CREW Network Special Report: Gibson Advises on Capital Markets Performance

As the investment market continues to heat up, Mark Gibson has some advice: Carefully consider liquidity and how best to deploy your capital.

Mark Gibson at CREW 2013As the investment market continues to heat up, Mark Gibson has some advice: Carefully consider liquidity and how best to deploy your capital. Offering a capital markets overview on Friday during the CREW Network Convention & Marketplace, the executive managing director, executive committee member & vice chairman of the board of HFF Inc. noted that investment activity is now around the 2005 level of $350 billion—well below the pre-recession market high of $570 billion but continuing to rise as capital pours in from around the world.

He estimated that about $90 billion worth of capital is seeking to invest in U.S. real estate, coming from a variety of sources. “The public market is very, very much open and wants that investment,” he noted. Non-traded REITs are also a growing source of capital—and were in fact the most consistent source during the downturn, he said, while the fund-raising business is now returning. And flight capital from overseas is pouring into the country to the extent that, even despite FIRPTA’s limitations, it is far outpacing the level of U.S. institutional capital investing in domestic real estate. Topping the list is the government of Norway.

Foreign investment has accelerated “pretty dramatically” this year, and Gibson expects that to continue, with the focus continuing to be on the major gateway cities like Los Angeles, New York, Boston and Washington, D.C., but also on Central and other second-tier cities such as Houston, Dallas, Chicago, Atlanta and Denver.

With so much capital pouring in and banks and other lenders eager to participate, Gibson cautioned those active in the investment market to tread carefully. Yes, returns have been improving and deal pricing involves much less betting on the future now. But with so much competition for a limited number of properties, cap rates have already compressed for core assets in the gateway markets, and half of the major U.S. markets are trading above their peak price in multi-family—although none have reached that point for commercial assets, he noted. In the technology markets, “appreciation has now eclipsed NOI growth” and “everyone today is looking at absorption.”

Collete English Dixon interviews Mark Gibson.
Collete English Dixon interviews Mark Gibson.

During a question-and-answer session with Collete English Dixon, transactions principal with Prudential Real Estate Investors and the 2011 CREW Network president, Gibson predicted another pause in the CMBS markets as investors, looking for any excuse to retrade price, take a breath. And he advised investors not to bet on current yield. Instead, consider long-term implications among fundamentals. He pointed to the office sector, where tenant demands are shifting rapidly, with the most notable trend such an increase in densities that existing space cannot meet requirements for restrooms, elevators and parking spaces. The more advanced situation in Europe offers insights into the future, he noted, but New York’s older buildings are already being passed over for new development that can better accommodate the new needs.