“We think it’s probably getting to the time to start looking at buying stuff,” said Adam Fletcher, co-founder and managing partner at 7Acre Investments.
Fletcher was joined by panelists Andrew Brain, co-principal at Brain Group, and Aaron Mesmer, CCIM, EVP and chief investment officer at Block Real Estate Services, LLC, to discuss commercial real estate investments in the current market at an event hosted by CCIM Kansas City. Andrew Perkins, CCIM, SVP and commercial real estate manager at Bank Midwest, moderated.
Brain said his group has been waiting for the opportunity to acquire office properties for the past couple of years, and currently, there is a lot of activity in the office market.
“I love what’s cheapest, and that’s office right now. There’s a lot of office. We’re busy. . . . We’ve got 250,000 SF that we’re going to close on in two weeks. We’ve got 100,000 SF we’re putting under contract soon. Right after that, we have about three, four, five deals. Honestly, the only reason we haven’t moved more is just due to size of the team. . . . We still believe in it long term, particularly at the price points we’re talking about,” Brain said.
From 2017 to 2022, Mesmer said it was cheaper to build a project than to purchase one. Capital was cheap, and once a project was built, the value was there.
“You could either sell it or refinance and get a big pop, so we really spent a lot of time in those five years focused on doing new development,” Mesmer said.
Starting in 2022, “the world changes,” he said, as interest rates exploded, and his company shut off the development pipeline.
“When that happens, it not only impacts your capital in terms of how much capitalized interest you’re going to have on a ground up deal and how long it’s going to take to carry it. You don’t know where the cap rate is going to settle. . . . There was just a lot of pause from an equity standpoint. We said, hey, we’re not going to get into the development business right now because we don’t know where it’s going to be,” said Mesmer.
Mesmer said in the last two years, there has been a focus on trying to find properties to buy, but lately, Mesmer has seen a pivot back towards development. For his company, the next deals out of the ground will be second phases of existing developments.
Above: Panelists at October's CCIM event from left to right, Andrew Brain, Adam Fletcher, and Aaron Mesmer. Image credit: Marcia Charney
“I think we’ll continue to do acquisitions throughout 2025, but I think we’re going to pivot pretty strongly back into the development space so we can move some of this land off our books,” he said.
Fletcher said his firm effectively acts as a lender with preset returns and caps. Seventy percent of the deals they work on are new originations. They concentrate on the multifamily space and underwrite the risk for the potential upside.
“We’ve got to get to a point where either (a) the numbers are showing us that it’s worth it to take that risk, or (b) we have a thesis that we believe we’re going to outperform with a somewhat high degree of certainty,” he said.
Mesmer said it’s been harder to raise capital while interest rates have been high and affect returns.
“A lot of people just want to know if I’m putting $100,000 into a deal, am I getting $500 a month or $600 a month? What is that going to look like for me? And if it’s only a few hundred dollars more than the savings rate, then you may not do a deal,” said Mesmer.
“We really made a concentrated effort in the beginning of 2022, end of 2021, to get as much of our debt into as cheap and as long as we could go, just to preserve those where it was available to prepay or where prepay wasn’t so punitive. . . . [W]e’ve got a number of deals that now the lenders wish they hadn’t done, which is great for us,” Mesmer said,
According to Fletcher, the equity deals for acquisition on which he works have a term of anywhere from one to five years. Mesmer said the terms are three to seven years for institutional investors doing a joint venture with an insurance company or pension fund.
Asked if he was looking at refinance or sale of office assets, Brain said his firm had the forethought to get seven to 10-year debt on almost every asset they purchased in 2018 and 2019.
“We’re not too worried about it. We probably in the next two years need to start thinking about it. We’ve added so much value . . . . We wanted to refinance more out, but we’re definitely going to be able to refinance our principal and hold,” he said.
Lenders tend not to provide any relief to borrowers in distress in the office business, and that creates opportunities for firms like Brain’s.
Mesmer said lenders are more willing now to offer fixed-rate construction loans rather than floating rates.
“There was never a fixed rate available when rates were very, very, very low because no lender wants to do that. And, now there’s probably fixed rates available on construction, but the borrowers don’t want to do that because their expectation is that rates are going to come down. So it’s always kind of this game,” Mesmer said.
Brain said if he wasn’t focused on the office market, he would invest in multifamily.
“A lot of those [multifamily] guys way overpaid on a three cap and loaded it up with debt. There’s going to be a lot of fun acquisitions,” he said.
All three panelists agreed that retail is a good investment now. Mesmer said other than pad sites, he does not recommend new retail.
“Don’t buy the mid-block. Buy the hard corner,” Mesmer said.
Header image: Altitude 970, strategically located near the Kansas City International Airport and KCI 29 Logistics Park, is an example of the premier luxury apartment communities sprouting up around Kansas City to support the growing demand. Photo credit: BAM Capital