How has the capital- raising process changed over the years?
There is more capital in the market seeking opportunities than ever before. Despite the competition for capital going towards good deals, base underwriting has stayed conservative and realistic for the most part over the years. In addition to familiar underwriting, investors, including institutional investors, are increasingly interested in looking at the growth story in strong secondary cities. The cities that continue to show strong investment growth are Nashville, Denver, Austin, San Antonio, Phoenix, Tampa, Charlotte, and the Research Triangle. Further, investors have grown more familiar with the Opportunity Zone regime. As such, family offices are actively seeking investment opportunities in Opportunity Zones as a material portion of their portfolio.
How would you describe the current capital raising environment?
Frothy for specific asset classes and renewed interest in others. The pandemic narrowed the focus for most investors for a short period of time — multifamily, industrial, single-family rentals, data centers, and MOBs were attracting, and continue to attract, the vast majority of interest. Conversely, and as expected, the pandemic hit hospitality, senior living, and retail the hardest. Office wasn’t hit as greatly from a value perspective and continues to be mired in uncertainty. As a result, this led to the freezing up of investment activity. Most groups are still waiting to see which way the wind blows.
What were the lessons learned from COVID-19?
Industrial is here to stay and will continue its meteoric ascent. Multifamily is a resilient asset class even in a time of great uncertainty. Grocery-anchored shopping centers continue to hold up well and attract investors. It will be interesting to see where the office sector goes, as the story has not yet been written. Despite this, office buildings will continue to be a significant asset class due to collaboration, company culture, and relationships birthed in an office setting. However, older product may be impacted more than new construction as employers attract the best talent through incentives, such as new and amenitized spaces.
Have you seen a change in how investors operate and deploy capital?
Yes. Investors were undoubtedly cautious for a time but have started to gain interest in the once beaten-down sectors. For instance, hospitality is beginning to see an uptick in interest. Many groups took their foot off the pedal on development in 2020, but 2021 has seen a renewed interest in residential development. One trend that was accelerated during COVID-19 was the attention from equity in build-to-rent and single-family rental investments.
What do you expect the capital raising environment to look like in 2022 and beyond?
The capital raising environment is anticipated to be about the same in 2022 compared to 2021, barring any black swan events. It is expected that crowdfunding will grow in the future. Inflation may be more permanent, which should continue to push people towards real estate as a great hedge. There is also a tremendous amount of dry powder in the private equity real estate space looking for a home; therefore, this will continue to drive cap rates down in certain asset classes.
What are the top factors that influence a real estate project’s success?
SPONSOR, SPONSOR, SPONSOR. A good sponsor can overcome an emerging location. The qualities to look for in a sponsor are creativity, honesty, experience, and incentive. A sponsor with these qualities will dance the fine line between conservative yet realistic underwriting. On the one hand, projections not based in reality will instantly turn off investors. At the same time, a sponsor should tell the story as it may lie – rents are moving up in the sector/geography, and the underwriting should capture that, so long as it is defensible. On the other hand, fees should be kept to a minimum – development, acquisition fee (topped out at one percent typically), and asset management fees are often accepted (though negotiated) by investors. Disposition fees are generally disfavored, and investors prefer to promote structures.