Like many debt providers in the commercial real estate space, John Hofmann, commercial production team leader for KeyBank, sees a lot of money flooding the debt and equity markets.
“We see a lot of capital continue to come into the space,” Hofmann says.
Some of these groups on the equity side may be arriving in anticipation of inflation. They see real estate investment as a way to buffer their portfolios. “As you look at the headlines as of late, there have been inflationary concerns,” Hofmann says. “Real estate has been an incredible inflation hedge. So we see more demand there.”
During COVID, private buyers picked up more market share, according to a recent report from Marcus & Millichap. During the 12 months ending in March 2021, 55% percent of the dollars invested came from private buyers. M&M says this ratio is 300 basis points above where it was in 2019 before the health crisis.
However, Hofmann says a lot of institutional capital is still flowing into the space.
“In the preferred asset classes, cap rates continue to compress, and we see increased demand,” Hofmann says.
In the harder-hit asset classes, like retail, hotel, Hofmann says strong operators believe that there’s value compared to the other asset classes on a risk-adjusted basis. He sees deals being made that aren’t distressed and where the basis hasn’t reset.
“In retail and hotel, which grabbed most of the headlines, there are still a lot of regional assets underperforming,” Hofmann says.
But in other cases, retail flourished. “The grocery sector only did better in the COVID period,” Hofmann says. “People are focused on strong retailers in the right locations. Those are all of the things that you would have said pre-pandemic.”
Hofmann believes buyers are looking for more value in both the retail and hotel spaces right now. “As bank sponsors, we feel that our best operators can find value in all cycles,” he says. “When we see a deal come in from a sponsor, we’re looking at the asset, and we’re trusting that the sponsor has done the due diligence. We do the due diligence. And then really we really are banking on the operator’s expertise.”
Right now, those borrowers have a tremendous amount of debt options, including banks, life companies, CMBS lenders and debt funds, according to Hofmann.
“There is a lot of capital chasing the same deal,” Hofmann says. “So borrowers have more options.”
For lenders, that means they have to work harder to find opportunities. Often, a lender that can provide multiple options, including a balance sheet quote, a CMBS quote and an agency quote, can put themselves in a better position.
“When they’re able to come to one lender, see all those options and evaluate them, we see real value in that,” Hofmann says.
But not everyone is busy buying. Some groups are still working through issues that arose during the pandemic.
“There are certain firms that are still in asset management mode, understanding what they have and dealing with some problems from COVID,” Hofmann says.