Many of you may not know about NAIOP’s Forums. NAIOP National Forums are special interest groups for NAIOP members that provide an opportunity for exclusive networking and experience exchange with peers. Examples of some of the forums include Capital Markets, Sustainable Development, Urban Redevelopment, Investment Management, and Marketing and Leasing. For a complete list of Forums or for more information, go to NAIOP National Forums link.
Board member and Developing Leader Lyle Landowski of Inland Companies just returned from the Forums Conference in Miami. Read below about his experience on the newly created Developing Leader Forum.
Developing Leader Forum – Miami, FL
April 25-26, 2012
On April 25 and 26th I attended my second national Developing Leader Forum meeting, which is comprised of about 23 members throughout the country. The forum format is guided by member presentations followed by dialogue across markets and disciplines. We also have several guest speakers including nationally recognized developers, economists and lobbyists. I have highlighted the trends and topics that were most discussed in our forum.
National Real Estate Trends
Trend – In the best primary markets (e.g. Manhattan), real estate values are higher today than they were in 2007.
Commentary – What makes this trend particularly interesting is the driver behind it. Pre 2007 values were driven primarily by the economy and job growth. Today the driver is mainly real estate investment and the incredible amount of capital chasing core assets in primary markets. (Some of this can be accounted for by the irrational behavior of some REITs, which operate on a “use it or lose it” mentality when it comes to capital.) This has led many REITs and private investors to shift their focus to tertiary markets and other asset classes where they can underwrite higher yields (part of this strategy is a bet on the return of the CMBS market as an exit strategy). Yet other investors/developers without “constrained capital” are turning to spec buildings where there is still little competition.
Trend – The Fannie and Freddie effect.
Commentary – More and more economists and investors are growing weary of what they call the Fannie and Freddie effect. The main concern is that Fannie and Freddie, which account for approximately 60% of the apartment financing market, are lending based on treasury rates instead of real estate fundamentals. By essentially offering free rates, they are hijacking loans from banks.
Trend – There is a migration to the CBD nationwide, with very few exceptions.
Commentary – This appears to be a very real trend and was reinforced in each represented market in our forum (with the exception of Dallas). This is forcing some investors to alter their investment strategies, and developers to reinvent themselves. Class A office vacancies are 10% or less in most CBD’s.
Trend – There is a growing polarity in valuation between Class A and class B office properties.
Commentary – While institutional Class A assets are commanding record high prices, class B assets in many markets are seeing values decline significantly. Many real estate investors nationwide have divested of their office product entirely in favor of multi-family and/or industrial. One economist essentially reduced office investments (entirely) to a “timing play”. Yet the flight from office by many investors has created opportunity for savvy value-add investors.
Trend – Green is here to stay.
Commentary – Several of the developers are delivering new Green (and in most cases LEED) facilities – apartments, offices and industrial. That said, most still complain about the process and cost, particularly in industrial where they feel the requirements are not aligned well to the property class.
Trend – Economic growth is primarily coming from two sectors, Energy and Tech.
Commentary – Houston has been a huge benefactor of the growth in energy, but they are not the only one. Oil companies are out buying real estate in several regions of the country. On the Tech side, Apple, Google, Amazon and others are expanding their footprint throughout the country.
Trend – Incentives are a plenty.
Commentary – As states and municipalities vie for economic growth they have becoming increasingly aggressive in the incentives they offer. Companies like Amazon and Google are taking advantage of this as they build data and distribution centers throughout the country.
Question – How many national lobbyists are there for commercial real estate, and how does this compare to some other large industries (e.g. Pharmaceutical, Insurance, Utilities)?
Answer – Commercial real estate has 457 national lobbyists, compared to 1,183 for Pharmaceuticals, 919 for insurance and 891 for utilities. (Source: opensecrets.org)
My favorite quotes came from a highly successful developer/investor in the Atlanta area. First, in describing his attempt to start his own real estate firm earlier in his career, he commented:
“I confused understanding the process with ability to do it.”
In describing his most recent acquisition he corrected our terminology in regard to his vacant building, quipping:
“I prefer to say it is unencumbered by tenancy.”