Operators and Deals: Time To Be Selective

Operating partners are predicting fierce competition for deals among yield-starved investors throughout 2015—and possibly for the foreseeable future. Record-high pricing and significant capital flows to U.S. commercial real estate, post–financial crisis, have not dissuaded institutional investor appetite for the asset class. Indeed, operators are witnessing the surge firsthand as large capital partners are aggressively bidding up deals. Michael Newman, president of Chicago-based Golub & Company, says the diversity of investors reshaping the landscape is remarkable.

“While we’ve experienced continued strong interest from traditional real estate private equity players, we’ve also seen a healthy uptick from places as wide-ranging as Canada and the Middle East, as well as high-net-worth investors and family offices,” he says. Newman’s firm is investing in markets including South Florida and San Francisco, in addition to its home base of Chicago and surrounding markets. The firm is focused on opportunistic and development strategies, mainly in office, residential, and mixed-use properties. Two other operating partners, at West Coast and Northeast-based platforms, acknowledge similar trends, noting high demand for value-add plays in markets covering the cities of Los Angeles, Denver, and Seattle, as well as New York, New Jersey, and Pennsylvania. “It’s definitely getting tough to find deals, especially the larger-sized deals, in major markets,” says one operator. “If you do find great deals, they get bid up like crazy.” He adds that non-U.S. investors are snapping up quality deals at highly compressed cap rates. “The market has changed a lot over the last couple of years, and investors have definitely become ‘yield-starved,’” says Newman. “Investors are paring back their yield expectations and looking at other markets, or taking on more development risk in order to satisfy their portfolio demands.” As a result of lower yield expectations, many investors have broadened their mandates beyond North America. Firms such as GID have sourced significant opportunities abroad as quality operators outside the U.S. are in desperate need of capital partners.

“That giant sucking sound you hear is capital leaving emerging markets for the U.S., leaving a gaping hole for development, recapitalizations, and restructuring [in emerging markets],” says Ken Munkacy, managing director at the family office and operator, GID, adding that there are significant opportunities throughout the capital stack. He sees strong potential in markets such as Mexico, Brazil, Colombia, and India, where solid fundamentals and strong partners offer significant return possibilities. For operators, today’s market dynamics mean this is an era of being selective and building pipelines with specific properties and real estate sectors across markets. Strong fundamentals and a good story have supplanted the rising-tide strategies of the past few years. For investors ratcheting up their portfolio risk, Newman says there will always be a fear of “bubbles.” “You will always see cycles, but quality can stand the test of time,” he adds. “Most investors are long-term owners, and they are putting their capital to work accordingly.”