Leaders of the Commercial Real Estate industry gathered in Washington, D.C., in mid-July to discuss and learn about trends in CRE and the world economy at the National Council of Real Estate Investment Fiduciaries (NCREIF) Summer Conference 2017. Situs and Situs RERC team members were in attendance.
Dane Anderson, Situs RERC Director, said the closing session of the conference provided a “good, general economic overview” that was useful for people involved in CRE.
Greg Daco of Oxford Economics provided statistics showing the Eurozone will have solid economic growth.
The picture for the United States, however, is mixed, he said. Proposals for tax cuts, increased infrastructure spending and less regulation would help spur the economy, but he believes increased trade protectionism and anti-immigration policies could hamper economic growth.
Brian Velky, Managing Director of Situs RERC, who also attended the conference, said many of the discussions delved into specific topics of interest to people in CRE, including daily valuation, the NCREIF Fund Index – Daily Priced, and cap and discount rates.
Highlights of the event:
NCREIF Fund Index – Daily Priced
NCREIF is continuing to make progress on building out the data set of the NFI-DP (NCREIF Fund Index – Daily Priced), which currently contains nine separately managed funds. NCREIF publishes the index results every month and is working on a detailed annual report, which will provide greater insight into the size and scale of this growing market, Velky said.
Independent Daily Valuation
“Daily valuation is attracting increasingly greater attention as fund managers explore ways to diversify their product offering to audiences beyond defined-benefit pension plans,” Velky said.
Cap and Discount Rate Increments
The valuation committee had a panel discussion about whether it is still appropriate in valuations and appraisals to think about cap and discount rates only in 25 bps increments. The basic premise is that in the current cap rate environment, where cap rates can be as low as 4.00% for core assets in top-tier markets, a 25 bps movement in rates (all else being equal) can reasonably cause the value to move by +/- 6%.
From the transaction perspective, panelists from Eastdil Secured and Invesco Real Estate reiterated that it is important to understand that when the market is pricing a deal, the cap rate is an output, which is why the cap rate can look so precise (i.e. 4.13%). This compares to the appraisal side of the equation where the cap rate is an input.
There was no consensus among the panelists about whether the market should be thinking in smaller increments (i.e. 5 bps, 10 bps, etc.), and when the audience was polled there were still very few appraisers that are applying within the context of smaller increments, Velky said.
“It is clear that appraisers need to be keeping this in mind as they go through their valuation, and it may be reasonable to be concluding to somewhere between the 25 bps increments, if supported by market sales activity,” Velky said. “However, what is most important is understanding the underlying dynamics of such an underwriting model, because even minor differences in the model related to certain items – real estate taxes in particular – can create wide variances in a value conclusion, even if the cap and discount rate applied is spot on.”
The Situs team was inspired at the conference by the opening remarks of David Rubenstein, co-founder and Co-CEO of the Carlyle Group. Rubenstein grew up in a blue-collar family in Baltimore, experienced challenges in getting into college and struggled to find his way as an attorney. All of this led to his career in private equity as co-founder of the Carlyle Group.
Rubenstein briefly gave his thoughts on the economy. He said he was surprised that the markets have been stronger for longer than he anticipated. He said he believes that something will surface – geopolitical or otherwise – over the next 18 months that could cause a correction in the markets.
Lastly, he told the audience about his mission to give back to the country that has given so much to him, and he encouraged everyone to think about what they can do to make this great country better, echoing President Kennedy’s famous inauguration speech.