Expo Real 2015: Risky Deals, Investment Opportunities

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An interview with John R. Homsher, CCIM, Principal

As written by Natalie Dolce & published on GlobeSt.com | October 21 & 23, 2015

Earlier this month John Homsher, CCIM and a principal of Podolsky|Circle CORFAC International based in Chicago attended the Expo Real Conference in Munich, Germany, as the US representative of CORFAC International. Homsher will be president of CORFAC in 2016.

Expo Real is considered to be one of Europe’s preeminent real estate investment events. This year the conference drew more than 1,700 exhibitors and nearly 38,000 commercial real estate and banking professionals from 74 countries. GlobeSt.com interviewed Homsher on his experience at Expo Real and some of his takeaways.

Q. Candidly there has been a lot of negative news about Europe that is being published here in the U.S. What was the mood at this year’s Expo Real?

A. The mood was buoyant, very upbeat. There is a ton of capital chasing deals in Europe just as there is in the U.S. Sure, there were discussions on some of the issues in Europe we read about in the States – one of the panel events was titled “Migrant Crisis a Threat to Growth and Prosperity,” yet another panel was called “Overseas Capital Hits 50% in Germany.” The latter panel touched on the fact that North American private equity funds have been the largest investors in Germany this year, accounting for 28% of deals and half of the total investments by volume in commercial property.

Q. What were some of the other panel discussions at Expo Real that struck an interest with you?

A. There were several panels that were forecasting an uptick in M&A activity including brokerage, banking and even developers. One of the speakers said that merger activity typically increases in up cycles like the one we are currently in; sellers are more likely to sell when their businesses are thriving because the valuations are higher. During Expo, ULI’s Europe division released a report calling for cities to become denser in order to thrive and survive based on the notion that if they don’t get denser they run the risk of becoming irrelevant to their populations and incapable of producing the economic and social drivers that make them desirable to live in. ULI studied Birmingham (England), Dresden, Istanbul, Stockholm and Warsaw. It was interesting to me because we’re seeing a similar trend here in the States with cities like Cleveland, Minneapolis and Kansas City becoming more urbanized with people moving back to the city centers to live.

There was also a panel on market conditions in the U.S. that was moderated by Ulrich Steinmetz, managing director from Rreef, who said his company was buying American assets in core markets where safety is one of their main criteria. As such they were willing to accept cap rates in the 4% to 5% range. That led to a conversation by the panel that concluded one of the safest real estate investments anywhere is ultra-high end retail shopping districts such as Bond Street in London, Rodeo Drive in Los Angeles, Michigan Avenue in Chicago and a select-few others. Part of the investor attraction to these districts is that if you lose a tenant you don’t have to invest in expensive retrofits because luxury-brand tenants will do their own improvements. However, cap rates can be even lower – sub-4% on prime high street retail!

Q. What were some of your CORFAC colleagues saying about commercial real estate market conditions in their respective regions?

A. Our affiliate in Germany, Berendes & Partner Consulting/CORFAC International, mentioned that the lowest interest rates ever and huge global liquidity is driving ongoing strong demand for German property (which is expected to top 40-45 billion € commercial investments in 2015). The inventory for core products in the seven biggest cities is nearly empty and investors are looking for more risky deals in secondary markets and new product niches like student and micro housing, hotels and senior-living homes. Additionally, Berlin has become a startup capital in Europe and mostly driven by e-commerce in part because it is one of the hippest places on the continent, plus it is much more affordable than London. Berlin got $2.2 billion USD in venture capital in 2014 while London got $1.5 billion USD. Even so, London had more startups last year – 175, versus 115 in Berlin.

Farebrother/CORFAC International in London said the investment market there has never been stronger and it is driven by consistent rental growth. Prime office rents in the West End currently stand around £117 per square foot (approximately $180 USD). There is an interest in a wide variety of properties in London, For example, just last week Farebrother announced over $200 million (USD) in new sale offerings and they include the former London HQ of The English Football Association (which relocated to Wembley), the leasehold of a 100,000-square-foot building on Fetter Lane that has multiple tenants (London HQ of Marriott Hotels is one of them) and The High Holborn Telephone Exchange building (76,000 square feet in eight floors).

In Paris, BG Carré/CORFAC International told me that investors are looking in Paris because they are getting priced out in London – particularly value-add investors who believe they can improve and reposition properties to achieve returns in the high teens. Cap rates are also low in Paris. For example, the investment yield for a recently sold, pre-leased new office development in Boulogne-Billancourt – a suburb of Paris, was sub-4%. Economic growth in France remains low at just 0.5% but is expected to improve in part because new presidential elections are scheduled for May 2017 which may result in a more business-friendly government.

Q. At CORFAC’s Fall Summit in Minneapolis the current CORFAC president said that you have 10 existing European affiliates and are looking to add more. Having just been to Expo, any update on this initiative?

A. In addition to myself, CORFAC had 16 other attendees at Expo from eight European countries and we sponsored a booth. During the conference we had meetings with independent brokerage firms from Helsinki, Amsterdam and Lisbon, which are some of the markets we would like to add to our network, but it is too early to forecast an outcome. However, my takeaway is there are independent commercial real estate firms in all corners of the globe and despite the size and scale of the big brokerage houses, there remains a place for well-run independent, local and entrepreneurial firms that are seeking an alliance with a global real estate network like CORFAC International.