December 10, 2020
By Dennis Kaiser
Underscoring the disruption caused by the COVID-19 pandemic in 2020, commercial real estate has proven to provide a compelling investment option. Uncovering the best assets in the best markets to invest in requires sound strategies carried out by savvy investors. Digital tools are contributing to the real estate resurgence into 2021 and online auctions are an emerging area of the CRE industry that delivers opportunities, even in challenging times.
CRE marketplace Crexi has risen as a leading platform advancing the trillion-dollar commercial real estate industry by supplying users with innovative technology to simplify, expedite, and ultimately democratize the entire transaction process for brokers, buyers, and investors. Crexi’s success is a reminder of just how important digital tools have become this year and serves as an ideal backdrop for a conversation with Fernando De Leon, Founder and CEO of Leon Capital Group, a commercial real estate investment and development firm that manages more than $3 billion in assets. De Leon also sits on Crexi’s board and was the first investor in the organization.
De Leon shares insights on a range of topics including ways investors can approach 2021, how the CRE sector is viewed today from an investor perspective compared to other investment options, and what might be ahead in 2021. He also touches on the impact of tax policies, what some of the biggest investment opportunities are, investment strategies amidst a market dislocation and the ways transactions are getting executed today.
As to the question of what investors should do to get ready for the coming year, De Leon cites a quote from the boxer Mike Tyson. “Tyson famously said: “Everybody has a plan, until they get punched in the mouth.”
While that analogy certainly would apply to 2020, De Leon notes, “We’re subject to a tremendous amount of external influences, a vast amount of which cannot be predicted, so I like to avoid making plans, and instead remain flexible and adaptive.”
So now that the first punch has landed, and the year has continued to produce numerous ‘hits’ to the economy and commercial real estate sector, the advice De Leon offers to weather challenges is anchored on experience rather than knee-jerk reactions.
He says, “I think investors should not try to time their markets. We should anticipate what we think the post-COVID world looks like and make our bets accordingly. You don’t outperform, though, if you are not occasionally contrarian.”
Understanding where the market might lead and uncovering the best investment options in 2021 means investors must have a firm grasp of where they are today. Real estate does offer a compelling alternative to other, often more volatile, investment options.
De Leon points out three big trends have changed real estate investing in the last few years. One is the fact that capital formation over 30 to 40 years of compounded growth in emerging markets has created pools of capital that are seeking out U.S. real estate assets at the highest rate in modern history.
Secondly, some sub-asset classes in retail, office and hospitality have essentially become un-investable, undermined by both secular and structural changes. He notes that this leaves industrial, single-family and apartment rentals, and at the margins, data centers and self-storage as the most viable property types for investors to consider.
Lastly, De Leon indicates, U.S. coastal markets in high tax jurisdictions have also become difficult to underwrite for office, as corporations flee to low tax states, and apartments via rent control policies, among other factors.
But he doesn’t believe future tax policy changes being considered such as 1031 exchanges, capital gains, or others, should impact investment decisions today. The advice De Leon has, given the potential impacts of various scenarios, is that cutting the best deal is a most important investment criteria.
“We have governments that legislate tax policies that are later undone by subsequent administrations. Tax policy changes like the wind,’ says, De Leon. “To me, the best hedge against tax changes is to not overpay for assets — because that is the highest tax of all.”
Among the biggest opportunities De Leon sees ahead include industrial and logistics development, as customers move online, and digital adoption occurs in all demographics. He points to the fact that 10 million seniors are now buying their groceries and goods online because they fear getting COVID-19.
“We didn’t expect them to adopt that technology along with the rest of the population, so we’ll see a need for distribution space to fill an extremely high demand,” says De Leon. “Suburban housing is also a clear winner to me as people move to get more space and live in less dense environments.”
Market-wise, De Leon notes that the fundamentals for industrial and housing in Sunbelt markets are compelling. “Lending costs are low if you want to buy,” says De Leon. “In terms of selling an asset, given those low funding costs, you can command very low cap rates for solid assets.”
Many factors must be considered when acquiring a CRE asset, ranging from cap rates and rents to market fundamentals and formulating an exit strategy. But De Leon also indicates transactions today require a new set of tools, including digital resources such as new data technologies, incorporation of virtual tours and online transaction platforms.
“I think we’re seeing a lot more technology adoption in all parts of a real estate transaction. I use DocuSign 20 times a day now,” says De Leon. There’s also been an increase in and adoption of new ways of operating including self-guided tours, contactless move-ins and virtual customer service.
“I think we’ll start to see more auctions and more transparency in the real estate marketplace,” concludes De Leon. “I think marketplaces that connect buyers, sellers, landlords and tenants will see more online connectivity and that serves the industry very well.”
The end result is digital tools truly have acted as a bridge to 2021 for the commercial real estate industry as it navigated the challenges presented this year.
For comments, questions or concerns, please contact Dennis Kaiser