IPA panelists examine real estate's position in market cycle, Fed's rate increases

John Carter, chairman of Carter Validus

John Carter,
chairman of Carter Validus

Real estate is facing concerns over the market’s abundance of capital and the pace of rate increases by the Federal Reserve, said panelists at the Investment Program Association’s 2016 Executive Leadership Summit, held in Washington, D.C., on April 19.

The real estate market cycle tends to last about 18 years, with the steps progressing from recovery to expansion, hyper-supply and recession, said H. Michael Schwartz, founder, CEO and president of SmartStop Asset Management. That theory indicates that the next peak is likely to come in 2025, after previous peaks in 1989 and 2007, he said.

A big question as many investors are “chasing yield” in this market cycle is “where do we go from here?” said John Carter, chairman of Carter Validus. Real estate now faces “a little bit of uncharted waters” as banks are well-capitalized, but generally not letting that capital out for development except in areas such as multifamily and, to a lesser degree, hotels, he said.

The panel considered the legitimacy of broker-dealers’ concern about too much capital creating artificially high prices. Carter said a great deal of capital is “pushing us up the value curve” in real estate, with the market full of attractive deals and capital rates.

The panelists also weighed in on the Federal Reserve’s likelihood to raise interest rates this year. Guggenheim Partners expects a slow pace of increases, with two occurring this year, said Joe McCurdy, managing director and head of origination at Guggenheim Partners.

Carter said the “level and velocity” of rate increases are crucial. “Slow and steady” increases are likely to have little material impact as companies perform better and more rent is flowing in, he said. But “quick and abrupt” increases will have a major impact at a time when “everybody’s equity is in real estate because you can’t get returns elsewhere,” he said.

The Fed “can’t act alone” in making rate increases, because of zero and negative rates in effect around the world, said Rick Caplan, senior adviser at EIG Global Partners.

“If you raise rates 100 basis points, that budget deficit is going to be ballooning. There’s going to be a real political lack of conviction to raise rates quickly anytime soon,” he said.