South Florida Capital Markets A-Z

Transcription

1 South Florida Capital Markets A-Z Current Landscape, Challenges and Opportunities for CCIM Commercial Real Estate Outlook Conference January 16, 2019

2 Capital Sources and the Capital Stack

3 Four Quadrants of Real Estate Capital Markets Private Debt: Traditional Mortgage Loans Whole Loans, Mezz Loans -Stable income -Customizable investment Strategies -Low Liquidity -Greater initial capital investment Public Debt: Securitization and CMBS -High diversification -High degree of current income -High volatility -Less leverage Private Equity Real Estate: Limited Partnerships, Private REITS, Separate Accounts -High returns -Low volatility -Low liquidity -More difficult to diversify Public Equity: Public REITS, Mutual Funds -Strong returns -High liquidity -Sensitive to demand for other high-yield assets -Tax disadvantages

4 Four Quadrants of Real Estate Capital Markets Private Debt: Traditional Mortgage Loans Whole Loans, Mezz Loans -Stable income -Customizable investment Strategies -Low Liquidity -Greater initial capital investment Public Debt: Securitization and CMBS -High diversification -High degree of current income -High volatility -Less leverage Private Equity Real Estate: Limited Partnerships, Private REITS, Separate Accounts -High returns -Low volatility -Low liquidity -More difficult to diversify Public Equity: Public REITS, Mutual Funds -Strong returns -High liquidity -Sensitive to demand for other high-yield assets -Tax disadvantages

5 Commercial Real Estate Lending 101 Investor (often a business entity): -Purchases a property, leases out space and collects rent from the businesses that operate within the property. -The investment is intended to be an income-producing property. Sources of Capital On a scale of 1 to 10, respondents rated local and regional banks as the most significant source of capital to the commercial real estate sector at a 6.7 Lender s basic considerations: -Loan s collateral (i.e. the property itself) -Creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns -Financial ratios, such as the loan-to-value ratio and the debt-service coverage ratio. Source: Investopedia Source: National Real Estate Investor

6 Risk/Reward Profile -Type of Project Stable properties vs speculative, non-performing or construction loans. -Different layers of financing sources that go into funding the purchase and improvement of a project. -Seniority over all capital sources located above it in the capital stack and is subordinate to all capital sources located below it in the capital stack. -Upon sale or refinance, the bottom position gets paid first until fully repaid and so on. Losses are incurred from the top down. -Risk AND returns should increase as you move higher in the capital stack. -Sponsor co-investments are most typically contributed as equity at the highest position in the capital stack. Source: Crowd Street Decoding the Capital Stack Four most commonly used types of Capital Source: Crowd Street

7 Availability of Capital and Interest Rates

8 Availability of Real Estate Capital 2018 vs Late-cycle sentiment offset by competition -$4.17 trillion in CRE debt held by all lenders, with 52.4% held by banks -$266 billion of private investor dry powder targeting real estate -Depth of capital pool vs. ability to draw on it -Pattern of decelerating transaction volume since Federal Reserve s April 2018 Senior Loan Officers survey showed, for the first time in three years, an easing of credit standards on commercial real estate -Underwriting standards such as loan-to-cost ratios and maturities holding steady. -Larger loans for development projects, and to expand the geography of construction lending. -Expectation of deregulation (Dodd-Frank) Sources: PWC Emerging Trends in Real Estate Survey, Based on U.S. Respondents only; Fed Reserve; data firm Trepp LLC

9 Consensus on Interest rate expectations 90% of investors expect 2+ rate increases by the Fed in the next 12 months Diminishing spread between short and long term Treasuries push towards Fixed Rates * Source: National Real Estate Investor

10 Impact of Rising Interest Rates Cap rates expected to rise mitigated by flight to quality How will rising interest rates impact each aspect of the CRE market? Negative impact on new construction financing * Source: National Real Estate Investor

11 10 Year Treasury Rate - Drives Pricing US 10-Year Treasury Rate: is a key benchmark for lending rates 2.74% Jan. 10, 2019

12 South Florida: Primary Market Stability in 2019 CRE values especially in top-tier markets are at all-time highs and cap rates are as tight as ever Average Cap Rate by Tier Late cycle compressed yields led investors to secondary markets 75 to 100 bp spread Investment activity shifting back to Primary Markets Income stream coupled with high-quality assets that will be best-positioned to go through different economic cycles * Source: Trepp LLC

13 Market Activity: Recent Deal Profiles

14 Recent Deal Profiles: Retail Development $80.5M Retail Construction Financing Client: Gatlin Development Companty Lender: City National Bank of Florida Terms: 3 years with floating interest rate The Pavilion at Durbin Park, Jacksonville, FL 80-acre retail project, site over 100 acres in total Set to be the largest shopping center in NE Florida Wal-Mart and Home Depot anchored Over 600,000 SF of retail space Population growth: St. Johns Sub-market 19% growth in 5 years

15 Recent Deal Profiles: Multifamily $142M Multifamily Financing Client: Melo Group Lender: Freddie Mac Terms: 10 year fixed-rate; full term interest-only; aggressively low spread over the Treasury Square Station, Miami, FL 710 rental units and 20,000 SF of retail Core near-downtown location in the Arts & Entertainment District Project 95% leased within 6 months after opening Population growth 40% since 2010; number of people between grown by 86%

16 Recent Deal Profiles: Core Retail $24.5M Retail Acquisition Financing 78% LTV Client: Private Investor Lender: Florida Community Bank Terms: Fixed rate, non-recourse, long-term loan Old Cutler Town Center, Cutler Bay (Miami), FL Publix-anchored; best-in-class grocery anchored center Affluent Demographics

17 2019 Trends: Opportunities and Challenges

18 Trends: Opportunities for 2019 Opportunity Omnichannel Demand for Strong Hotel Zones Retail Suburbs Occupancy Investors are lining up to pour billions into Opportunity Zone Funds, with more than $6 trillion in unrealized capital gains eligible to be deployed into opportunity zones. -Real Capital Analytics Retailers will continue reinvesting in their physical footprints to achieve the perfect omnichannel shopping experience for consumers. Digitally native retailers will increasingly shift to open physical stores to grow their business and retain more customers. -CBRE Global Research With aging millennials now hitting their mid 30s, many are turning to the suburbs with their families. More than 2.6 million Americans relocated from the city to the suburbs in the last two years. Demand for increased walkability and access to public transit that so resemble urban metros. -ULI The hotel sector is expected to experience a record-breaking year of occupancy levels in Occupancy levels are expected to surge to 66.2% in 2019, the 10th consecutive year of growth. This increase will be driven by a 2.1% increase in demand to offset incoming supply. - CBRE Hotels America Research

19 Trends: Challenges for 2019 Construction Uncertainty in Rising Interest Integrating Costs High the Cycle Rates Technology Cost and labor challenges in the construction industry. Factors include a decline in immigrant construction laborers, superstorms as a result of climate change that has led to massive rebuilding efforts across the country, and tariffs and the trade war. Margins are going to be squeezed, cost overruns incurred, and values under pressure unless rents and NOI can be increased to cover the increasing costs of new construction - CCIM Institute Chief Economist K.C. Conway There are no obvious imbalances that have the potential to trigger a downturn, so the current expansion is likely to settle into a lengthy period of balanced, noninflationary growth. -JP Morgan Chase Commercial Banking Head Economist Jim Glassman Inevitable disruption is probably the appropriate risk strategy mode to be in for Real estate is not immune from business cycles, economic recessions or disruptive black swan events such as a trade war, currency crisis or cyberterrorism. K.C. Conway The market and most analysts anticipate two to four [interest rate hikes in 2019], as both inflation and wage growth exceed their targets. This will ultimately translate into declines in consumer and business borrowing and curb spending and investing. - Colliers International U.S. Chief Economist Andrew Nelson -Shift to integrate Realtech, industry prone to late adoption We are entering a supercycle of innovation in the real estate industry as new technologies are dramatically improving how assets are designed, built, managed, bought, sold, financed, and everything in between. Fifth Wall connects entrepreneurs with the largest real estate owners in the world, accelerating innovation and creating value for the entire Built World ecosystem. Fifth Wall -Online Marketplaces -Blockchain -Green Energy -Robotics

20 2019 CCIM Commercial Real Estate Outlook Conference January 16, 2019 Presentation By: Andrea Molina, Director O: (305) E: LinkedIn: Aztec Group, Inc South Bayshore Drive, PH 2 A Coconut Grove, Florida, Although the information contained herein is believed to be correct, Aztec Group, Inc. has not independently verified the information contained herein and disclaims any and all responsibility for any inaccuracies. No representation or warranty, expressed or implied, is made as to the accuracy or Completeness, or any other written or oral communication transmitted in the course of this presentation.