Placing Capital in Uncertain Times: A Conversation with CBRE’s Val Achtemeier
MBA NewsLink interviewed Valerie Achtemeier, Executive Vice President at CBRE Capital Markets in the Debt & Structured Finance Group. Based in Los Angeles, Achtemeier leads a team in placing debt and equity on commercial real estate throughout the U.S. She has originated more than $32 billion of commercial real estate loans and joint venture equity transactions during her career. Since joining CBRE in 2009, Achtemeier has established a predominately institutional client base and a strategic focus on sourcing debt and equity capital for industrial, office and retail projects.
MBA NEWSLINK: Your team focuses on placing debt and equity across the U.S. with specialties in industrial, retail and office transactions. How are investors thinking about underwriting in such an uncertain environment across different asset classes?
VALERIE ACHTEMEIER: The market is clearly seeing a “rotation of capital” that favors certain asset classes and penalizes other asset classes. We are seeing winners and losers on a relative basis in terms of attracting capital and in terms of pricing.
We focus a lot of our time on industrial assets and data center projects, which are clear winners today. E-commerce growth continues to propel industrial warehouse demand and industrial (of all types) is proving to be very resilient. Data centers are attracting more capital and gaining momentum. Multifamily remains in high demand and is also performing well. For industrial assets, we are seeing very balanced underwriting with solid forecasted rental appreciation and we are experiencing core cap rate compression given the flight to quality and stable income. Asset pricing/values have increased during COVID-19 and investor demand is high for logistics assets. At the same time, debt pricing is very attractive. Core fixed rate loans are pricing, lower than pre-COVID levels – at 2.40-2.75% for 8-to-10-year, full interest-only loans today.
For office and retail, we are seeing more of an underwriting shift as investors are more conservative on lease up, rental rate forecasts and overall valuation metrics.
NEWSLINK: You are based in a gateway city that has outperformed this cycle; however, since COVID-19, demand is shifting away from dense urban cores to more suburban markets. Was this trend already happening and is it something that likely reverses once the country gets past the danger and fear of the pandemic?
ACHTEMEIER: I am based in Los Angeles in the heart of SoCal, a large, diverse and vibrant market. We are seeing increased demand in the suburban markets as patterns shift. Yet, urban and infill space is still viable and will regain more traction after the pandemic subsides. These trends also vary by product type.
The retail and restaurant mix is getting hit hard, so we need to see this stabilize to bring back all the benefits of an active urban lifestyle that drives CBD demand.
NEWSLINK:Let’s discuss office markets. What’s trading or not? What trends are available data, such as rent, occupancy and sublease space showing up in markets? Do you expect distress to emerge in this sector in 2021?
ACHTEMEIER: West Coast office sales volume is down about 53% YTD and net absorption has been negative in most markets. Single-tenant credit deals are still trading and in demand. The office capital markets sector actually has paused, but it will resume as activity returns. Credit quality and rent roll maturity schedules are getting a lot of focus on the debt and equity side.
The West Coast region still has a very solid average occupancy at +/- 89% with a base inventory of 1.34 billion square feet. The office market will likely undergo some design changes and extra capex requirements for re-configured space, but we believe long-term demand for office space will continue to be solid in most of the West Coast markets. Leasing volume is down and office tenants are being cautious with more shorter term leases getting signed generally.
I expect some distress to emerge in the office sector, but leverage levels are generally manageable and investors were quite well capitalized going into the pandemic. I expect to see distress hit the retail and hotel sectors more severely than the office sector.
NEWSLINK: What trends in retail are you seeing that will drive this asset class over the next several years? It’s been a laggard in terms of debt capital appetite as compared to other property types over the last few years. Anything you see that could reverse that trend?
ACHTEMEIER: Retail currently has significant challenges and will need to be revived and reinvented. Luckily, retail developers/investors are incredibly creative and entrepreneurial, plus they have excellent close relationships with their tenant base. E-commerce is seeing all of the growth now and retailers that survive will capitalize on that trend and incorporate it into their strategy. Showrooms, e-commerce efficiency and experiences will be key to survival. The food and beverage/restaurant tenants will need some help as will the service-related tenants; these users help drive the desirability of retail today and they have been very negatively impacted with the pandemic so we have some work to do.
We are seeing interesting plans from big national retail chains to step up their e-commerce activity and connectivity with their brick-and-mortar stores. Major department stores are adjusting with better online promotions and e-commerce distribution systems to boost sales and profitability. In my opinion, retailers that survive are going to work to find the perfect mix between brick-and-mortar retail experiences coupled with the efficiencies that e-commerce offers. The supply chain efficiency and online ordering ease are keys to driving growth and better margins.
NEWSLINK: The bid/ask spread seems to be a big hurdle for driving sales transactions in this marketplace. How do you view the tug-of-war playing out with so much capital raised to take advantage of opportunities and owners not looking to lock in COVID-discount pricing if they don’t have to? What variations might we see across different property types or markets?
ACHTEMEIER: The bid/ask spread is really interesting now.
- Industrial assets are typically experiencing bidding wars with cap rate compression and deep bid lists. The price per square foot for top-quality industrial is now often higher than suburban office pricing. We have more disappointed would-be buyers than ever before as it hard to win industrial deals now–pricing is very tight. Industrial is proving to be a consistent performer with very attractive returns and limited capex costs. Pricing across the risk spectrum is tightening from core to opportunistic profiles. It is a huge bright spot in the market and is supported by the fundamentals.
- Multifamily sales are strong with general pricing agreement between buyers and sellers.
- The bid/ask spread is fairly large on office assets with a lot of price discovery and broker opinion of value exercises.
- Retail and hotel bid/ask spread is a big issue as investors search for solid footing on value and net operating income trends.
The tug-of-war will really vary by property type and risk perception. Some former secondary markets are more appealing currently because the workforce is less restricted now with more optionality for workers. Overall, liquidity remains fairly robust, but it varies significantly by asset type.
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