Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/591312
48 • November 2015 • Texas Real Estate Business www.REBusinessOnline.com is, in my opinion, the most desirable asset class if you are in Houston, and there's a lot of money fowing into it. I echo those thoughts that remain as far as foreign investment capital. They've got direct and indirect money com- ing into play. We have seen a little bit of a slow down with Canadian cash, and I like the points you've made about Edmonton, and we're seeing Mexican money, huge, especially in The Woodlands and some of the sur- rounding areas. Some of the markets that we've had a lot of success in do- ing business in are Magnolia, outside of The Woodlands. Everyone wants to be in The Woodlands. In fact, we just rolled out a deal in The Woodlands and it has garnered a lot of attention. Those markets are highly desirable. Investment capital is coming down here very strong. I would say, from a 1031 exchange standpoint, exchange buyers are very active. The way I look at our transaction history over the last 12 months, 50 percent of the retail deals that have been sold were sold to exchange investors, that was about 30 percent the year before. The major- ity of those exchange guys are from California. Upwards of, I think, 35 to 40 percent are from California, so the money is out there. Scott Gardner: I have a question for you investment guys: do you see the cap rates as being the new norm? Or is it due to interest rates and the volatility of the stock market? I know it's like me predicting rents fve years. From your general history and expe- rience, do you think we are now just going to have lower cap rates in the retail class? Luther: It's a combination of those points, but you also have to consider the buyer profle in a single tenant deal. They're not getting high lever- age. A lot of times they're all cash, low leverage buyers. I'm not sure if they're interest rate sensitive, al- though the cap rates are so low, there comes a foor, and you're seeing a little bit of a push back and seeing that with some of the deals in DFW. I think some of the deals are more com- pressed up there. We are seeing some of those buyers kind of push back. On the multi-tenant front — a lot of it is 100 percent occupancy with stock performing rents — a lot of buyers want to see short term leases so that they can market those rents. They're placing a lot of value on that upside. Because the fundamentals are strong, and construction is low, when you talk about double digit rent growth, there's a strong argument to make that there's some signifcant upside, so these buyers are willing to accept that. Again, it's more the Texas inves- tor who knows the environment. The California guy may give you some push back. Gibson: I think there's got to be a foor at some point. We focus on alter- native investments. Once the 10-year treasury starts going up, then maybe there's some yields and some of these guys will look somewhere else. Da- vid is right on the cash 1031 buyers $5 million and down; they are paying cash, and not leveraging much. All our REITs and pension funds, they've still got to pay that dividend, so they still need that 6.5 and 7 cap deal. They have to buy a bigger deal at lesser credit. We can go sell a 15-year FedEx ground for a 5.75 cap tomorrow, so that pension fund is out of that deal. They're still borrowing money in the high threes right now; there's not a big enough spread for them to pay their dividend. They've had to change their parameters on what they're actually acquiring. So $5 million and down, it's a cash guy. As some point those yields have to stop, they just do. It makes no sense to be buying 3.5 cap Walgreens. Gilliam: You guys have done your job leasing up a new shopping center to maximize returns. There probably isn't any rent growth on the lease ex- cept for maybe 2 or 3 percent per year Top tier trade areas in the Houston market are generally of interest to retailers when they're frst making a market entry, says Kenneth Katz (left) of Baker Katz. Listening on is Eric Lestin (right) of CBRE.