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Virginia
Business
December 2004
John
B. Levy is a nationally recognized expert in commercial
real estate. His commentary and national mortgage survey
— a monthly survey of more than 30 of the country’s
largest institutional investors and buyers and sellers
of commercial mortgage-backed securities — has
been published monthly in Barron’s since 1983.
Following a 10-year stint in commercial mortgage banking
with Virginia National Bank and the institutions it
merged with, Levy started his own real estate investment-banking
firm in Richmond in 1995.
The company specializes in raising equity and debt for
developers and owners of commercial and multifamily
projects. Since its inception, it has arranged for more
than $1 billion in investments for projects along the
Eastern seaboard, including several projects in Virginia.
Virginia Business talked with Levy to find out why commercial
real estate has been such an attractive investment and
to get his take on how long favorable market conditions
will continue.
Why
are investors flocking to commercial real estate?
The markets are awash in capital because investors are
finding stable returns and a general lack of event risk.
... [Event risk is a sudden, unexpected event such as
the corporate scandal that brought down Enron.] It’s
hard to know when someone is cooking the books. Real
estate is transparent. You can see what’s going
on. When people feel comfortable, they’ll invest
more.
People also invest in real estate because of diversification.
They don’t want to put all their eggs in one basket.
This is especially true since the collapse of the dot-com
market when people expected a 30 percent annual return
on their money. Now people are happy with an 8 percent
annual return.
Who’s
investing in the market and which sectors are hot?
Since the early 1990s — when we had a depression
in real estate and there was no interest — we’ve
had a change in the market from institutional investors
only. Now there’s a huge market of loans that
get originated on Wall Street. We’ve had a tremendous
amount of money flowing in, because the performance
has been good. Real estate yields, relative to other
options, have done well. If you put $10,000 into an
S&P 500 index fund five years ago, it would be worth
about $9,300 today. If you invested the same amount
in a real estate investment or perhaps a mortgage, your
investment would have gained 6 to 10 percent a year.
That’s a striking difference.
As for what’s hot, multifamily housing is the
darling of many players. It will do well in Richmond
for the next few years. ... What’s hot as a firecracker
in Northern Virginia? Condomini-ums are on fire. They
sell them as fast as they can put them up. …In
Norfolk and Virginia Beach, the apartment market is
one of the best markets anywhere. More Navy spouses
are staying put in the Hampton Roads area while their
loved ones are on deployments. Plus, as mortgage rates
go up, good tenants will no longer will able to afford
to buy and that will be profitable for the apartment
sector.
So you expect mortgage interest rates to go up in 2005?
They will absolutely and positively go up. It’s
inevitable. Even if they go up a few basis points, they’ll
still be low, because they’re at record lows.
What’s your take on the current market
conditions for commercial real estate?
If the market of the early 1990s was the perfect
storm, then this market appears to be the polar opposite.
We have extremely low Treasuries, low spreads and aggressive
underwriting. From a borrower’s point of view,
how does it get any better?
How long do you expect such favorable conditions to
last?
Maybe another year.
Looking
ahead, what do you see as major trends that will affect
investments in commercial real estate markets?
I’m not sure how stable this economy is. …
I see a war that’s dangerous. I don’t see
a great exit strategy. Gas is expensive. The consumer
has been the driver of the economy, and high oil prices
take money right out of the consumer’s pocket.
... That’s something that could potentially weaken
the economy — that consumer spending won’t
be as robust as it has been — and, if it’s
not as robust, then we’ll have a weaker economy.
That’s not good for real estate. There will be
less people renting office space, less people shopping.
I’m not being negative about the economy, but
I’m nervous about it. Corporate profits are damn
good, but some companies are holding costs down by not
hiring.
For
what size project does your company broker deals?
Fifteen million dollars to $70 million is the
strike zone of where we do most of our deals. We just
did the permanent construction loan for Canal Crossing
[a redevelopment project on downtown Richmond’s
river front], and we did the original construction loan.
We’re very entrepreneurial. We invest along with
our clients. We just put in an offer to buy $25 million
worth of land in Northern Virginia with one of our clients
for a single-family project.
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