CRE Capital Flow 2018

By Belinda D. Schuster, CCIM, NWI Commercial Real Estate

“Capital Flows refer to the movement of money for investment, trade or business production, including the flow of capital within corporations in the form of investment capital.” Capital Flows -Investopediahttps://www.investopedia.com/terms/c/capital-flows.asp

I attended the Real/Share Net Lease April 2018 conference.  A session on Capital Markets had several capital market panelists giving views on the flow of capital within the commercial real estate market.  According to one panelist the United States has been in a continued economic growth for the past nine years, and the commercial real estate market is entering its late stages of the cycle.   He went on to say uncertainties are still looming such as policy regarding tax reform, and interest rates continue to rise.

Kyle Gore, Managing Director & Principal. CGA Capital and Thomas J Zarrillli, Managing Partner at CL Capital both confirmed that the window on low-interest rates is closing and cap rates are rising.  Also, capital markets are steering away from retail and are attracted to areas with strong demographics such as industrial and medical. The retail market with its overcapacity of stores, high level of debt, and the e-commerce are some of the reasons investors are also looking at other property types.

In the Net Lease market, the degradation of the lease (corporate guarantees), tenants reluctance to provide financial reporting and the master lease falling away is changing underwriting criteria for this sector. Property location and property conditions will begin to play a more critical role in the underwriting of these deals.

Uncertainty in GDP growth, Yield on 10-year Treasury, and interest rates all affect cap rates and the expectations for NOI growth. Each market and property type reacts to their perspective location and local economy.

The panelists suggested that during uncertainty in the market managing risk would require discipline to suppress the “flight to safety.”  One strategy to avoid a possible liquidity crunch would be to try and extend existing debt to fives years or more.  Also, communication with their equity partners during a downturn is vital to determine the best strategic plan.