At the 2013 Mortgage Bankers Association CREF/Multifamily Housing Conference, David Durning, president and CEO of Prudential Mortgage Capital Co., explains Prudential’s targets for balance sheet, Fannie Mae, Freddie Mac and FHA, CMBS and bridge financing for 2013.

Kohlberg Kravis Roberts & Co. has been setting its sights on seniors housing recently. In February, it invested $150 million in Sentio Healthcare Properties Inc., a two- to three-year investment that will help the Orlando-based REIT expand its portfolio of seniors housing and medical offices and facilities. In mid-September, it teamed up with Beecken Petty O’Keefe & Co. and Coastwood Senior Housing Partners to purchase Sunrise Senior Living’s management company component for $130 million. The company has contracts for nearly 300 communities, leasehold interests in 15 communities and 12 development parcels.

But KKR is hardly focused on seniors housing. Since hiring Ralph Rosenberg, a former Goldman Sachs partner with more than 25 years in the real estate industry, to lead its global real estate efforts in March 2011, it has invested in properties ranging from a suburban Chicago shopping mall to a Kansas City outlet center, a multi-family development in North Dakota to a business park in Texas and a Pittsburgh office building—and, of course, those seniors housing and healthcare facilities.

While the company has made many investments in commercial real estate businesses, platforms and properties over the years, Rosenberg’s arrival marked the first time the global investment firm had established a dedicated real estate group. Since then, the team has committed approximately $600 million to 10 transactions, with about $300 million of that invested to date.

The investment firm seeks to partner with real estate owners, lenders, operators and developers, according to Rosenberg, a KKR managing director, providing such flexible capital solutions as outright ownership of assets, companies and platforms or investments in private and public real estate securities “up and down the capital structure.” They may include equity, debt, mezzanine or other types of infusions.

Retail, healthcare and hospitality investments are all natural extensions of KKR’s private equity franchise, Rosenberg said. “We have to believe that our industry expertise or trends we are seeing provide us unique insight to be able to improve the asset.”

“Everyone and their brothers are trying to fight for assets in New York City. Where they’re playing, they have the ability to play alone and get some really attractive deals,” noted Dan Fasulo, managing director of Real Capital Analytics Inc. “They’ll go where the deals are, and I don’t think they’re going to discriminate over geography or sector.”

So far, KKR has not established a third-party fund like its competitors Blackstone or Carlyle Group, instead using its own balance sheet to pay for the real estate deals. Fasulo said KKR may eventually create a real estate fund if these first investments perform well. Rosenberg would only say that the team has access to “multiple pools of capital to be able to execute on opportunities we are seeing.”

The real estate team includes 11 people in the U.S. and Europe and numerous other KKR professionals in Asia searching for opportunities. It has already uncovered some deals in China, so far committing approximately $150 million to two strategic joint ventures to build entry-level to middle-income for-sale apartments in China, one with Sino Ocean and the other with Poly, Rosenberg said. In Europe, the group has purchased a joint-control position in a mezzanine debt instrument for Queens Moat Housing, a private hospitality company.

The first deal publicly announced by the real estate group came in April 2012, when KKR partnered with YTC Pacific to buy Yorktown Center, a 1.5 million-square-foot suburban Chicago shopping center, for $196 million. YTC Pacific manages the mall, which is undergoing approximately $30 million in upgrades.
The group tapped into the hot Houston market in late September, when it partnered with Hines and Pinto Realty Partners to develop a 971-acre business park. And in November it said it was answering the need for housing in Williston, N.D., one of the fastest-growing cities in the United States because of the surge in oil and natural gas drilling. KKR Financial Holdings, along with co-investors Pfeffer Capital and CP Realty, acquired 164 acres to build The Ridge at Harvest Hills, which will include 330 apartments and 500 single-family lots. 

KKR is buying the Legends Outlet Center Kansas City for $131.5 million with joint venture partner RED Legacy, which will own 5 percent and manage the 658,453-square-foot outlet center, according to Real Capital Analytics. Rosenberg told Bloomberg Businessweek it intends to invest $40 million and borrow the remainder.
The Del Monte Center, a 270,619-square-foot office building near Pittsburgh’s two sports stadiums, is also part of the portfolio. The firm purchased the headquarters of Del Monte Foods Co. from Continental Real Estate Cos. in February on behalf of the Pittsburgh Steelers and Pirates for $52.5 million, RCA reported.

Expect more to come. Rosenfeld said that he and the KKR leadership team felt the time was right to create a dedicated real estate unit to capitalize on opportunities emerging from the financial crisis.

“Trillions of dollars of real estate loans will be maturing over the coming years, and it will be difficult to refinance them in the traditional debt markets,” he said. “Property owners will require significant new capital to deleverage and to improve and re-tenant assets. We believe that this large capital need, coupled with the inefficient and local nature of private real estate markets, will create dislocation and attractive opportunities for investors with real estate expertise and capital markets savvy.”

By Eliza Theiss, Associate Editor

“We believe in the long-term growth story. We don’t believe there’s going to be a hard landing in China,” declared Stuart Grant, senior managing director & head of real estate asset management for Asia-Pacific at The Blackstone Group. Grant spoke during the “Mastermind Asia” panel at the MIPIM world property market in March. That optimism and belief in the Chinese market, especially as a prospective area for long-term investment, was echoed throughout the four-day international property conference and trade show.

In fact, Reed MIDEM, the organizing body behind MIPIM and MIPIM Asia, itself expressed optimism in announcing there will be a special China-centric event, dubbed MIPIM China, starting in 2014.

It’s not hard to see why China is touted as the promised land for real estate development and investment, especially if its market indicators are compared to those of the United States or the Euro zone. Europe has an estimated 19 million unemployed, a negative growth rate and countries struggling to lift themselves from recession—if not to prevent going completely over the cliff, as in the case of France. The U.S. picture is better, but its estimated 125 percent growth over the past decade pales in comparison to China’s 325 percent.

In fact, the country’s 1.34 billion population and US$8 trillion GDP (in 2012) make it the second-largest global economy after the United States, a position it reached in a matter of years.  The speed of its rise is breathtaking: Five years ago, Beijing International Airport barely breached the global top 10 chart; it now threatens to overtake leader Atlanta International Airport. And even though the explosive growth of the country is expected to cool off some, it is still predicted to present satisfying growth numbers.

Three major trends currently characterize the country, all of them likely to persist: the rise of the middle class, continued rapid urbanization (about 50 percent of Chinese now live in urban areas) and an increase in consumption and decrease in export of China-produced goods.

Of course, China continues to be known for its challenges, including a highly politicized investment environment and a local culture sometimes quite different from the western business status quo, further complicated by the fact that it is racing through motions other markets had decades to pursue. Veterans of the Chinese real estate arena, such as Hampton Hoerter China President Bromm Cole, stress the importance of knowing the local investment and political environments, staying on top of the rapidly changing local culture and having the right local partner.  A strong, trustworthy, transparent local partner is particularly important, stressed Grant. With ever-changing legislation controlling the market, and many areas of investment still off limits to foreign investors, such a partner from the highly competitive local pool of real estate players can make all the difference.

Land availability presents another challenge. Thanks to massive inland sprawls unfit for development, urban development is largely limited to the coastal regions. Where urban growth is possible, however, it reaches a scale that is hard to imagine. The megacities of Guangzhou, Shanghai and Beijing are booming, and a vast and expanding network of bullet trains is joining together second- and third-tier cities that would pass as tier one in most parts of the world. According to Cushman & Wakefield Inc. estimates, by 2025 China will have 200 cities with populations in excess of one million, and 15 of them will become megacities with an urban populations above the 25 million mark. And 350 million new urban residents will require five million new buildings, roughly translating to 40 billion square feet of new built space.

That would seem to diminish risk from a market bubble, and panelists speaking on the session China – Asia’s Destiny were not concerned it would burst and cause a repeat of the United States in 2008. Their consensus was that while a market bubble does exist, it is controlled. “China cannot risk an Arab spring” was one of the assurances given regarding the nation’s economic and market growth, although the panelists also cautioned that the Chinese government will need to keep the market and economy growing, control poverty and promote the rise of the middle class.

Picking Properties

Opportunities exist in a variety of property sectors—some less obvious than others. With a middle class whose economic potency is on the rise both in the immediate future and for the long haul, those directly connected to consumer habits offer real potential, including both retail and the logistics-related properties needed to support it. Some dismiss a need for shopping malls and retail centers in China, but with the ratio of shopping malls to population quite low compared to that in the United States, there is plenty of room for growth. Furthermore, Western brands, common throughout Europe and the United States, are still expanding in China.

China’s growing middle class also has a voracious appetite for housing, a severely underserved market primed for investment. With millions flocking to dense urban areas every year, the need for housing is acute. In many areas, “if we build it, they will come” becomes “we must build it; they are here.” And urban transplants aren’t the only ones driving demand; it is also coming from upgraders—households that have reached new financial potency but cannot move to bigger, higher-end residences due to a market shortage.

Still other potential lies in the hot new market for seniors housing. One of the consequences of China’s lightning-fast economic growth is the clash between cultures, generations and the economy. While a strong stigma persists against checking older family members into nursing homes, the traditional Chinese culture of the younger generation caring for its elders within the family core is rapidly becoming logistically unattainable. One of the main reasons is the accelerated migration of the young generation into the densely populated cities. The other is the artificially inflated senior demographic due to the decades-long one-child policy. Currently, this demographic represents 20 percent of the population, which has led to a 4-2-1 family structure: Each child potentially has to care for two parents and four grandparents, a ratio that doubles in the case of couples. With the precariously low number of government-run senior homes looking and functioning like the 1950s American nursing homes and some of the new projects handled by local developers that were squeezed out of the multi-family arena and lack the know-how to make these properties successful—not to mention a reinterpretation of what caring and honoring elders means—there is plenty of potential in this sector.

Some failed developments do exist, Grant affirmed, but the stories of China’s ghost towns—those developed in recent years but uninhabited—are “a bit overblown” and located mostly in inland China, far from other settlements and opportunities. “In Asia,” Grant added, “there’s a big difference between headlines—and especially Western (outlets’) headlines—and the reality on the ground.” And China’s urbanization is favoring a move toward higher-quality development and longer -term investment. Having moved from an opportunistic to an emerging market in only a few years, it now even has pockets of core assets, such as SAR Hong Kong, which is so dynamic it is developing a second CBD: Kowloon East. Change is also happening on the regulatory front, with new title legislation under consideration.

China is changing in its approach to growth. And with a market of its immense size, that is likely to breed further change. After all, when China shifts, all other Asian markets shift, as well.

Further coverage of MIPIM:

And the MIPIM 2013 Awards Go To …

MIPIM Special Report: Global Healthcare, Seniors Housing Dynamics
MIPIM Special Report: Innovation, Reinvention, Communication: Keys to Inner City (Re)Development

MIPIM Special Report: $460M Beirut Terraces Possible First Lebanese Global Award Winner

David Rubenstein of The Carlyle Group speaks of housing being the most prolific CRE investment.

Despite construction costs on the rise and financing still not being up to par to pre-Great Recession times, real estate is still the soundest investment of today and tomorrow, according to commercial real estate high rollers who spoke at Pension Real Estate Association’s 2013 Spring Conference in Washington, D.C.

“Real estate is a great investment, if you have real estate expectations, it’ll raise returns,” said David Rubenstein, chairman & founder of The Carlyle Group during the earlier part of the first part of the two-day conference taking place March 14-15. “Real estate does not appreciate at 20 percent a year, but if you love to touch and feel the asset and you want something that has some stability to it and you’re happy with the rate return that is realistic, at about 15 percent, I think real estate is universally good to invest in.”

As for which category of commercial real estate is best to put your money in going forward — housing still takes the cake. There is a perceived shortage of housing in the United States today, as no new development has gone up the last couple of years, and yet the population continues to drastically grow, to 315 million in 2013, up by 2.2 million from the year 2010, according to the Census Bureau, which predicts that number to increase to 400 million by 2050.

“Apartments have the lowest lease structure, but also have the lowest cap rates and low cap rates are very important,” said Ken Rosen, chairman of Rosen Consulting Group, a real estate market research firm, and one of the three conference co-chairs, adding that low interest rates are very positive for those struggling to get credit.

During the Multi-Family Investment session portion, Mike Kirby, chairman & director of Research at Green Street Advisors agreed that “household formation is perking up,” and job growth numbers are encouraging, adding to the fact that apartment demand will remain strong.

According to panelists, the dream of home ownership has not gone, but simply slowed down, as rent growth has peaked. The average apartment rent increased by 4.1 percent in 2012, and is predicted to increase by 4.6 percent this year, according to National Association of Realtors’ fourth-quarter report.

Ken Rosen brought up the latest Fannie Mae Monthly National Housing Survey, which reflects that “people under the age of 35 don’t have their lives settled yet.” Many of them cannot afford putting down a downpayment on a house or a condo, because generation X and Y are stricken with the burden of student debt.

There is hope yet for the U.S. RE market.

“They don’t think it’s a good investment, they have a dream, but there’s restraint,” Rosen added.

While multi-family investment was the highlight topic during all of the panels, the subject of student and seniors housing was glazed over as well. According to Kirby, student housing has especially been a profitable business, especially for American Campus Communities.

“Lots of people have kids in college and the places they live in are run down, lots of these places are getting replaced,” he added.

Similarly, the senior sector is seen as generating “excellent growth” while supply remains fairly low.

During the Urban Investment session, panelists differentiated between Manhattan and the rest of the world,” only mentioning San Francisco as a possible contender for an urban high yield investment.

“Although society reflects a desire to stay urban … there are few places where urban investment works,” said Jeff Blau, CEO of Related Cos. “The wealth is there, but there’s not enough population, it gets limited quick.”

Panelists gave most credit of their successful urban investments to luck and to Mayor Bloomberg for being development-friendly, overhauling zoning and planning rules to allow New York skyscrapers to soar. Most recently, under Bloomberg’s push, the Department of City Planning proposed a zoning strategy for 78 blocks of the East Midtown office area centered around Grand Central Terminal and generally located between Fifth and Second/Third avenues, and East 57th and East 39th streets with Park Avenue as its center, according to DCP’s website. Despite Bloomberg’s run coming to an end and a New York’s mayoral election around the corner, the real estate moguls remain positive about the future of urban investment.

“There won’t be another mayor like Mr. Bloomberg, but we’re hopeful the next person won’t take us backwards,” said Michael Fascitelli, president & CEO of Vornado Realty Trust, clarifying that he hasn’t officially retired just yet.

While economy and politics were the highlight topics at the conference, and several voiced concerns over investing less during hard times, and appropriately for being in the country’s capital, took pot shots at the government, calling it “an easy target,” the majority remain hopeful about CRE’s future, seeing the country three fourths into recovery mode now, and out of the recession, reflective of the recent spike in job growth, nearly 200,000 jobs were created in February, according to ADP.

“Interestingly that as things as the sequester started getting on the horizon, and all the craziness that goes on down here (referring to Washington, D.C.), the private sector actually picked up the pace,” said Rosen, adding that “the fed will be late to the party, behind the curve, but once they get in, it’ll get done,” referring to government’s role in economic recovery.

From left: Stéphane Pinchon, managing partner, Your Care Consult, Mel Gamzon, president, Senior Housing Global Advisors; Guillaume Truong, head of investments – healthcare real estate, GECINA; Bromme Cole, president, Hampton Hoerter China

By Eliza Theiss, Associate Editor

With social, economical and demographic shifts occurring all around the world, the question of healthcare and elderly care is becoming more and more of an issue as well as an investment opportunity. And with the unavoidability of aging and necessity of healthcare there is a massive opportunity for growth and expansion for the real estate industry, as well as significant risks. To address the issue, MIPIM 2013’s brought together specialists from three of the largest markets: the United States, China and Europe.

“Nearly nine percent of the world’s GDP is spent on healthcare,” observed  Pichon Stéphane, managing partner for Your Care Consult and the panel’s moderator.  That 8.8 percent, however,  is very much an average. Healthcare spending varies greatly across the globe; North America unsurprisingly leads the list, with 14.5 percent of its GDP going toward healthcare expenditures, Europe’s more prosperous West and North regions spend around 10 percent, the Middle East spends 5.1 percent and Asia spends 7.3 percent.  Whatever the region and  spending pattern, though, the healthcare industry offers growth potential worldwide.

China’s one-child policy, for example, has created the 4-2-1 family structure: four grandparents, two parents, one child. That translates into one caretaker per six people, which puts significant strain on the youngest generation. While the one-child policy has drastically reduced births and artificially created an elderly demographic that is set to soon outnumber the entire population of the U.S., the continuous economic growth has  shaped the young generation into a mindset very similar to their Western counterparts. In a nutshell, young people don’t want children.  And if they do, they delay starting a family.

This impacts the senior housing industry heavily in China. Even though Chinese social conventions hold children responsible for their elders’ care, the young middle class today either cannot take charge of their elders or prefers not to. Bromme Cole, president of Hampton Hoerter China, sees this as an opportunity, since with shifting values, taking care of elders can also start to mean housing them in high-end senior living facilities. These properties are designed for this specific purpose, by developers that have the know-how, rather than players that were forced out of the general multifamily industry. The potential for growth in China is vast, assuming the government refrains from imposing harmful, non-market oriented policies. Cole also predicts that prospects for “value-add” or distressed acquisitions will likely dominate China’s senior living landscape.

And while the senior housing industry is in its infancy in China, the U.S. senior housing industry has grown to a $275 billion business in the past 30 years and is expected to keep growing.  Between 2025 and 2030 the current yearly growth of 18,000 new senior housing units could skyrocket to 77,000 and 82,000 annually.

The senior industry was put on the map by specialized health care REITs that now  occupy three of the top ten REIT slots in the U.S. Furthermore, said Mel Gamzon, president of Senior Housing Global Advisors, during “the five recession years, senior (housing) outperformed all other markets.“ He also predicted that value-add properties are the next logical target for investors because the supply of available Class A senior living assets is running out. Gamzon also emphasizes the necessity of creating mixed-use, inter-generational projects, so as not to cut off the elderly population from the rest of the community, as well as creating independent living communities where residents can focus on preventive health, fitness and wellness.

Kohlberg Kravis Roberts & Co. L.P. is providing $150 million of equity to Sentio Healthcare Properties, Inc., a REIT that invests in senior housing and medical facilities, to help it grow its portfolio.

Both firms said an affiliate of global investment firm KKR will invest with Sentio’s current shareholders in the Orlando, Fla.-based REIT over the next two to three years. The proceeds will be used for acquisitions. KKR is Sentio’s largest equity partner to date.

“We are very excited to have an industry leader like KKR as a long-term partner who can help us access new opportunities through its vast network of relationships,” John Mark Ramsey, Sentio president and CEO, said in a prepared statement. “We believe KKR’s financial commitment and real estate and capital markets capabilities will complement Sentio’s industry expertise to help us drive meaningful shareholder value in the coming years.”

Founded in 2006, Sentio owns 20 health-care related assets in at least 10 states. Fifteen are senior housing, including independent living, assisted living and skilled nursing facilities. The remaining breakdown is two medical offices – Physicians Centre in Bryan, Texas, and Hedgcoxe Health Plaza, in Plano, Texas – and three specialty medical facilities such as in-patient rehabilitation and long-term acute care hospitals. Some of the assets are triple-net leased properties.

The REIT’s most recent acquisition occurred in September, when Sentio acquired a portfolio with four assisted living facilities for $49 million in a joint venture with JEA Senior Living. The portfolio had a total of 130,800 square feet, 264 beds and 152 units. All of the facilities are for residents with Alzheimer’s’ or other memory ailments. Three of the four properties are in Illinois – Springfield, Urbana and Normal – the remaining site is in Bryan, Texas.

Sentio currently owns assets in Texas, Florida, Indiana, South Carolina, Tennessee, Ohio, Pennsylvania, New Hampshire, Illinois, Georgia and Colorado but is looking to expand to other states and regions.

This is not KKR’s first investment in the senior housing sector. In September, the global investment firm agreed to team up with Beecken Petty O’Keefe & Co. and Coastwood Senior Housing Partners to purchase Sunrise Senior Living’s management company component for $130 million.  The management company has contracts covering 282 communities, leasehold interests in 15 communities and 12 development parcels, according to a September KKR press release. The acquisition is expected to close this quarter.

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MBA President & CEO David Stevens

The low-interest-rate environment is driving the demand for relatively higher-yielding commercial real estate loans, and the commercial real estate financing industry cautiously greeted the rapid return of liquidity into the sector during the Mortgage Bankers Association’s (MBA) 2013 Commercial Real Estate Finance/Multifamily Housing Convention & Expo. The exposition opened on Monday with a record attendance level of about 2,600.

“As the year begins, we can see positive momentum,” said Debra W. Still, 2013 MBA chairman, at the opening session. “Commercial and multi-family real estate finance has enjoyed a relative calm amidst the storm.” Still, she noted favorable conditions for both financing and commercial real estate–interest rates are lower than ever before, and yields and cap rates remain attractive relative to those of other investments. “Multi-family markets have arguably never been stronger, and office and retail markets offer plenty of upside.” Still cited, however, challenges to the commercial property sector including the European sovereign crisis and federal deficit, and she referred to the current “artificially low” interest rates.

“You feel good about the business environment, and you should,” said David Stevens, MBA president and CEO, in addressing attendees during the opening session. Stevens said that delinquencies are at the lowest level since 2009, the $2.4 trillion in mortgage outstanding is increasing, and CMBS issuance is expected to grow this year to $65 billion from $45 billion last year. “This really reflects the demand and recovery on the private capital side.” Life insurance companies and banks, meanwhile, are also looking to retain mortgages, he said.

On the other hand, although the low interest rates provide many benefits, Stevens said, capital is struggling to obtain concurrently desirable yield levels and asset quality in the low-yield environment.

One fear among market participants is that debt investors’ bid for the relatively higher returns offered by commercial property could lead to lower underwriting standards and a weakened CMBS sector—all too soon–as lenders compete for the same deals.

Debt investor groups across the board are generally said to be increasing their appetites for commercial loans this year. CMBS and bank financing has returned to the market, while life insurance companies and the GSEs are expected by many industry players to maintain if not increase the dollar amounts of their financings in 2013. Fannie Mae closed 2012 with $33.8 billion in multi-family financings, while Freddie Mac announced $28.8 billion in new multi-family volume for the same year.

A key driver of increased liquidity for the overall commercial property sector has been the recovery in demand among investors for CMBS. “Sustained bond market rally in the second half of 2012 has helped drive down funding costs, enabling CMBS lenders to reduce rates charged to borrowers,” stated Jones Lang LaSalle in a press release.

In the session “The Search for Yield,” moderator E.J. Burke, executive vice president and group head of KeyBank Real Estate Capital, commented that it appears “there is far more capital chasing for a home than there are good deals.”

“A lot of this has come back too quickly. We are concerned about how fast things have moved in terms of risk tolerances,” said Kevin Riordan, president, CEO and director of CreXus Investment Group. “I can’t answer if $100 billion is a normal market [for CMBS financing], but I think we are getting there too quickly.” Riordan also said that the “creep” over time of lenders institutions to the secondary market has already turned into a “herd.”

Life companies are still under-allocated to the multi-family sector in the billions, estimated Brian Casey, managing director and head of real estate debt strategies of MetLife Inc., in responding to a question about how much financing life companies would execute under ideal circumstances.

And Diana Reid, executive vice president of PNC Real Estate, said that banks have resolved their balance sheet issues and become more competitive in multi-family construction financing in the fourth quarter. As a result “there are more lenders looking for the same deals,” she said. Still, pricing, rather than recourse, remains the point of competition.

There were also questions raised about the self-regulation of CMBS and whether B-piece buyers are holding onto the risks rather than selling them. “I do not believe we are at CMBS 2.0,” said Reid, referring to the new, safer regime of CMBS that will prevent a repeat of 2007. Reid noted the Dodd-Frank risk retention regulations are yet to be released.

MBA announced this week that it forecasts commercial multi-family mortgage originations to increase by 11 percent to $254 billion in 2013 from 2012. Commercial and multi-family mortgage originations jumped by 49 percent in the fourth quarter compared to the same quarter in 2012.

By investor type, the dollar volume of loans in the fourth quarter of 2011 compared to the same period in 2011 rose by 228 percent for CMBS, 68 percent for commercial bank portfolio loans, 51 percent for GSEs and 18 percent for life insurance companies. For the entire year, originations in 2012 rose by 24 percent, MBA reported.

JLL said it expects capital availability to drive transaction volume increases of 15 to 20 percent in 2013. “Competition for core product is opening up attractive opportunities for borrowers,” it stated, and that JLL’s capital markets experts are “seeing a variety of aggressive debt structures,” on core products such as debt yields between 8 and 10 percent and DSC ratios of 1.15 to 1.35.

While making possible many deals and rescuing mortgages from default, the extremely low interest rates also introduce another point of concern: refinancing risk in the future when and if interest rates should increase again, and many speakers referred to that risk. Financed at extremely low interest rates, properties may have difficulty finding refinancing if interest rates rise significantly in future, especially if they have not amortized, or property values do not rise, adequately.

The longer the low interest rates persist, the greater the buildup of stress, said Sally Gordon, managing director, Risk and Quantitative Analysis Group, of BlackRock, Gordon presented a general session on portfolio diversification strategy.

The seeming lack of euphoria among lenders despite the return of liquidity could also  be attributed perhaps to the recognition that the abundance of capital, especially that slushing in the CMBS markets, could disappear overnight and be affected by both foreign and domestic developments, as has happened in recent memory. “Liquidity can evaporate faster than you even thought possible,” commented Gordon.

The potential volatility of the capital markets tied in with the life lessons of guest speaker John Bucksbaum, founder of Bucksbaum Retail Properties LLC. Bucksbaum recounted his experiences with the financial crisis in the late-2000s as former CEO of retail giant General Growth Properties (GGP). One of his biggest mistakes, where the GGP bankruptcy was concerned, was to allow mortgage maturities to compress in the same time period, said Bucksbaum. The second mistake, in view of the fact that liquidity could disappear very quickly, was to not raise equity when there was the opportunity, and to wait for higher stock prices before making a stock offering for the public company. “You don’t always know when you can raise equity. The day may come when “you need equity, and you don’t have it,” said Bucksbaum.

And as Gordon said, once liquidity dries up, it may be too late to mitigate the risk.

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Will Cooper Jr.

WNC finishes out the year on a high note with the closing of a $124.5 million federal low-income housing tax credit fund that will be invested in 20 affordable housing projects across the United States and a Hawaii state tax credit fund for almost $5 million that will be used for a seniors housing project in Honolulu.

Will Cooper, Jr. president and CEO, said the combined funds have a total of 10 investors, three of which are new to WNC, and have an equal number of banks and insurance companies.

The larger, federal LIHTC fund is known as WNC Institutional Fund 37 and will help build nearly 2,000 units of affordable housing spread across 20 properties in 15 states. The projects are a combination of new development and rehabilitation and include senior, family and mixed tenancy.

“WNC Institutional Fund 37 is a national multi-investor fund formed to acquire a diversified portfolio of federal low-income housing tax credit properties,” Cooper said. “We were able to reach many parts of the U.S., including Alaska and Hawaii, while exceeding our initial fundraising goal by nearly 25 percent.”

One of the first projects funded in the WNC Institutional Fund 37 is development of 32 new single-family homes in Joplin, Mo., where thousands of homes were destroyed by a tornado in April 2013. Some residents have already moved into completed homes.

The Hawaii fund will be used for construction of a new 160-unit senior housing community in Honolulu. It is slated for completion by summer 2014, according to Cooper.

The core business of WNC, founded in 1972 and based in Irvine, Calif., is providing LIHTC equity. A national investor in real estate and community renewal initiatives, WNC has acquired more than $5.5 billion of assets representing more than 1,100 properties in 45 states, Washington, D.C., and the U.S. Virgin Islands.

In March, the firm closed WNC Institutional Tax Credit Fund 35, a $100 million LIHTC fund that financed 18 affordable housing communities with a total of 1,134 units in 11 states. Twelve of those projects were for low-income families and the remaining six were for seniors. The developments were split evenly between new construction and rehab projects. Seven institutional investors participated in that fund – five banks and two insurance companies. WNC Instititutional Tax Credit Fund 34 closed in May 2011 with $116.2 million in investments to be used for 13 properties.

In June, WNC closed a $50 million California affordable housing fund that was to finance eight affordable housing properties with a total of 445 units. WNC Institutional Tax Credit Fund X, California Series 10 represented the 10th consecutive year WNC had closed a LIHTC fund in the state.

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Ken McCarthy, global chief economist, Cushman & Wakefield

With an acrimonious and seemingly endless presidential campaign finally completed, CRE experts are watching to see how newly re-elected President Barack Obama and Congress deal with a host of financial issues impacting the real estate market, including the budget deficit, debt and spending, tax rates, capital gains taxes and job creation.

They are also hopeful that the uncertainty which had been hanging over the business world, including commercial real estate, has been lifted.

“The main thing right now from the corporate America standpoint is people are just looking for some semblance of certainty,” said John Sikaitis, director of Americas Office Research Markets for Jones Lang LaSalle.

“The fact that we have someone and we now know where they say they will go goes a long way toward creating more confidence,” said Ken McCarthy, global chief economist for Cushman & Wakefield. “Over the last six months we didn’t know what the policy environment was going to be like. That’s the worst. Knowing who’s going to be president will be an important factor for the real estate industry and for the economy in general.”

Sikaitis said the President is going to have to extend an olive branch across party lines with the Congress that is going to remain split with the Republicans controlling the House of Representatives and Democrats continuing its majority in the Senate. He also said Congress needs to be less partisan to get legislation moving to help the overall economy.

“We need a Congress that actually legislates and compromises across the party lines,” Sikaitis told Commercial Property Executive. “This is currently the least effective Congress in history. This Congress has produced less legislation than any other Congress in 75 years.”

John Sikaitis, director of Americas Office Research Markets, JLL

Charles Achilles, vice president of legislation and research for the Institute of Real Estate Management, a Chicago-based association representing property managers, also said compromise will be needed in Congress but noted that gridlock historically results when different parties are in power.

In his acceptance speech early this morning, President Obama pledged to work across the aisle in his second term.

“Tonight you voted for action, not politics as usual,” he told a cheering crowd at Chicago’s McCormick Place convention center. “You elected us to focus on your jobs, not ours. And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together — reducing our deficit, reforming our tax code, fixing our immigration system, freeing ourselves from foreign oil. We’ve got more work to do.”

That work will begin immediately as the President and lame duck Congress will have to tackle the “fiscal cliff,” which includes a series of tax breaks expiring at the end of the year and deep cuts to agencies such as the Department of Defense and entitlement programs like Medicare that were agreed upon during the debt ceiling deal reached in 2011.

The potential spending cuts, also called “sequestration,” have already depressed the Washington, D.C. metro office market because so many government agencies or federal contractors have not been increasing long-term leasing, noted Sikaitis. He took it a step further by stating that tenant demand in the Metro D.C. market is tied strongly to Congressional activity. JLL research found that over the past 20 years, the office market in the region is strongest when passage of legislation is at its highest. For example, positive net absorption was at 52.4 million square feet between 1985 and 1988 when there was a record amount of legislation passed. During the past four years, the market saw cumulative absorption gains of 4.5 million square feet.

Charles Achilles, VP of legislation and research, IREM

The CRE executives pointed to possible changes in the capital gains tax structure sought by President Obama as an imminent problem for the industry.

“Owners who have a significant capital gain may want to sell before the tax increase. There could be some tax-driven activity,” McCarthy said.

Achilles said an increase in capital gains tax rate up to 20 percent from 15 percent for people making over $200,000 and couples making more than $250,000 could take away incentives for some people to invest in real estate.

He also said the Democratic plan to tax carried interest as regular income would have a big impact on his association’s members.

In addition to the probable ending of the Bush era tax cuts, new taxes to fund the Affordable Care Act (Obamacare) are set to begin in 2013. With Republican Gov. Mitt Romney losing the presidency, the Obamacare policies will continue to be implemented, which some say could impact job creation.

Also moving ahead will be regulatory changes to banks and financial institutions under the Dodd-Frank legislation passed during President Obama’s first term. Jeffrey DeBoer, president and CEO of The Real Estate Roundtable, said his group’s members have concerns about the impact of the Dodd-Frank regulations, particular those governing the commercial mortgage-backed securities (CMBS) market and the proposed Volker Rule, which he said could unintentionally impede real estate capital formation.

“The industry will continue working with national real estate trade groups to encourage a more robust recovery of the CMBS market, which will ensure a broader recovery in commercial real estate markets while strengthening financial institution balance sheets,” Deboer said.

Both DeBoer and Achilles said the Basel III capital accord that requires increased capital reserves by financial institutions could make it even more difficult for loans and mortgages to be made.

Achilles said CRE financing is still often difficult to get. He is particularly concerned about a program for small businesses that allows them to refinance loans on an annual basis. He said it expired in September and Congress has not extended it. The association’s web site noted that an estimated $360 billion of commercial mortgage debt is due within the next year and that many small business owners would like to turn to the Small Business Administration’s 504 refinancing loans for salaries, rent, utilities, to pay off or down credit debt and other financial obligations.

“What’s best for the country are those things that encourage small business,” Achilles said.