(Read more on the TIC market.)
LOS ANGELES-The tenant-in-common industry has enjoyed immense success, but the industry also faces daunting challenges and a slowing rate of growth, according to speakers at Thursday's RealShare TIC. Expert after expert at the conference, which drew more than 230 attendees at the Millennium Biltmore Hotel in Downtown Los Angeles, spoke of the industry's potential, but also of its lack of standardization, inefficiencies and risks.
Gary Beynon of Omni Brokerage, who delivered a report called "State of the TIC Industry Mid-year 2007," observed that many TIC sponsors "are not good at their jobs, so we have to be more efficient in how we run our marketplace." Explained Beynon, "A lot of information is available to us, and we need to be good students so we can build a strong TIC marketplace."
According to Beynon, some of the majors hurdles the TIC industry is facing are interest rate risk, the amount of money chasing real estate, managing the growth from the larger institutions entering the marketplace, overpromising and underdelivering, dealing with legislation and regulations, and lack of standardization. Although these challenges may seem daunting, Beynon said that they can be overcome by, among other things, adding more properties to the marketplace, shortening syndication times and reducing fees.
Tony Thompson, keynote speaker and founder of Triple Net Properties, voiced his views on the risks facing the industry. "There's a lot of aggressive underwriting," he said. "And sponsors, in general, are undercapitalized, and most don't have recurring revenue. Undercapitalized sponsors are always the biggest risk."
Many of the weaknesses and risks that experts acknowledged were evident during the last part of 2006 and the first quarter of 2007. Last year, the TIC industry raised $3.7 billion-worth of equity in completed securitized transactions, short of the its $4-billion projection. Although the industry did not fare much better in the first few months of this year, many experts remain optimistic.
"We experienced a little slowness in the marketplace but, in terms of investor demand, I don't see that diminishing whatsoever," said Patricia DelRosso, president of Inland Real Estate Exchange and TICA, and a participant in the Town Hall panel on supply and demand. "In 2007, we're seeing more larger investments and larger amounts of equity coming into the marketplace. We're seeing people that are coming to us with $1 million to $2 million to place."
DelRosso described investor demand as still relatively high, but she observed that it is often accompanied by trepidation. "Investors are being more cautious in terms of returns on investments," she said. "Investors are affected by the media and the news about sponsors experiencing bumps. But our projection for the future is that demand is there."
Panelists suggested numerous ideas on how to ensure that demand remains high, despite dealing with sponsors that many felt were lacking in communication, knowledge and a willingness to lower yields. "I do not think sponsors do nearly a good enough job with their pro formas reflecting the rent structure," said William White, founder of Alexander Partners and a participant in the due diligence panel.
White said that the TIC sponsors "need to be able to articulate to our investors where the particular risk is or about aggressive underwriting. At the end of the day, as a broker-dealer representative community, we have to start asking a lot harder questions."
Conference participants pointed out that, at a time when sponsors are facing increased criticism, investors are requiring more assurance from broker-dealers. With the continued debate about whether a TIC interest is a real estate purchase or a security, some investors are diversifying into other securitized products.
Rich Kelley, director for the RealShare conference series, kicked off Thursday's event, which was the second annual RealShare TIC conference. The RealShare TIC conference and other RealShare events are produced by Real Estate Media, publishers of GlobeSt.com, Real Estate Forum and Real Estate Southern California. The company also produces two other regional publications and a wide variety of niche online products.
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