Executive Panel Explores the State of Capital at ULI Conference

The debt markets are forcing a reset in much of commercial real estate and concerns about rising costs have investors rethinking strategy, according to a panel discussion “Capital Flows in Uncertain Times” on Tuesday at the ULI Spring Conference in San Diego.

Cia Buckley Marakovits, president & CIO, Dune Real Estate Partners, led a fast-paced chat with Kavindi Wickremage, managing director, Bain Capital; and Amy Price, managing partner, co-head of US, BentallGreenOak.

The group said today’s economic environment is “episodic” with Marakovits saying, “this pause in real estate is a resetting, not a crash. During the past year, the real estate industry may have over-shot itself. Real estate is a bit painful right now, but it corrects. That’s how it takes care of itself.”

Wickremage said that values will be challenged given these debt markets and Price added that “interest rates can go to 3.5 percent, but won’t be there for long. It’s not like they are going to 5 percent. Lenders can be prudent, working with loans already in place.”

Marakovits said NOIs are stretched right now and are under pressure. Wickremage said the markets are reacting to inflation “with oil and supply chain costs out of control. Insurance costs are up. Real estate taxes are up. This should not be long term, but will be episodic. When the price of everything is going up, it’s hard to rely on growth.”

Wickremage said some in the industry “paid for the growth they wanted to achieve, and the sellers took advantage of that. Now, there’s a shifting back of that risk.”

Country is First Choice Point for Investors

Price said the war in Ukraine is making people think twice about investing in Europe and Asia. The US will be a net benefactor of this.

Marakovits said that today investors are looking at country selection first, then sector, then geography for that sector. “If everyone is just a little bit more-picky about what they choose, the real estate industry will pull back a lot,” she said.

Location is a preference point that has changed to the desire for “new.”

“Just because the building is located at the corner of Main & Main doesn’t mean it is what buyers want,” Marakovits said.

Industrial Growth Getting ‘Pushback’

Marakovits said she’s seeing that all the growth in the industrial sector “is starting to get some push back from nearby neighborhoods. People are having to choose what they want included in their built environments. Industrial space is more than just logistics. We’re seeing some small manufacturing in the US today.”

Office space is a bit of a wild card as “the perceived worth in the minds of the buyer and the seller is widening. Every conversation starts with ‘What can this convert to?’ ” Marakovits said.

Price said that the type of building people want today is changing. “There’s more interest in ESG and sustainability overall,” she said. Wickremage added, “Density in our office space is out of favor now. Workers want more space so they can feel safe.”