2017 Pension Real Estate Association Spring Conference

I was recently lucky enough to go to the 2017 PREA Spring Conference in New York, and here is some of what I heard:

Highest residential rents in New York are way west in the 30’s, and lowest on the Upper East Side. And that is after adjusting for apartment size and age. Looking forward, rental construction is hard to justify financially without 421(a), and construction loans are tough to get. {Here’s a not bad article about 421(a)}

A lot of office is coming out of the ground, but much of the existing stock is obsolete compared to the rest of the world.

One topic of conversation was debt funds. Are there too many of them? Is a private equity real estate fund the right format, or do you need an originator with a balance sheet? Can’t do a senior debt loan program in a fund without dividing the loans into A and B pieces. Fees are also a much bigger part of the return than in equity funds, or even mezz funds. {Here’s a not had article about A/B notes.}

One “out there” analogy worth mentioning: Displaced DC democrats are as shell-shocked by the Trump victory as many Trump voters have been by tech and globalization. Losing their government perches may give those Dems a little more “perspective” (or empathy?) about what it is like to be rendered powerless by change.

Sales volume is down. But volume is typically volatile, while prices are typically “sticky” – multifamily volume is down 60%. What will prices do? Sometimes they “do nothing”: for example cap rates don’t change, and income grows 1% — it happens. Some risk that financing is disappearing, but less construction is good for the industry. Dodd Frank repeal could cause easing “at the wrong time”.

Currently no signal to buy or sell, so maybe it is a time to cull the portfolio. Look for income, or for great asset skill or knowledge – presumably because headwinds>tailwinds. Avoid liquidity pressure in the next few years.

The link at the top of the article brings you to a list of PREA’s upcoming events.

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