Turbulence Creates Opportunities for Astute Investors, Developers

Case Real Estate Capital Founder & Managing Principal Sanford Herrick details how these market participants are overcoming capital constraints to achieve outsize returns.
Sanford Herrick

Recent turbulence in the real estate market has sparked an increased level of anxiety among some participants in the second half of 2018. Investors and developers who exercise caution and carefully investigate the market may find that, despite the limited number of solid projects and the stepped-up competition that tends to drive down returns, good opportunities still exist. The key is to identify potential and remain flexible, particularly when considering complex situations.

Navigating volatility

Many investors are particularly unsettled over reports of uncertainty within capital markets due to a myriad of conditions. Those range from questions about the pace of interest-rate hikes and whether pricing has peaked already to Millennial-spurred changes in housing demand and vulnerabilities within the retail and office sectors.

Specific examples include department store anchor spaces that are being repurposed as fitness centers due to the seemingly unstoppable increase in online shopping. The office segment is also under pressure, as the number of stay-at-home telecommuters rises, along with the “WeWork” trend that promotes shared office space on an as-needed basis.

Seizing opportunities

In our opinion, despite the challenges, there is runway in certain segments. Consider multifamily assets in urban areas, which are drawing Millennials, thanks to mass transit and desirable live-work-play opportunities. Still, Millennials tend to be picky, so the opportunities in this segment are not all equal.

Millennials often favor multi-use projects where shopping is right at hand or, at the very least, within walking distance. They are also looking for upscale amenities while keeping a close eye on rental or purchasing budgets as many want to set aside funds for a vacation or a second home. Despite this Millennial inflow to urban areas, multifamily pricing is still being pressured—and returns impacted—in some cities that have been overbuilt. At Case Real Estate Capital, we continue to extend multifamily loans on a selective basis, balancing risk and reward and remaining focused on due diligence.

Due to challenges in the marketplace as a whole, some investors have decided to park their capital on the sidelines until clearer signposts emerge. The risk, of course, is that this abundance of caution could cost them more in the long run, when investors en masse return to the space and demand quickly ramps up pricing. Meanwhile, the current investor fence-sitting—along with the reluctance of some banks to go long on real estate—has put more pressure on developers.

Room to grow

Private lenders, though, are stepping forward to help fill this vacuum. At Case, we structured a $17 million financing package on behalf of a New York-based borrower that operated a chain of medical outlets and faced liquidity challenges after embarking on an overly ambitious expansion program. Although the loan went into technical default almost immediately—due to issues like a lack of permits and constrained liquidity—our team worked closely with the borrower for 15 months to restructure it, enabling a refinance. At the conclusion of our involvement, our principal was fully repaid. With funds to invest and expertise in handling complex deals, Case and other select experienced investors are providing a solution to developers’ capital-scarcity needs while offering investors the opportunity for outsize returns.