Commercial real estate continues to be on an upswing, in general, but the market is not without problems. Banks and other traditional lenders are back—but are they much of a factor?
What’s the key to success in a cyclical market, and how much of a role does experience play?
What parts of the country are doing better than others?
Case Real Estate Capital, LLC is a commercial real estate investment company, and in the following commentary, industry veteran Sanford Herrick, Case’s founder and managing principal, addresses these questions and more – and looks to the future for a market that has been getting stronger.
Q: The last recession left a landscape of under-performing properties. Now that the market has been on an upswing, how’s the market doing in terms of such properties?
A: “The banks still have ‘problem children’ on their balance sheets, such as those that are subject to litigation, which they would like to dispose of if possible. In many cases, capital costs are too high, or the borrower/developer didn’t have the necessary capital or expertise to work out the problems. As a result, there is still a lot of product ‘hidden’ on bank and institutional balance sheets. Much of that ‘hidden’ part of the ‘iceberg’ consists of smaller deals, and the banks tend to be notoriously slow about working things out, even in a market that looks and feels like it has been getting better for years. Their hope is that time will cure all ills.”
Q: That being said, how much of a factor are traditional lenders and investors right now? Are they finally coming back into play as funding sources?
A: “Yes, they are finally coming back, but the reality is that they’re getting scared again. Simpler is better for the traditional banks.”
Q: What’s the profile of today’s typical value-add property?
A: “Because the market has been on such a long bull run since the end of the recession, each value-add property today has its own characteristics. And again, shortage of capital, the lack of expertise by some on the borrower/developer side, or a bank’s unwillingness to add money to solve problems are among the classic problems the market continues to face.”
Q: What geographic markets are the best for value-add opportunities right now?
A: “Our firm is very tied to the New York tri-state area, as well as to Florida—the ‘sixth borough.’ We believe that there is sufficient activity here. I know that many of our competitors are going into secondary and tertiary markets, but that is not what our instinct is to do.”
Q: What’s the status of situational lending in the current market?
A: “We’re finding deals and would like to find more of them—and there should be more of them. There are people that are buying debt and looking for financing, and we would like to help finance them to give them the chance.”
Q: In terms of traditional assets, how can risk be minimized going forward?
A: “Among the factors that minimize risk are lower leverage, pre-leasing or substantial leasing, credit tenants, and a strong hand on the part of the developer.”
Q: Industrial real estate has been a focus for Case—how is that sector doing?
A: “In the Northeast and the New York metropolitan area, it’s booming. For warehouse/industrial, this market and Los Angeles are two of the strongest markets.”
Q: A lot has been said about the strength of the multifamily market. How do you view that sector?
A: “We’ve looked at multifamily and have indeed taken advantage of some opportunities in that sector. Right now, however, so many building permits that have been issued, and so much product is under construction that we’re taking a bit of a wait-and-see attitude for the time being.”
Q: Are you seeing opportunities in the retail sector?
A: “Yes, we are. This month, we finalized a $20.5 million deal, purchasing two NPLs secured by a group of nine net-leased properties and simultaneously assumed ownership through a deed-in-lieu of foreclosure agreement. The transaction involves retail and industrial/warehouse assets in prime locations across New Jersey, New York, Connecticut and Massachusetts.”
Q: How do you approach any opportunity? What’s your process?
A: “I answer the phone. I try to understand what is being requested and why it’s being requested—that’s on the situational lending side. Jon Leifer, our director-acquisitions, spends much of his time connecting with sources at banks and on Wall Street, as well as prospecting for new transactions. It’s all a mix of personal relationships and responsiveness.”
Q: Bottom line, how can investors benefit from doing business with your firm?
A: “We have a 30-year track record. We know what we’re doing. We get people into and out of deals.”Based in Rochelle Park, NJ, Case is active as a high-yield private lender, a purchaser of sub- and non-performing debt, and an equity investor.
The company offers highly profitable opportunities for local entrepreneurs, and its investor base is extremely diverse, including individuals, family offices and institutional investors.