Tag Archive for: risk management

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Amid its tinkering with the interest rate to tamp inflation down, the Fed has identified commercial real estate as one of the biggest risks to financial stability.

So where does that leave private lenders?

Mortgage Professional America reached out to Jeff Holzmann, COO of RREAF Holdings, to learn more. RREAF Holdings is a private real estate investment firm with more than $5 billion in assets.

But first some context: Large banks have pulled back from commercial real estate financing, causing smaller, regional banks to become more exposed to the travails of the industry. Given the freefall nature of the market, this creates a perfect storm for a “doom loop.”

And yet Holzmann seemed rather confident in his company’s approach to choppier waters.

“I think the obvious elephant in the room is the interest rate,” Holzmann said during a telephone interview. “Any large-scale commercial real estate developer like us is basically subject to the same metric. Some companies are bigger, smaller, but nobody has any type of silver bullet. We all do deals the same way.

But things are changed now.

“Obviously these days, the interest rates are what we would consider high,” Holzmann said. “Not necessarily historically high – if you had been around in the 80s and 90s, you remember higher rates – but they’re certainly higher than they were in 2015 through 2018. Pretty much everybody – unless they’re a liar or an idiot – is on hold right now.”

Living In An Age Of The Inverted Curve Yield

It’s a matter of economics.

Holzmann explined: “In terms of new acquisitions of income-producing properties such as multifamily, the main reason for that is simply because we are currently in what is known as an inverted curve yield – the cost of debt is higher than what you’re yielding from that property; your cap on costs is higher than your cap rate. Basically, you’re working for the bank. Any money you make on these properties – on average, there are always exceptions – is really going to the bank.”

So how does this movie end?

“It ends just like anything else in economics, in one of two ways,” Holzmann said. “Either through supply and demand. One thing that can happen is that interest rates – and I keep my fingers crossed, but keeping my hopes up – will decline; they will go back down, and there seems to be a consensus that this won’t happen quickly, and it won’t happen abruptly. So this is going to take a significant amount of time. The other thing that can happen in the next 12 to 18 months is that you’re going to see commercial real estate operators that basically can’t hold their properties. They’re running out of money, they’re crushed under the cost of the debt, and they are forced to sell.”

If it’s just a few properties succumbing in that way, some investor will swoop in and take it.

“But if you’re talking dozens, maybe 100s, every year, then that starts to change the economics a little bit and people might start selling at a lower price to avoid this kind of crash,” Holzmann said. “So eventually, I think the market will find equilibrium. But how is that going to come about? Through a change in the interest rate? Or a change in the supply and demand of vendors having to offload those assets? That I don’t know. But I do know that history teaches us that the market has to go back to some kind of equilibrium.”

Too Big To Want To Fail

Given today’s economic scenarios, there are strategies companies can adopt to mitigate risks and/or capitalize on opportunities. Holzmann outlined the way RREAF approaches things.

“RREAF is a large, institutional kind of operation,” Holzmann began. “We’re not like one of these younger entrepreneurs that can take crazy risks and make a killing. That’s not us. We’re a large business with a lot of investors and pension fund money, so we have to be very, very methodical about how we approach things.”

So what is RREAF’s approach?

“The way we approach it is by hedging the risk,” Holzmann said. “We prefer to be in a situation where we paid for a rate cap and regretted spending the money, as opposed to being in a situation where we took on the risk without a rate cap and now, in so many words, we’re screwed because we have to pay so much money in debt and this whole thing doesn’t make sense. Companies like RREAF don’t take that kind of risk.”

Formed in 2010, Dallas-based RREAF Holdings is a privately held commercial real estate firm that deals in the acquisition, development, asset management, ownership repositioning and financing of complex real estate projects throughout the US.


Source: MPA Magazine

As industry experts cast predictions of how various smart city sectors will evolve in the new year, one sector is offering a blurry outlook for 2019: real estate.

While commercial activity has been on the rise, particularly from expanding technology firms, shifts in e-commerce, affordable housing and residential demographics have also spurred many questions for how the urban real estate landscape will transform.

The Urban Land Institute and PricewaterhouseCoopers (PwC) has analyzed this real estate forecast and compiled insights in its 40th annual Emerging Trends in Real Estate report. While 2018 promised to be a year of tech adoption and activity among Generation Z buyers, 2019’s biggest trends will likely include cybersecurity risk management and prioritizing resilience.

“Think of this year’s trends as circles in a Venn diagram,” the report reads. “Trends will overlap, indicating that they interact, and over time those interactions (sometimes involving more than just two circles) foster new conditions that can alter either the features of the trend, its relative strength, and even its duration. We aren’t in coloring-book world anymore.”

Hot Markets To Watch

Each year, the Emerging Trends survey — which reflects the views of more than 2,300 individuals, including property owners, real estate investors, homebuilders and developers — highlights areas that rank high for investor interest.

The report authors wrote, “Growth appears to be in vogue for 2019,” noting that survey respondents favored markets with growth potential over traditional “gateway” markets.

Dallas/Fort Worth took the crown as the top market for overall real estate prospects, up from the No. 5 spot in 2018.

The top 20 list includes:

  • Dallas/Fort Worth
  • New York/Brooklyn
  • Raleigh/Durham, NC
  • Orlando, FL
  • Nashville, TN
  • Austin, TX
  • Boston
  • Denver
  • Charlotte, NC
  • Tampa/St. Petersburg, FL
  • Atlanta
  • Miami
  • Salt Lake City
  • Los Angeles
  • Orange County, CA
  • Seattle
  • Fort Lauderdale, FL
  • Washington, DC
  • Indianapolis
  • San Antonio

Seattle — which ranked No. 1 in the 2018 report — came in at No. 16 for 2019, which the authors suggested may be to the blame of the media for its coverage of the city’s real estate market. The authors also noted the list is so vastly different from last year’s list due to the impacts of 2018 tax laws. Overall, however, it is noted there is not a market in the survey that is ranked poorly based on respondent answers.

“The bottom line is that opportunities are available in all markets,” the report reads.

Experiential Retail

The surge of the e-commerce industry has turned retail on its head in recent years, transforming brick-and-mortar stores and shopping plazas into vacant canvases for new development possibilities. The rise of experiential retail will likely shake-up real estate opportunities in 2019, as developers look to “creative solutions” to take advantage of the evolving retail industry — such as combining retail and non-retail offerings into mixed-use properties.

“Over time, cities and suburbs may have the new opportunity to support — through zoning or master-plan amendments — needed development on sites previously dedicated only to retail,” the report reads. “In any given community, new uses may include housing, schools, or any activity for which land availability had been limited. These new uses will, in turn, create new demand for retail goods and services.”

Retail properties, specifically in cities, will also likely see more technology implementation in 2019 to collect consumer data and optimize the shopping experience. The report notes that this trend will become lucrative for the real estate market, suggesting that monetizing data collection of a retail building “might someday generate more income than traditional leases.”

Cybersecurity Risk Management

Cybersecurity scored 3.14 out of 5 on an “importance of issues” scale in the 2018 report. For 2019, cybersecurity is now described as an “industry disruptor” by the report authors, scoring 3.44 out of 5 on the importance scale.

“The increased flow of data and growing use of mobile devices to control facilities are raising awareness about the need for more sophisticated cybersecurity,” the report reads.

The authors list cybersecurity risk management as an issue to watch in 2019, noting that the popularity of internet of things (IoT) technology infiltrating building components has made the overall real estate industry more vulnerable to attacks. An interviewee of the survey noted the need for real estate leaders to establish “industry norms and best practices” to defend against cyberattacks and evaluate the efficiencies and vulnerabilities of such technologies.

Building Resilience

As is the trend for any smart city-related sector, building resilience into the framework of the real estate industry is crucial for long-term sustainability — especially as changes in climate have brought unprecedented destruction to a number of U.S. markets.

The report estimates natural disasters in 2017 — including Hurricanes Harvey, Maria and Irma — cost an estimated $306 billion in the U.S. These and impending natural disasters have put a heightened focus on resilience in real estate.

Two particular factors — an increase in risk and the potential for decreased property values — are driving much of the focus on resilience. Nearly 25% of the National Council of Real Estate Investment Fiduciaries (NCREIF)’s Property Index value is in cities among the 10% most exposed to sea-level rise, according to the report. Such flood risk has caused property values to decrease in some areas, particularly in flood-vulnerable regions on the East Coast; properties in such regions of New York, Connecticut, New Jersey, Florida, South Carolina, North Carolina, Virginia and Georgia had lost $14.1 billion in value between 2005 and 2017, according to the report.

The report authors suggest embracing resilient design (both of real estate properties and surrounding infrastructure) to enhance protection of at-risk markets. Such investments in resilience are said to not only benefit properties in the long run, but make them far more attractive to investors.

“Investing in resilience may also become an effective part of a community engagement strategy and help limit local opposition to a project,” the report reads.


Source: SmartCitiesDIVE