Market Matters: Capital Markets

Dallas-Fort Worth’s real estate continues to draw interest from the capital markets, and industry experts look at the present and the future for North Texas.



Grant Thornton
Greg Ross is national managing partner at Grant Thornton. He has more than 25 years of experience in the real estate, hospitality, and restaurant industry sectors. He provides accounting, auditing, and consulting services with those industry groups.


Gables Residential
Sue Ansel is chief executive officer of Gables Residential, where she has worked for more than 25 years. She has held positions in acquisitions, development, and operations, and has led major company initiatives.

The Retail Connection
Alan Shor is co-founder and president of The Retail Connection. He’s involved in The Retail Connection’s strategic direction, oversees the day-to-day operations of the company, and leads its investment and merchant banking business. 

Michele Wheeler is president and chief operating officer of Jackson-Shaw, which she joined in 2005. Wheeler has guided Jackson-Shaw through major property acquisitions and dispositions, many property refinances, and the closing of new and permanent construction loans. 

Colliers International
Creighton Stark in executive vice president of Colliers International, and he specializes in investment sales and recapitalization of office assets for institutional, private, and financial organizaitons. Stark moved his practice to Colliers International in 2010.

The Real Estate Council brought together a panel of experts at The Belo Mansion to offer the latest insights and 2019 projections in office, industrial, multifamily, and retail. The panel—Alan Shor, Michele Wheeler, Sue Ansel, and Creighton Stark—was moderated by Greg Ross of Grant Thornton. HFF’s Mark Gibson presented the keynote address at the event.

ROSS:  Creighton, we’ll kick it off with you. Give us an update on the capital markets. From your perspective at Colliers, what are you seeing—and what are you expecting to see—from interest rates, capital market structure, and the investment community?

STARK: The bottom line is, it appears as though all the fundamentals are in check. It really doesn’t seem like there’s any one specific sector that’s overseeded. Right now, in our sector in the industry, lending has grown, but leverage borrowers are under control. Both borrowers and lenders have been disciplined about their underwriting practices. It appears as though there’s not really a whole lot of high-octane debt out there that makes the cap tax seem a little bit lopsided. There continues to be record levels of debt and equity available, although interest rates have inched up quite a bit. 

As far as the sponsorship and property, capital is progressively targeting opportunities. You look at where we are and all that we have going on here in Dallas-Fort Worth and you have to ask, “Why not?” This is a tremendous place to be: great for dynamics, properties are at historically high levels as far as values go—and continue to be. Rental rate growth year over year continues to exceed expectations. We’ve got steady job growth, we’ve got favorable Texas business climate, we’ve got a highly talented labor pool, and we’ve got significant industry growth. 

DFW continues to be ranked as one of the top three places for investors to invest in. We’re seeing a flood of new capital sources that come into the region from every level. Hertz Investment Group came in and bought the Pier 1 building in Fort Worth. You [can] look at where we’re at now on the market for 465 Independence at Independence and George Bush: We’ve seen buyers coming in from every area of the country, every area of North America, looking for an opportunistic-type return that they can achieve on a building of that nature. 

Currently, overall dynamics in place have allowed for a highly desirable investment arena. There are some potential elements that I think we have to be cognizant of. A few things stick out, and there is a corporate debt bubble that we have to be aware of. Corporations have taken advantage of really low levels of debt, and they are 50 percent higher leveraged than they were in the last downturn. That’s something that we really need to think about. 

A weaker global climate is kind of what we’refacing currently, as well. You can look at what’s going on in China, where they’re trying to get control of their debt. You look at Brexit, and what’s going on there. You look at the immigration movements in Europe, too, which are affecting the global economy drastically. Rising oil prices and auto production are something else: With rising oil prices, gas gets more expensive, and with rising interest rates, it’s more costly to buy a car. So, it affects a lot of us. The tariffs are also very important, but, with a lot of the things that are going on, it just seems more costly for goods. 

The thing I want to touch on the most, which I know is in the back of everyone’s minds, is rising interest rates. The 10-year Treasury note climbed to 3.2 percent in early October, which is the highest level since May 2011. The federal bonds rate is up 2 percent, and the Federal Reserve is expected to raise 25 basis points over the next 60 days. Those are some things we really need to think about. It’s real, but it still doesn’t seem to affect a lot of new capital. 

The yield curve is also something we really need to consider. The short-term interest rate could increase  ... this typically is a passage toward a recession. If the Fed continues to raise interest rates and the growth of the economy falters, the yield curve could invert—and we know what happens with an inverted yield curve. But, overall, I think everything currently looks good. 

The median GDP is forecasted at 2.9 percent in 2018, and 2.7 percent in 2019. So we’re only just a few basis points off there. With growth softly nearing 3 percent and unemployment rate at 3.7 percent—which is the lowest since 1969—I think it’s hard to say if is any evidence for the economy to do anything. Any single headwind that’s going to come could change our current environment. 

ROSS: Michele, I know Jackson-Shaw is invested in many different sectors of real estate. I want to talk a little bit about where you’re at, what you’re seeing and what your investments are. 

WHEELER: We’ve done a lot in the industrial space in the last several years. As most people have alluded to, it’s been one of the product types that’s been in strong favor. It’s a product type that we are continuing to focus on. The struggle that we’re having is available land and also a run on construction price. So, our return on costs have compressed. But, at the same time, capital is out and available for that asset price. Given that it’s a low capital-intensive product type, it’s been readily available. What we are trying to do is really look at how we mitigate our risks given where we are at. What happens if, all of a sudden, there’s an abundant supply? 

We’ve seen a number of developers who have entered into this space that haven’t done industrial before. You’re seeing that across the U.S., because it’s a product type that’s in favor. In terms of additional products, we are doing some limited-service hospitality, but we’re also being very mindful of making sure that we stay in that space. We have historically done full service in the past, but again, when we were this late into the cycle, and given that we also were experiencing labor shortages, we are trying to be really disciplined—and that’s generally not a word you hear from a developer. But, we are having to be really mindful about how we structure things: Who do we structure things with in terms of partners? How do we think about lenders? What are we doing on leverage? How are we hedging our main construction projects to be able to weather some disruptions? 

And then, we are spending a lot of time on the construction cost side. There isn’t much we can do about that right now in terms of shortage of labor and pricing. Primarily, our focus has been on industrial—really focused on a smaller level. 

ROSS: Sue, affordability keeps coming up in every marketplace, but it’s critical to [the] economy, and it’s critical to urban structuring. Talk a little bit about affordability, and about making sure that’s something to be addressed by our developers and that we are taking care of our communities. 

ANSEL: It’s an important question. From a multifamily standpoint, if you look at the underlying fundamentals—the number of household formations compared to the amount of multifamily or single-family housing being built—we’re totally underdeveloped. Homes are a need, as opposed to a want. But, where the development is headed has been primarily in the “A” space and the luxury space, because that’s where we all think we can afford to build. We’ve talked about rising construction prices and rising land prices. It’s very difficult to build a new apartment or affordable multifamily home. So, we really are at a fundamental divide within the multifamily industry. There is a lot of supply. It’s taking its swerve in the luxury space. But we are underservicing the affordable market housing supply or demand. 

So, what do we do about it? You’re seeing it come across in different ways. There’s a regulation that’s going before California in two weeks called Costa-Hawkins. Costa-Hawkins is a law that was put in place in the early ’80s in California that said no city or locality can have an ordinance that has a home rent control program. There was rent control that was grandfathered. There’s no new rent control allowed, and they are trying to rescind that law, and allow cities and states to have their own laws and regulations about what rent control to put in place. That’s probably the worst thing you can do for affordable housing, because what it will do is shut it down—and make it even more expensive to deliver any supply. 

What you really need is more supply to address the issue.  I think as an industry, it’s really incumbent upon us to come together to try to find a solution. There’s lots of ways that we can address it. Some of them are going to be public/private partnerships. There’s a role for the federal government to play in this space, and I think as multifamily developers and owners, we need to come together to try to lead into the process. If we don’t, the solution will be imposed on us, which will be difficult. 

I had the opportunity about three weeks ago to testify before Congress on this particular topic. There was a study that was done by the NAHB and the NMHC— together they funded the study—on the cost of regulation. What you may not know is that the cost of regulation is about 30 percent of new development. Regulations are important. 

We need to stay within the guidelines, but there are unintended consequences of layer upon layer upon layer of regulation. [We’ll need] a multipronged attack to address this issue, but it’s a critical issue. I would encourage everybody who’s in this industry to start thinking about what we can do to try to address it because there’s not a silver bullet that solves the problem. 

ROSS: Alan, there’s a lot going on in the marketplace. Developing was a lot different two years ago than it is today. You’re developing, and you’re investing. What does that new development and investment look like now, compared to five or 10 years ago? 

SHOR: Retail, obviously, has been in a very dynamic place. In the last few years, we’ve seen a lot of change. There are those that think retail is in a real down cycle—the apocalypse is here—with all of the retail bankruptcies. But, on the other hand, you see a lot of growth, from both traditional retailers and new digital retailers that are opening up physical stores, as well as in the medical retail space, and the restaurant space. If you look at the numbers—and get past the bankruptcies of Sears and Toys “R” Us and others—the growth is dramatic in places like value retail and entertainment. Medical retail is growing tremendously. 

In our first 13 years in business, we built large centers and had as our anchors the two boxes that provided great credit, great stability, and were growing: the Bed, Bath and Beyonds and the Dick’s. That’s really changed.

We’re seeing those retailers focused on cleaning and leaning their portfolios, and slowing their growth. What’s replacing them, in part, are the entertainment concepts, the restaurant concepts, and the medical retail. So, we’re changing with that. We’re pivoting our business to where we’re building something today, or we’re buying and redeveloping something today—and it’s going to probably be in the urban markets. 

A great example: We just bought the Knox District with our partners. That’s going to be a longer-term project, and it will be mixed use with some additional multifamily and some office. The base customer is looking for an experience: We’re going to have green space. We’re going to have pocket parks. We’re going to make it authentic and walkable. I think that’s the difference between building and developing—or redeveloping—something today versus what we would have done five or 10 years ago. 

ROSS: Sue, back to you. From a technology perspective what do you see, and what do you expect? 

ANSEL: You’re seeing it in everything we do, every walk of life: Technology is changing what we do. I think it’s going to fundamentally change the real estate industry. You know, if we built a parking garage within your communities today, it’s primarily regulated by the city, saying how many spaces you need. If we built a project that had 1.6 spaces per unit, I used to think we would be totally under parking, and have a parking challenge. Well, the world has changed. Now there’s Uber, and there’s Lyft, and there are lots of other transportation choices today. Now if we have 1.6 spaces, we are totally over parked. So, from a technology standpoint, that’s one thing that’s affecting us and impacting our costs. 

If you think about everything that’s happening at the property level or the management level, think about blockchain technology. You hear about Bitcoin. We are not accepting Bitcoin. I’m not sure we ever will, but it’s fundamentally changing the way we do business. If you think about how you will design a community, there are places where people are using 3D printers to design parts of their building. 

When we’re designing a product today, we’re trying to think about how we can take common space and make it do one thing in the morning, one thing in the afternoon, and one thing in the evening. So, it’s hard to imagine all the impact that this technology is going to have on our business. From the multifamily standpoint, where we had amenity wars in the past, I think that the amenity war in the future will be driven by services and the level of services that we can deliver to our residents, which is fundamentally going to be driven by technology. 

ROSS: Michele, you indicated labor costs are rising, land costs are rising, and acquisition costs are higher. We talked about how much change there is in the real estate environment from sector to sector. Technology changes, and we’ve got all the disruptors in the marketplace. Being a leader in an organization, how do you manage that? How do you talk with your folks about that? 

WHEELER: We have very transparent discussions: It’s hard. We look at markets and see where the opportunities are. On our limited-service hospitality space, we’re looking at infill locations where there are barriers to entering in a more long-term issue. On the land side, we’re looking at a longer period of time and a larger assemblage—and how we can put that together so that we can all live through a downturn. … If we can find some great opportunities and be in a position to be a first mover, those are things that we’re thinking about. We’re only stretching or leaning in right now on areas where there are rewards for taking the risks. 

ROSS: Do you see more partnering? 

WHEELER: On the industrial side, we’ve got great partners. There’s also a lot of what I would say is the capitalization strategy specifically on that side. You see people wanting to have longer-term deals, because they’re having a very different time placing capital. So, they’re coming up and being a little bit more creative.  If they think there’s an industrial park that has multi-phase potential, they’ll take some entitlement risk with you. Or, they’ll look at it and say, “Hey, let’s see how we can capitalize this to have the ability to have multiple places to be able to put it into production.” Capital and structuring is becoming increasingly more important, given where we are right now. 

ROSS: Alan, about e-commerce and the on impact on retail: We see it everywhere—in the Amazon fulfillment centers popping up all over the place and technology. What do you see from a retail perspective? When your customer comes to you, what are they coming for? What services are they buying and what type of help do they need now due to the change in the marketplace? 

SHOR: I start with the thought that Amazon will be the largest brick-and-mortar retailer in the world one day, and there is a reason for that. You can’t just be a pure-playing e-commerce retailer, and you can’t just be a pure-play brick-and-mortar retailer. You have to do both really well. That’s what today’s customer wants. You can talk about cycles. I tell our guys we are not in a down retail cycle. We’re in what I think is a very long-term retail transition, and we have to think like that. 

Our brick-and-mortar retailers, they want to design their stores differently. They want less space. They want to have distribution function. They want to have an area where the customer can order online and bring it back to the store. If you do that really well, the statistics show you’ll have a 27 percent increase in revenue. [Customers] come back, and they exchange, and that’s where we are. 

There’s a reason why the e-commerce retailers are opening up stores, and it’s happening well beyond Amazon. Walmart, which I think is going to be the competitor to Amazon in the e-commerce space, has decided it can’t do what Amazon has done identically. They’re going to do it through it acquisition, and they acquired five or six different retailers, and they are opening up stores. They’ve got, as I understand it, targets for 10 or 12 more in the next 18 months. They want to build a platform to support their e-commerce business, and they are going to open up stores. It’s going to be complimentary. They’re using their Walmart stores almost as distribution centers, the way Amazon has used Whole Foods. 

There is a reason why Amazon bought Whole Foods, opening up convenience stores, opening up book stores—and they are not through. The bottom line with us is, when we either are building something, redeveloping something, or just representing our clients—and we’ve started to represent a number of the digital retailers, as well—is that we have to help them do both well. I think that’s the future of retail. 

ROSS: Bottom line is, in Washington a lot is happening. There are changes every day in the market. In terms of sales and transaction activity, what do we expect to see? How do you think that will impact us? And in the real estate sector, how might our outlook change over the next six months versus the next couple of years? 

STARK: Just based on current fundamentals that we have in place here in Dallas, it’s not going to change a whole lot. We’ve got a very mature office market here. We’ve got current fundamentals in place that are just outright dynamic. We’ve got investors that want to be here. We’ve got all different levels of a capital stack that want to invest in our marketplace. Historically, we haven’t seen anything like this, ever, and we’re going to continue to see it strong, regardless of what happens with interest rates or who is in charge of the government. It’s purely an investment play to these guys. 

We’re still one of the strongest marketplaces in which to invest your capital, and we have a tremendous opportunity here. We are stewards of the industry. We have to be responsible. We have to be disciplined, which we’ve got a history of not being, and that’s has prevented a lot of groups from coming back into our market because of what happened to them 20 or 30 years ago. So, if we continue to do what we’re doing today—and have been doing for the last 10 years—I don’t see any end in sight. I don’t see a hiccup along the way. 

ROSS: Sue, tell us a little bit about your culture and your organization, and how you think that drives your success. 

ANSEL: That’s a topic that we’re passionate about at Gables, and I love to talk about it. Fundamentally, I think we focus on four things. A lot of people talk about those same things, but it’s a part of the hearts and souls of many Gables associates. The first thing we focus on is the associates. We want to make sure that they have an unparalleled employment experience. We want to be the employer of choice. 

I’m going to digress for a minute: One of the questions you asked me about was government regulation, and how it’s going to change. One of the things that’s impacted this organization and this industry is employment. It’s difficult to find associates, and our development sides are having a difficult time finding labor. We need to come up with a sensible immigration policy within the United States to provide labor for all of things that we do. 

As a result of that, we are making certain that our associates have a great experience inside the company. We want to train and retain those. Every 10 years, they’re required to take a six-week paid sabbatical, and then every five years thereafter. That’s a huge benefit, we think, to grow and come back fresh-minded—ready and eager to work. 

We look for high-potential associates to provide training and leadership skills within the company. The first step is [providing] an unparalleled employment experience. The second is really focusing on the best for our residents: They are the reason we’re in business. We can build the best communities in the best locations, but if we’re not taking care of those residents and delivering to their needs, they’re going to go somewhere else. We were talking about amenities earlier. We ask, what is it that our residents really need? 

We’re seeing it in all of our industries. Alan [Shor] was talking about how the world has shifted: What I think is most important is that last mile of delivery. You hear about it from retail, you hear about it from industrial, you hear about it from technology. We are really at that last mile of delivery for our residents. So, we ask, how do we deliver that service and those amenities they want? 

Focusing on our investor, we want to make sure it’s a great investment with a lot of transparency and integrity. Probably the most important thing within the company is giving back to the community. We want contribute to the community that gives so much to us. One of the things that we do is close our operations for a day in each city in which we operate and we partner with a local organization. Everybody gives their time and talent that day in giving back to the community. That’s my favorite day of the year. 

We’re so fortunate to be able to be in the position that we are. We have good jobs. We’re able to take care of our families. Not everybody is in that same position. Being able to give back those things means so much to us. To me, it’s critical. Those are the things that really drive our culture. 

A good measure of that are the 10-year associates within our organization. We started the company 36 years ago. I’ve been with the firm for 31 years, but I haven’t been in the top 10 of tenure within the organization. People come to the organization and stay. The elevator speech is, we try to do the right thing.  When you spend more time with the people that you work with than you do with your family and your friends, it’s important that you like or respect the people you work with and that you are like-minded. We’ve been able to create that culture over those 36 years. It’s something that’s difficult to build and easy to lose, so we’re very intentional on trying to maintain that. 

ROSS: Any additional thoughts before we close? 

ANSEL: We talked about debt funds today. Next year, it’s going to be people investing in opportunity zones. A critical piece is the requirement for the 10-year hold. To get those benefits, you have to stay invested for 10 years. 

WHEELER: For people who have a long-term view, [that’s] going to be very advantageous. A lot of people in the institutional space that we’re seeing have a longer-term yield requirement to their investors. 

We’re looking at a project in Las Vegas that’s within the opportunity zone, and we had a presentation in Boston in the last couple of weeks. The advantages and the yield-return differences that are available are interesting if you’re able to take advantage of those opportunity zones. I think you are going to see a lot more capital and a lot more funds being created to take advantage of that tax structure. For example, there was an illustration that showed that if you had an industrial building, an asset within an opportunity zone that’s been earning a 6 percent return, and you were able to keep that same investment over the entire 10-year holding period, you’d have 300 basis points at the end of that period. I think it’s a pretty significant tax strategy for people who have a long-term view on holding the assets. 

SHOR: From a retail perspective, we’re not long-term holders. We’re starting those: That’s part of the nature to have change. We’re early on in how we’re going to do that. 

ROSS: From a client perspective, our institutional clients are very interested. They’re calling and looking for partners. They’re long-term holders and are very interested. But again, I think I’ve been on more opportunity zone calls in the last two weeks than anything else. 

ANSEL: We’re later in the cycles when people are chasing yield. They’re looking for different ways to find yield, and in all of our industries, it’s reflected in the last eight years. You could hit it down the middle of the fairway, and you would be very successful. Strategies are having to change 10 degrees, 20 degrees to the right or left to find that missing example of looking for ways to create that yield. 

STARK: We see it as a tremendous investment. We have a property for sale in Baton Rouge—a 750,000-square-foot business park—that’s a very opportunistic investment. The level of activity that we’ve received since this property was put into place in an opportunity zone is staggering. It’s all of a sudden becoming a property opportunity. 

ROSS: We’ve talked about various activities, your individual companies, and your business plans. What are some of the changes you’ve had to make over the last month or so? When you go to your office today, what are the first couple of things you have to tackle?

ANSEL: In the last year, we’re looking at investment opportunities differently. We’re looking for shovel-ready. We’re adding a lot of contingency—much more contingency—in our underwriting. … We’re more conservative on that side. In the last 30 to 60 days to 90 days, the uncertainty that’s created by the potential tariffs is immeasurable. We’re hearing from our subcontractors that there’s a reason for saying this. Those tariffs haven’t taken place yet. So, who knows if it’s really the subcontractors looking for an opportunity to create for themselves? 

WHEELER: From a project perspective, like most businesses, we keep our heads down. We get the projects done that we need to get done. It’s business as usual. There haven’t been any major disruptors. … [But] we think about things. We go to panels and discussions like this one. Everyone asks, ‘When’s the ball going to drop?’ But so far, everyone has been very disciplined. The banks have been disciplined, the capital partners have been disciplined, and the developers have been disciplined. Labor and construction costs have also moderated all of that. So, we are still really excited. 

We’re all very blessed to be in Texas. Look at the number ranks: We’re one of those states that doesn’t have a state income tax, and we’ve really benefited from strong jobs and relocations to our market. We’re excited about what we’re doing right now. 

The Capital Market panel transcript has been edited for brevity and clarity.