Mark Avilla Avilla: “One of the issues I think we’re seeing in the cycle right now is that institutional investors are becoming very cautious.”

SAN DIEGO—Sellers’ assumptions about rents may not hold true, so buyers need to do their due diligence on each property’s rent potential, taking into account many factors, Cushman & Wakefield SVP Mark Avilla tells GlobeSt.com. Avilla recently joined C&W’s new private-client investment advisors team here, along with Peter Curry, Brooks Campbell and Duncan Todd. With more than 80 years of combined experience and a 10 year-history of closing 260 sale transactions totaling more than 6.1 million square feet and $1.5 billion in sales volume, the team specializes in investment sales under $20 million located in Southern California.

We spoke exclusively with Avilla about the strategies private clients are using to get ahead and what his team is advising them to do at this point in the cycle.

GlobeSt.com: What strategies are private clients are using to get ahead?

Avilla: There are really two different types of private clients: buyers and sellers. The buyers will have a lot of different strategies because not every buyer has the same angle, so it’s important for us to understand the buyer’s criteria. Private clients are very different from institutional folks, who are much more sophisticated buyers; private clients are either individuals or a group of individuals looking to put their money in real estate rather than the stock market where returns are low.

Some private clients may not understand real estate so well; they might do one or two deals a year and are not necessarily hands-on people. They might be better served to invest in triple-net-lease deals. We will work with the triple-net-investment people in our company and can transition them to that arena. It’s important to understand each person’s objective and what they’re looking to achieve.

By and large, big thing is treating these investors like you’re investing your own money, how you would look at a deal yourself—is it a good deal? Are the returns accurate? Are the assumptions that the seller and seller’s broker have made on rents realistic, can you push them for a better return or are they farfetched? The main thing is looking out for them and understanding their objectives.

On the sell side, it’s almost the reverse. We try to figure out how to maybe reposition an asset so that we can achieve more rent or better price down the line. We’re looking at the property from start to finish, understanding the process. We’re being realistic, but we’re also trying to push the assumption and also look at the deal and how to try and possibly reposition or attach value to it. Everybody on our team has a lot of leasing experience; I started as a leasing-transaction person, doing 100 deals a year. I have done 2,000 leases, and I understand—as does the rest of the team—how the mechanics of value are formed: through leasing, tenants’ makeup and the rents they’re paying. So, for sellers, it’s a matter of how can you reposition rents to push value?

GlobeSt.com: What are you advising your private clients to avoid doing right now?

Avilla: One of the issues I think we’re seeing in the cycle right now is that institutional investors are becoming very cautious. A lot of them were pursuing value-add deals, of which there were a lot in the market two to five years ago. But they have dried up, and we’re not seeing institutional investors in a lot of value-add deals now. The private-client group has filled that void. They’re looking typically at not more than $20 million to $30 million. They’re one-off transactions, not a portfolio.

We caution buyers to be very careful on the assumptions that sellers are putting in for rents. Things aren’t escalating now the way they were in the last two to three years. It’s customary for brokers to put 5% to 7% increases in rents or CPI growth rates for deals, but 3% growth is more traditional. Depending on the submarket, you have to be careful because there’s been a slowdown in rents last couple of years.

GlobeSt.com: As this cycle approaches its end, what is this group of investors considering investing in?

Avilla: It really depends on the buyer and the buyer’s profile. There are a lot of buyers that don’t like office, industrial or retail, so that is very buyer dependent. But I would say that it’s not necessarily changing due to the point in the cycle. Value-add stuff has kind of gone away, but there may still be ways to create value. I don’t think that the market, from a leasing standpoint, has necessarily reached the top; we’re still going to see an increase in rents in San Diego—it’s a great market to grow in—but people are just a little more cautious.

From the seller’s standpoint, it’s tough to sell non-core assets. You really have to look at the value in your own property and peel the onion back and find ways to create value. Some of that might be repositioning a standard office building into creative or converting flex space into a creative-office campus with amenities. Project amenities are a big focus for sellers and buyers.