We assembled a panel of industry experts to tackle our recent roundtable question.
Here’s what they had to say.
Jose Cruz, senior managing director, HFF (Florham Park)
We have seen investors seek out and acquire more medical office this year. Historically, there had not been enough opportunities to purchase or finance this product type in New Jersey and the surrounding markets. The interest in well-capitalized health systems along with longer-term leases that include annual steps result in higher renewal probabilities and have drawn not only traditional medical investors but 1031 capital along with private and institutional buyers as well. Investors seek the stability of these tenants within the office buildings and will underwrite projected upside as health care continues to evolve. Proximity to hospitals is also a driving factor in the investment decisions along with the types of medical practices that are found on site. We have been involved in multiple transactions throughout New Jersey and the suburban tristate market where per-square-foot pricing can surpass $300 and cap rates can fall below 6 percent. We expect this demand to continue increasing in the coming years.
Sanford Herrick, founder and managing principal, Case Real Estate Capital LLC (Rochelle Park)
Geographically, built-up markets in the New Jersey-New York area, and other locations in the Northeast with high-density populations may offer hidden refinance and other opportunities. Some financing firms have overlooked or avoided these because of complications, especially as the financial and real estate segments continue to be buffeted by uncertainties. But investors with a deep understanding of the markets — who thoroughly investigate situations and keep the lines of communication open — can continue to uncover them.
At Case, clients often bring us their most complicated situations, so much of our activity is made up of ‘unexpected’ transactions. As an example, we recently completed a successful, drama-free exit involving an experienced multifamily developer whose lender had withdrawn suddenly, leaving the builder with only about 30 days to find a new source for $15.5 million of bridge financing at competitive pricing.
Jeremy Neuer, executive vice president, CBRE (East Brunswick)
With the pace of sales significantly lower in 2018 than in past years, investors have been creative in creating deals rather than waiting for them to hit the market. We have seen developers utilize patience and perseverance to move redevelopment projects through the rigorous approval processes while others have worked to secure off-market deals either through direct relationships or the debt side. Specific to office, many of the value-add buyers in 2015 and 2016 have executed their business plans and are exiting those properties to a different, more patient core-plus or core investor. Value-add investors will continue to be aggressive as many have achieved success in this cycle, but with fewer deals, creativity will win the day.
Fahri Ozturk, vice president, Marcus & Millichap (Saddle Brook)
It’s been an interesting year if you were looking for unexpected opportunities for CRE investors and lenders. Stabilized suburban offices and medical offices in New Jersey may have been the biggest surprise. We’ve seen more activity in 2018 than in the past 20 years. There are two key reasons for this. First, vacancy rates in those markets have declined five years in a row. Second, for the first time in a long time, investors are able to have predictable cash flows in that asset class.
Another unexpected opportunity has been in workforce housing in secondary markets. We are seeing that because rents are still effectively a lot lower then primary markets and there’s still a lot of room for growth in the rent. Finally, selective urban street retail has been doing very well. In those urban markets, where there is already a lot of density, we’ve seen a lot of new development.
