I was recently invited on behalf of RealtyShares to attend UC Berkeley’s 36th Annual Real Estate & Economics Symposium in San Francisco. With over 500 attendees from around the country, the symposium is one of the most prestigious one-day real estate conferences in the entire country. It brings together a distinguished group of experts and entrepreneurs in real estate, finance, government and academia to discuss and evaluate real estate and the financial markets. This year was no different. From the keynote address by Ken Rosen to the luncheon speech by Lieutenant Governor Gavin Newsom, the day featured the who’s who of the real estate and finance industry. Btw, in case you missed it, you can catch Ken on CNBC’s Street Signs discussing momentum in the housing market HERE.
The panels were just as diverse as the speakers featuring some of the best business and real estate minds from around the country. There was a general consensus among the panelists that finding good real estate deals was now tougher than raising capital. The panelists also agreed that we still had some time to go before reaching a full recovery and that real estate values would continue to increase, albeit a bit more modestly than in 2009-2012, over the next 3-5 years.
I wanted to share with our readers some of the highlights I gathered from the day and in interest of keeping this post relatively short, I’ve decided to break it into two separate parts. In this part 1, I’ll be highlighting the Capital Markets panel that brought together Kevin Shields, the Chairman and CEO of Griffin Capital Corporation, John Schissel, Executive Vice President and CFO of BRE Properties, and Dennis Williams - Senior Vice President of Northmarq Capital and an advisor to RealtyShares.
Dennis kicked off the discussion for the panel by highlighting how the volume of originations for Commercial Mortgage Backed Securities has recovered since the economic recession. In 2007, there were $228 Billion in CMBS originations and in 2008, the peak of the recession, that number had dropped to $12B. As of 2013, that number is back up to 2003/2004 levels with a forecasted $80B in originations. In his concluding thoughts, Dennis stated that CMBS is back, that underwriting has generally been sound and that we are in a healthier market for CMBS than we were in pre-recession times.
Next up was Kevin of Griffin Capital. Griffin operates the second largest non-traded REIT in the country and has closed more than 650 transactions representing over $16 billion in value. According to Kevin, the capital markets are very robust and debt and equity capital for real estate is plentiful. For example, non-traded REIT’s issued over $20B of equity in 2013 which is almost double last years $10.2B issuance. Accordingly, the difficulty isn’t in raising capital but rather in finding the right deals in which to deploy that capital. I found this statement to be interesting since we are seeing the same trend at RealtyShares and the very reason we are being extra conservative with the investments we list on our platform.
Last up was John Chisel of BRE, a multifamily equity REIT with a west-coast focus. John made some interesting points regarding foreign influx of capital into the US real estate market. In 2011, 70% of capital for Equity REIT’s came from Japan. Although this number has decreased to 30% in the last few years, Japan still accounts for 8.5% of total public REIT values. With a total market cap as of 2012 for public Equity REIT’s of almost $550 Million (and larger still for all REIT’s), that number is staggering. Kevin also alluded to the current low single digit yields for the REIT market which is a concern among investors (this is something we discussed in a previous blog post that compared REIT’s to private real estate like that offered on RealtyShares - RealtyShares v. REIT’s).
Subsequent to Dennis, Kevin and John offering their thoughts on the outlook of the commercial real estate market for the next few years, the panel moderator - Kristin Gannon, a real estate law partner at Dean, Bradley and Osborne proceeded to a Q&A. Here are the highlights:
- Cap Rates for NNN properties saw a fair amount of compression over the last 18 months and depending on the lease duration and credit of the tenant, we are seeing NNN cap rates anywhere from the low 6’s to the mid 8’s.
- Cap Rates for core multifamily assets in high job growth, west coast markets (specifically LA, Seattle, Orange County, San Diego and San Francisco) range from the high 3’s to the low 4’s. Even as interest rates have risen over the last year, cap rates have for the most part remained stable.
- It is important to remember that the correlation between interest rates and cap rates isn’t 1. In fact, Multifamily cap rate spreads to the 10 year treasury have gone from about 200 bps in 2007 to 400 bps today so there is still a wide spread which offers a fair amount of protection in a rising interest rate environment. I think this is an important point because as fear of rising interest rates enter the minds of investors, cap rate compression becomes a concern but one that should not be overestimated.
- Debt pricing has inched up slightly over the last year and the current rate for a 10 year fixed commercial mortgage from a life insurance company is at 4.25 to 4.5 (4.75-5.25 for riskier asset types).
- The Private REIT market continues to be slow to provide liquidity to investors because there is no public market for Private REIT shares. However, we’ve seen a lot of liquidity events in the last 6 months due to increased mergers and acquisitions among REIT’s.
Despite the very informative discussion from the panelists, for me the true highlight came towards the very end when an audience member asked Kevin, Dennis and John about their thoughts on crowdfunding as a means to raise capital for real estate now and in the future. What was most exciting was that all three of the panelists had heard of crowdfunding and a few had even considered using it. The panelists were generally bullish on crowdfunding but also made clear that the market is still in its infancy much like the REIT market was a few decades ago.
Thanks for reading. I’ll be back with more next week! In the mean time, please email your questions or comments to email@example.com or if easier, give me a call at 866-202-2023 ext. 701.