Where are capital markets now, and where are we headed next?
At CRE.Converge 2018, experts engaged in a candid conversation about what they’re seeing in CRE investment, and shared their insights, strategies and predictions for the market. Moderator James Cassidy, executive managing director with Newmark Knight Frank, led the discussion.
The first question: What keeps you up at night in terms of investing in the current environment?
Marc Deluca, regional president with KBS Realty Advisors, brought up interest rates. “Rising interest rates have had a huge impact over last 45 days. I’ve seen spreads move 100 basis points.” The Federal Reserve has said, “basically that they’re not sure when they’re going to back off,” he added. On the other side, Deluca said corporate balance sheets are the best they’ve looked, and low unemployment is another positive.
Joe Gorin, managing director and co-head of GSAM Private Real Estate at Goldman Sachs, echoed Deluca’s concerns about rising interest rates. He said the increasing rates are going to impact large deals, and “those investors are breaking out their calculators as we speak.” While underlying fundamentals look good, like low unemployment, Gorin pointed out there are about 10 million jobs unfilled, and “a lot of workers this economy needs aren’t here.” However, he sees the buzz around innovation and technology in healthcare, biotech, robotics and AI as promising.
Mike Hagan, executive vice president and chief investment officer with Liberty Property Trust, brought up the industrial sector, saying, “It can’t get much better than it is now,” but on the flip side, “When will the switch go off?”
All the panelists cited the challenging current environment – there’s a lot of capital to go around, but investors are nervous about yields and tend to be more conservative in their spreads. They’re looking at core plus investing and income with some appreciation.
Next, Cassidy asked the group: When we meet investors, industrial tends to be the asset they most want to acquire. What do you still like about it, are where are the opportunities?
“Everyone is a little bit infatuated with industrial right now,” Gorin said. “It’s white-hot – there are 240 million square feet of industrial currently under construction in the U.S. right now. But can that absorption continue over the next few years?”
The current level of industrial construction has surpassed the last peak – in 2007 – by a staggering 35 percent, he pointed out.
But the panelists all agreed that industrial continues to play a critical role in their portfolios. “Companies are revisiting their supply chains,” Hagan said. “Everyone wants to get closer to the customer. It’s all about what customer expectations will be. Order it today, get it tomorrow.”
“Coworking – you can’t go anywhere without hearing about it,” Cassidy said. “What do you think about that space, and how do you think it affects valuation?”
“I’m Debbie Downer about it,” Deluca laughed. “In the ‘90s, a bunch of them existed and many folded. In the right market, it makes sense. But you have to be very select about where.”
Gorin was candid, too: “Would I invest in WeWork? No. Would I entertain them leasing space in my building? Maybe.” The panelists brought up the heavy wear and tear that flexible space occupiers can have on a building, on elevators, bathrooms, etc. “Plus they demand a $125 per square foot TI,” Deluca said.
With the last question Cassidy threw to the group, he gave them $100 to place a bet on the new Amazon HQ2 location.
Hagan said he’d put $70 on Metro D.C., $25 on Philadelphia (his hometown), and $5 on Austin, Texas.
For Gorin it was $75 in Crystal City, Virginia, and $25 in Austin, Texas.
Deluca also favored the D.C. area, saying he’d bet $95 on Crystal City or Dulles, Virginia, and $5 on Austin, Texas.
“Ninety percent of the world’s internet goes through data centers in Loudoun County [Virginia],” Deluca said, which he believes will lead Amazon to locate in that state. “Maybe Apple comes too.”
“I’m making a bold call – the [HQ2] announcement comes before the election,” Gorin said.
It’s an exciting time for change in commercial real estate, and Amazon’s major play is just one piece of it. All panelists were optimistic and enthusiastic about the opportunities for the industry in the near future.
“We’re going to see real estate used in ways we haven’t even thought about yet,” said Hagan. Will old office or multifamily space become adaptive reuse for data centers? How will vertical farming (pictured above) disrupt commercial agriculture? Will multilevel industrial become the norm in urban areas? All of these questions were a part of the discussion, but the answers have yet to be determined.
Brielle Scott is Senior Communications Manager at NAIOP.