Capital markets in commercial real estate, which has been on a bull run in Denver and nationwide, will be in the spotlight at a halfday conference June 5.
More than 300 industry leaders are expected to attend the 2018 Emerging Trends in Capital Markets Summit & Expo from noon until 4:45 p.m.
The conference is expected to be the largest of its kind in the Rocky Mountain region this year. It will immediately follow a conference on development at the Hyatt Regency Aurora-Denver Conference Center.
Both conferences are sponsored by the Colorado Real Estate Journal.
In advance of the Emerging Trends in Capital Markets conference, I posed some questions on capital markets for Pete Schippits, senior managing director and market leader for the Colorado Region of CBRE.
Schippits will provide opening remarks and an overview of capital markets at the conference.
Following are the questions and his responses:
Rebchook: Pete, how do you define capital markets in commercial real estate?
Schippits: Capital markets combines property sales, debt and structured financing and investment banking. It can span any commercial property type. For the sake of the upcoming conference, we are focusing on office, multifamily, industrial and retail real estate.
Rebchook: How do the capital markets in Denver stack up against other markets across the U.S.?
Schippits: With a lack of suitable alternatives, much of today’s “wall of global capital” continues searching for yield in U.S. commercial real estate. This has pushed many foreign and domestic investors out of the gateway markets and into strong secondary markets like Denver, Atlanta, Seattle and others.
For example, three of the top six markets for multifamily investment sales volumes in 2017 were strong secondary markets. (Denver ranked sixth. It was topped by New York City, Los Angeles, Dallas/Fort Worth, Atlanta and Washington, D.C. Denver ranked better than Chicago, Seattle, Phoenix and Miami.)
Beyond transaction volumes, we are seeing momentum in investor interest in Denver. The city advanced in this year’s CBRE Americas Investor Intentions Survey, now ranking the seventh most attractive metro for commercial real estate investment across all of the Americas.
Rebchook: What is driving the investment interest?
Schippits: The investor interest is being driven in part by Denver’s strong economic fundamentals, which continue to include population and job growth, investments in infrastructure, access to highly educated and skilled labor and relative affordability compared to most coastal/tier 1 markets.
Rebchook: What asset class do you see as being the strongest in Denver in 2018?
Schippits: Last year multifamily dominated Denver commercial real estate investment sales, making up 63 percent of the total $10.1 billion in volume. Office came in second, representing 19.8 percent, followed by industrial, which ranked third with 7.7 percent of the investment sales volume for the year.
What’s interesting, however, is that in the same CBRE Americas Investor Intentions Survey mentioned earlier, respondents selected industrial as their No. 1 preferred property type for the year ahead. In fact, 50 percent of investors ranked industrial as the most attractive for investment in 2018, up from 38 percent in 2017.
We have already seen industrial come on strong in Denver in 2018 with the record-setting 1.9 million-square-foot Pauls portfolio sale, led by CBRE’s Jim Bolt. The first quarter of 2018 saw industrial sales volume reach $402.2 million, a 34.3 percent increase over last year’s fourth quarter. However, the investment sales volume for industrial will likely end up lagging other sectors simply due to a lack of available for-sale assets.
The office capital markets sector has also had an impressive start to the year, including the partial interest sale of 1801 California, the sale of One Belleview Station and the sale of Re/Max’s headquarters, all completed by CBRE’s (Mike) Winn-(Tim) Richey team. Office investment sales volume in Denver in the first quarter of 2018 totaled $977.9 million, an 82.5 percent increase year over year.
Overall, Denver’s investment sales volume across all sectors was up in the first quarter of the year: totaling $2.7 billion in Q1 2018 (compared to $2.2 billion in Q1 2017). We anticipate the capital markets business will remain strong throughout Denver and across all sectors. However, on the fundamentals side (e.g., rents/occupancy/NOIs), there will be areas of softness in all sectors. For example, downtown multifamily fundamentals are flat due to significant supply headwinds (despite strong demand). Suburban multifamily and transit-oriented developments will continue to do very well. Lower-class office assets will need to get creative to continue attracting tenants as new, high-quality space persists in drawing strong demand — particularly Class B/C office in less desirable locations.
Rebchook: How big of a deal do you think rising interest rates will be for commercial real estate this year? If cap rates are further compressed, what will that do to values?
Schippits: We can expect some impact from rising interest rates on cap rates. That said, it will be relatively muted and far from a 1:1 impact. First, writers of monetary policy (globally) have done a good job managing the expectations within the financial markets. We are less worried about rates rising — and more concerned with them rising too quickly. And second, the persistent “wall of global capital” that remains squarely focused on U.S. commercial real estate will continue to put downward pressure on cap rates and overall pricing for many years.
Rebchook: If you look into your crystal ball, do you see anything happening in the second half of the year that might take the markets by surprise?
Schippits: As always, it is impossible to predict specific black swan events. That said, there are a number of factors we are keeping an eye on.
Locally, we could see a major occupier announce they intend to plant a new or growing flag in Colorado.
The market may also be pleasantly surprised if we saw an acceleration in local wage growth this year.
On the downside, the spread between short- and long-term yields is important to maintain. White House policy —particularly trade relations — could give pause to both the flow of goods/services around the world and to global capital flows. Denver commercial real estate has benefited in recent years from the increased interest foreign capital has in our market, so a disruption in that could be felt here.
In addition to Schippits, other speakers and panel members at the Emerging Capital Markets conference will include:
- Spencer Levy – head of research, Americas|senior economic adviser, CBRE;
- Austin Kane – vice president, regional director, Unico Properties LLC;
- Jim Neenan – president and chief operating officer, Prime West Development Inc.;
- Mike Winn – vice chairman, CBRE Capital Markets, Institutional Properties;
- William J. “B.J.” Hybl Jr. – president and chief operating office, Griffis/Blessing;
- Matt Barnett – senior vice president, Capital Markets, Multifamily Investment Properties;
- Monica Newman – executive vice president, CBRE Capital Markets;
- Brady O’Donnell – vice chairman, CBRE Capital Markets, Debt & Structured Finance;
- Brian Stoffers – global president, CBRE Capital Markets, Debt & Structured Finance;
- Michael Cantwell – executive vice president, CBRE Capital Markets, Debt & Structured Finance;
- Fritz Konker – vice president, Clarion Partners LLC;
- Hien Le – executive director, JP Morgan;
- Jim Bolt – executive vice president, CBRE Industrial & Logistics;
- Tyler Carner – senior vice president, CBRE Industrial & Logistics;
- Jarrett Armstrong – partner and co-founder, Armstrong Capital Development;
- Celeste Tanner – chief development officer, Confluent Development;
- Brad Lyons – executive vice president, CBRE Capital Markets, National Retail Partners;
- David Treadwell – first vice president, CBRE Capital Markets, Debt & Structured Finance; and
- Matt Vance – director of research & analysis, economist, CBRE.