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Big money going off the grid

By Konrad Putzier

This summer, cities like Tampa or New Orleans are more than just holiday destinations.

Institutional real estate investors, long drawn to the safety and liquidity of large gateway cities, are starting to branch out into secondary and tertiary markets in a hunt for higher yields.

This shift in strategy has led to record deals on the real estate periphery and poses a serious challenge to the smaller investors that dominated the field two years ago.

DAVID KESSLER
DAVID KESSLER

“What the smaller funds lack in capital, they hope to make up for in agility and vision. In the last couple of years, funds have tended to self-segregate along these size and investment strategy lines, competing primarily against others within their own class,” said David Kessler, national director of the accounting and advisory firm CohnReznick’s commercial real estate division.

While institutional investors sought the safety of primary markets like New York or Chicago following the 2008 crash, smaller funds found a niche in the more risky and cash-strapped secondary and tertiary markets across the country. But now this distinction is getting blurred, Kessler said.

Institutional investors — a broad category that encompasses banks, insurance companies and large asset management firms like Blackstone — have begun investing heavily in trophy multifamily assets in smaller cities over the past year.

More recently, they have started to branch out into less high-profile commercial buildings, said Gabriel Silverstein, head of Angelic Real Estate, a real estate investment banking, investment advisory and brokerage firm that does most of its work in secondary markets.

GABRIEL SILVERSTEIN
GABRIEL SILVERSTEIN

Silverstein recently worked with a large public REIT to buy a $40 million office building in Detroit and a $100 million office building in Charlotte. One of his clients recently partnered with a life insurance company on a real estate project in Albuquerque.

Unsurprisingly, this influx of institutional money has driven up prices and compressed cap rates.

“The difference this year is that people have broadened the type of product they are willing to consider to achieve yields,” said Dan Fasulo, managing director of research firm Real Capital Analytics. “The competition really gets great and pricing goes up to the point where — at least for class A properties — some are starting to feel a little frothy.”

Six days ago, the $215 million sale of the Fifth Third Center in Charlotte to the public REIT, Cousins Properties, set a price record for an office deal in the city with a $308 per s/f.

As prices rise, it is becoming harder to find profitable deals, which is particularly bad news for small and mid-sized investors.

“No question, it has gotten more competitive,” said Paul McEvoy, senior managing director of DRA Advisors, a real estate investment firm with $11 billion in assets across the country.

McEvoy explained that DRA has been investing in secondary markets for 27 years, but is now forced to be creative in its search for deals. “We don’t expect to do well in a regular auction,” he said. Instead, the company is on the lookout for quiet sales and opportunities to become a fall-back buyer if another buyer can’t close.

DAN FASULO
DAN FASULO

One type of institutional investor that has been noticeably shy on secondary markets are sovereign wealth funds, which still prefer the liquidity and perceived stability of gateway markets like New York.

At any rate, RCA’s Dan Fasulo reckons the growing interest in second-tier cities won’t divert significant capital away from New York City. “The pool of capital has gotten bigger,” he said. “There’s plenty to go around.” микрозаймы и займы онлайн без отказа

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