On April 22, ULI Charlotte and UNC Charlotte Center for Real Estate  hosted a capital markets program entitled “Navigating Private Equity.”  Throughout the afternoon, three panels highlighted their perspective on capital, the market and opportunities for the future.

A special thank you to Lei Hou and Jonathan Brooks,  students in the Master of Science in Real Estate (MSRE) Program at UNC Charlotte.  Photos of the event will be posted when available.

To view the PowerPoint, click here.

Private Equity Perspectives

Where are we in the current cycle?

• 3-5 good years left. Clients are heavily scrutinizing deals. Get concerned when the spread between BAA and cap rates rates starts to increase. It’s important for them to go in the same direction.
• cap rates will rise 1-1.5% in the next 3-5 years
• Vacation/second home volume is back, but prices are still low. Still plenty of good times ahead.
• According to Moody’s report, for top 20 markets, the price is about 120% of the peak price, as opposed to secondary market with only 93%

What’s important in a partner/project?

• 5-45% sponsor equity, good track record, will take up front risk for outsized returns on the back end
• Institutional dollars are inflexible, commit to a partner and a plan early.
• The real estate needs to make sense and the project should match the sponsor’s skills. Think long term on partners, the lasting relationship is more important than the rate on one deal.
• High net worth investors can be more hands off. Beware the thorough nature of institutional dollars.

What’s the next big thing?

• 18-34 year old millennials are renting by choice, want walkability, and will pay a premium for it.
• “Millennials can’t save money, they just want to shop and dine…. So retail.” Office has also been neglected, specifically TAMI (technology, advertising, marketing, and information) tenants.

Crowdfunding

• Under the radar deals are ideal, and community pride can play a big role. Millennials don’t want pension funds so those will eventually dry up creating a gap in mezzanine funding, allowing crowdfunding to play a larger role. The new Investment Banker Model they’re using has accelerated the process and allowed them to grow rapidly.
• “Internet is ruthless to middle man” A “paradigm shift” is coming in traditional capital raising to internet based system.

• A good partner understands the deal, and the platform allows this. That is not the case with institutional dollars. The I-Banker model has taken a lot of stress out of it, waiting for the deal to fund before closing.

What about regulations in North Carolina?

• Disclosure is required, which is a good way to garner local support for entitlement. Reg A+ registration will require sponsors six months and a fortune in legal fees.

Why is Charlotte a good market for crowdfunding?

• There’s a current immigration of youth into the local market and they’re open to new concepts.
• local growth and a financially savvy population
• Infill is tough and scares institutional investors away. There’s a local movement here and on ground floor retail institutional lenders want a national chain- that doesn’t work on most infill deals.
• “Banks fund the past, not the future.”
• Crowd funding can be applied to underserved community, donation based model to eliminate the pain for the underserved

Complexities of Capital in P3 Arrangements

What’s challenging about P3 arrangements?

• Building trust and communication. Speed, staying power, and patience are required.
• The developer bears all of the risk and expenses up front. Patient investors are required.
• Government CAN’T take on risk, which is why they have to enter the deal late.
• Governments have to be careful about what they’ll fund due to public outcry, which limits deals.

CEO Panel

What will happen when returns are compressed?

• A shift to focusing on secondary markets because locals are getting priced out of primary markets.
• A trickle down from primary to secondary markets in every cycle. Strategy is to get in and out early.

How do you combat rising interest rates?

• Don’t bet on interest rates, hedge using a combination of fixed and floating rates.
• Lock in rates as long as possible. Their current portfolio average runs to 2029.
• Moderate risk with long hold periods, particularly in multifamily.
• Have to address both as a borrower and how if affects his home buyers.

What do you think of crowdfunding?

• Don’t completely ignore it, but stay the course. More regulation is coming, not less.
• There are a lot of bad deals out there, which may be why they’re crowdfunding. Expect the Charles Schwab’s of the world to eventually get into it.
• “I don’t get it.” “It’s going to blow up” when deals start to go bad during the next market downturn which is going to bring a ton of regulation.