Investors are More Disciplined Than '06/'07

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LOS ANGELES—Leverage is much more conservative and lender options are more plentiful than they were before the recession, making for a healthier, more prudent investment environment, said speakers at RealShare Los Angeles last week. The “Investment Forecast” panel also said the use of equity is much higher today than it was pre-recession, and supply is in check.

When moderator Marc Renard, vice chairman and executive managing director, capital markets group, for Cushman & Wakefield, asked the panel to compare the investment environment between 2006/2007 and today in terms of discipline, Jonathan Klein, managing director of Fortress Investment Group Inc., said real estate has a reasonable use of leverage to mass investors. “Development is getting done on real long-market plays, but it's gotten very pricy.”

Jonathan Quicksilver, founding partner and managing principal for Walton Street Capital LLC, said, “The fundamentals are in good shape, and real estate returns don't seem out of whack compared to other types of investments. We are selling into enormous demand for core and core-plus assets, especially from overseas.”

Renard asked, “What is a value-add deal today?” and Quicksilver answered, “Managing the risk profile of investments. We have in the last six to 12 months been trying to buy yield in strip retail and hotel properties. If you buy good real estate in markets with a lot of liquidity, you should do well.”

Regarding whether risk is appropriately priced today as you go up the capital stack, Friedman said the 10-year Treasury is typically closer to 5%, but is now at 2%. The question of investing in Houston came up, and Quicksilver said, “If you look at Houston in the next 12 months, there will be some interesting investments there.”

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Kev Zoryan, managing director of Morgan Stanley Real Estate Investing, said the important factors in deploying capital are to get involved in situations where you provide solutions and have issues to fix and to be cognizant of the cycle or the environment. “Well-positioned, defensive assets with good capitalization are where you should be at this point in the cycle.”

Quicksilver said his firm is starting to see more multi-funds offered. “Our question is, do we have a pocket of capital for that fund? We will see more of this.”

Klein said his is seeing really aggressive asks out there and deals are closing, but Quicksilver said, “It's not the way things were in '06. There is discipline, but a healthy development demand. One worry is can you execute within the timeframe of the current cycle? Because there will be another cycle.”

Friedman said, “The appetite of investors isn't there to finance leverage upon leverage like in '06. Capitalization now is up to 75% of financing; anything above that is very opportunistic.”

Renard asked the panelists if they are getting the returns they need today, and Rich Kimble, senior director of TIAA-CREF Global Real Estate, said, “It varies. That's why we focus on industrial,” a sector that currently has strong returns.