Lever’s Angle on 2020 Real Estate Investment Strategies
By: Adam Horowitz, Lever Capital Partners
Where are we in the cycle:
We’re on a 10+ year run of economic expansion since the fourth quarter of 2008 and people have been predicting a recession for a couple of years now. Since news outlets have to sell ads, there are stories littered with the mention of an “inverted yield curve” predicting an upcoming decline. It’s certainly not a foolproof predictor of a pending recession and in any case it’s flip-flopped back and forth a few times already this year.
Regardless of some possible indicators, investors are certainly worried about a global economic slowdown and the threat of an ever-escalating trade war. What do they do when they feel that way; they flee to higher-quality assets both on the real estate side and as well as long-term US government bonds. There have also been interest rate cuts which are having an impact on the industry. “As a result, there may be some incremental cap rate compression in some markets and property types as lower interest rates reduce upward pressure on cap rates” according to a report from real estate services firm CBRE (NREI).
What are the possible solutions:
Not surprisingly, there’s been an immense amount of development during the growth period. Some of it necessary, especially in sectors like industrial and student housing, and some geographically needed in the “smile states” where population continues to increase. In late 2019 we’re seeing development slowing down as it becomes more difficult to arrange debt and equity financing. That’s certainly not for a lack of deal flow, just what’s actually capable of getting done. Many of our clients, who are both developers and value-add buyers, are moving the needle more towards the acquisition business and away from longer term development projects that might catch them in the middle of an economic downturn.
Value-add deals tend to have a timeframe somewhere in the 1-3 year range which gives sponsors the ability to sell a cash flowing asset more easily. Even if you don’t complete your full improvements, a cash flowing asset still has value and maybe the LP investors get their money back but won’t realize the lofty IRRs predicted by their GP partners. Our most successful clients sell once their greatest returns are realized. I have a feeling we’re going to be seeing faster turnaround in the next year.
We’re also seeing a shift to more NNN deals. Sponsors who haven’t been in the space in the past are looking to park some of their money in safer transactions that can weather a storm and come out the other side relatively unscathed so they’ll have a lot of cash when the market bottoms out. There has been a lot of groups getting their toes wet in this space, which is super competitive, making it hard to find a good deal.
What we can do for you:
In short, A LOT. We’ve been arranging Joint Venture equity financing for value-add transactions across multiple sectors as well as financing NNN development and acquisitions. Everyone and their sister wants to buy value-add multis so you either have to find off-market transactions or seek another asset class that’s lets competitive to find an interested LP. For NNN deals there are many financing options on the acquisition side if you’re acquiring the asset at a market cap rate and we’re arranging development projects at 100% LTC plus pursuit costs.