Rising risks, including an eventual increase in interest rates, are leading commercial-property investors to borrow less and expect lower returns, said real estate executives including Rob Speyer and Richard J. Mack.
AREA Property Partners LP isn’t building U.S. offices without signed tenants, even as commercial values increase, Mack, chief executive officer for North America, said at the Bloomberg Commercial Real Estate Conference Tuesday in New York. Tishman Speyer Properties LP is using “average leverage” of less than 50 percent in deals since 2010, said Speyer, the New York-based company’s co-chief executive officer.
“Our investors are less interested than you might think in taking advantage of all the money they can borrow, and more interested in investing their cash,” Speyer said. They want a “margin of safety” to high-risk strategies, he said. “We know not everything goes as you plan.”
Real estate in the U.S. has benefited from the Federal Reserve’s policy of keeping its benchmark interest rate near zero, with investors drawn to higher-yielding assets such as well-located and leased offices, hotels and apartment buildings. Sales of commercial property nationwide rose 19 percent in the third quarter from a year earlier to $67 billion, according to research firm Real Capital Analytics Inc.
“It’s hard to imagine that this rate environment is going to persist,” Speyer said.
Commercial-property prices have been driven up by low interest rates, Robert Knakal, chairman of New York-based Massey Knakal Realty Services, said during a separate panel at the conference.
“Periods of low interest rates for long periods of time create asset bubbles,” he said.
Opportunistic investors such as Cerberus Real Estate Capital Management LLC are avoiding lower-yielding U.S. markets and instead are focusing on Europe, which is “two to three years behind” the U.S. recovery, Ronald Kravit, managing principal of the New York-based firm, said at today’s conference. The U.K., Germany, Ireland and Spain have the best legal systems for resolution, and plenty of real estate distress, he said.
“We’re not particularly interested in returns of 10 to 14 percent,” Kravit said. Still, investors need to be “very careful” in their quest for cash flow even as debt-laden building owners dispose of properties, he said.
In the U.S., markets outside so-called gateway cities are drawing investors to lower-priced buildings whose rents are rising, Michael Boxer, a partner at Cowen Group’s Ramius unit, said during a separate panel discussion at the conference.
Pittsburgh has office vacancies of less than 10 percent, Houston’s energy sector makes it a “prolific” market and San Diego has a favorable “risk-reward ratio,” said Ralph Rosenberg, head of real estate at New York-based private-equity firm KKR & Co.
Still, potential pitfalls exist in secondary markets, Boxer said.
“You’ve got to really choose your spots and, in my opinion, you have to have a strong operating capability,” he said.
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