Now that going-in yields on cash-flowing core properties are about as thin as they have ever been, more investment officers and real estate managers are heeding that century-old strategic advice from Major League Baseball hall of famer Wee Willie Keeler: “Hit ’em where they ain’t.” Rather than slugging it out amid the ferocious competition eroding core capitalization rates, many tax-exempt investors are looking to boost yields by allocating more capital to higher-risk vehicles and ventures where fewer players are willing to place their bets.
From the Current Issue
The debate surrounding the institutional push into the solidly “mom-and-pop” single-family rental sector has been fun to watch. Can they manage far-flung assets effectively? Will they build scale at the right prices?
As noted in last month’s column, everyone seems to be resigned to the expectation that interest rates will be going up; just not by all that much. As of today, March 10, the 10-year Treasury rate stood at 2.60 percent. Approximately one year ago, on March 11, 2013, 10-year Treasuries stood at 2.07 percent. Even with the recent drop-off in rates in response to easing of tensions in the Ukraine (as of today, at least), that still reflects a 25.6 percent annual increase in rates from a year ago.
Most people know about Sam Zell, both for his real estate exploits and his infamous leveraged buyout of the Tribune Co. media conglomerate, which filed for bankruptcy in 2008. The vision for the legendary investor was to roll up the Chicago Tribune, Los Angeles Times and other media assets and amass a media empire worth billions. Of course, we all know that the bubble burst for Zell as he managed to rack up more than $13 billion in debt at the Tribune in a “bad bet” driven more by greed and enrichment than protecting an enduring business icon. Many participants, including Zell, were richly rewarded as corporate executives cashed out while others were not so fortunate.
Today’s industry news headlines are often dominated by trophy real estate assets trading for record high prices and all-time low capitalization rates. These headlines have led some investors to conclude that the market has returned to 2007 euphoria and that limited investment opportunities exist across the entire core real estate universe.
My wife and I visited Havana for New Year’s week. Cuba’s music, higher education, enthusiasm for baseball and much of its art are great. The quality of medical care is higher than it has ever been, allowing the average Cuban to live to 77, just below the average life span of an American. Infant mortality rates in Cuba have dropped below those of the United States.
When it comes to mitigating risk, it is hard to beat the security of pre-selling a real estate project before ever putting hammer to nail.
In a move illustrating the growing pressure on Asian pension funds to adopt alternative investment strategies in their portfolios, Japan’s $1.3 trillion Government Pension Investment Fund, the world’s largest pension fund, has announced plans to invest up to $2.7 billion in infrastructure during the next five years in partnership with the Development Bank of Japan and Canada’s Ontario Municipal Employees Retirement System.
February saw CMBS delinquencies drop 47 basis points since January to 6.78 percent — the lowest level since early 2010 — according to the latest report from Trepp. But, while the plunge was the largest recorded in a number of months, a closer look shows that there is a lot more to the drop than on-time payments.
The recovering for-sale housing market has created opportunities and challenges for bulk owners of single-family rentals, including both REITs and other investors. The U.S. median existing home price climbed 11.4 percent in 2013, according to the National Association of Realtors. On one hand, single-family owners benefit when the value of their existing homes increases, both from the appreciation and as price gains make renting more attractive.
Last year was very good for property investment activity. This year will be even better.
Let’s face it, investors are controlling. That is not a bad thing; it is simply a pressing byproduct of their fiduciary responsibilities. And they are getting more controlling, as attested to by increased capital flows to separate accounts.
National transactions volume, while not having regained 2007 levels, has increased more than four times since the 2009 trough. How can investors avoid the winner’s curse during this headlong rush to buy assets?