Scott Pertel co-leads HFF’s San Francisco office during a time of great expansion and expectation for the firm.
Investment brokers have an especially deep and clear view of the market. They are privy to most of the dealmaking in the industry and can help investors shift billions of dollars into the industry. HFF’s office in San Francisco is no different. It has been growing steadily and in 2017 had a record year. Co-leading it is Scott Pertel, who has helped grow the office and the region for HFF. Seeing the deal flow is why we asked him for a few insights into the market and where it is heading in 2018 and beyond.
In many ways 2017 was record year for the industry, what are some of the big picture statistics that stand out for you?
Whereas 2016 was a standout year from an investment sales volume standpoint, debt was the main driver in 2017, with a 17 percent year-over-year gain in originations. The amount of capital flowing into the debt fund space was astonishing, which lead to tighter spreads across all product types. We were successful on financing large scale development projects throughout the country, proving the availability of construction financing. Industrial origination volumes were up significantly as well, a 49 percent year-over-year gain.
In general, we are very bullish on the 2018 trading environment. Dry powder for CRE investing is at its all-time high of $150+ billion.
And what about HFF, how did the firm do in the region overall, and how does that compare to where the firm was a year earlier or even in the last cycle?
HFF had our best year on record, closing ~$96 Billion of volume, a 27 percent year-over-year increase. Our stock began the year trading at $28/share, reaching a high of $51/share in the 4th quarter, illustrating our ability to continue to add value to our clients and shareholders. We’ve added Corporate Merger & Acquisition capabilities, bringing on New York-based Henschel Company in April, in addition to opening our London office in May and Seattle office in December. We now have 25 offices, 375 capital markets advisors and close to 1,000 employees.
Regionally, 2017 was a record year for the San Francisco HFF office. We transacted on ~$4.7 Billion worth of debt placement, investment advisory and equity placement business, spanning 96 separate deals. This represented a 65 percent increase over 2016.
How is 2018 starting to shape up? Are you seeing any indication today how the year may unfold and things to consider?
We believe 2018 will be another banner year for HFF San Francisco, with over $3 Billion of investment product available in the Bay Area to begin the year, representing over 6.5 million square feet.
As a firm, our pipeline is up, as well. We anticipate achieving another significant jump in transaction volume, stemming from our global presence and growth in market share in core gateway markets such as New York, San Francisco and Seattle.
With the recent run-up in treasuries causing fluctuations in the lending markets, our clients are relying on us more than ever to help them navigate through these waters. With our breadth of reach into both debt and equity sources, we bring tremendous value to our clients and deliver solutions to many complex financing scenarios.
What industry indicators and key metrics are you personally following that help you make sense of what is happening in the industry today?
We are constantly tracking job creation, interest rates, bond yields, consumer confidence and inflation metrics. We also track emerging capital, both foreign and domestic.
There is some sense that a lot of capital is still looking to enter the commercial real estate space. Some folks are looking to increase their investment allocation to real estate, others are looking just put more capital to work in the industry. Are you seeing this still occuring, and do you see this continuing into 2018 and beyond?
In general, we are very bullish on the 2018 trading environment. Dry powder for CRE investing is at its all-time high of $150+ billion, institutional allocations for CRE are breaking the 10 percent threshold, and CRE continues to outperform other asset classes (NCREIF vs. S&P 500). With a scarcity of available product, we are seeing a shift to platform level investment and company level recapitalizations.
We are also seeing new entrants in the non-traded REIT space. Groups such a Blackstone, TH Real Estate and Starwood began raising multi-billion dollar funds in 2017. Another example would be Oaktree, just announcing their intent to raise a $2 billion non-traded REIT. Lastly, foreign capital remains very active in US CRE. Drivers for foreign capital interest in US CRE remain constant, with the core focus being a safe-haven for capital, diversification of currency, better risk adjusted returns and geopolitical headlines.
What in your mind will shape the investment picture in 2018? Secondary cities where assets are more affordable, gateway cities with high employment and strong barriers to entry, others?
We feel the investment picture in 2018 will be shaped by the robust availability of debt and equity capital. A theme throughout the year will be rising interest rates, but we are bullish on the growth drivers supporting that expansion. The cycle appears to be extending.
Is high pricing in certain markets like the Bay Area starting to affect demand? At some point are investors worried about placing capital at this stage of the cycle?
We have over $3 billion of product in the market, representing various return profiles, from core office product, to value-add multi-family and industrial development. With ample liquidity in the market place, we are receiving significant interest on each asset we are marketing. It is more of a matter of placing the appropriate capital to opportunities to match their return profile.
We have seen capital become more cautious late in the cycle. Investors are targeting asset classes with limited capital requirements and steady cash-flow, think industrial and multi-family.
What product types do you foresee getting considerable attention in 2018 and beyond and why?
Industrial is the clear darling at this point in the cycle, with most every equity and debt source under-allocated in industrial. With a dearth of industrial product, we see yields continue to compress for the best-of-the-best industrial.
Investors are drawn to industrial for a multitude of reasons but the shift in consumer trends (i.e. e-commerce) is a key driver of investor interest. E-commerce sales increased 15 percent year-over-year, further buoying tenant demand and in turn development. As companies continue to focus on delivering product to the end consumer next day or same day, we anticipate continued focus on last touch facilities, driving rent higher and higher.
Where do you anticipate cap rates going, and do you foresee any concerns about that?
In general, we anticipate cap rates to remain flat. There is natural upward pressure from rising interest rates, however, as capital continues to be allocated to and raised for CRE, we see demand keeping downward pressure on yields. Certain markets (such as urban/infill) and product types (industrial, core office, core MF) will see cap rate compression as capital chases security.
Do you anticipate any issues arising out of the political uncertainty in Washington and having an impact in the industry in 2018 and beyond?
We feel tax reform is largely beneficial to CRE. With the landscape changing daily, we take a wait and see approach to much of the proposed legislation.
In 2018, what excites and what concerns you about the industry?
I’m most excited about the constantly changing landscape. When CRE capital markets are stressed, HFF can provide tremendous value to our clients. We stay ahead of market drivers and guide our clients through the fluctuations. With our global reach and deep roots in both the debt and equity markets, we see trends before they arise. 2018 is setting up to be a robust transaction year.
Are there any questions that we’re not asking that we should be asking?
What inning are we in? Kidding…