Although the Federal Reserve Board is expected to raise interest rates, many macroeconomic trends continue to favor U.S. commercial real estate as an asset class, Jimmy Hinton, a managing director of research at Holliday Fenoglio Fowler—a large provider of commercial real estate and capital markets services to the U.S. commercial real estate industry—told attendees at a ULI South Carolina capital markets conference held on Kiawah Island in September. He highlighted the positive effects of a recent reclassification of real estate into its own Global Industry Classification Standard category. “Commercial real estate allocations for institutional investors have already doubled since 2000,” Hinton noted. He likened it to the increased capital flows that the real estate industry saw when the first real estate investment trusts (REITs) were added to the Standard & Poor’s (S&P) 500 stock index in 2001.
Foreign direct investment from Norway, China, Abu Dhabi, and Canada also continue to support the market, with 17 percent of all 2016 transactions involving some foreign capital, according to Hinton. International investors also seek the U.S. market because they are “desperate for yield,” during a period in which three countries are offering negative interest rates for bonds up to ten years out. He also said there is some $129 billion in unallocated “dry powder” funds available for investment if the market were to take a downturn.
The commercial mortgage–backed securities (CMBS) market had a rough first half of the year in part due to volatility in the market, and Hinton said that would likely slow both the hotel sector and third-tier real estate markets. Speaking on a separate panel about commercial debt, Owen Bouton, a vice president at Dallas-based lender LStar Capital, said he also thought that unanchored strip centers in third-tier markets are going to struggle to refinance loans issued during the market peaks of 2006 and 2007 as their ten-year leases come up for renewal. Bouton said his firm is also holding more of its own loans for up to five years to comply with increased financial regulation.
Secondary markets in the United States that have annual population growth in the 4 percent range, including Orlando; Richmond, Virginia; and Austin, should continue to do well, Hinton said. But several speakers said that construction loans are still hard to come by, making it unlikely that serious oversupply will occur.
Brian Leary, president of commercial and mixed use at Crescent Communities, said that he believes much of the existing office stock in the Southeast will be functionally obsolete if it does not incorporate mixed uses. “When the land is expensive, you need more uses to create the value,” Leary said. His company, which is developing projects like Stonewall Station and Tryon Place in Charlotte, North Carolina, believes that such cities are still underserved by full-service hotels. The firm is including concepts like a two-story Whole Foods grocery store with a café space upstairs for on-site dining. Todd Wigfield, managing director of development at Greystar, a national multifamily property management firm, said that such grocery stores are becoming the key anchor to mixed use, with “grocery first, then residential and everything else coming second.”
If the Southeast were to experience a downturn, that could present opportunities. Leary noted also that some of his company’s best projects are ones that they took over from someone else. Wigfield agreed: “We’re certainly guilty as charged in that regard . . . that’s how we first got involved in the Miami market.”
But much of this development is predicated on job growth, and some of South Carolina’s recent success in attracting companies like BMW, Boeing, Volvo, and the Sprinter division of Mercedes-Benz has been driven in part by access to the Port of Charleston. David Ginn, president and chief executive officer of the Charleston Regional Development Alliance, said that the port generates an estimated 10 percent of South Carolina’s gross domestic product. Jim Newsome, president and chief executive officer of the South Carolina Ports Authority, said he hopes that Congress will authorize spending to further dredge the Charleston harbor this calendar year, allowing use by container ships that can hold up to 20,000 tanker equivalent units (TEUs), which the expanded Panama Canal is expected to bring to ports of call along the Eastern Seaboard. Newsome said that his organization is planning for $2.2 billion in capital expenditures on the port over the next ten years to keep the port competitive, with bigger cranes and bigger ports capable of handling the biggest ships.
Newsome said that global trade has slowed somewhat this year, with the shipping industry likely facing some consolidation, as demonstrated by the recently announced bankruptcy of South Korean Hanjin Shipping, which was the seventh-largest shipping company in the world. He also said his organization has also had success with inland ports in more lightly populated areas such as Greer, South Carolina, and would like to do a second or third inland port if the demand is there, which would bring jobs and economic development to additional parts of the region.