Q&A: MacKenzie Capital President John Black Dissects Capital Markets in DMV
By Keith Loria January 28, 2022 12:07 pm
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There’s no denying that the pandemic has had a huge impact on capital markets.
Many investors are turning to real estate as a preferred investment due to the recent volatility in the equities market as it provides investors with a current return and appreciation potential.
The industrial sector in particular, is seeing a huge influx in capital because of an increase in demand for storage and warehouse space.
John Black, president of MacKenzie Capital, under the umbrella of MacKenzie Real Estate, has more than three decades of experience in commercial real estate finance and investment. Black oversees the firm’s activity in Baltimore and Washington, D.C. Metro, and recently spoke to Commercial Observer about what he sees in the capital market space in the year ahead.
What economic fundamentals and trends are currently fueling the capital markets industry?
Over the past 10 years or so, real estate companies have been operating within an environment featuring unprecedented low interest rates, which has fueled confidence, growth and activity among all asset classes. But now, that scenario is slowly changing with inflation and rising interest rates at our doorstep. In their constant search for the highest possible yield and income-producing assets, financial institutions and investors are now pivoting more actively towards real estate because of its historically proven hedge against inflation. Labor shortages, supply chain issues and peaking demand for products and materials are all contributors to inflation.
What is the current state of the real estate capital markets? Debt and equity?
Especially since the beginning of the pandemic, a significant amount of capital has been amassed, with much of it not placed, because the prediction of large numbers of distressed properties becoming available never actually materialized in the marketplace. During the past year, an increasing number of investors began seeking commercial real estate positions up and down the capital stack in the search of higher yields. This activity is fragmented across all asset classes and geographic regions, as investors seek opportunity in the midst of disruption among property types. Retail continues to evolve with adaptive reuses and includes medical and logistics end-users backfilling empty spaces. Many commercial office buildings, particularly those in the [central business districts] of major cities are distressed. However, when disruption occurs, opportunities follow and capital sources are looking to take advantage of the growing disconnect. Real estate is often considered the third wheel but now, during times of distress, private equity and debt funds, [real estate investment trusts] and high-net worth individuals are shifting their investment strategies and real estate is the beneficiary.
Which asset classes are leading the charge? Which sectors are expected to outperform 2021?
Industrial has become the star asset class over the past several years and, due to changing consumer shopping habits as fueled by e-commerce, there is no reason for this dominance to subside in the near future. Following closely behind is the favored child of multifamily, and escalating home prices are creating additional value in this asset class. What we find more surprising is the expansion of preferred property asset classes such as life sciences, student/workforce housing, self-storage and marinas finding strong investor and lender interest. Each asset performance remains closely aligned to specific sub-markets, with interest increasingly shifting to the Southeast portion of the country. With land prices soaring and the land entitlement process becoming more difficult to navigate, adaptive re-use and redevelopment projects will be more prominent with opportunistic return expectations.
In which direction do you see cap rates trending and why?
Being an old-school band of investment guy, I have learned that when the mortgage constant makes up roughly 70 percent of the capital stack — and interest rates rise — capitalization rates will follow. The governing on this correlation is the total volume of capital looking for real estate investment positions. The competition for superior risk-adjusted returns in commercial investments will lessen the impact of rising cap rates. Most owners took advantage of historic low rates and extended debt maturities so there exists no pressure to sell.
Which submarkets are specifically poised for growth in the year ahead?
We envision significant growth following where jobs are being created and, in turn, where population is increasing. Major areas include the Research Triangle portion of North Carolina in Raleigh-Durham, as well as the Piedmont Triad, which encapsulates Greensboro, Winston-Salem and High Point extending into Charlotte. We expect continued strong activity throughout Florida. Locally, we see tremendous activity and opportunities following the life sciences industry with a focus on Rockville and throughout the I-270 corridor.
What is your strategy to capitalize on activity in the year ahead?
Our team remains active in the DMV region and there are many opportunities, and we are also following our clients to the Southeast portion of the country to assist them with investments and capitalizations to find the right balance of debt and equity. In many instances, our team identifies an opportunity and then finds the right match in terms of sponsorship and capital involvement. We leverage our vast relationships in the brokerage community, including our in-house team of brokers, to locate off-market opportunities for our clients. Success breeds additional success and confidence and this philosophy has enabled us to grow our stable of clients and investors.
Keith Loria can be reached at Kloria@commercialobserver.com.
