In the last few weeks, no matter the company, the conversation always seems to turn to real estate investment.
Musicians and techies in tattoos and tee-shirts, investors in Zegna suits and econ-dev officials – everyone seems to be trying to read the tea leaves.
The next emerging neighborhood.
The next great commercial real estate play.
The next hot area for multi-family development.
We were fortunate enough to be invited last week to a summit of major investors and developers at The Green Building.
The event launched “The Diversity in Real Estate Series.” The theme for session one was, “Opportunities in The Local Market and Beyond.”
The open discussion included a panel with PRG Founder, Chairman and CEO Fred Sutterlin, PRG affiliate Chip Hamm and Andrea Kinser, a financial advisor for Bank of America/Merrill Lynch in Louisville.
Hamm also is an attorney with Miller Wells in Louisville, and a partner in several businesses and restaurants including The Comfy Cow ice cream parlors. He’s the former national real estate manager for Yum! Brands.
Reed Weinberg, PRG president, was the moderator.
About 45 people attended including:
• Fred Faulkner, president and CEO of Faulkner Real Estate, which developed the Forest Green Corporate Office Park at North Hurstbourne Parkway and Ormsby Station Road among other projects.
• David Nicklies, president and CEO of Nicklies Development. Nicklies has developed office, retail and industrial projects.
• Bob Duane, president of Duane Realty & Development, which has developed numerous office parks, business parks and residential developments across Louisville.
The conversation revolved mostly around the end of the recession starting something of an investment Gold Rush in Louisville. National real estate developers and investors who once avoid Louisville are now vying for properties. Same with national retailers.
Downtown? That’s another story ….
PRG’s Sutterlin opened the forum discussing “the interesting market dynamic of the influx – what I’m calling the ‘tsunami’ – of institutional investment in real estate in Louisville.”
By that, Sutterlin said, he wasn’t speaking exclusively of large real estate investment trusts and pension money, or institutional investors per se. “Just sizable transactions that are really amazing to see.”
His first question of the evening to the audience was, “I’d like to know how this big money investment in real estate affects you? As investors, managers and owners of investment real estate?”
The following is verbatim, with editing for length and clarity:
Louisville rental rates were lower than Atlanta. and now rental rates will start reflecting those in larger cities where these investors already are active. That would be good for us as we begin to build, with increasing construction costs and costs in insulation requirements and other energy codes.
When I think about institutional investment, I’m thinking more on the finance side. My experience has been, when you have a downturn like we had, you’re getting a lot more institutional opportunity money, particularly in light of the banking situation nationwide. So it’s really made it a difficult time to be an entrepreneur, I think. We’ve really gone from a development standpoint to a fee developer as opposed to an owner developer.
No doubt there are pros and certainly cons to increased competition. Generally speaking, it’s great there’s liquidity created in the market place. But what does it mean for us? It’s not necessarily good. Particularly as principals, we’re competing with big balance sheets, and that makes it challenging.
I can remember a little over two years ago, I was constantly on the phone with the PASSCOs of the world dealing with their southeast regional acquisitions director – with Greystar to some extent – having the same conversation. “You’ve got to try Louisville. Louisville is great. We have a young population. It’s a destination for young people for apartment properties.” I just kept on them and on them. “You can come here and buy the same income streams for less. We’re a dynamic economy, not just manufacturing.”
At one point, Reed (Weinberg) and I were so interested in getting their attention, we went to Taste of Kentucky and sent ‘em gifts. We tried everything we could to convince them Louisville was a solid market, and opportunity market.
And at the end of every conversation, they said, “We’ll never invest in Louisville. It doesn’t fit our criteria.” Well never say never. PASSCO is here. And I bet they wish they were here sooner.
Really, CRA was part of the multi-family side with $100 million. Took out Camden’s Portfolio and the tsunami started. Greystar is here now. Steadfast REIT as you all know purchased the Renaissance Development portfolio. They’ve done a number of transactions in Lexington and Frankfort. So the secondary markets are finally, as much as we pounded on them to pay attention to us, I think the institutional, large money acquisition folks are attracted to us. We’re proud to be part of that and glad it finally happened.
There are a couple of things Fred (Sutterlin) said I found interesting. One was that PASSCO said the were was never coming to Louisville. I remember talking to Nordstrom back when I was with Yum … We had conversations with them … “So when are you guys coming to Louisville?” They said, “Well, probably not anytime soon. We haven’t gone to Cincinnati. We haven’t gone to Nashville.” I said, “It’s a secondary market.” He said, “No, it’s a tertiary market. We’re not coming anytime soon.” Sure enough, we have Nordstrom Rack coming.
If you had a similar conversation with H & M years ago, you would probably have had the same conversation. The reason they’re coming is the exact same reason the institutional money is coming. They have to get a return. How are you going to grow your business if … let’s say you’re a $400 million company and you’re going to grow your company 10 percent. How are you going to do that? There are really only two ways; same store sales, or growth. That’s it. So if sales are flat and you go through a recessionary period like we did … the only other way is to grow.
It’s a round about way of saying to you, I think the retailers are coming … I think they’re going to come and keep coming.
Fred Sutterlin: With new development, I keep coming back to multi-family … there’s a lot going on in new development in the pipeline. The number of new units for 2013 is still way below (the time before the Recession) in numbers. But by my count, we have six projects in just the northeastern part … Fred (Faulkner), I know you have couple of exciting projects … 2,300 new units coming on line in 2014. I’d just be curious to know what your thoughts are about new Class A in the East End. Who you’re serving.
Reed Weinberg: On that point, in Louisville, no matter how nice it is, someone is going to fight you, no matter what. I’ve noticed that trend a lot. A lot of people in this room who have built projects – or who are trying to build them now – have faced a lot of opposition. What are thoughts about apartments … What is about apartments that people are so scared of, even nice apartments? People are paying $1,200 a month. Young professionals are moving in! Am I right about that?
There’s a perception that apartment dwellers … everybody thinks it’s going to be Section 8 low income … people just have the perception irrationally that there’s going to be crime. Traffic is going to be a mess. Maintenance is going to be a problem because it’s multi-occupied. It does make it difficult, but I will tell you the only thing of substance other than Dollar General stores I’ve done in the last couple of years has been multi-family, nice new multi-family. There’s still an interest in this community and I’ve got a couple in the pipeline soon for new multi-famly projects. Yes, they can be challenging, but for a real estate attorney like me ….
What do you tell people about investing in real estate?
We have a lot of customers … who contemplate investments and say, “I want an asset I can see, feel and touch.” It’s certainly an asset class that demonstrates over history it appreciates if well managed. The tax benefits are numerous with the accelerated depreciation concepts out there. For high-income folks, it’s a really an attractive way to shelter income and build wealth. I can spend a whole seminar talking about the benefits and compelling aspects of real estate.
Right now, certainly, your cost of debt is so attractive, historically low. Your cost of capital is low for certain asset classes. So to be able to get in and get yields you otherwise wouldn’t get in a relatively ill-liquid asset with the interest rate environment and the opportunities we see in distressed pricing. The reconciliation of values (after the Recession) we have seen when you look at yield-to-risk. We think that will continue through next year. I’m sure cap rates will rise by 100 basis points (1 percent) by the end of 2014. The 10-year Treasury (rate) will stay low through the end of the year, in the threes in 2014.
From a historic perspective, we may not see the perfect storm that we’re seeing in terms of cost of debt and preferential pricing. It’s an exciting time to be in the industry.
Sheldon Gilman, attorney and investor:
On a personal basis, I would love to have a nice condominium, sell my home and move into a nice condominium with a balcony. I was really pleased to see Willow Grande, that it got approved. I don’t want to live in Shelbyville. I want to live inside the Watterson Expressway. I would like to have a nice apartment like the ones I see in Nashville near downtown, and in Indianapolis. I’d like to have something in Louisville as nice as my condo in Boca Raton. Can’t buy one.
I’m a believer we’ll be there. We’re always behind Nashville a bit. But we have the benefit of learning from the past mistake we’ve all made and seen in other markets. We are the market participants, so if you want it, keep asking and it will be built. It will take people like Bob Duane Dave Nicklies and Fred (Faulkner) who are willing to take on risk to do great projects. That they are prudent with taking on risk, and take on risk with a great deal of responsibility, and the community benefits from this ….
Edward Weinberg, attorney and investor: I work downtown. Is there any possibility I’ll be able to buy anything other than a toothbrush downtown or mouthwash? A pair of socks!?
David Nicklies: There are no big retailers that will come downtown until we have more people sleeping downtown. We don’t have enough people sleeping downtown on a daily basis. In some markets, the city will come along and subsidize retailers until they become profitable.
Insider Louisville: I was just curious if you’ve heard what GLI is thinking as far as getting the fulfillment people – the Gilt.com, Zappos, etc. – to offer them space for pop-up stores along Fourth Street. Is that workable? Is that viable?
Chip Hamm: I don’t know, but I think it goes back to what David said about subsidizing bigger retailers to be downtown. For a pop-up store if they don’t have a lot of build out, possibly so. There’s not much to it. But someone is going to have to pioneer it. We (Comfy Cow) have been approached about coming down there for a good solid year. We’re not going to be first ones in. We’re going to wait for things to go in and succeed. I don’t want to sound like a chicken, but we can’t make a mistake on a location. If Gilt.com is coming in doing a 6-month store, that’s one thing. That’s really a pop-up store with no investment and a limited lease. Our lease is going to be a couple hundred thousand dollars worth of build out, five or 10 years term. Seven years or whatever.
We can’t change anything else. Let me rephrase that. We can change everything, but we can’t change location. We can can change staffing. We can change concept and sell flowers instead of ice cream. We can do all of that stuff. But we’re stuck with that lease in that spot. And that’s really what scares me about coming down to Fourth Street.
My answer is, “I don’t know. It could. But that’s the right approach. Get a 6-month type thing and have it demonstrate success, then come and sell to people like me.”