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In a recent podcast excerpted here, Michel Couillard, CRE, interviewed James Nelson, CRE, about real estate investment opportunities that have emerged during the pandemic recovery. Couillard is global chair of The Counselors of Real Estate, and Nelson is principal and head of Tri-State Investment Sales for Avison Young in New York City, specializing in multifamily, office, and retail sales. Nelson is former chairman of the Real Estate Board of New York's commercial board of directors.
How would you describe the investment environment?
We have very low sales volume because many buyers and sellers have been on the sidelines. They're waiting to see how this all plays out and where the opportunities are. But what I’m optimistic about, and how this [pandemic] downturn is different from the financial crisis, is the amount of liquidity that's in the market, the amount of equity on the sidelines, and the debt that’s available, albeit that type of financing is really more available to the cash flowing assets at a much more conservative loan-to-value. But to talk about the opportunity in the market, I haven’t seen this before, where there’s this much of a spread between the cap rates and the 10-year Treasurys. That presents an opportunity if you can buy at today’s pricing and lock in long-term, 10-year debt.
If you speak to most of the investors out there, they’ll say they’re frustrated because they’re not seeing a lot of deal flow. It’s been quiet because a lot of sellers are trying to hold off decisions if they can. They’re saying, “I can sell in six months to a year from now, once the offices return and people return to markets like New York City.”What property sectors look attractive to investors in 2021?
It depends on if you’re looking to make a mainstream investment or you’re a contrarian. If you look at the spectrum—my data is just for New York City—but trying to understand where pricing is by asset classes, there are several asset classes that have experienced downward pressure on pricing. But other asset classes—like life sciences, medical, and certainly industrial logistics—have been winners. I don't even know where to put hotels right now. I think there's a difference between hotels for the business traveler and leisure. With regard to the future of the workplace, we’re still trying to figure that out. Companies are downsizing and offering flexibility. This is probably the greatest experiment we’ve seen in the modern age of office use. We really need to get through this time, get everyone fully vaccinated, and see how the office use has changed.
Based on the data, with the possible exception of retail, the pandemic had less effect on real estate than the global financial crisis. Why?
With the financial crisis, we created a leverage situation. I sold a vacant building where one of the big banks provided 90% financing on pro forma rents. That would never happen today. A lot of the big banks learned their lessons, and they were a lot more conservative with how they approached these loans, looking for the cash flow and underwriting the deals more carefully. During the financial crisis, the idea was to kick the can down the road and hope a market recovery would save the day. This time around, it’s very difficult to talk about the market without getting specific on asset classes. But in general, we’re not going to see any drastic moves until buildings open back up and tenants come back in the market. My firm does a lot of work, including valuation, with special servicers. For now, no one’s taking an aggressive stance. You may have banks selling off loans here and there, but for the most part, they’re going to give forbearance and give borrowers time to figure this out and work with their tenants. There's that feeling that we’re all in this together.
Hear more perspectives from CREs in the know by tuning in to this and other CRE podcasts.