Insider Insights

Commercial Investment On The Rebound

Andrew Kaeyer

Title: Principal, Hunneman Capital
Age: 46
Experience: 20 years

As a principal with Boston-based Hunneman Capital, Andrew Kaeyer is responsible for lining up financing for acquisitions and

Andrew Kaeyer

Andrew Kaeyer

development of commercial and multifamily properties. During his career Kaeyer has arranged more than $1.3 billion in capital origination for clients, including such projects as the Waltham Watch Factory redevelopment and the Gatehouse 75 apartments in Charlestown.

Q:In this overheated commercial real estate market, how much has the timeline for acquisitions shrunk?

A: It’s 100 percent driven by the amount of capital chasing real estate. As the market gets stronger, it compresses everything. People want to see highest price and certainty of execution: how quickly can you get me to the finish line? When the market’s soft, there’s an ability to extend those timelines. When the market heats up, it’s who can close quicker. The timeline gets squeezed. We’re seeing 30 to 45 days of due diligence followed by a 15- to 30-day close. When the market’s softer it could be 60 days of due diligence with a 30-day close. At the peak of the market in 2007, it went down to basically no due diligence and they were closing with all cash.

Q:What are investors looking for in pre-leasing requirements for office space in downtown Boston and the suburbs?

A:Typically people are looking for opportunistic investments. They want to see some vacancies so they can go in, implement their management and ownership style, and lease up the vacant space. Because there’s vacancy in the building right now, they feel they’ll get a better buy than buying a stabilized property. Anywhere from 60 to 70 percent leased. Spec office is incredibly difficult still. The concern is that was one of the product types in the last downturn that got hurt hard. Banks like to know there’s cash flow and the timeline to lease vacant space. Downtown Boston, you can get away with spec because demand has shifted from suburban to urban. It’s very difficult to do spec development in the suburban marketplace unless you’ve got a monster balance sheet.

Q:How would moderate interest rate increases affect commercial properties?

A:It’s going to have a lagging effect in respect to upward pressure on cap rates. In the short term, the market will absorb a rise in interest rates because of the demand from an equity standpoint for real estate. Long-term, it’s going to have equal impact on cap rates. They move in tandem.
Q: Who’s showing the most  interest in office space?

A:[There is] a lot more foreign capital coming into the U.S. marketplace, Asian and European money. Institutional funds continue to be a big driver of where the marketplace is: pension funds, opportunity funds, private equity. Where a lot of those groups would chase large projects, $20 million and up, due to the competitiveness  of the marketplace, you’re starting to see the biggest players shifting to the smaller assets. They might be looking at $10 million and up. We have a lot of small owner-operators out there. The operators are more conservative because they’re investing largely their own capital. They’re very accustomed to what their returns have been in the past. When they see the market get overheated they tend to pull back and focus on their own assets, and then the foreign investors come in.
Q: What are the prospects for more hotel development downtown?

A:The biggest hindrance to hotels is they’re competing with residential. Residential developers can afford to pay more for the dirt because their return expectations are lower and their debt financing is vastly superior to what you can borrow against a hotel, which is an operating business as much as it’s a real estate play. They’re competing against residential in Boston and Cambridge to acquire land sites, and they can’t compete effectively unless they get some subsidies. Part of that is you can build residential stick. Hotel you have to build steel and concrete. It’s a much more institutional quality, so that’s a higher cost.
Q: How aggressive are banks in development financing?

A:Commercial banks, the superregionals and the local banks are very interested in pursuing development deals. They’re balanced between the short-term and long-term. They have a very strong appetite for three- and five-year money. What we have seen in this economic cycle is the life companies were interested in the longer end of the curve and banks were doing shorter-term lending. Now the banks, because they are so healthy, are lending out as long as 10 years. You’re seeing that blurring of who’s doing long-term financing.
Q: Is the multifamily market shifting from apartments to condo financing?

A:I think it’s the opposite. I think (rental housing) continues to be the main driver, where you get the best terms from the banks and the highest level of funding. The condo marketplace is starting to make a  rebound. The biggest difficulty with the condo lending environment has been the warehousing of the units.

In the past, lenders were able to finance condo projects and the end financing was put in Fannie Mae and Freddie Mac. In the downturn, they changed the regulations. Now you have to have 50 percent of the units sold before you can lay off those loans into Fannie and Freddie. Banks have to be able to warehouse those loans until you can get to that level of sellout.

For smaller condo projects, there’s been an appetite. When you get up to 100-plus units, there’s not that many of banks willing to warehouse loans. It’s made construction financing challenging.

But multifamily rentals has been very predictable. There’s been a lot of appetite for that product. Multifamily came through the downturn, and cap rates for multifamily are in the 4’s for institutional quality product. While construction costs are on the rise, the rents have continued to grow. In downtown Boston, Cambridge and the inner-ring suburban communities, multifamily has been incredibly strong. They’re basically following public transit. 

Top Five Favorite Recently Read Books:

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Commercial Investment On The Rebound

by Steve Adams time to read: 4 min