October 15-November 4, 2014 —
COLORADO REAL ESTATE JOURNAL
— Page 23
Finance
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COMMERCIAL REAL
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W
e are all familiar
with the kings of
commercial
real
estate finance – Apollo, Carlyle
and Blackstone. While these big
boys battle each other for trophy
assets in gateway cities, middle-
market financiers and sponsors
are getting better prices and
superior returns on deals across
the country.
The term middle market
means real estate transactions
in the $5 million to $20 mil-
lion range. The middle market
makes up the majority of assets
(by number) in the U.S. These
deals are too small for the big
guys and too big for the country
club money, leaving a void few
can fill.
While much of the attention
has been paid to the recent high
prices of the trophy proper-
ties in gateway cities such as
New York, Washington, D.C.,
San Francisco, etc., those prices
are more a reflection of fearful
investors bidding up the price
of low-risk yield than real value.
Most real estate assets in the
United States are not Class A
properties inmajor markets with
great tenant rosters. Most com-
mercial real estate in America is
the other 99 percent.
According to the June issue
of the Small Balance Advocate
newsletter: “Cities with the high-
est percentage sales gains during
the first four months of the year
are dominated by smaller cit-
ies and underscore the growing
attractiveness of secondary and
tertiary markets among inves-
tors and owner-users for their
unique risk-return profiles.
“Moody’s further reports
that prices in
‘major’ mar-
kets (Boston,
Chicago, Los
Angeles, New
York,
San
Francisco and
Washington,
D.C., inclu-
sive of apart-
ments) have
s u r p a s s e d
their prere-
cession peak
by approximately 7 percent, but
prices in nonmajor markets (i.e.,
roughly another 55 markets) are
still about 14 percent below their
previous high-water mark.”
The big funds don’t do invest-
ments in the middle-market
range, thus the owners of this
real estate do not have access to
institutional capital. There are
few, if any, institutional qual-
ity mangers that are exclusively
focused on this space. Further,
middle-market properties are
suffering from certain “disloca-
tions,” and there continues to
be a lack of liquidity for this
space from both capital provid-
ers and sponsors. Less capital is
available to the middle market
because: depositories have tight-
er regulations and equity con-
straints; sponsorship lost liquid-
ity due to values still below 2008
levels; country club investors are
out the market; and maturity
defaults will continue through
2017, as the 10-year notes from
the peak lending years come
due.
In addition, natural causes also
are at play, as the primary own-
ership profile of middle-market
real estate owners tends to be 50-
to 75-year-old males. This “gray-
ing of real estate ownership” is
giving rise to a whole new set of
opportunities and issues, such
as: death, succession, divorce,
liquidity and partnership issues.
These are known as life events
and they are a significant driver
of middle-market real estate.
Yet this middle-market owner-
ship is experienced and savvy,
and they only want to do busi-
ness with reliable and predict-
able capital. Thus, while sig-
nificant capital still follows the
large funds that focus on intu-
itional real estate, the middle
market provides higher returns
with better structures that allow
for better principal protected
investment.
s
Jay Rollins
President and CEO,
JCR Capital, Denver
Most real
estate assets
in the United
States are not
Class A properties
in major markets
with great tenant
rosters. Most
commercial real
estate in America
is the other 99
percent.
