In a recent podcast, Michel Couillard, CRE interviewed James Nelson, CRE about real estate investment opportunities that have arisen during the pandemic recovery. Couillard is global chairman of The Counselors of Real Estate, and Nelson is principal and head of tri-state investment sales at Avison Young in New York City, specializing in apartment, office and retail sales. Nelson is a past chairman of the Real Estate Board of New York's Commercial Board of Directors.
How would you describe the investment environment?
We have very little sales volume because there were a lot of buyers and sellers on the sidelines. They wait to see how it all develops and where the chances lie. But what I'm optimistic about, and how this [pandemic] downturn differs from the financial crisis, is the amount of liquidity that is in the market, the amount of marginal equity, and the debt available, albeit that kind of funding is available Cash flow investments are actually available at a much more conservative LTV. But to talk about the opportunities in the market, I've never seen this before where the spread between cap rates and 10 year Treasuries is so wide. That presents an opportunity when you can buy at today's rates and take out long-term, 10-year debt.
If you speak to most of the investors out there, they will say they are frustrated because they are not seeing a lot of deal flow. It was quiet because a lot of salespeople try to withhold decisions when they can. They say, "I can sell in six months to a year once the offices return and people return to markets like New York City."
Which real estate sectors appear attractive for investors in 2021?
It depends on whether you want to make a mainstream investment or are a contrarian. If you look at the spectrum – my data is for New York City only – but trying to understand asset class pricing, there are several asset classes that have come under pricing pressure. But other asset classes – such as life sciences, medicine and certainly industrial logistics – were also winners. I don't know where to put hotels right now. I think there is a difference between business and leisure hotels. When it comes to the future of the workplace, we're still trying to find out. Companies are shrinking and offering flexibility. This is probably the biggest experiment we've seen in the modern age of office use. We really need to get through this period, get everyone fully vaccinated, and see how office use has changed.
With the exception of retail, the data suggests that the pandemic may have had less of an impact on real estate than the global financial crisis. Why?
With the financial crisis we created a debt situation. I sold an empty building where one of the big banks was funding 90% of the proforma rents. That would never happen today. Many of the big banks have learned their lessons and they have been much more conservative with these loans, looking for cash flow and drawing the deals more carefully. During the financial crisis, the idea was to get the can on the move and hope that a market rally would save the day. This time around, it's very difficult to talk about the market without going into asset classes. But in general we won't see drastic steps until the buildings reopen and tenants come back on the market. My company does a lot of work, including evaluation, with special service providers. Nobody is taking an aggressive stance right now. You may have banks here and there selling loans, but in most cases they will be lenient and give borrowers time to figure this out and to work with their tenants. It is the feeling that we are all together.
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