alpha and the higher returns offered by value-add and opportunistic commercial real estate plays.
Our lenders are telling us they are “tightening up” and are more apt to lend to existing customers as opposed to expanding their relationship base at this point in the cycle. They want to minimize risk by concentrating on those with whom they have a proven track record, helping these partners with their needs to ensure long-term success with assets they own and want to acquire. Lower leverage around the 50 percent-to-60-percent range of total project cost is looked upon favorably and allows lenders to still offer very attractive terms.
Many in the CRE industry are echoing lenders’ sentiment by staying very close to strong existing relationships in all facets of the industry. These relationships include principals, brokers (investment sales, leasing, tenant representation), special servicers, and traditional and non-traditional lenders. This, along with maintaining even greater diligence in reviewing the financial and structural terms of leases, exhibiting patience while underwriting acquisitions, and managing the desired sale of certain assets should lead to the continued realization of desired returns.
Jim Yoder is a partner at Velocis.