What’s on the Minds of Investors?

The mood at the recent Crittenden National Real Estate Conference in San Diego, CA, attended by EDR Insight, was more optimistic than expected, in spite of a continually uncertain U.S. economy. Throughout panels led by lenders, investors and developers, the common theme was one of a cautious willingness to pursue potential opportunities for property investment deals in 2012.

A panel of diverse professionals from real estate finance and advisory firms shared their views on the status of financing, attitudes toward risk and market trends during a session titled Opportunistic Lending – Opportunities & Strategies in Today’s Market. Panelists included: Brett Forman, President of Forman Capital, LLC; James Henderson, Co-Head of the Alternative Investment Group at Cornerstone Real Estate Advisers; Michael May, Senior Managing Director at Cantor Fitzgerald; and Paul Sargent, Principal of Oasis Financial.

MindsOfInvestors---ImageEnvironmental due diligence professionals and commercial real estate lenders can take some comfort in the collective thoughts shared by these panelists:

1. Lenders are lending if the opportunities are right. Life insurance companies, pension funds and offshore capital are currently the most active sources of funding for large projects, more so than traditional financial institutions. Cash is still king, but the investors with dollars are not the only ones out looking to capitalize on new opportunities for property investment. There is a selective willingness on the part of investors needing capital sources to take advantage of available opportunities to secure deals. This, in turn, presents an emerging opportunity for lenders to offer financing and catch the wave early as momentum builds in the property market.

Investors are beginning to focus their attention on metros outside of the traditionally strong global gateways, where it has been, until now, difficult to get financing. Larger lending institutions are starting to get more comfortable extending capital in metros previously perceived as higher-risk prospects. For lenders, the ball is in their court to locate where the deals are and start lending on properties in areas where activity has been limited. The panelists advised lenders, particularly at large institutions, to gain a strategic advantage by putting staff all over the country, noting that this would provide a strong sense of credit, a deeper understanding of the land and neighborhood, and easier access to doing business locally.

2. Investors remain risk averse and value environmental due diligence. Given all the market uncertainty, lenders were advised by panelists to approach all deals with caution, “modeling the downside before moving forward on providing financing”. Equity investors and lenders continue to operate in a risk averse manner, maintaining an aversion to environmental risk. Several panelists noted procuring at least a Phase I environmental site assessment before closing on any deal, even if it means “holding the deal up for a few days”. One panelist observed that “it would be crazy to close without a property condition assessment or environmental due diligence”. Asked about timeframes to close, panelists generally agreed that they try to close deals within two weeks, depending on deal size, but noted that it can be rough to have a quick turnaround time while trying to do the necessary due diligence.

3. Deal volume is starting to come back in coastal gateways and re-emerging in new areas. According to Real Capital Analytics, transaction volume in 1Q12 was up 40% from a year ago, leading investors to begin targeting previously undesirable geographic areas and property types in search of new activity. Portfolio work drove much of the gain, as well as an 89% increase in retail property sales in 1Q12 compared to 1Q11. RCA’s latest data supports the heavy involvement in portfolio deals discussed by the investors at Crittenden. RCA reported that office and apartment properties increased not only in the major metros and coastal markets, but in other markets across the U.S. Panelists noted, in particular, a significant volume of hotel deals waiting to be scooped up, as well as opportunities in the retail sector. As interest moves into less competitive markets outside gateway cities, lenders and environmental due diligence professionals could also see increased opportunities for projects involving multifamily properties, military bases, casinos, hotels and marinas.

Geographically, the best opportunities for lending and investing today are still in the majority of the coastal states and metros, but one panelist noted that his firm was starting to focus more on opportunities in Arizona, Florida and Nevada, citing opportunities for commercial real estate investment in metros like Phoenix, Miami and Las Vegas, in particular. One panelist observed seeing more deals in Las Vegas in the past two months than in all of 2011. The coastal states where opportunities are still strong are California, New York, Florida, Oregon, Washington and New Jersey. Another panelist also reported seeing activity pick up in Denver and Chicago, as well as in Texas.

Based on these takeaways from the Crittenden conference, environmental professionals and commercial real estate lenders should start seeing new opportunities for growth, particularly as investors show more interest in metros that have been slower to recover. Financial institutions may also start seeing more opportunities to lend in areas where they have not recently been active as investors expand out of the safety of major coastal metros. Commercial real estate shows like Crittenden can be an effective way to stay on the pulse of how lenders and dealmakers view the market, and can identify who is getting deals done in today’s uncertain market.

NOTE TO READERS: EDR Insight wishes to thank Don Grauer and James Stanton for peer reviewing this Strategic Brief.