NAREIM Acquisitions Meeting key takeaways

June 9, 2023

Office deals are expected to start trading again in 6 months time, according to the NAREIM Acquisitions meeting, which took place on June 8. 

However, managers should underwrite discounts of at least 20%.

The question of when you can sell office was the key conversation for transactions managers, at the NAREIM Portfolio Management, Acquisitions & Asset Management meeting in NYC. Factors impacting their decision to sell in today’s market included:

• Amenities needing to be relevant to a changing workforce and working models

• Smaller size of the physical space and of the deal

• Ability to purchase unlevered, due to equity availability or strong relationships with local banks and lenders

• Access to private owners willing to purchase older vintage office via 1031 exchanges. 

• Ability to sell the office in pieces, effectively lowering the price for any one investor

• Within a mixed-used office building, managers need to provide confidence to potential buyers of ground-floor retail, about the health of the office tenants.

Presentations:

The NAREIM Acquisitions meeting jointly with distinct meetings for NAREIM's Portfolio Management group and Asset Management group. More than 110 people gathered in NYC. To download the meeting presentations, attendee list and polls during the meetings, click here.

During the meeting, managers agreed that decisions to buy or sell ultimately hinged on where debt pricing lands. 

One manager focused on retail recently pulled out of a deal that ended up being re-traded 10-15 days before the end of the due diligence period. Core funds face even more pressure, from the impact of price increases in subscription lines, which push interest rate to up to 7 percent plus.

But everyone wants to know when deals will start trading again. 

• The consensus seems to be within the next 6 months, after first real group of trades start to happen, we will see deal volume tick up again. 

• But not until that pool of buyers concedes to discounts of at least 20 percent, by some estimates. 

Thankfully they don’t have much say in when: private owners are going to need to make decisions sooner than later as their loans come due.

So, what makes a deal pencil out today? Seller financing, for one. 

Looking ahead, groups may need to offer this to make transactions accretive. It’s also important not to conflate all office products, cited another manager, because as you get more granular by class, subtype, tenant mix, size and submarket, the story begins to diverge from the headlines.

The Office to Resi Debate: Is it even worth it?

• "It’s like the opposite of Fight Club – everyone’s talking about it and no one’s doing it,” one manager quipped. 

Another, with a bank-backed firm, has been getting a lot of phone calls about office to residential conversion opportunities, but isn’t comfortable yet: “We don’t know if it’s scalable for us, or if it’s just too much energy to be worthwhile.” 

Add in zoning risk, pushback from municipalities that are not supportive of housing development, and by the time you build a model and stabilize a near-obsolete asset, you may as well just tear it down and build new residential with the right amenities.

Finding & Retaining Talent: Tools to build the best transactions team

• What are deal teams doing now that fundraising has gotten so challenging? Bolstering their teams, on the institutional side at least. 

Many groups reported plans to grow their investor relations and transactions teams within the next 6-12 months. A larger institutional player recently expanded its Analyst program, tipping the scale toward more junior than senior transactions staff in-house.

In order to retain these analysts, managers need to be able to communicate career paths and opportunities for advancement. 

What's working? 

• One firm discussed spending a lot of time cross-training their junior staff and integrating them across the business, as well as offering them stretch assignments and special projects. 

• A larger institutional player recently expanded its analyst program, tipping the scale toward more junior than senior transactions staff in-house.

The NAREIM Acquisitions meeting jointly with distinct meetings for NAREIM's Portfolio Management group and Asset Management group. More than 110 people gathered in NYC. To download the meeting presentations, attendee list and polls during the meetings, click here.