Investment Sales: Recession's After-Effects Are Still In Play
Positive Economic Signs and Availability of Capital Provide Optimism
By Eugene Diaz, Principal Partner
Prism Capital Partners, LLC
Uncertain capital flow for "in-between" deals, increased foreign investment money for big city properties, an increase in construction money, and signs of hope from the economy - those are some of the current trends in an investment sales market still impacted by the after-effects of an economic recession that "officially" ended nearly four years ago.
Those after-effects are playing out in an investment sales market that has not completely stabilized. After a surge in sales in 2011, for example, the market slowed a bit in the first quarter of 2012, and not necessarily because there is not a sufficient supply of capital. Rather, there has been a lack of quality supply to fuel transactions.
The analogy is that current supply is "two ends of the barbell," with nothing in the middle. There is either a strong desire for high-quality core, long-term stabilized assets on one end of the barbell, or absolute rock bottom pricing providing the basis for opportunistic, value-add transactions on the other. For now, there is very little capital in the market to appropriately price deals in the middle of the barbell - deals that may be value-add in nature, but involve an investor or operator who has to do something with the asset to generate a significant yield.
Put another way, those "in between" transactions currently providing little investment impetus are those that cannot guarantee long-term cash flow, or do not guarantee or have a significant opportunistic upside - mid and upper 20 percent returns or higher. For those transactions, investors have not put the risk on trade in terms of having confidence in the economy to carry those investments with any sort of underwrite-able certainty.
That said, and despite the ebbs and flows of the marketplace, the recent performance of the economy has indeed provided some hope and a sense of positive expectation. There has been moderate job hiring and employment gains, although that has not necessarily shown up in all of the statistics just yet.
But we are seeing a clear increase in activity, particularly among the small to mid-sized companies. One indication comes from the Bankers Association, which reports that those small to mid-sized companies are now beginning to access capital and that lenders are beginning to let capital flow to those non publicly traded enterprises.
That is indeed a change, because while many of those companies have continued to have very good balance sheets, it has been the large, multi-national public companies that for the past years have had sole, exclusive access to the capital markets.
One example of the increase in activity among banks that lend to those kind of groups is Sun Bank, based in Vineland, N.J. Sun, which has its Northern New Jersey business office in our company's office park, has been there for just three years and already has doubled their occupancy on the expectation that their middle market lending business is increasing dramatically.
In terms of other current investment market trends, foreign investor money has been extremely active - but only in the gateway cities. As far as the region's suburban markets, there is some interest in credit-based, long-term leasebacks - they'll play in that arena. But in general, the suburban markets are not attracting foreign capital.
Over and above the foreign money, the majority of capital currently in the market appears to be the commingled funds and institutional pension fund advisors. They are generally, of course, the same buyers that have always been here and after experiencing a long hiatus are coming back to market. More funds have been raised, they've been sitting on cash, the mandates are starting to come in, and they are becoming more active. We are, in fact, receiving calls from them and seeing more interest and competition when a quality transaction becomes available.
We are also seeing some construction money returning to the market, especially for multi-family product. As has been reported, there has been a significant increase in multi-family construction projects, driven in part by the REITs, as well as by private institutional capital. The industry just can't seem to build enough apartments to meet the current demand in a housing market that has seen a surging in rentals at the expense of home buying.
But overall, returning to the earlier analogy, there is still too little available product for investment money to be chasing at the ends of the "barbell." That overall trend, by the way, is impacting pricing positively. When a very attractive, high-quality, stabilized transaction does become available in this market, it will indeed be sold at aggressive pricing.
For the rest of the year and into 2013, the investment sales market forecast remains mixed. Trends in the overall economy will set the tone, and if pricing does remain aggressive, more opportunities will arise for the flow of money that has been sitting on the sidelines post-recession.