While millennials prefer to rent versus buy and interest rates could have a significant impact on the sector, the outlook for commercial real estate is strong, with multifamily housing, gateway cities and new construction showing opportunities. Matt Galligan, President of CIT
Real Estate Finance, offers his insights on current trends and opportunities in the industry.
A: The four property types that are in demand today include multifamily, condominiums, industrial and office.
Multifamily has been a key driver of the sector for some time now, particularly since the price of housing has been high and millennials haven't been inclined to purchase their own home. Millennials have been large renters of properties, in part because they saw their parents go through the trauma of the 2008 Great Recession.
In addition, millennials are very urban-oriented and tend to prefer smaller spaces, rather than a large, traditional single-family home. We don't see that changing anytime soon although as people age, their needs change. When you have children, having a yard has been attractive for a long time. So it's a tough bet to figure whether they'll transition. One of the key factors is the price of housing and the fact that they would have to save an awful lot to make the move to the suburbs.
A: We generally see opportunities on both coasts in what we call gateway cities, including New York City, Los Angeles, Seattle, Portland, Boston and Washington, D.C.
The gateway cities are enjoying growth and will continue to expand. It's been this way for a long time now. The expansion in China fueled growth on the West Coast, and trafficking between the U.S. and Europe on the East Coast always creates demand.
On the flip side, the Midwest has experienced muted growth. There's an occasional city, such as Austin or Denver, that has done fairly well because they have natural resources as well as technology. Houston has done well, but with the price of oil decreasing, it's commercial real estate market has slowed down significantly.
A: A rise in interest rates would impact the commercial sector very significantly. The price of any of these assets is at extraordinary levels right now so it will mute the growth in pricing and could actually decrease the cost of real estate. What I'm hoping for is that it slows down the amount of money that's flowing into the industry, as there has been tremendous cash flows into real estate in recent years.
A: The way to find the best investments in unfamiliar markets is to lend to the best private equity sponsors. We have a lot of demographic information, including data on the supply of particular types of real estate within specific markets and niches within those markets. Today the business is so data-driven that it's a lot easier to enter new markets.
Now, just because you have the data that a particular suburb and a particular quadrant within that suburb has X vacancy rate, it doesn't tell you where you want to be in that quadrant. It's still critical to go out and look at the real estate just the same.
A: I think the outlook for commercial real estate is strong, although a few questions remain, such as will interest rates go up and will construction get ahead of itself? New construction has had a very nice run over the last couple of years, in part because other asset classes are frothy.
To a certain degree, commercial real estate is not much different from other asset classes. I think one of the fundamental questions is: Are we in a bubble? Of course, when you're in a bubble, you never know it. But, if you pick the strong private equity sponsors and the good locations, and do your homework on the underwriting, you're better prepared if there is some kind of shock to the system.
A: The acquisition of OneWest Bank doubles the size of our commercial real estate business. It also diversifies our business by product type and geography by giving us a stronger foothold into the Western markets. Before the acquisition, we had about 10% of our assets there. Today that number is closer to 50%. They have an investment banking approach when doing business, which is a little bit different than the way that we go about our business, so I think that that's good.
We are very excited to welcome our newest colleagues from OneWest and believe the addition of this talented team further establishes CIT Real Estate Finance as the premier provider of middle market commercial real estate financing in the United States.
A period with ample sources of capital, very low cap rates and high valuations has set the stage for commercial real estate in 2016, but the impact of coming regulations is yet to be factored in. Nonetheless, as long as there
As found by the
"2016 Commercial Real Estate Outlook," released by CIT, many commercial real estate executives see solid prospects for their sector, with 52% indicating that they believe that their segment of the market is e