Top 5 Takeaways From The 2018 Western States CREF Conference
By Holly Neber
October 1, 2018
Holly Neber is CEO of AEI Consultants, an international consulting firm of more than 25 years that provides comprehensive services to commercial lenders, property owners, managers, tenants and developers. These services include environmental, property and facility assessments; zoning and energy consulting; site investigation and remediation; industrial hygiene and construction risk management. She can be reached at firstname.lastname@example.org.
More than 900 commercial and multifamily real estate professionals gathered in Las Vegas for the 21st Annual Western States CREF Conference, hosted by the California Mortgage Bankers Association. Top-of-mind for speakers and attendees was where we are in the extended real estate cycle and how the current climate is impacting location selection, asset sectors, capital flow and loan terms.
Our top takeaways from the Western States CREF Conference 2018 include:
No. 1: Celebrating a Great Year While Hedging for a Future Correction
In line with overall industry consensus, we heard from several professionals who agree that there is some degree of a market correction on the horizon--and this will likely occur within the next two years.
That said, the industry has experienced a robust volume in 2018, and any future downturn is not anticipated to be nearly as severe as that of the late 2000s. As investors look ahead, diversification in regions and property types provides a great hedge. Lenders and investors alike have adjusted their strategy away from the markets likely to be impacted--those facing oversupply and seen as overheated.
In terms of hedging for the future, multifamily markets in the U.S. should be considered from the perspective of each region's employment mix. Markets with higher proportions of medical and education jobs are predicted do well in spite of a correction.
Other property types, such as office, also benefit from a diversification strategy. For instance, portfolios weighted heavily in tech-centric regions are looking to balance with investments in other regions.
On a global scale, Europe is currently experiencing an influx of capital, in part because it is viewed as earlier in the real estate investment cycle than the U.S. However, geopolitical uncertainty creates a level of hesitancy in the European markets, which could counteract its appeal over the next couple years.
No. 2: Target Locations with Proven Resilience
When it comes to identifying locations to direct capital flow, lenders and investors are putting a particular emphasis on the resilience of investment markets.
This includes environmental factors such as seismic and flooding risk as the severity of weather events increases and sea levels rise. Regional and community political attitudes related to planning, zoning and infrastructure investment are also taken into account, as they may affect how a location responds to or plans for these events.
For example, a global real estate investment management firm at the conference indicated they are beginning to add a resilience evaluation element to their risk review process. While the firm does not intend to rule out any particular regions entirely, this new level of assessment will deepen the company's focus on resilient investment markets.
No. 3: Many Are Eyeing Specialty Sectors
The investment outlook remains strong for specialty sectors, including self-storage, medical office, senior housing and student housing.
Medical office, senior housing and self-storage are all poised for growth in conjunction with shifting demographics as the large Baby Boomer generation ages.
One caveat in self-storage--though a highly desirable asset class--is the relatively small loan sizes required. As a result, portfolios are garnering the most interest from lenders, especially those that are geographically diverse.
In the case of student housing, it has proven to be a resilient product type due to continued rising enrollment in higher education. This product type did not decline in the last recession.
No. 4: Retail Is Not The Only Product Type Evolving
Over the last several years, industrial has emerged as a highly favorable product type.
As with retail, e-commerce is a dominant force influencing the industrial sector. Industrial production rates are no longer predictive of industrial net absorption because of the retail effect. For instance, we heard at the conference that grocer Kroger is building more distribution centers than stores this year.
At AEI, we have observed this hunger for industrial firsthand and are currently providing property condition assessments, zoning reports and seismic evaluations for a portfolio of industrial warehouse assets.
Office is also undergoing a transformation, with net absorption being affected by co-working options and open concept offices. For instance, even large corporate clients including Aetna are beginning to use co-working providers such as WeWork.
While many office investors are targeting areas such as San Francisco due to its thriving tech presence, some experts advise that investors should also diversify their portfolios by targeting markets with a variety of industries so they are not fully reliant on the tech sector.
No. 5: Non-Bank Lenders Hungry for Deals
Non-bank lending activity continues to remain high as the cycle lengthens.
Several conference attendees agreed that if the lender believes in the strength of an asset and the sponsor's business plan, they will develop an appropriate structure to originate a loan regardless of the debt service from operations.
For many investors, the certainty of closing offsets the added cost of originating loans through these lenders.
Many institutional non-bank lenders such as life insurance companies are diversifying their portfolios with a mix of product types. That said, many are preferring only to provide term loans to stabilized assets. Government-sponsored enterprises are originating the majority of multifamily loans.
Also discussed was emerging alternative sources of funding, including commercial property-assessed clean energy (C-PACE) lending. These loans can replace mezzanine financing for owners seeking to complete capital improvements to increase the efficiency, resilience and reliability of their assets.
The C-PACE programs vary greatly state-to-state. C-PACE provides a new tranche of capital, which has the unique characteristic of being repaid through an assessment on the property's tax bills.
The general consensus at the Western States CREF Conference 2018 indicates that investors and lenders alike remain optimistic and open to a variety of product types and investment markets. While a market correction is likely on the horizon within the next few years, resilient locations and sound business plans will continue to attract ample capital.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)