Investment Column: Flood of Capital Continues in 2016

By Sandy Herrick, Founder & Managing Principal, Case Real Estate Capital LLC: The best investment opportunities in the face of rising prices.

Sanford HerrickUncertainty around the globe—sharp swings in global commodities and stock markets, as well as political uncertainty—will continue driving investors to commercial real estate in 2016. That flood of both participants and capital is likely pushing pricing too high for the intrinsic value of a number of properties. More than ever, investors will need to measure safety versus the risk premium for each transaction. Even with changes in risk profiles, there will be substantial capital for investments.

As prices rise, participants are becoming more bullish in their visions of what they can achieve with vacant space or how they can further develop a property for higher rents. Nowhere is that more evident than in the New York metro area’s multifamily sector, where investor demand shows no sign of easing. During the past few years, a large number of building permits have been issued, with many projects already in various stages of construction. That crowd of interested participants in the New York market, as well as in other top-tier cities, has caused numerous investors to turn their focus to secondary and tertiary markets for multifamily opportunities with potentially greater yield.

Looking to the industrial and warehouse sectors, Los Angeles and the New York metro area, particularly New Jersey, should remain robust through 2016. New Jersey’s distribution capacity, dense population and proximity to ports and airports will override concerns about the Garden State’s aging infrastructure and taxes. Retail, specifically in the Northeast, will continue to offer up some strong opportunities on a case-by-case basis, even with retailers working to balance online shopping with brick-and-mortar stores. Across sectors and geographic locations, participants are well advised to ask themselves if a given deal makes financial sense.

When it comes to transitional assets, the most sought-after deals are those with loan-to-stabilized-value ratios of less than 75 percent and a 12-month timeline to liquidity. In today’s market, however, that is not the norm. In large part, this is due to the influx of players and the fact that banks and insurance companies have already divested their “easiest to understand” properties.

Many of the thornier issues remain on conventional lenders’ balance sheets, including the ones subject to litigation. In many cases, the capital costs were too high or the borrower/developer did not have the necessary capital or expertise to handle the issues. Getting these types of properties recapitalized requires both creativity and market expertise.

Case Real Estate Capital hopes for a robust year of dealmaking with properly risk-adjusted transactions.