Cushman & Wakefield’s Eric Roth On Navigating the Volatile Investment Sales Market

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Talk about a tale of two markets. When Eric Roth chatted with Commercial Observer in November 2021, the industry was in a wildly different place. Sure, it was still emerging from a global pandemic, but interest rates were low and lenders were going gangbusters originating debt during a period that many labeled their “best quarter ever.” Fast-forward a year, and advisory firms have their work cut out for them (to say the least) trying to keep up with a fast-moving, volatile market where terms change overnight. 

It’s times like these, however, that brokers can add the most value in terms of helping clients navigate the storm. Roth, a senior director in Cushman & Wakefield’s middle market investment sales group, chatted with CO about how he and his team are doing just that. 

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Commercial Observer: How has the fourth quarter of 2022 been for you so far, compared with the same quarter last year? 

Eric Roth: At the end of last year, we were on an absolute tear across the city. Everybody was placing capital, interest rates were next to zero, and there was a light at the end of the tunnel for COVID. What happened in the fourth quarter of 2022 is the perfect storm of all the distress that everybody has either been waiting for or kicking the can down the road to try to get out of, all coming at once. It started in 2017 when retail reset, then we had rent regulation change in 2019, COVID in 2020, and now the interest rate hikes. So the perfect storm of the change in the fundamentals of real estate alongside the change in interest rates is bringing everybody to a halt. 

We’re still transacting and seeing activity, but most people who are investing in real estate today haven’t been in a rising interest rate environment —definitely not one where it’s rising this quickly. And because it’s rising so quickly, nobody really knows how to underwrite. The volatility makes it very hard to pin the tail on the donkey, so whatever deal is agreed to today, we’re advising that the world will change, two times minimum, by the time you sign a contract four to six weeks from now.  

Any lights at the end of the tunnel?!

The one little light at the end of the tunnel for us right now is there’s a lot of capital still on the sidelines. That’s one thing that’s the same as last year. There’s a lot of capital earmarked for New York that’s been waiting for the right time to buy. That being said, a lot of liquidity has been wiped out of the market from stock portfolios, mutual funds and crypto investments. So from a high-net-worth individual standpoint there’s less liquidity and a little bit of hesitancy, but there is enough liquidity overall that we’re starting to see all-cash buyers who feel they’re getting in at a good basis that they can wait until the debt markets pull back in eventually.

Who is transacting on the buy and sell sides in this hairy environment? 

Most sellers that are transacting today have a motivation because they have to do something — maybe there’s debt coming due, maybe a fund is closing, or maybe there’s a major capital event of some kind. The groups that are hiring us today to sell their properties are less price-driven, and more market- and timing-driven. Our rhetoric has been, “Hey, it’s not a seller’s market, but it’s also not the worst time as rates are going to go up further.” If expenses continue to climb, taxes are also going to continue to climb, so it will probably get a little bit worse before it gets better. So our sellers are also seeing that, and, if they have to make a move in the short term, a lot of them are doing it. 

On the buy side, what’s interesting is we’ve started to see a lot of local, New York-based groups come back into the market. We’re seeing new partnerships, equity sources and local operators really looking to buy, capitalizing on the housing shortage and the rents going up in the multifamily world. We’re talso seeing a decent amount of foreign buyers. We have two or three deals out there right now that are all being negotiated by foreign buyers.

Is multifamily still the asset class du jour? 

In Q2 and Q3, the majority of transactions were multi-
family, with office not moving at all. We’re starting to see an uptick in office transactions, whether that’s note sales or people taking equity positions. I think we’ll also see an uptick in recapitalizations because equity can come in at a diluted basis and a partner can stay in and recapture some upside while holding on for a better day. 

What are you seeing in terms of distressed transactions? 

We keep saying that if we had two deals side by side, and we were asking the exact same price, but one was selling the asset and the other one was selling the note — a nonperforming distressed note — there’s capital lined up around the block for that note, but a lot less buyers out there for the actual asset. I think when you look at where values are compared to where debt is, that’s really what hits the distress trigger, whether it falls over the line or not. 

The group that has been very quiet is the long-term owners who are still in the equity positions, because they have the patience and the capability of holding on. But there are definitely financially engineered deals from the last five years that are hitting that distressed point today. So, I think in the first quarter there’ll be a reassessment of where all these deals stand on the lenders’ and funds’ books, and decisions around what they’re going to do. 

What’s the hardest part of your job today? 

Just keeping up with the pace. Adapting as quickly as the environment is changing, and being able to educate and advise our clients quickly. We’re adjusting our models more frequently, because we have to show what a little change in the interest rate environment does to a deal. Or the banks might decide, “No, we’re not going to give any interest-only period,” so debt payments are larger and returns smaller.

Maybe the hardest part is moving the buyers and sellers as quickly as the environment is moving, because groups come up with an investment or business plan and the world changes before it even gets implemented.