With Tightening Margins, Focus is on Expenses
With cost increases during the last several years, property margins have decreased compared to prior years, bringing the focus to expenses and the right capital plan, Allison says in this EXCLUSIVE.
DALLAS—Investment management firm Admiral Capital Group’s Dallas office opened in October 2018 to address its growing real estate portfolio in the Southeast and the Southwest. The firm recently named Minnie Allison, formerly of Goldman Sachs, JP Morgan and Matthews Real Estate, as senior asset manager for the office.
Allison will be responsible for asset management of a portion of the firm’s $1.6 billion real estate portfolio. In this exclusive, she shared insights into the changing asset management industry, trends emerging in Dallas and the firm’s acquisition criteria.
GlobeSt.com: How has asset management changed during the last three to five years?
Allison: At all points in a cycle, managing expenses and capital budgets is important, but now with an abundance of capital chasing opportunities and a run-up in values, asset management is the key to creating value. Over the past seven to eight years, rent growth and cap rate compression provided coverage to underperforming assets, and in the current environment that is not likely to continue. With increases in operating, acquisition and construction costs over the last several years, property margins have decreased compared to prior years. As margins continue to tighten, the focus on expense savings and the right capital plan for each property is crucial.
Additionally, during the strong economic recovery, most office tenants were renewing or expanding. In later stages of a cycle, it is important to understand the health of each tenant and anticipate a more challenging leasing environment. Focusing on strong tenants with staying power and longer term leases to provide more durable cash flows in a downturn has become a primary focus. We understand that rent growth has been extraordinary in most markets and is not likely to continue.
Technology innovation and sustainability in the commercial real estate industry have been key drivers for creating value across properties for the last several years, and both will continue to be crucial in the performance of assets in the future.
GlobeSt.com: What is the current commercial real estate financial climate in Dallas and what trends are you are seeing?
Allison: Very strong job growth due to expansions and relocations, favorable business climate, tax incentives and reasonable cost of living. Admiral has been particularly focused on office and multifamily in the far north Dallas submarkets of Plano and Frisco. As a value investor, we primarily have been targeting assets that provide a value alternative to some of the newer supply to take a more defensive approach. Amenities at office and multifamily properties continue to improve and are necessary to continue to provide a high quality experience to attract and retain tenants.
On the other hand, Dallas has lower barriers to entry for development. We need to be very comfortable on basis as there is a large amount of capital focused on Dallas given the strong fundamentals, which continues to drive down cap rates.
In addition to the strong job growth, Dallas has a become a more diversified economy over time which should help provide stability during a potential slowdown.
GlobeSt.com: In terms of acquiring prime property in Dallas, what are the key fundamentals you look for?
Allison: Our focus is on assets that are well positioned if we hit a market slowdown. Some of the key fundamentals we focus on are the discount to replacement cost, barriers to entry, transportation and accessibility, retail amenities and quality of schools in the area. If an asset is in the pathway of growth and properly capitalized to weather a downturn, we believe we will be well positioned in the long run.
Given the availability of land in Dallas and the rapid growth further north, constantly monitoring supply and demand with a focus on basis remains critical.
At this point in the cycle, we have been selling many of the assets that we have repositioned and re-deploying capital defensively in markets and assets that are well positioned for a longer term hold with the property capital structure.