CR006  FREEDOMFEST 2018 PANEL DISCUSSION

Have Rising Rates, the SAFE Acts, and Dodd-Frank Killed the Real Estate Market?

No matter which way you voted or didn’t vote. We have an example in the White House about what real estate can do for wealth creation.

I told my mother after the election “See you thought this real estate thing wasn’t going to go anywhere for me when I first started out  as a real estate broker in 1986, but now you can see I am qualified to be the president United States”. And she responded to me “Yes but you don’t have anywhere near his Twitter skills “

Concordia Realty invests in and operates commercial real estate, mainly Shopping Centers and Single-Tenant Net-Lease retail properties.

Our properties are primarily Grocery-Anchored and Community Shopping Centers. We have operated in more than 15 states and look to acquire well located shopping centers throughout the US.

Which brings me to the current state of the commercial real estate market.

We are in the 2nd longest commercial Real Estate bull run in history right now.

Prices are up near highs in all the major property classes from apartments, industrial, office and retail is off a bit this year because of media scare-mongering. It looks like the market has some room to run.

Political uncertainty, rising interest rates, and elevated valuations are just some of the headwinds facing the real estate industry in 2018. Hopefully, interest rates will increase gradually, providing the market with time to adapt. Real estate’s sensitivity to interest rate movements will be tempered by NOI growth from stronger tenant demand and favorable supply/demand fundamentals in most asset classes.

Lenders this time around have exercised restraint with loan to value ratios. Cash flow is being underwritten as “in place”, no “proforma income underwriting” has taken place, and debt service coverage ratio is REAL.  Notwithstanding all this, 50% of all new loans made in 2018 YTD in CMBS have been full term interest only.

In May 2018, State Farm refinanced a shopping center for us in the amount of $18 million, interest only for the first year at a 3.8% fixed rate. The loan was less than 50% LTV.

What we are hearing from banks is they still want to lend money. But there is starting to be less money (deposits) to lend out. Second, the Feds are putting the squeeze on lenders for more reserves in case there is a pull back. Third, in some areas, the banks non-owner occupied real estate “buckets’ are full, especially the deals where there is a value add play.  In other words, the deals where it will take 12-36 months for a project to stabilize are too risky for many banks to lend on right now.

For deals that make financial sense with experienced sponsors it is still a good time to buy. I was on a call yesterday with Peter Linneman and he showed statistics that on average if you bought at the top of market in 2007 you would have still made quality returns to date plus the benefits of tax efficient cash flow.

Concordia Realty specializes in Retail Real Estate and because of drum beat of the stories about the retail apocalypse the retail real estate market is on sale. We are seeing great assets with quality anchors at prices we have not encountered for a while.

Which brings me to the recent US Supreme Court decision in South Dakota vs Wayfair. All states that have a sales tax can now collect them from online sales transactions. With South Dakota that kicks in at $200,000 or 50 transactions but adds another expense for online retailers in an already low margin business.   And believe it or not online sales are still only around 10% of total retail sales. Amazon made a $13.7 billion investment in brick and mortar real estate with Whole Foods Real Estate not only creates wealth but when people get really wealthy they put their money in real estate to grow more wealth.
I founded Concordia Realty with my partner Corey Andrews in 1990. Some of you may not have heard of it, but that was the height of the Savings & Loan Crisis. The slogan was “Stay Alive Until 95”
Having gone through 3 recessions we follow economic trends and over the years have become more Austrian in my approach to evaluating the economy.

We have worked with in partnered with insurance companies pension fund advisors, private equity funds and hedge funds. All of them have a commercial real estate investment allocation as part of their portfolio strategy.  A lot of these institutional investors will not invest in publicly traded Real Estate Investment Trusts because those securities have more correlation with the US stock market.

In commercial real estate, especially Retail Real Estate the tenants are also required to pay a proportionate share of building operating expenses, therefore limiting landlords’ exposure to rising costs.

Our business is working with the businesses most people encounter in their everyday life. From the local nail salon hair salon restaurant to the multinationals like Walmart, Sainsbury, Aldi, Gap , H & M, Starbucks and McDonalds.  

One final word about Robert Kyosaki, I have never read Rich Dad Poor Dad but I really admire and respect what he has done to raise awareness of investing in real estate.  I have met more investors who have created real wealth because of the financial education and motivation that Robert Kiyosaki has done in his life. Robert Kyosaki’s Thursday night (7/12/2018) main stage talk at FreedomFest was fantastic!

For more information about Concordia Realty Corporation and our investments please visit Booth 213 in the FreedomFest Exhibit Hall or our website