There is no denying that the pandemic has had a huge impact on capital markets.
Many investors are turning to real estate as their preferred investment due to recent equity market volatility because it offers investors current yield and upside potential.
The industrial sector, in particular, is experiencing a huge influx of capital due to an increase in demand for storage and warehousing space.
John Black, President of MacKenzie Capital, under the aegis of MacKenzie Real Estatehas over three decades of experience in commercial real estate financing and investing. Black oversees the company’s business in Baltimore and Washington, DC Metro, and recently spoke to Commercial Observer about what he sees in the capital market space over the coming year.
What are the economic fundamentals and trends currently driving the capital markets industry?
For the past decade, real estate companies have operated in an environment characterized by unprecedentedly low interest rates, which has fueled confidence, growth and activity across all asset classes. But now that scenario is slowly changing with inflation and rising interest rates on our doorstep. In their constant search for the highest possible yield and income assets, financial institutions and investors are now turning more actively to real estate because of its historically proven protection against inflation. Labor shortages, supply chain issues, and spikes in demand for products and materials all contribute to inflation.
What is the current state of real estate capital markets? Debts and equity?
Especially since the start of the pandemic, a significant amount of capital has been raised, much of which has not been placed, as the prediction of a large number of distressed properties becoming available never actually materialized on the market. Over the past year, an increasing number of investors have begun to seek commercial real estate positions up and down the capital stack in search of higher returns. This activity is fragmented across asset classes and geographies as investors seek opportunities amid disruptions among property types. Retail continues to evolve with adaptive reuses and includes medical and logistics end users filling in the blanks. Many commercial office buildings, particularly those in the [central business districts] big cities are in distress. However, when disruptions occur, opportunities arise and sources of capital seek to take advantage of the growing disconnect. Real estate is often seen as the third wheel, but now, in times of distress, private equity and debt funds, [real estate investment trusts] and high net worth individuals are changing their investment strategies and real estate is the beneficiary.
Which asset classes are leading the charge? Which sectors should outperform in 2021?
The industry has become the star asset class over the past few years and with changing consumer buying habits fueled by e-commerce, there is no reason for this dominance to continue. diminish in the near future. The favorite child of the multifamily is following close behind, and rising house prices are creating additional value in this asset class. What we find more surprising is the expansion of preferred real estate asset classes such as life sciences, student/worker housing, self-storage and marinas which are attracting strong interest from investors and lenders. The performance of each asset remains closely aligned with specific sub-markets, with interest increasingly shifting to the southeastern part of the country. With soaring land prices and the land rights allocation process becoming more difficult to navigate, adaptive reuse and redevelopment projects will be more prominent with opportunistic return expectations.
Where do you see cap rates trending and why?
Being an old school bunch of investors, I learned that when the mortgage constant is around 70% of the equity stack – and interest rates go up – cap rates will follow. The determinant of this correlation is the total volume of capital seeking real estate investment positions. Competition for higher risk-adjusted returns in commercial investments will mitigate the impact of rising cap rates. Most owners have taken advantage of historically low rates and extended debt maturities, so there is no pressure to sell.
Which specific submarkets are poised to grow in the coming year?
We envision significant growth where jobs are being created and therefore where the population is growing. Major areas include the portion of the North Carolina Research Triangle in Raleigh-Durham, as well as the Piedmont Triad, which encompasses Greensboro, Winston-Salem and High Point extending to Charlotte. We expect continued strong activity throughout Florida. Locally, we are seeing tremendous activity and opportunity in the life sciences sector, particularly in Rockville and throughout the I-270 corridor.
What is your strategy to capitalize on the activity in the coming year?
Our team remains active in the DMV region and there are many opportunities, and we also follow our clients in the southeastern part of the country to help them with investments and capitalizations to find the right balance between debt and equity. In many cases, our team identifies an opportunity and then finds the right match in terms of sponsorship and capital involvement. We leverage our extensive relationships in the brokerage community, including our in-house team of brokers, to find off-market opportunities for our clients. Success breeds further success and confidence and this philosophy has allowed us to grow our stable of clients and investors.
Keith Loria can be reached at [email protected]