ATLANTA — Today’s perfect storm of low interest rates and availability of debt financing has many sellers garnering top dollar for properties. However, the recent increase in interest rates poses a big risk to the commercial real estate industry, says Dean Adler, co-founder and CEO of Philadelphia-based Lubert-Adler Partners LP, a real estate equity firm with more than $6.5 billion in equity and $16 billion of assets under management.
“I think this is the most perilous, difficult market I’ve seen in the last five to 10 years,” says Adler. “If you buy a stabilized income stream today, and you are paying a much higher price for a lower cap rate because rates are low, you could really be whipsawed in three or four years after interest rates rise rapidly.”
The insights from Adler came Tuesday morning during a commercial real estate finance and investment conference at the Westin Buckhead Hotel in Atlanta. The law firm of Morris, Manning & Martin LLP and France Media’s InterFace Conference Group jointly produced the daylong event, titled “How Can You Take Advantage of the Recovering Market?” The event attracted hundreds of investors, developers, lenders and financial intermediaries from across the Southeast.
From left: Dr. Peter Linneman, Dean Adler, Dr. David Lynn, Tom Crocker, Bruce Cohen and Jim Meyer.
A benchmark for long-term financing, the 10-year Treasury yield stood at 2.65 percent on Tuesday compared to 1.86 percent on Jan. 2, a rise of 79 basis points. Still, today’s 10-year Treasury yield is well below the 10-year average of 3.61 percent. Prudential Financial Inc. predicts the 10-year yield will reach 3 percent by the end of the year.
Adler warns that buying an asset today with the intention of selling it three or five years later is a dangerous strategy. “You are going to be selling in an environment with a lot more supply and higher interest rates and those are not a good combination,” he says. Adler recommends today’s buyers should plan to own their properties for at least 10 years.
Adler was one of five industry experts who participated in a lively panel session titled “State of the Market,” moderated by keynote speaker and economist Dr. Peter Linneman, principal of consulting and research firm Linneman Associates. Other panel participants included Dr. David Lynn, executive vice president and chief investment strategist of Cole Real Estate Investments; Jim Meyer, managing director of Tishman Speyer; Tom Crocker, founder and managing partner of Crocker Partners; and Bruce Cohen, senior partner, president and chief operating officer of Ares Commercial Real Estate Corp.
Dr. Peter Linneman, principal of consulting and research firm Linneman Associates, gave the keynote address during this year's Commercial Real Estate Financing and Investment Conference.
“We are in a fairly perilous time, but I think the most important thing to remember is you can still make money, and that’s our challenge,” says Crocker of Boca Raton, Fla.-based Crocker Partners, which has invested $4 billion in more than 120 properties.
Cohen adds, “I think today is a great time to be investing, it’s just a question of time.”