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Foreign.
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Hi, I'm Mark Civitelli and welcome to Inside CRE conversations with the people developing the future of commercial real estate. On this podcast, we talk with developers, investors, owners and industry leaders about the ideas, strategies and trends shaping the built environment. The Commercial Real Estate Development association provides education, advocacy and connections to help commercial real estate professionals succeed. INSIDE CRE is proudly sponsored by Majestic Realty. On today's episode, I'm joined by Chad Lavender, President of Capital Markets for North America at Newmark. Chad sits at the center of today's capital markets environment, advising on transactions across debt, equity and investment sales. And he brings a unique perspective on what's actually happening in the markets right now. Chad, it's great to have you on the show. I'm sure that we've got a lot of listeners eager to hear what you have to say about the capital markets.
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C
Well, thanks for having me. We're excited to be a part of this and you guys do a great job. So longtime listener, first time caller, I
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B
guess we going to say first time guest for certain.
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C
First time guest. Yeah.
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B
There you go. Absolutely. Well, I'm very happy to have you on him here. I mean, capital markets are always a popular subject and probably even more the center of focus today than they typically are. But before we jump into the market, I always like to just start with a little bit of a background to give our listeners a little bit of an idea about who it is we're talking with today. And you've had a pretty unique path going from development into capital markets that's probably don't need all the fingers on a hand to count the folks that have done that. But what was the moment or inflection point when you realized you wanted to focus on the capital side of the business?
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C
Well, I guess a blessing or a curse. I started my real estate career at the beginning of the gfc. So we were building high rise office buildings all over the world, kind of class AA and condos, which was a ton of fun and a great experience. But, you know, it's pretty clear that the development window was going to be closed for a long time for the foreseeable future. And I really wanted action. I wanted to underwrite as many deals, see as many deals as possible, and work on a bunch of different things just to learn and kind of bend the curve from a learning standpoint as quickly as possible. So, you know, I think I had 62 meetings, you know, during the GFC, still had the spreadsheet, didn't ask for a job because no one was hiring I just asked to get introduced to a couple more people from each person I met with and that led me to Brian o' Boyle at ara and I started on the multifamily brokerage side as an analyst as well as an investment sales professional when I was probably 24. And Brian was a great mentor, ran Ara Dallas, which Newmark subsequently bought. So kind of came back to Newmark and came back home, which was fun.
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B
That really is not only full circle, but you're also maybe one of the few people that has a positive story that comes out of the gfc. So you know, almost a double, double hats off to you. There's.
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C
Yeah, it didn't seem positive at the time, I'll tell you that.
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B
Yeah, for a lot of folks listening to this, there's very few times that we will use the word positive in relation to the great financial crisis.
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C
Absolutely.
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B
Well, for those who may not know your platform as well, can you give us a quick overview? I mean what does your role as president of Capital markets across North America look like on a day to day basis?
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Sure.
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C
So I'd say it doesn't look the same on a daily basis. You know, we're trying to meet our clients needs across different real estate verticals. So every asset type in real estate really think trying to help them see around the corners and see what's ahead based on our information and technology and all the knowledge we have in our platform and really try, try to help enable our advisors across newmar to meet the needs of our clients and kind of exceed those by seeing around the corners thinking ahead and being strategic advisors versus hey, I'm just a broker and multifamily. You know, we want them to pick their head up and really help their clients. Holistically we believe we have the best talent in the industry. So. So it's really harnessing that talent on the path of our clients so that we can create alpha in their businesses so they can hit better returns.
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B
Well, everybody always clamors for better returns but talking about it in the broad before we get into the specifics maybe about how we can achieve those better returns. How would you describe the state of the commercial real estate market today in just a few sentences?
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C
You know, it's a constructive market. You know, really debt liquidity is helping drive pricing in the market. Every time we see treasury run out, spreads are tightening. I think there's a lot of super intelligent capital. The pretenders are kind of out of the business and the people who are in it transacting today are very knowledgeable and are using all the technology and information to their behest to go make better investment decisions. We are seeing interest across all sectors and we've seen cap rates really flatten in most sectors. So the bid ask gap has narrowed. There's very good pricing transparency in the market. Whether people want to meet the market as a buyer or seller, that still remains. But we're able to give clients great advice on what their assets are worth, and it's their decision on whether that's whether they want to sell or refinance or do a recapitalization. That was more than a few sentences, but it's hard to distill anything down. As dynamic as the market is today. And it's different per asset class.
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B
Well, you know, thankfully, I'm not a. I'm not a very strict grader on that, so it's important that we get some good insight to that because, boy, I heard you saying something that I've been hearing from folks, specifically our members and a lot at our recent ICON conference, and that is that there's talk about capital coming back.
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C
Oh, yeah.
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B
So let's dive into this a little bit and hearing your reaction there, you would agree. So.
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Oh, yeah.
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B
What are you actually seeing? And do you think we're in a recovery, or would you still define it as being a bit selective?
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You know, at sue, we're definitely in a recovery. You know, whenever Blackstone, they called the bottom last summer, so that's good enough for me. So we're definitely in a recovery, I think, as well, you know, as much as buyers know where pricing is today and capital is very intuitive and smart, so you need a seller who's willing
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C
to meet the market.
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But starting with office, Newmark's the number one office sales platform in North America. And on the office front, we're seeing bidder pools continue to expand, more institutional capital playing. But pricing has reached a point where
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C
it's very constructive, fair.
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And also you're having rapid rate growth in a lot of markets where you're on the class A end of the market. You're having extreme rate growth and real, real scarcity of product. So fundamentals have tightened. You know, on the industrial side, you had 80 million square feet lease in Q4 and about the same amount of product deliver. So the supply dynamic is really tightened and it's pretty constructive there. We expect to see rate growth back in real scale and next year and kind of bump along with inflation this year. So it's really different per asset class. You know, housing, it's Muted on the rate growth side. Think people have big expectations for the back half of the year. You're seeing supply trend down.
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C
You know, on this, the senior housing front, you're kind of seeing the opposite, this extreme NOI growth when the senior housing has been, you know, in the doldrums from 2020 to 2024 and now you're having 15 to 20% NOI growth across the industry projected for the next three years. So you're seeing a ton of equity interest there as well. Student housing is a little bit of the same story. Retail see the momentum in that sector and it's really, there's no new supply in this in the asset class. And if there's any tenants going out, there's a line down the door to come in generally at a higher rate. So it's a lot of fun kind of seeing what's happening per asset class and where capital's flowing dry powder actually ticked up over the last quarter. So you're seeing more equity and the debt funds and banks, insurance companies, Fannie and Freddie. The availability of efficient financing is kind of an all time high from our perspective and super competitive and kind of looking. You know, we talked about the GFC earlier. You know, I try to tell our, our team members who've just seen trees go grow to the sky over the past 10 years that the market is still really good and comparison to the GFC where there was no liquidity on the debt side so you couldn't really get anything done. So it's still, we're having fun and really trying to create great outcomes for our clients and try to think strategically to help them out.
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B
Well, Chad, let's talk a little bit about where some of these deals are actually getting done. Where are you seeing deals clearing today from a pricing perspective?
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C
Are you speaking industrial specifically or you want to hop around through asset classes?
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B
Yeah, let's hop around a little bit here. A lot of our members are involved in various asset classes but maybe if we could touch on some of the big ones, that'd be great.
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C
So industrial, we're seeing pricing for class A at a five to five and a half cap, really driven by debt and people are starting to ratchet up rate growth really year two, year three, where we're seeing, I think the largest amount of demand from a buyer perspective, which is interesting, is in the larger big bomber assets because there's virtually no speculative development and no supply for the big million square footers. So that's kind of a change we've seen over the last 12 to 18 months. The class B space is kind of five and a half to a six cap. Generally tons of industrial, tons of interest, more private in nature from a capital standpoint. You know, switching to retail, I'd say the Odyssey index core funds are trying to buy as much retail after spending the last 10 years trying to sell as much as they can.
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B
And boy that is.
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C
Yeah. And as well as the offshore capital providers. So we're seeing a ton of demand, a ton of interest there. You know, pricing for grocery acre stuff is, you know, in the low to mid fives. You know, we're seeing power centers price, you know, two, 300 basis points inside of where they did five years ago. There's a lot of great pricing and depth from an institutional capital perspective there where it was pretty bleak a handful of years ago. And it's really driven by tenant demand and just the overall health of that industry office. There's a huge bifurcation from a yield perspective between class A and class B. You know, class A's in the six to sixes to mid sevens, you know, line down the street from a buyer perspective. And the class B stuff is still high single to low double double digits from a cap rate perspective. And people are really looking at that basically as a two way option, as great cash flow vehicle. Potentially a covered land play, potentially a cover, you know, a conversion opportunity to housing. So there's kind of a lot of different ways people are playing the class B space, which is fun to see how creative the investors are. You know, if you kind of transition to the alts. Senior housing cap rates have compressed probably 150 basis points to the mid fives to sixes for class A stuff over the last really 12 to 18 months. You know, class B still in the sevens. Students, you know, in the low fives, very robust, better pools, lots of offshore capital for both. Storage is just kind of coming out of it where you know, they've had muted rent growth, you know, they really need housing starts to pick up and you know the fundamentals in the housing market and the development market to get a healthier to see that rate growth. I think they see that coming next year. The data center space and powered land space. We've seen an unbelievable amount of interest from the hyperscalers and from capital. You know, we finance and raise equity for more of that than any group. So it's been a lot of fun to be at the tip of the spear on that front. And despite the noise in the media, we're seeing a robust interest from a Capital perspective in that asset class hospitality, you know, we're seeing a little bit of, we're seeing a lot of equity interest. There seems to be a bit of, a bit more of a bid ask gap than other asset classes. Just because everyone's underwriting is so different right now. I think people are pretty bullish on the class A side of the space and the extended stay space. So we're seeing investor interest there and on the multifamily side, tons of interest. You know, from a bidder perspective, we've seen on the class A in the Carolinas having 70 plus bids and go five rounds, you know, for sellers with, you know, market expectations for what pricing is today and then if you price stuff too tight, you have very little bitter pools. So if you're in the high fours low fives for class A, you're seeing pretty good healthy bidder pools. Obviously the financing markets are robust and you know, interestingly, if you transition to the eight foot lids, you know, eight foot ceilings, you're seeing way less bidders. So and you're seeing pricing, you know, mid to upper fives to well into the mid sixes in a lot of cases. So there's not as much capital formation for that space. And we're starting to hear and see kind of institutional capital chasing those higher yields as well. So that's something we kind of expect to see play out and more scale and that pricing tighten over the next 12 months.
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B
One of the conversations that, you know, we've been hearing quite a bit, and I'm sure, you know, you and your team hear it all the time, is simply the cost of capital. Yeah, I mean it's been expensive, right? Get capital. And we're still seeing, at least compared to where we've been in the not too distant past, you know, that interest rates are still elevated, albeit until recently, heading, you know, in, in the right direction. But that still leaves some uncertainty in the market, you know, particularly with the geopolitics that are out there right now. What are you seeing in investor behavior at the moment? And what do you think we're going to see perhaps maybe six 12 months down the road in investor behavior?
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C
Yeah, I mean, I think people, you know, are pretty sober to where rates are. We are focused more on GDP growth. So if you have GDP growth, you can raise rents as businesses and people are making more money across the board. So we're highly focused on that. You can't control what rates are, you can't time rates. Everyone has been wrong nearly 100% of the time. So we don't really prognosticate or give advice from that perspective. It's more asset level. Every deal's a snowflake, has its own story and it's unique that we're trying to give bespoke advice based on your specific asset or portfolio and really give advise people on what their assets are worth real time. We're seeing a lot of LPs kind of exhausted or longer into their funds that need to harvest assets due to fund life issues. So we're seeing a lot of GPs choose to recap or do continuation vehicles, which we've done a ton of where they think pricing is. They're a buyer, not a seller at today's pricing. So that's kind of a phenomenon we've seen play out over the last 12 months. We expect that to continue. People like focusing on replacement costs, knowing that no one's building around the corner. You know, if you can buy at 70, 80 cents, that that's a pretty good defensive play and rate growth is going to come down the road. So we're seeing a lot of people play it different ways and it's fun to see how intelligent all the capital is and everyone with a different angle.
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B
I want to move back, Chad, to something you talked about a few minutes ago and that was private credit filling the gap left by banks permanent. Do you think that change is and what do you think it means for developers trying to get deals financed today?
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C
Yeah, we're seeing private credit fill a lot of that void and they're obviously back levered by the banks. So the banks are playing a role as well in that. But we've seen banks increase their construction lending and overall lending in a big way in every asset class. I mean office, they're up materially. So the bank market's very constructive. They have a lot of excess deposits and are feeling pressure to put out capital. So it's a very healthy debt market across the board. The CMBS market's choppy just at this point in time, but it's been super healthy and SASB market's been ultra constructive as well.
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B
So I'm going to ask you to wear both hats here, the developer hat and the cap markets hat here. Because I want to shift a little bit to the developer perspective. Looking at it from a developer, what do you see as the biggest challenge today? Is it the cost of capital, is it construction costs or maybe just uncertainty around exit values?
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C
I think it's both of the first two. So I think it's a cost of capital and what Are my construction costs going to be, you know, in some markets we've seen land repriced pretty materially which has helped take some pressure off. Some of the trades are looking for work now. So you're seeing a little bit of help in certain regions on the trades perspective. But it's really seeing I think accelerated rate growth and having the confidence that GDP is going to continue to grow into the future to get people a little more front footed on putting out capital. Obviously developers are forever optimistic in a good way, which is awesome.
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B
If not, they're in the wrong line of work.
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C
That's right. And it's, they're the best entrepreneurs on the planet. They see optimism everywhere. But it's really getting capital to meet that optimism. And if deals meet the right metrics, there's capital for it and at the box. But you know, we're seeing a handful of groups start to do spec, you know, million square footer construction and the LPs are all about it, but it's not a deep field. But that's a lot. A handful of very smart capitals. Their plan is to go build six or eight of these across the country where there's no availability. So you know, the developers are always a step ahead and see opportunity early. And I think a lot of developers are trying to sit on sites, continue to do work and really kind of build their pipeline where they see us kind of coming out of this malaise.
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B
So where do you see us I think sitting right now? Do you see developers really at this point moving forward with projects? Or would you describe it more as that there's still a greater focus on recapitalizing and protecting existing portfolios?
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C
You know, it depends on the developer. There's a lot and we've seen a lot of new talent spend out, you know, a lot of new companies start. So a lot of groups that have no issues, their main guy spun out and started as put out his own shingle and building new products. So it's different for everyone. We're seeing people try to get shovels in the ground because they recognize the opportunity. It's all constrained on capital. It's not the debt side at all, it's all the equity side.
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B
So there's a lot of discussion. I'm sure you and your colleagues talk about it all the time as well, about AI power and infrastructure and how at least at the moment is reshaping real estate.
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C
Yeah.
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B
So my question is, do you see this as a true structural shift in how capital views real estate or is this more kind of a snapshot in time.
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C
You know, I think it remains to be seen we're seeing immediate demand, you know, certainly in the sun belt where a lot of the AI infrastructure is being built. And we're seeing a lot of industrial demand for all the components that go into the data centers and the power generation side as well as advanced manufacturing side of the business. You know, San Francisco office demand and Bellevue are off the charts really driven from AI demand. I think we're, we're kind of keeping a watch on kind of the call center, that back office space to see what happens there over time. But I think it's still too early to tell, but so far it's been great.
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B
Yeah, it's good to hear that too. I mean, I hear more and more optimism guarded, but more and more optimism today than certainly 18, 24 months ago. And it gives this eternal optimist kind of a little bit more buoyancy there.
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C
Absolutely.
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B
A couple of quick things here, Chad, as we begin to wrap up. What do you think is one misconception about today's market that you think people are getting wrong?
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C
You know, that's a great question. I think we mentioned the Class BC side of the multifamily space and your discount to replacement cost and your yield premium to class A multi. I think that's a great opportunity. I think the same holds true for class B industrial, that your foots and your kind of defensive nature of those assets feel pretty good today. I think the development in certain markets and virtually every asset class is extremely interesting just because it's hard for people to start up the development cycle and really scale over time.
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B
It's actually really interesting to hear you talk specifically about the class B product. I mean, I think that regardless of asset class, it has largely been overshadowed, particularly, you know, within office and to a little bit of a lesser degree, industrial. It's great to hear that and to see maybe perhaps there is a bit of a story in the class B side as well.
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C
Yep, we'll see if I'm right.
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B
Yeah, well, you know, thankfully I've never come back and fact checked anybody on this one here. Largely because we're always looking into the future. We work in real estate development. We're not looking in the past. You know, no one to the best of my knowledge, ever held Kreskin or a tarot card reader to do a batting average on their prediction.
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C
So, you know, that's right.
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B
We'll leave it with that. And so I got one final question for you, Chad. If we fast forward 12 to 18 months. What needs to happen for the market to feel fully like the big neon open for business sign is flashing again?
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C
Yeah, I mean, I think it's just stability in the market from a geopolitical perspective, clear line of sight from a rate perspective, an actual rate growth at the asset level, NOI growth. And as soon as we start seeing rapid NOI growth across sectors, we're gonna see incredible sales activity pick up both from a buyer and seller's perspective.
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B
That is the high note I think we ought to end it on. I really appreciate it. Absolutely. Chad, thank you so much for joining us and for sharing your perspectives, especially on what's happening on the ground in today's markets. It's been great talking with you, glad you listened. But most importantly, we'd love to have you back at some time too.
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C
Anytime. Thanks for having me. You guys do a great job and we really appreciate all that you do for the commercial real estate industry.
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B
Thanks, Chad.
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C
Have a good one.
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B
Thanks for listening to Inside CRE conversations with the people developing the future of commercial real estate. And thanks to our podcast sponsor, Majestic Realty, for supporting the show. If you enjoyed today's conversation, please share it with a colleague and subscribe so you will never miss an episode. To learn more about NAOP and connect with more than 22,000 commercial real estate professionals, visit NAIOP.org.