Commercial Investment Real Estate Winter 2020 | Page 28

1.3 percent from the same time last year. The
key takeaway is that CRE investors need to
understand that foreign banks are expanding
debt capital into U.S. commercial real estate
at a faster rate than the top 350 U.S. banks
— another opportunity for CCIMs and other
CRE pros.
CHAPTER 7: HOW TO NAVIGATE THE
INDUSTRY IN 2020
It should be clear now that vectors are ap-
plicable to commercial real estate capital de-
ployment. CRE professionals should pause
and ask:
1. What direction will capital flow into
commercial real estate in 2020 (at
both the property type and MSA/
geographic levels)?
2. What volume of both debt and equi-
ty capital will flow into CRE?
Triangulating the data from the
sources cited in this report, the vectors
pointing toward capital sources for com-
mercial real estate focusing their efforts on
five areas in 2020:
Searching for viable assets given a
landscape that has a dearth of properties
for sale in 2020. Finding assets and portfo-
lios to list will intensify in 2020. Some relief
may come from completion of new construc-
tion, but the market is clustered around pri-
marily two property types — multifamily and
insurance, and deep-dive market analysis
savvy that can differentiate submarkets,
tenant, and lease-term trends, and assess the
impact of new construction.
Understanding that while CRE debt
capital is healthy today, risks are ahead.
CRE concentration in domestic banks is
back to pre-2009 financial crisis levels. With
community banks healthy and able to lend
more, now is the time to diversify your debt
lending relationships in case a lender in your
stable merges or pulls back due to its regula-
tor’s concerns over CRE concentration. Con-
sider the community bank landscape as a
diversification strategy from your large bank
lenders. Bank regulators may think they’ve
tackled “too big to fail,” but they have yet to
say “too big to merge.”
Incorporating housing affordability
as a cogent investment driver or deterrent
in all markets. Just as Amazon left the West
Coast for the East, Apple migrated to Texas
and Norfolk Southern Railroad announced
its headquarters will move to Atlanta. Hous-
ing affordability is as much a site selection
and asset investment consideration as work-
force availability and asset price.
Three letters: E-S-G. Environmen-
tal and social governance is permeating all
aspects of CRE investing. Knowing how
to factor in emerging local ordinances to
enhance building efficiency in markets
Top 5 Foreign Countries In U.S. Commercial Real Estate Loans
Multifamily
($Million) Construction/
Land
($Million) $49,842.3 $9,489.0 $9,012.7 $68,344.0 $64,454.1 6.0%
$16,410.9 $10,754.8 $4,181.8 $31,3347.4 $30,173.6 3.9%
Country Commercial
($Million)
Canada Spain Germany
Total
($Million)
June 30, 2019
Total
($Million)
June 30, 2018
YOY
Change
$20,591.2 $6.696.7 $2,951.2 $30,239.1 $27,474.9 10.1%
France $18,711.8 $1,946.7 $2,543.7 $23,202.2 $26,026.4 -10.9%
Japan $12,615.4 $6,880.4 $3,081.1 $22,576.9 $19,432.8 16.2%
industrial. Since it’s late in the economic cy-
cle, institutional and foreign debt and equity
capital sources will not move away from these
two property types.
Ensuring that assets, while fully
priced, are not over-priced. The New Year
will continue to be a sellers’ market — with a
scarcity of assets for sale, low interest rates,
and low cap rates. Having the investment
and comprehensive market analysis skills
to maximize net operating income — cou-
pled with the ability to coax institutional
investors out of their large-MSA bias that is
driven by late-cycle liquidity anxiety — will
be essential for success in 2020. Hone those
discounted cash flow analysis skills to identi-
fy operating expense savings from areas like
property tax appeals or rebidding property
26
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
like New York and Washington, D.C., is
critical to investment. A big unknown
remains how capital will migrate from or
toward intense ESG markets where capex
is more of a known into less ESG-intense
markets like Atlanta, Dallas, or other large
non-coastal MSAs less fixated on the rising
sea levels.
CHAPTER 8: WHY CRE INVESTORS
NEED A PLAN B IN 2020
There is no shortage of items keeping CRE in-
vestors awake at night. Some are uncontrolla-
ble; some can be mitigated to a certain degree
with strategy; and others are avoidable if your
vectors are properly calibrated. The uncon-
trollable factors that can’t be mitigated unless
one taps into money on the sidelines:
• The 2020 elections that may result
in reversing the tax and economic
policies currently in place;
• The Fed getting monetary policy
wrong and the market losing confi-
dence in the central bank; and
• Geopolitical items like Brexit (with
more capital leaving Europe for the
U.S.), and China trade.
Conversely, these items can be miti-
gated by altering capital and property mix or
tracking construction activity:
• Elevated CRE concentration in the
banks. It’s time to diversify your
lending relationships and capital
mix with a higher ratio of equity.
• GSE reform gaining traction after
2020 elections and impact on mul-
tifamily. Simply rotate into other
property type sectors like industrial,
medical office, and student housing.
• Overbuilding risk prevalent today
in self-storage with an emerging
concern for industrial. Monitor the
ratio of new construction activity
as a ratio of total existing inventory
and diversify out of those markets
where the ratio is above 2.5 to 3.5
percent of existing inventory.
• Capital migration from high-tax
states creating a fiscal crisis for
preferred foreign investment mar-
kets like New York, San Francisco,
and Chicago. Consider heading
south to low-tax, low-cost states
like Florida, Texas, the Carolinas,
Utah, Arizona, and re-emerging
parts of the Midwest like Indiana,
Ohio, and Michigan.
As with any data, it’s not about the
numbers as much as the story behind them.
The capital markets for commercial real es-
tate in 2020 will remain strong, but it will
take an added layer of sophistication on the
part of the CRE practitioner to stand out in
the crowd and enjoy success in the New Year.
K.C. Conway, MAI, CRE
CCIM Institute’s chief economist and
director of research and corporate
engagement at the Alabama Center for Real
Estate, housed in the Culverhouse College of
Business at the University of Alabama
Editor’s note:
This article was adapted from the 4Q19/1Q20
Commercial Real Estate Insights Report,
“Vector Calibration: 2020 Capital Markets,”
available at www.ccim.com/insights.
Listen to an in-depth interview with
Conway in a recent episode of CIRE podcast,
available on SoundCloud, iTunes, Spotify, or
any other major podcast platforms.
WINTER 2020