As the events of 2020 continue to unfold, both lenders’ and investors’ views on CRE continue to evolve. For the remainder of 2020 and into 2021, there are numerous unknowns about the capital markets, such as interest rate predictions, fluctuating borrower requirements and various asset classes cap rates.
Financing for some deals has seized up due to the uncertainty that has followed economic turbulence in the wake of the pandemic. For those with capital in hand, Opportunity Zones remain a viable avenue for protecting wealth. Is now the right time to take the OZ plunge?
Intent on tackling these questions and many more, REjournals assembled three panels for the 2020 Real Estate Capital Markets & Opportunity Zones.
The Banking & Construction Lending Update panel was moderated by Katherine VanBerschot, vice president, senior private banker, Wells Fargo Private Bank. Joining her were Daniel Barrins, senior vice president, Associated Bank; Bart Johnson, executive vice president, Wintrust Commercial Real Estate; John Manos, regional president, BankFinancial and Art Rendak, president, Inland Mortgage Capital LLC.
The panelists generally agreed that, despite the down markets that occurred since March, they don’t expect any surprises for the end of year. Lenders had a busy 2020 due to handling PPP loans and consulting on credit relief to clients. As for next year, so much depends on medical, not economic, interventions.
“2020 was a gut punch and our business was terrible this year,” Rendak said. “2021 is all about the vaccine and the impact of the vaccine on CRE and people’s behavior. We’re very optimistic given the good news coming out from the pharma companies.”
The experts spent a lot of time discussing the enhanced due diligence that financiers are now performing before underwriting any deal. It’s not all bad, however, as Barrins said that it allows him to have more touchpoints with clients.
“Enhanced due diligence has been a positive for us,” Barrins said. “It allows us to get more familiar with clients, and it’s just good business practice that should continue post pandemic.”
Touching on the various asset classes, Manos said that multifamily is currently one of the safer products, especially out of state. Rendak said that office performance has been great, with low delinquency rates—though landlords may face trouble as lease terms end in the next year or two. Medical office and lab space, according to Johnson, continues to be a well-occupied sector. Self-storage is one niche asset class that the panel was bullish on, especially with the homeownership versus renting dilemma that many are in right now.
Jerry Lumpkins, Chicago commercial real estate lead, Bank Leumi USA moderated the second panel—CRE Investor Equity Requirements & State of Credit Markets & Impact on Financing. The panelists joining him were Martin G. Alston, managing director, capital markets, Brennan Investment Group; Douglas W. Lyons, managing principal, Pearlmark and Jonathan Wolfe, managing principal, STREAM Capital Partners.
According to Wolfe, we have already seen and should continue to see a high level of sale-leaseback activity. Companies who have money tied up in real estate, he argued, are leaving valuable capital on the table that they could use to grow their businesses.
“Any company that owns their real estate should look at monetizing. If you’re making and selling a product or providing a service, that’s where you make your money,” said Wolfe. “If you’re a middle market or larger company sitting with these assets, you can be rewarded for putting more cash on the balance sheet.”
The availability and pricing of debt has changed for better in terms of liquidity, Lyons said. At the early onset of the pandemic, many large banks stayed on the sidelines and remain there to this day. He said that regional and local banks are more active.
Overall, lenders, insurance companies and banks have pulled back and Alston said that he is seeing demand for mezzanine bridge lending. The most challenging part of locking down capital right now, he continued, is locating the right partner. He also said that foreign capital continues to have a bias for coastal assets.
The last panel focused on Opportunity Zones & Tax Strategies. Edward J. Hannon, shareholder, Polsinelli moderated the discussion between Josh Graham, partner, Wipfli; Dannielle Lewis, senior manager, Wipfli; Nick Marietti, managing director, real estate, Cresset Partners and Robin Schabes, director, Chicago Opportunity Zones Consortium.
Opportunity Zone investors can defer federal taxes on any recent capital gains until December 31, 2026 so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. There is no cap on the amount of money that can be invested in Qualified Opportunity Funds, but at least 90 percent of fund assets are required to be invested in Opportunity Zones.
According to Graham and Lewis, the changing standards around the Opportunity Zone program have left many bewildered about how to proceed, so proper guidance is needed.
The city of Chicago has been extremely proactive, Schabes said, especially with development in INVEST South/West areas that often overlap with Opportunity Zones and has committed $750 million into these neighborhoods. Whether in Chicago, Cook County or elsewhere in Illinois, those looking to invest in an Opportunity Zone should also seek TIF financing, capital backing or programmatic dollars to maximize their efforts.
Not all Opportunity Zones are created equal, Marietti said, using the example of downtown Portland, Oregon which is entirely within an Opportunity Zone—and in which a Ritz Carlton is currently under development. He echoed previous comments on the program that they don’t make a bad deal good and he is only looking at Opportunity Zones where they would be looking to invest anyway.