Archives for June 2019

U.S.-based private equity funds have more than $300 billion waiting to invest in commercial real estate. That’s a lot of money chasing quality deals, while some experts—including Bank of America/Merrill Lynch—warn that we are coming close to another recession.
What can that mean for foreign investors looking to invest in the U.S. market? Possibly higher risk, since flush domestic investors will have pushed up the price of quality investments, perhaps even above the asset’s inherent value. An investor not fully knowledgeable of the market—both locally, regionally, and nationally—may end up paying above top dollar just as a market decline hits, which could be disastrous. Foreign investors often take a much longer view in terms of the expected ROI, making them attractive partners for U.S. developers. However, given the situation, foreign investors need to be acutely aware of some of the pitfalls facing those who are willing to invest in the United States. Recent examples provide some perspective.

One Israeli investor who closed upon a parcel of land didn’t understand that commercial lenders in the U.S. were only willing to provide financing of 55 percent to 65 percent loan-to-cost with limited recourse, less than the 70 percent to 80 percent LTC available in Israel. The need to provide additional equity lead to higher costs that reduced the expectation of returns. A domestic partner would have been able to provide a clearer financing picture for the Israeli investor.
In a separate example, a Canadian investor substantially overpaid for a project based upon the expectation that additional public infrastructure would be provided. Unfortunately, the additional infrastructure did not materialize, and the investment value fell flat. The investor’s failure to understand and appreciate the local community resulted in paying too much for a product that could not provide sufficient returns to justify the investment. A savvier investor would have brought on an in-market, local partner for precisely this type of knowledge.
As these examples show, foreign investors should seriously consider looking for local partners in today’s tight investment environment.
In another example, we recently encountered a Middle Eastern investor who wasn’t interested in acquiring individual assets. Instead, it was seeking a stake in an experienced real estate property company with a track record of resilience, having sustained one or two market downturns.
The thinking for this investor was that an experienced local company would be ready to exploit opportunities that may become available if a downturn does hit. At the very least, the entity will avoid the mistake of the Israeli and Canadian investors previously mentioned by relying on the local partner to understand the financial and local landscapes.
The key for foreign investors facing well-heeled domestic rivals in a market that may be heading down: Local partners who understand the nuances of the marketplace, who can help source opportunities and can assist with moving capital at the right time.
By: Joseph A. Panepinto Sr. (NREI)
Click here to view source article.

U.S.-based private equity funds have more than $300 billion waiting to invest in commercial real estate. That’s a lot of money chasing quality deals, while some experts—including Bank of America/Merrill Lynch—warn that we are coming close to another recession.
What can that mean for foreign investors looking to invest in the U.S. market? Possibly higher risk, since flush domestic investors will have pushed up the price of quality investments, perhaps even above the asset’s inherent value. An investor not fully knowledgeable of the market—both locally, regionally, and nationally—may end up paying above top dollar just as a market decline hits, which could be disastrous. Foreign investors often take a much longer view in terms of the expected ROI, making them attractive partners for U.S. developers. However, given the situation, foreign investors need to be acutely aware of some of the pitfalls facing those who are willing to invest in the United States. Recent examples provide some perspective.

One Israeli investor who closed upon a parcel of land didn’t understand that commercial lenders in the U.S. were only willing to provide financing of 55 percent to 65 percent loan-to-cost with limited recourse, less than the 70 percent to 80 percent LTC available in Israel. The need to provide additional equity lead to higher costs that reduced the expectation of returns. A domestic partner would have been able to provide a clearer financing picture for the Israeli investor.
In a separate example, a Canadian investor substantially overpaid for a project based upon the expectation that additional public infrastructure would be provided. Unfortunately, the additional infrastructure did not materialize, and the investment value fell flat. The investor’s failure to understand and appreciate the local community resulted in paying too much for a product that could not provide sufficient returns to justify the investment. A savvier investor would have brought on an in-market, local partner for precisely this type of knowledge.
As these examples show, foreign investors should seriously consider looking for local partners in today’s tight investment environment.
In another example, we recently encountered a Middle Eastern investor who wasn’t interested in acquiring individual assets. Instead, it was seeking a stake in an experienced real estate property company with a track record of resilience, having sustained one or two market downturns.
The thinking for this investor was that an experienced local company would be ready to exploit opportunities that may become available if a downturn does hit. At the very least, the entity will avoid the mistake of the Israeli and Canadian investors previously mentioned by relying on the local partner to understand the financial and local landscapes.
The key for foreign investors facing well-heeled domestic rivals in a market that may be heading down: Local partners who understand the nuances of the marketplace, who can help source opportunities and can assist with moving capital at the right time.
By: Joseph Panepinto (NREI)
Click here to view source article.

New York property owners and developers and local officials are trying to understand what the city’s new, tougher energy use loss might mean for them, and how much it might cost co comply.
A new law will require thousands of city buildings to deeply cut the amount of energy they use.

“New York City is the first city in the world to require all large existing buildings of 25,000 square feet or more, of which there are 50,000 citywide, to make efficiency upgrades… or face steep penalties,” according to New York’s City Hall.
New York City is just the latest municipality to raise the bar for apartment investors and developers on sustainability requirements. Local governments across the U.S. are raising the requirements on what developers have to do to be allowed to build their projects. Advocates for sustainable development also call for tougher building codes, including “improvements” to the International Energy Conservation Code (IECC), a national model energy code that many cities and statesuse as the basis for their own local codes.

The cost of higher requirements

Buildings account for roughly 40 percent of the energy used in the U.S. and over one-third of carbon emissions. “Without addressing the building stock, climate action and energy policy goals are simply not achievable,” according to the New Building Institute, based in Portland, Ore., which has called for a tougher IECC, calling 2019 “the Year of Energy Codes.”
This fall, the International Code Council members will cast their final votes on the new, three-year update of the IECC. The American Society of Heating, Refrigeration, and Air-Conditioning Engineers (ASHRAE) standard, which also gets an update this year, often tracks the IECC.
“Energy efficiency is a worthwhile objective, but NMHC has argued that the upfront cost needs to be kept within reasonable bounds,” says Colin Dunn, communications director for policy and advocacy with the National Multifamily Housing Council (NMHC). “NMHC has supported some recent changes to the model International Energy Conservation Code, but opposed others as not cost-effective.”
Nearly all (98 percent) of apartment developers said changes in building codes over the past 10 years increased development costs for the average apartment project, and these costs, when they exist, average 7.2 percent of total development costs, according to research from the National Association of Home Builders and NMHC.
NMHC has attempted to participate in the discussion by creating its own standard for efficiency and sustainability: the National Green Building Standard (NGBS). As of 2019, more than 4,400 new and remodeled apartment buildings totaling 162,000 units had been certified. Another 2,800 buildings, totaling 128,000 apartments, were in the process of being certified.

More cities require LEED

Dozens of cities also now require some buildings to meet or exceed the tough Leadership in Energy and Environmental Design (LEED) requirements for sustainable design set by the U.S. Green Building Council.
Many cities and towns require all projects involving city-owned buildings to earn a LEED certification. Other municipalities go further. For example, in Nashville, Tenn., local officials require all projects with more than 5,000 sq. ft. or projects that cost more than $2 million to earn a LEED Silver certification.
In Washington D.C., the Green Building Act of 2006 requires all residential developments with more than 10,000 sq. ft. financed by the city to meet or exceed the LEED Green Communities certification standard. All private development projects with more than 50,000 sq. ft. of space must also meet the standards of a basic LEED certification.

New York City’s Green New Deal

New York’s City Council passed its new Climate Mobilization Act on April 18, just a few days before Earth Day 2019, celebrated on April 22. The centerpiece of the package requires large and medium-sized buildings to reduce their emissions by 40 percent by 2030. By 2050, lawmakers plan to cut the overall greenhouse gas emissions from New York City by 80 percent from the city’s levels in 2005.
Buildings covered by the new law will be fined if their carbon emissions are higher than the limits, starting with their emissions for the year 2024. However, most buildings are already in compliance with the first deadline. “The 2024 limits were designed to only cover the 20 [to] about 25 percent highest carbon emitting buildings,” according to Brightpower, an energy retrofit company. “About 75 to 80 percent of multifamily buildings are already in compliance for 2024.” In 2029, the limits will get tougher in an effort to get New York’s buildings to a carbon reduction of 40 percent by 2030, according to Brightpower.
By: Bendix Anderson (NREI)
Click here to view source article.