Berkeley-Haas Alumni Network Real Estate Panel

Jan Brzeski, Principal and Portfolio Manager, for Arixa Capital Advisors participated on the Berkeley-Haas Alumni Real Estate panel held May 2nd in Brentwood, California. Other panelists included Chad Sanderson, Principal, The Bascom Group; Kurt Strasmann, Senior Managing Director, CBRE Southern California; Tingting Zhang, Founder and President, TerraCotta; and Steve Orchard, Senior Vice President of Structured Finance, Transwestern.
The panel discussion, entitled "Is the Boom Back?", explored the factors contributing to the recovery in the real estate market since the crash in 2008 and some of the macroeconomic trends that will be driving the asset class in the future. The low interest rate environment was cited by a number of panelists as a driver of growth in both commercial and residential real estate. Cap rates, which can be defined broadly as the income yield on property, are historically low for institutional quality assets such as downtown Los Angeles office buildings. As panelist Steve Orchard put it, "Investors in search of yield have been synthetically creating bonds with institutional quality real estate assets."
Real estate is in the midst of a bull market which prompted the question to the panel, "What inning of the recovery are we in?" Jan Brzeski and panelist Chad Sanderson agreed that it felt like we were in the 3rd or 4th inning, despite some areas of real estate that seem overheated. Housing in Los Angeles was up 25% in 2012 and there is limited inventory. On the commercial side some REIT quality properties are trading at sub-three cap rates. Both of these are indications of a frothy market. With respect to housing Jan Brzeski said that while it may be true that we are in the midst of a strong recovery in some areas, the pendulum had swung so far in one direction that houses were selling for less than they would cost to build. The recovery has been strong but we are still far off the peak values reached in 2006. Mr. Brzeski said that while Los Angeles may be particularly strong, not every market has recovered to the same extent and he expects that nationwide housing will continue to appreciate for the foreseeable future. Steve Orchard said that for commercial real estate, while some properties may be trading at ridiculously low cap rates, nationwide, the spread between cap rates and Treasuries is about 600 bps, close to its historical average. He also commented that according to Goldman Sachs, wealthy investors have been slow to take on risk and still have 45% of their investible assets in cash and cash alternatives. There is a lot of cash sitting on the sidelines that will continue to flow into real estate in search of yield and inflation protection.
--Post submitted by Kevin Zvargulis