LOS ANGELES-Commercial real estate markets have made progress, but unemployment, debt levels and other factors cloud the picture for recovery, according to speakers at the 2011 ICSC/LAMA Capital MarketPlace West Conference this week at the Skirball Cultural Center. The conference brought together capital providers and commercial property owners for an in-depth look at the state of the markets, their views on where the economy is heading and how economic factors will play out in the commercial real estate world.
Opening speaker Hessam Nadji, senior vice president and managing director of research and advisory services at Marcus & Millichap, outlined progress in the commercial real estate markets in what was a generally optimistic assessment of the industry’s prospects. Although Nadji pointed out that “we are still on shaky ground,” in terms of the economy, he said that there have nonetheless been significant improvements. “We have lived through major events. It’s no wonder we are dealing with what are dealing with,” Nadji said.
Nadji explained that the economy cannot expect to add jobs when it grows at less than 2%. “Companies have gotten a lot tighter and more efficient,” he said, “so there is a structural shift in the economy.” Lowering US debt levels will have significant long-term ramifications, he said. “We have this mountain of debt that we are dealing with. Deleveraging will take time.”
Nadji cited a number of positive developments that he said are sometimes overlooked in assessments of the US economy. Retail sales, for example, have recovered from their “dramatic drop.” Retail is sitting on a relatively good footing, he said. He also discussed retail online sales, and the pressure they put on stores, a sentiment echoed from the ICSC Western Division conference held a few weeks ago in San Diego. “Some people have called Best Buy the showroom for Amazon.com. But even with this change in the retail business, we have seen in store sales come back strong,” Nadji said.
According to Nadji, apartments are the only sector that is in a full-fledged recovery. Industrial is second to follow. And in terms of investment sales, “we have seen the market come back pretty rapidly,” he said.
In terms of jobs, Nadji expects employment growth to regain momentum in 2012—even if it is just catching up to the long-term average. “I don’t think there will be a job surge,” he said, “but based on very conservative modeling, we should add about 2.7 million jobs next year.”
A couple favorable factors behind his long-term economic and real estate outlook include demographics,” which he said is “a huge positive.” In addition, he said that cap rate interest rate spread is sending the ‘buy’ signal. “There is a rare opportunity to lock in interest rates.”
During an equity provider panel titled “The Ins & Outs of Structured Finance,” moderator Gary Tenzer, principal and managing director of George Smith Partners’ Los Angeles office, talked about how senior financing is back, but said that so are the tools of structured finance. When Tenzer asked panelists how they prefer to get introduced to an opportunity, the overwhelming majority pointed to “relationships” and establishing a system where deals come in through long-term relationships on the brokerage side and the banking side.
“Relationships have been efficient for us. We are out trying to establish relationships with quality partners,” said panelist Christopher Winnen, senior vice president of Blue Vista Capital Partners of Chicago. “Over the last cycle, we have seen that the best partners we have had are ultimately the deals that perform the best.”
According to Jonathan Lotter, a managing partner with Appian Capital of Larkspur, CA, his company is spending substantial time on the front end to form those relationships and partnerships. “Our whole philosophy is about finding a partner. It is about finding folks with boots on the ground and expertise within where they are,” Lotter said. Lotter said that value-add and opportunistic business plans interest Appian Capital. “We don’t focus on a property type per se. It is more the business plan.”
Urdang Capital Management, too, is very relationship-driven. And according to Jeffrey Reder, the Newport Beach, CA-based senior vice president of acquisitions, he would prefer to have those relationships in advance to doing a deal. “If you are seeing some deals before the first one we do together, we want to meet up earlier so that when we find the deal that make sense, we can react quickly,” he said.
Most of the panelists said they have been working on deals in all sectors. Scott Chisholm, managing director of Redwood Trust of Mill Valley, CA, said that his company has been closing deals from “all the major food groups,” but has really liked multifamily deals. “We have a pretty big range of folks we are looking to do business with,” he said.
For Reder, the deals they are looking for really depend on the story. But he did say that Urdang Capital Management has been doing a lot of office and retail. And according to Blue Vista Capital Partners’ Winnen, instead of choosing a deal based on property type, his company looks at the deal to see if it makes sense on a macro level.
Christopher Simon, managing director of West Coast Origination at Pembrook Group of Los Angeles, pointed out that his company feels better about putting the money in core markets.
On a panel moderated by Guy Johnson, president and CEO of Johnson Capital of Irvine, CA, leaders from across the lending spectrum talked about their preferences. Prudential Mortgage Capital Co.’s Marcia Diaz, managing director in the L.A. office, said that “Given where spreads are relative to other fixed investments, our company is doing well. It is the first time in a while we have been able to win some apartment business.”
For John Loshbaugh, associate director of Freddie Mac of Los Angeles, “Things are very busy agency-wide.” Loshbaugh said that the agency has no limitations on the volume that is done. “It is really about finding the right deals to execute,” he said.
Alan Flat, director of Bank of America Merrill-Lynch out of Irvine, CA, said that the only limitation he sees is “finding transactions.”