Investment Experts: "The Search for Yields Continues"
NEW BRUNSWICK, N.J., Feb. 26, 2013 - The financial and investment vocabulary is peppered with new words - "fiscal cliff," "sequestration," and the like, said Michael Fasano of Marcus & Millichap. But Fasano, who moderated a general session at NAIOP New Jersey's "Federal Fiscal Update & Roundtables with Industry Experts" at the New Jersey Law Center, noted that one "old" word remains a constant: "Yield."
"The search for yields continues," said Drew DeWitt of JP Morgan Chase. And while real estate continues to be attractive (especially a growing factor in pension fund portfolios), not just in primary markets but secondary markets as well, "investors are looking for alternatives," he said. Among those alternatives: infrastructure and such exotic targets as wind farms.
"As the economy has strengthened, yields have reached pre-recession levels," said Michael Nachamkin of HFF. Secondary markets are "gaining traction," he agreed, with a great deal of interest in multifamily and industrial across the board. However, he termed retail as "challenging," and noted that office "is not so good." And in general, "there is too much capital chasing too few assets."
Because of the economic problems there, "European investors are coming to the U.S. for yields and cash flow," said DeWitt. In particular, European investors "are anxious to buy trophy product," added Nachamkin.
"Where does Corporate America fit into this," asked Fasano.
"We are seeing a lot of sale-leaseback action, and it's all credit-related," Nachamkin responded. "There are more corporate debt issues in the past 12 months than we've seen previously."
"Corporations are looking to remove items from their balance sheets," added DeWitt.
What's ahead? Panelists agreed that there is a risk of interest rates going up, questions about pricing and not enough product in general, and concern about the future of suburban office product. On the latter, panelists agreed that a lot of that space will never get leased, and much of it will get razed and redeveloped, "except for certain class A properties," Nachamkin said.
But on balance, there is optimism. "The market is way ahead of where it was a year ago," Nachamkin concluded. "Lenders are increasing the amount of capital they're putting out for debt, and the market has become increasingly competitive."
The general session was followed by roundtable discussions on a variety of topics, ranging from lease accounting standards, to financing and underwriting, business continuity and emergency preparedness, and environmental due diligence. The latter roundtable, titled "Due Diligence in the Post-SRRA World & LSRP Update," provided insight on a subject that is especially timely for commercial real estate in New Jersey.
SRRA, of course, is the Site Remediation Reform Act, promulgated in 2009 and mandatory in 2012. "The rules that now govern how site remediation investigations are done in this state have really changed the landscape," said Don Richardson of EWMA. "It has had an effect as to how due diligence is done.
"Due diligence is really dictated by liability protection needs, especially the environmental part of due diligence," Richardson said. He also noted that the Licensed Site Remediation Professionals (LSRP) program ushered in a new era in which those professionals are now "empowered to make regulatory-like decisions." Subsequent discussion within the group focused on whether LSRPs are required to report problems even at sites that they haven't been hired to oversee, with no clear answer.
But with that regulatory empowerment, "LSRPs are not entirely on our team anymore," said Marcie Horowitz of Cole Schotz Meisel Forman & Leonard. "Now, they mostly have to be on the team of public interest, upholding the statutes. But LSRPs can help move projects ahead faster than the New Jersey DEP, and many will benefit from that."
Indeed, "there has been an uptick in loading up the pipeline for projects," said Richardson, noting that provides a yardstick for a commercial real estate industry in recovery. "The pipeline is recovering from the doldrums of 2009-2010.
"We want deals to happen," he said, while cautioning that the due diligence process and having LSRPs involved "could be upsetting, especially with a buyer-driven environmental due diligence."
Attendance at the event earned Continuing Education Units (CEUs) now required by the State of New Jersey for the re-licensing of industrial professionals. "Membership in NAIOP New Jersey continues to provide opportunities to learn, to get involved, and get access to experts and the knowledge to do business in New Jersey," said Michael McGuinness, chief executive officer of NAIOP New Jersey.