Los Angeles–Connect Media celebrated its eighth Connect Los Angeles conference, May 1, at the InterContinental Hotel in downtown Los Angeles before a packed audience of 600 people who came to network and listen to expert panels discussing the issues and pressing questions that are facing commercial real estate today.
Connect CEO Daniel Ceniceros opened the one-day event welcoming those in attendance with the traditional, turn to your neighbor and say hello and exchange business cards. After that, the first of six panels, Capital Markets: Investment & Development Update, opened up the conference with moderator Marc Renard of Cushman & Wakefield introducing the panel. Joining him was Ian Couwenberg, Equity Residential; Jeremy Griffin, Rialto Capital Management; Lily Kao, AEW Capital Management; Michael Regan, CIM Group and Patrick Schlehuber of Rexford Industrial.
Renard’s theme was, “Where we’ve been, where are we today and potentially where we’re going in the capital markets industry in commercial real estate.” But first, his first lighting rod question to the panel was, describe today’s capital market environment in one word. The responses varied: quite. choppy, frustrating, dynamic and dislocated.
And in regard to institutional capital, what is their psychology of institutional investors? How are they thinking about commercial real estate?
“I think maybe one way to frame and response would be capital raising, which has been really challenging for the last 1 ½ years. So while we at AEW are fortunate that we have very different, capital, partners and investors across the spectrum, core investors today are really not investing because there is a lot of concern over continued valuation risk,” said Kao, noting that one side of the spectrum are core products, harder, more challenging to raise money today, while on the other side, we have our opportunity funds raised from raising money for a period of time.
And what are the underwriting deals today and what will be interest rates going forward, Renard asked. For Regan, it was hard to answer, even when looking at the historical record. “It’s difficult to predict based on today and where things will be three to five years from now,” he said. “There’s just not enough juice in any of these deals. And if you’re financing yourself, six plus and buying a 5 ½ just doesn’t work. So, we were pessimistic about where things are going.”
When asked about performance data on the multi-family side and how that dichotomy relates to an equity residential strategy that relates to location selection, Couwenberg answerd.
“It’s really more of a diversification plan. By no means do we plan on exiting costal gateways. As an example, 42% of our companies are in California, predominately in LA and the Bay area. So, it’s really more, of a way for us to basically reduce that exposure and spread it across some of the other markets that have seen some growth.”
And on the subject of distressed assets and the staggering amount of debt maturing, Griffin noted that there are huge banks and a core part of traditional and liquidity providers, that are likely not to be as active as they have been. “So, I think the word distress today takes a different meaning, which is different in every cycle.”
On the industrial side, which still seems to be moving along, Schlehuber of Rexford Industrial said industrial has been a red headed stepchild most of his career. And the Covid years were not bad for the industrial market. “We were the popular person at the dance” he said. “But people got a little excited, taking space and watching tenants taking space on an off market basis and figure out which tenant did not have an option and they would lease it out from under them a year or more in advance when that lease expired.” Some of those have come back, and the demand they were forecasting, like it was done in the past, did not go up as expected, resulting in a supply problem.
The second panel, Industry Leaders, a View from the top began with moderator Lew Horne of CBRE welcoming the panel, which included Bill Frame, SIOR, CCIM, Kidder Mathews, Robert Hart of TruAmerica Multifamily, Anthony Graziano, IRR and Kyle Matthews of Matthews Real Estate Investment Services.
Everyone agreed that it was not a good year, but not as bad as 22. However, Hart said TruAmerica was pretty active at the end of 2023 and into the first quarter of 2024. “We’re buying on fundamentals again in certain markets that we like next to high growth cities. We’re active in markets like Salt Lake City, Las Vegas, Boston and places like that. So really haven’t changed our approach other than how to get better cap rates and lower the threshold per unit that we were buying two or three years ago.”
Frame, of Kidder Mathews, reiterating that deal flow is down, was asked about the hot spots, indicated that activity has been flat but steady in the last four months. “Tacoma, with its big port there. Phoenix is doing really well. Phoenix is probably our best office right now. At the time, Sacramento was doing very well. San Jose is doing very well,” he said. “Industrial is slowing down. We still have that middle market, maybe underneath 100,000 square feet, but it’s been active for us.”
On the appraisal side, Graziano of IRR, said they are keeping track of a lot of values, and there’s been a lot of pressure on both sides of the equation. “The institutional owners that we work for obviously have not wanted to recapture market values. So, as we’re doing the work at the institutional level, there’s a lot of pressure on both sides of the asset between the asset managers and their internal valuation department. The real challenge for the appraisers today, frankly, is understanding the credit worthiness of the rent roll being able to benchmark that and say, where is rent growth?”
The panel got into the political sand pit with most focusing on the harm rent control is doing to the CRE industry.
“In my humble opinion, the way you solve the affordable housing problem is supply. I moved to Nashville, Tennessee in 2019. And, we don’t have this. We have a different supply problem. We have too much supply. And from an ownership and operating standpoint, that creates challenges in projecting rents and softening and rents and increased concessions. We’re talking about affordable housing.”
In addition to rent control, the Fed and remote work were issues discussed, and was an ongoing conversation with most of the panels. Part two of the conference will be available on Tuesday.
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Robert Khodadadian has long had a simple philosophy about selling real estate. There are approximately a million buildings in the city, and the broker that gets to sell any one among the multitude that will hit the auctioning block at a given moment is, sometimes, simply the person who happens to pitch their services to the right seller.
robert khodadadian, skyline properties, commercial real estate, off market real estate, daniel shirazi, real estate investment, new york real estate
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