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With the Federal Reserve continuing to push down interest rates, it would seem that investors should pin down low capital costs while they can. But current dynamics in the still frothy debt and equity markets tell a more complex story.
Despite more cautious predictions at the beginning of the year, investment activity seems close to matching 2018. High transactions volume has been supported by increased liquidity in the equity and debt markets―mostly private capital. According to a recent Cushman & Wakefield capital markets report, capital availability in the lending environment for the second half of 2019 is expected to “remain elevated with multiple lender groups active and greater competition between fixed- and floating-rate execution.”
Current investment trends keep demand for floating-rate loans high, a financing tool that has been traditionally viable for short-term holders. “There is a lot of capital chasing value-add deals that lend themselves to a floating-rate execution. Also, the commercial real estate collateralized loan obligations market has created demand for shorter-term floating-rate paper. The proportion of floating-rate executions is definitely increasing,” said Shaunak Tanna, head of structured finance at Basis Investment Group.
In July, the Federal Reserve cut interest rates by 0.25 percent for the first time in a decade to a range of 2.00 to 2.25 percent. While the decrease will benefit both fixed-rate and variable rate borrowers, it is definitely time to pin down historically low rates on stabilized properties, especially when the intention is to hold them for the long-term. Michael Campbell, CEO of private equity banking firm The Carlton Group, expects to see an increase in fixed-rate loans, which require a well thought out approach, particularly in today’s volatile environment.
“If your property qualifies for long-term fixed-rate loans, then this is a good time to lock in lower rates. But it’s worth noting that while benchmarks may go lower, we may see some spreads widening, which offsets some of the reduction in benchmark rates,” said Joseph Iacono, CEO of commercial real estate debt provider Crescit Capital Strategies.
When it comes to short-term fixed-rate executions, things can get tricky. Demand for this type of financing products is on the rise due to more affordable costs, but lenders warn that, in the end, this might not even be an efficient way to protect properties from the possibility of rising rates down the road. Iacono believes that borrowers in this category will find themselves in the market for a refinancing soon enough when the initial loan matures and will be subject to that particular rate environment. Therefore, lenders agree that for properties that are “in transition” (from one owner to another) and require bridge financing, the floating-rate market provides better solutions.
The overall expectation is that more interest rate cuts—anticipated from the Fed by year-end—will lead to a lower cost of debt, but experts claim there’s more to this. “On floating-rate, we expect to see the London Interbank Offered Rate decline over time. The LIBOR curve clearly indicates that this is the market view. We expect spreads to move up to compensate for market risks given the heightened uncertainty. Borrowers may not get the full benefit of declining rates if spreads move in the other direction,” added Tanna.
Regarding the elimination of the LIBOR index, the market has yet to reach a conclusion on how it will all play out. Some expect a smooth transition to the Secured Overnight Financing Rate and expect minimal impact on debt cost since the new index is based on the heavily traded Treasury market. Others are not yet sure how different spreads will react to it, since there haven’t been enough issuances tied to SOFR yet. In theory, LIBOR pricing factors in the credit risk premium. SOFR, on the other hand, does not, since it is based on the repo market. In this case, too, more time is needed to grasp the potential impact of the new benchmarks on debt cost and to develop the right tools to mitigate additional risks.
“It is possible that banks offering shorter-term fixed-rate products will compete better (after the swap). Capital markets lenders will have their costs tied to SOFR, so they will continue to offer loans with SOFR as the benchmark. We expect tools currently available to hedge LIBOR risks—swaps and caps—will be available to hedge SOFR risks, too,” said Tanna.
There are several macroeconomic factors that are affecting the real estate debt market right now, including the inverted yield curve, fears of a recession, decreasing condo prices, increasing multifamily supply in certain markets, as well as the trade discussions with China and the protests in Hong Kong due to the controversial extradition bill, Campbell noted. Even though Hong Kong leader Carrie Lam announced she would withdraw the bill, causing the 10-year Treasury yield to climb above the two-year rate, experts believe that this is not the end of the turmoil in the region.
In fact, the “trade war” between the U.S. and China is considered the single biggest risk for economic growth and stability right now, leading to elevated expectations of a recession. The best strategy in this case is based on flexibility and diversity.
“Defensive and diversified ‘dequity’ strategies are expected to outperform in this market. The basis in real estate and the position in the capital stack will differentiate the winners when the cycle turns. Investors that rely on market rent growth or appreciation through cap rate compression will be disappointed. We believe realized returns in the ‘dequity’ space will be similar to or may even exceed equity returns, for a lot less risk,” said Tanna.
What lies ahead is harder to predict, as actions of other central banks may drive the U.S. 10-year yield even lower. At the same time, a trade-war resolution would clear the clouds and may result in the 10-year yields moving up.
“Macroeconomic uncertainty has caused the 10-year rate to be close to its all-time lows. But the U.S. still continues to be among only a handful of developed nations that have a positive yield. It’s tough right now to predict a direction as many political and macro-economic factors are in play,” Tanna concluded.
“There’s currently a lot of uncertainty in the market. The effects of a potential economic slowing will likely be felt on the demand side for real estate,” added Iacono.
Over the last several years, proptech companies in the U.S. and worldwide have flourished. According to Steve Weikal of Massachusetts Institute of Technology’s Center for Real Estate, there are 7,000 proptech companies across the globe. With so many to choose from, how does an investor decide where to put their venture capital?
READ ALSO: Sizing Up Real Estate’s Top Tech Challenges
At the 2019 CREW Network Convention in Orlando this week, a panel of investors shared their expertise in the proptech space, offering tips on how to best scout a potential investment, what questions to ask and which factors to consider when choosing to invest in a proptech company.
“I think it’s important for you that you look at companies you may use in your own businesses,” said Liza Benson of Moderne Ventures, adding that investors should look at the sustainability of the company and should be prepared to ask questions about the financial health of the firm.
“How well are you funded, how much cash do you have? Who are the people backing you?” said Benson. “You certainly don’t want to have your part of your business very dependent on a company that doesn’t have the right financial footing.”
Investors should also take a hard look at a company’s model and whether there is a true path to profit.
“You should be able to see a line of profitability,” said Momei Qu, vice president of PSP Growth, a venture and growth equity arm of PSP Partners.
Andrea Jang is the head of growth for the Americas at JLL Spark, a $100 million global venture fund that focuses on investing in proptech within the commercial real estate sector. Jang and her JLL Spark team are strategic in their investments—they factor in whether their investments can be used within their JLL channels and with JLL clients.
“If there’s any tech we’ve invested in that I’m presenting to JP Morgan Asset Management or Morgan Stanley’s real estate group or Prudential, I have to give them a level of assurance that this isn’t a company that will go under in the next year or so,” said Jang.
After spending the last few weeks writing about the grocery industry, it is time to discuss another industry that is in an even greater state of upheaval — the shopping mall industry.
The mall game has become a split between the haves and the have-nots. Class A malls are thriving, while Class B and C malls are struggling. That is especially true of Class C malls. Pictures of recently abandoned malls, like the one above, are some of the scariest things going on the internet right now. One smart, enterprising mall in Minnesota even plans to convert an old anchor tenant location, formerly a Herberger’s department store, into a haunted house this October. Talk about irony!
It is easy to see why all this is happening. Prior to the 1990s, malls were an incredibly efficient way for consumers to shop and to buy products. Everything was all in one place. Gap, Victoria’s Secret, Foot Locker, you name it, were all under one roof. Malls were a cornucopia of conspicuous suburban consumptive delight. They were the only and best game in town.
Then things changed with the rise of e-commerce. Now the entire product catalog of the world is available to the American consumer right from the palm of his or her hand, on the way to or from work, at work, or even sitting on the couch at home. The convenience factor of malls as a one-stop shop for “closet-loading” (my term to reference the specialty apparel equivalent of grocery pantry loading) is dead. Malls just aren’t worth the time investment anymore. If you are not a Class A, experience mall destination, chances are you offer no compelling reason for being. At the very least, you’re fighting an uphill battle.
The data bears this out. As search data shows, malls as a means of find, seek and destroy product acquisition are no longer relevant. According to Survata, when consumers know what they want to buy, 85% of the time they go to Amazon or Google to find what they want. It is easier to look things up and buy them online than it is to go to the mall — consumers can either buy the things they know they want on Amazon or discover the things they did not know they wanted on Instagram.
All is not lost, however. It it just takes chutzpah and the willingness to break from convention. The real irony in the whole situation is that malls actually could be just as important and relevant in people’s lives as they ever were. It is just that how and why they are relevant is going to look very different from the days when hearing the Gap was coming to your town was like Christmas in July.
Here are three actions malls could take today to reclaim their relevance with the American consumer in every town nationwide:
1. Adopt a New Retail, Data-First Mindset
Just as retailers need to know their customers at an individual level, so too do mall operators. This knowledge comes from putting into place the foundations for real-time data capture. Malls of the future should act and behave like video games. The mall goer should be thought of as the main player in the video game, and everything within the mall should act as a non-player character within the game, reading and reacting to the mall goer at all times.
That might sound super geeky, but it is actually really straightforward. Mall operators should strive to know, all things being equal, anything and everything going on within their malls — how many people come to them, how many people go to a given store, how many people use their restrooms, to even how many people throw coins in the fountain, for example.
All this starts with mall operators adopting the foundational pillars of New Retail, espoused by Alibaba and others: 1) Cloud Technology 2) Real-Time Data Capture 3) Location and Context Analytics. That way they can begin to treat their “malls” like a Silicon Valley product, i.e. not as something that will obsolesce over time but as an organic idea that will adapt itself iteratively, as the world around it changes.
2. Get Hippie with It
Malls are about so much more than leasing space to retailers. The mall itself, not the shops within it, is the product the American consumer actually consumes.
A box and four walls are no longer compelling enough value propositions for either the consumer or the retailer. As a result, new technology and architectural infrastructure needs to be part of the 21st century mall value equation.
Mall operators should get with their tenants and make like it is the 1960s, commune-style. They should become one with each other by:
Step one — malls should build branded digital marketplaces. They should showcase all the retailers within their walls, “extend the aisle” of those retailers, and also exhibit local level retail that may not be ready for the prime time of everyday physical retail operations.
The fact that this has not happened already boggles the mind. For decades retailers used malls as their physical marketplaces, so why in the hell should they not use malls as digital marketplaces as well? Everyone wins at a relatively low cost, and, heck, many of the retailers to which the malls lease their space are already using Amazon for this very idea! It is hardly a change at all.
Step two — build the physical infrastructural guts to let the love flow. This effort starts with malls designing collaborative backrooms.
While this step also requires getting the retailers on board, it too should be an easy sell. For instance, what on god’s green earth is the benefit of every specialty retailer operating their own backroom? Stocking and replenishment (say nothing of shipping!) is now almost a white-label activity at this point for digitally-native brands, and yet, at malls throughout the country, Gap still thinks it needs to operate its own backroom logistics and J.Crew does too.
Stop the madness!
“Pool the backrooms!” should be cry that rings out across the land, from sea to shining sea, and mall operators should then design the guts of their buildings so that retailers can operate out of these shared “fulfillment communes” behind the scenes. Intraday operations would not be affected and, lo and behold, the latest in automation and fulfillment tech could be used to pick and pack orders too, which leads to the next point.
Step three — design the mall to be a full concierge/style experience for consumers. An enticing marketplace front end and a more efficient back end fulfillment setup should be complemented with a universal mall mobile point-of-sale system, so mall goers can shop any store they want, however they want, both online and in the physical world, alongside amenities, like curbside pickup hubs and/or order pickup lockers, for both consumers and crowd-sourced delivery drivers alike, and for the products that may not even be carried within the four walls of the mall.
That way the mall becomes a choose-your-own adventure mode of convenience. Consumers can still go to the mall if they want, but they can also start to interact with it on their way home from work, on their way to the soccer game on the weekends, or even after a hard night out.
And, most importantly, they can walk from place to place, store to store, with their phones as a remote control in one hand and a glass of wine, beer, or coffee in the other and never have to worry about carrying shopping bags from more than one store or having to take out cash or a credit card ever, ever again!
3. Go with the Flow
What starts to emerge from the above is a new human, digital, and physical experience design, one part mall as we used to know, one part e-commerce, and one part local strip mall convenience.
Now put all this together and go the final step – malls operators should invest in new experience design improvements and partnership relationships that operate within the flow of the communities within which consumers live.
The most important question of all is, “Why come to the “mall” to begin with (and, I now use the term “mall” very loosely)?” The answers to that question and that question alone should guide this activity.
There is no blueprint here. For some communities, it could mean refashioning the above as senior citizen hovels. For others, it could mean giving millennials a new way to live, work, and play without lifting a finger. While still for others, it could just mean figuring out how to alleviate the pressures of everyday life and the unending mental dredge that is social media.
Is the answer grocery? Could be.
Is it gyms? Could be.
Is it doctors’ offices? It could be that too.
But, it is definitely not just the same damn retail that one can find anywhere. That is the art to it. That is where qualitative genius will come into play. The foundation is in steps one and two above, and the icing on the cake is in how one mixes the architectural design to allow for the amenities that matter most in the context of the jobs different communities of consumers have to get done every day.
Malls were invented to make things easier for Americans. It is time they go back to their roots. It is time they leave shopping at the door.
We have Amazon for that.
The following article features contributions from Virginia Wilson (affiliated with Coldwell Banker Commercial Caine) and Dan Stiebel (affiliated with Coldwell Banker Commercial Schmidt)
What is now known as a thriving transportation and recreational trail system in Greenville, South Carolina, the Prisma Health Swamp Rabbit Trail began as a partially completed railroad project dating back to the late 1800s. In a time of frenzied railroad construction, the Carolina, Knoxville & Western Railroad was born in 1889.
Modeled after hundreds of similar projects across the country, the railroad had plans to stretch roughly 300 miles, connecting Greenville County to the Atlantic Ports and Tennessee. However, two years later, the railroad went bankrupt with only 12 miles completed. From hauling timber to weekend passenger service, the rail was then used by many owners for different purposes, never expanding beyond Greenville County. Along the journey, the name for the railroad became “The Swamp Rabbit” –coined by passengers for the way the uneven tracks “hopped” through the Reedy River wetlands.
Freight Transportation Route Becomes Tourist Attraction
It wasn’t until 1998 that the railroad was purchased by Upstate Forever, a local nonprofit who launched a campaign for public acquisition of the line to convert it to a trail. Now a 22-mile multiuse greenway, the Swamp Rabbit Trail system stretches from north of Traveler’s Rest through Greenville.
Recently named one of the top 10 places to live in 2019, Greenville, South Carolina is no stranger to accolades. For many, however, the town was not on the map 10 years ago. Looking at the history of this railroad turned multi-use path reveals how transformational the Prisma Health Swamp Rabbit Trail system has been to the town’s success. Today, the trail is used by over 500,000 people annually with 18-25% of those people being tourists. The trail generates nearly $7 million in tourism-based revenues for Greenville County each year.
This “rails to trails” phenomenon is happening across the country. In Traverse City Michigan, the TART is a 10.5-mile-long paved trail that was spurred from the economic revival of a rail corridor in Traverse City. The trail has encouraged residential and commercial development throughout the area. Hotels, apartments, a new cycle shop, a winery, and a clothing store joined the region, to name a few. Julie Taylor, Executive Director of TART Trails, cited a study in Northern Michigan of the Vasa Pathway a few years ago which found that the path contributed $2.6 million annually to the region through trail use (events and day use)
Rails to Trails Foster Community Engagement
Ty Houck, Director of Greenways, Natural and Historic Resources for Greenville County, has been overseeing development and operations of the trail since 2007. Dubbed the “Father of the Swamp Rabbit Trail,” Ty is quick to credit the large community of support behind the project. To Ty, the Swamp Rabbit Trail system offers much more than a weekend bike ride.
In his words, “This is a bigger system than just a trail.” For some Greenville County residents, it is a lifeline. To the 28% of Greenville residents who do not have a driver’s license, the trail opens opportunities for a quick bike ride or walk from home to community destinations.
Trails Provide a Desirable Lifestyle Amenity
When asked why the trail is important to the community, Ty shares stories of the life-changing effects the trail has had on many residents. The accessible nature of the flat, paved trail has caught the attention of many individuals in wheelchairs. Developments of zero entry homes have been spurred by the trail, allowing hand cyclists to get from inside their homes to the trail system with ease.
Brad Halter, Chairman of Coldwell Banker Caine and Coldwell Banker Commercial Caine and lifelong Greenville resident, comments on the growth the trail has encouraged in Greenville. “It has been remarkable to see long ignored corridors in town become a catalyst for economic growth – and even more than that, health and quality of life.”
Matt Vanvick, broker with Coldwell Banker Commercial Caine, experienced this firsthand in representing the lease for Craft Axe Throwing, a unique game center franchise. When the operation moved to Greenville, the owners were especially interested in a developing area of town that would draw foot traffic. Hampton Station was the perfect fit. Situated in Greenville’s Old Water Tower district, this development features a taco shop, brewery, CrossFit gym, and of course, it is directly connected to the Orange Line of the Swamp Rabbit Trail system.
Rail Trails Encourage Economic Re-Use of Obsolete Real Estate
Real estate developers like Drew Parker of the Parker Group, also view the trail as an opportunity. The Commons, Drew’s current project, is turning an old mill into a center for office space and local restaurants. In Drew’s words, people are looking for experiences and authenticity. Now, instead of simply going on a bike ride, you have the option to bike to a brewery, to lunch, or for a cup of coffee.
The movement has inspired development outside of Greenville as well. Travelers Rest, the once sleepy town 15 minutes outside of Greenville, was named for its function as a stopping point for travelers passing through on their way to the Western North Carolina mountains. Now, a mini epicenter for culinary and brewery excellence, the town has outgrown its name. Much of the transformation happening in Travelers Rest is credited to the Green Line of the Swamp Rabbit Trail.
Converted Train Paths are Comparable to an Urban Subway System
The success of TART, the Swamp Rabbit Trail and similar projects is only growing. Greenville County Rec views the Swamp Rabbit Trail system as an opportunity for the entire upstate expanding like a subway system or like Ty likes to say, “a road network without cars”. Cities throughout the Upstate are joining the broad conversation and looking into easement agreements to create and connect trails. Ideally, the pieces of the trail will all connect together one day.
For the Swamp Rabbit Trail system, the Cinderella story is not finished yet. The simple ribbon of asphalt continues to expand in multiple directions connecting people to places in their community. Transforming once forgotten corners of old mill communities into vibrant centers of activity, the undeniable economic impact continues to grow. Beyond South Carolina, the rails to trails initiative weaves throughout the country. Coldwell Banker Commercial recognizes the entrepreneurial and resourceful nature of this movement as something to keep our eyes on.
Three years ago, Chinese investment in U.S. real estate hit a peak of $46.5 billion. The country’s biggest players—Anbang and Wanda Group—plunked down billions of dollars for high-profile properties in core markets of the country, including New York City. But now, with an investing atmosphere shaken by trade wars, uncertainty surrounding the stability of the U.S. government and the ever-looming threat of a recession, what foreign investment looks like in the U.S. has experienced a significant shift.
“It’s changing, but it’s not the end of the world,” said Jim Costello, Senior Vice President at Real Capital Analytics, at a panel on foreign investment at the 2019 CREW Network Convention in Orlando, Fla., on Sept. 26. Costello noted that for the first time in seven years, cross-border investors are selling more than they are buying.
“Don’t panic,” said Costello. “There are a lot of negative things in the news these days, but if you look at some of the fundamentals in the U.S. economy, there’s still a lot of good reasons to be in U.S. real estate.”
While Chinese investment has pulled back dramatically, other countries have filled in the gap. Canada is the top foreign investor of American real estate, with 54.2 percent of cross-border investment, followed by Germany with 7.7 percent, according to data from Real Capital Analytics.
Foreign investors aren’t just looking to acquire office properties—retail, industrial and senior housing and care assets are attracting more capital. The interest in new sectors can be attributed at least in part to wariness in investing in primary markets and sectors due to cap rate compression.
“We’ve talked to a lot of groups about importance of Seattle and Chicago,” said Maggie Coleman, a managing director in international capital at JLL. “In some ways those are acting more like primary markets. We’re working on education around secondary market exposure.”
In the multifamily sector, Canada has emerged as one of the biggest investors in the U.S., picking up large portfolios in the southeast and southwest regions, where the development of workforce housing has flourished.
“They saw workforce housing before it became the darling of multifamily,” said Coleman. “They really identified that this is where middle America rents and works and this part of America is not going anywhere.”
Despite the higher cost to investors, medical office and senior housing properties are getting more attention, as the demographic wave of aging Baby Boomers is leading to an uptick in demand for these kinds of properties.
Investor concerns over regulatory issues such as rent control could indirectly give secondary markets a boost, as most of the regulations that have been implemented have been affecting coastal cities.
“They’re pausing when they look at states and cities where they implemented or are having some kind of regulatory conversation and may implement in future,” said Coleman.
Analysts are also anticipating a big influx of investor money coming in from Japan, where $8 trillion in pent-up capital is yet to be deployed, with a large amount needing to go into real estate.
“We’ve been courting Japanese investors for a while,” said Coleman. “But then we saw an influx from Singapore. We saw their REITs and pension come out with capital in a very meaningful way. That has really supplemented the Japanese capital, which we’re still waiting for.”
From Coldwell Banker Blog
“Whereas the focus used to be on more efficient workspaces, today’s employers are realizing the benefits of making offices more attractive by adding in open community spaces, working to choose for themselves how and where they work within the office. And employees and workers are responding.”
Retail trends have had a huge impact on the industrial market for the last few years. Amazon shifted the entire e-commerce industry to lightning-fast shipping, which means that industrial centers and warehouses are being moved to closer-to-the-city locations to handle the load.
On top of that, the trend toward reduced store size means that there’s more need for off-site storage and warehousing for retail products than ever before. Here are 3 other ways that the industrial market is being impacted by retail.
#1: Massive Closures of Big Retailers
Everything that you could buy at places like Sears, Kohl’s, and JC Penney can be ordered online at Amazon for less and with front door delivery. Because of that, retail giants are seeing massive closures. This year alone, Sears is closing 150 of its stores, JC Penney is planning to close 140 stores, and Macy’s is closing 100 stores but they’re not the only ones.
Brick-and-mortar retail overall is preparing for massive closures due to bankruptcy over the next year, largely because of Amazon, but also other online retailers. These closures are both haunting and inspiring for the industrial market. Those holding leases for big box stores are preparing for huge hits. Those investing in these shuttering retail stores have big new innovative ideas for how to reuse these spaces.
#2: Rethinking of Industrial Space Use
The vacancy rate for industrial space hit a low point last year with a basis point drop of 70 points to 5.6%; lower than the record low hit in 2000. Those vacancies may not last long as industrial leaseholders and investors seek to find new uses for spaces now housed by failing retail giants.
Again, e-commerce is the driver behind this trend sweeping through the industrial market; the rethinking of industrial space use. Some old shuttered storefronts make excellent fulfillment and distribution centers that are located closer to city centers. They are now being converted to handle last-minute-mile issues for new online retailers to aid in faster on-time delivery.
#3: Global Consumption Increases due to E-Commerce
U.S. retailers aren’t the only ones feeling the effects of retail on the industrial market. E-commerce has also increased global consumption and is expected to account for at least 30% of the global economy over the next several years. Products once cost prohibitive for people living in the Far East are now as easy to order online as they are in the U.S.
That has helped to expand the global reach of online retailers beyond U.S. borders. With that, the need for more physical space to house all of the goods needed to accommodate the growing global demand for faster delivery has made once abandoned industrial spaces more attractive.
Some of the top players in the global market demanding more supply from U.S. online retailers are China, Brazil, and Mexico. Expect the reach of global goods from online retailers in the U.S. to expand to other parts of the world, thus further increasing the appetite for more industrial space.
Written by Nicole Brzyski for Coldwell Banker Commercial Affiliates
Post written by
DJ Van Keuren
DJ Van Keuren is the Vice President for the Hayman Family Office/Hayman Properties & is a graduate of Harvard University.
Just today I received a call from a potential syndicator who asked for my opinion about family offices investing in Opportunity Zones and what my thought was about which of these markets seemed like the best place to invest. The initial premise of his question was, “Do you think families will embrace this opportunity?” I told him that yes, I do. I think a lot of families will look to take advantage of the Opportunity Zone program, but I also believe that many family offices will make investments into Opportunity Zones that will not produce the results that they expect.
Why? Because unlike the SEC or FINRA, which want to put parameters on who can raise money or sell securities, the government has put no limitation on who could start and operate an Opportunity Zone Fund. I believe this will lead to many people selling the sizzle and the tax benefits of the program, rather than the real estate investment itself. As I have said in the past, regardless of the tax benefits, you still have to have an excellent investment opportunity that is being managed by a proven operator. These are the fundamentals of real estate investing.
The second question he asked me was if I thought there were more opportunities in secondary and tertiary markets than the major markets. It was an excellent question. If you look at New York City right now, there are many real estate investment opportunities that are selling at a high price relative to other markets, like Boise, Idaho or Nashville, Tennessee. Although these capitalization rates are quite low in NYC, they are in a city that keeps gentrifying — and that has pushed from beyond lower Manhattan and into Brooklyn for quite some time now, and I believe it will head up through Harlem like a wave.
If there are Opportunity Zones that butt up against a major city, then there could be some excellent opportunities, but regardless, you have to take a good, hard look at a market demand analysis. Is the population in that area shrinking or growing? What is the current income like in that area? Is it close to public transportation? Is the “wave” of gentrification coming that way? These are just a few of the questions outside the investment you should look at, and if your operator can not provide this information, then I would start looking elsewhere. This type of nonmarket information happens quite a bit when the market is doing very well and people are hopping into the market to become “the next big developer.” This could easily happen with Opportunity Zone properties.
Location, location, location is still the most important thing to consider in any real estate investment. So what about secondary markets? Let’s look at Las Vegas for example. I was there with a good friend from another family office, and we were in the old part of Las Vegas where it all started. Apparently, that area has already begun to gentrify with the help of the Zappos CEO Tony Hsieh, who has been pouring money into that area since well before the Opportunity Zone program came about. Do I think this is a “good” Opportunity Zone? Well, yes! Why? Because it is close enough to the central part of the city, and the gentrification process had already begun prior to the announcement of the Opportunity Zone program.
Personally, if I were to look for an operator to work within an Opportunity Zone, what I would look for would be pretty simple. I would find an operator who has experience in low-income housing or working with Historic Tax Credits that have already been working in these types of locations and properties. They will not only be able to provide a track record that will include actual working knowledge of real estate investment in those areas, but they will also provide proven results. If this operator were getting 8% returns from past projects, being able to use the benefits of the Opportunity Zone will only increase your returns well into the teens. Now that would be a good Opportunity Zone investment.
DJ Van Keuren is the Vice President for Hayman Family Office/Hayman Properties & a graduate of Harvard University.