The Skinny on Class B, Tertiary Investing

MIAMI—David Lynn told us yesterday why cap rates may go lower in 2015. The CEO and co-founder of Everest High Income Property works in mixed-use, multifamily, retail, office, hotel, industrial, urban redevelopment, raw land and large-scale developments, and his diversity gives him a unique perspective.

GlobeSt.com caught up with Lynn to get his take on the lending environment for 2015, the investor appetite he sees in secondary and tertiary markets, and his thoughts on class B and C investments in part two of this exclusive interview. You can still read part one: Why Cap Rates May Go Lower.

GlobeSt.com: What are your predictions for the lending environment in 2015 and how will that impact commercial real estate investment strategies?

Lynn: Lenders have been doing well for five years—none of the dire predictions came true, and losses were not huge. Returns have been extraordinary. They will continue to become more comfortable with real estate, and local banks that were not in real estate for a while will be coming back into the market. 

Rates will remain low and competitive. I don't think the large amount of debt rolling over will be a problem. We have attained and even surpassed peak pricing in many major markets, so I think it will create more opportunity than problems. Lending standards are not lowered to any problematic level.

GlobeSt.com: Do you expect any movement toward secondary and even tertiary markets? Why or why not?

Lynn: Yes. Core markets have been the focus for the recent past, but there is more confidence now in secondary and tertiary markets. Expect recovery in more widespread geographic areas. 

If you have a good tenant with good credit, you're fine. So think beyond location—think locked-in long-term leases even with small tenants. As an example, investments in medical real estate could be anywhere because demand for healthcare services is anywhere. Many investors are looking beyond core markets now.   

GlobeSt.com: Do you expect any movement toward class B or class C properties? Why or why not?

Lynn: There is a shortage of class A buildings in many markets, so investors are likely to look at B or C buildings. Consider that for some buildings, they are classified as A because of their location, but the interiors don't measure up. 

Some tenants and investors, too, are willing to take a lesser interior for the location—there are some of those on Park Avenue in New York City, for example.  They don't meet the criteria of a class A building on all dimensions, but location is driving that class A classification.  

Not all investors will choose A in those circumstances. And public transit can help a B or C building gain in stature. Some more remote locations with good public transit available are now the more valuable sites.