External Affairs

[Alyssa Bray]

Various issues related to capital markets and finance were frequently cited by our members as an issue for the 2018-19 Top Ten. Here are some of the responses we’ve received so far.

• The giant imbalance of capital versus deal opportunities. The consolidation of ownership and capital in public companies and PE firms.  Restrictions by China on the exporting of capital.
• Dodd-Frank Reforms
• Toys “R” Us shows the failure of private equity — Toys “R” Us’s private equity backers had saddled it with $5 billion of debt. That classic buyout strategy might not work so well in the digital era, when spending on interest payments rather than innovation can mean handing your customers to Amazon.  More from Michael Corkery of the NYT “Consumer demands are changing so quickly that heavily indebted companies have trouble reordering their business to adapt and compete with better-funded rivals.  A wave of buyouts has collapsed in recent weeks, felled by digital competition.”  Two recent bankruptcies that fit the pattern: the radio company iHeartMedia and the New York grocery chain Tops. And an alternative reason Toys “R” Us gave for its collapse: not enough babies

Have anything to add? Share your comments below, and feel free to share articles and data illustrating this issue. 

[Dr. Victor Calanog, Ph.D., CRE]

Think about this topic in light of interest rate policy and its ultimate effect on cap rates and real estate valuations. Yes, there still seems to be a lot of “dry powder” / capital waiting to be invested. In what is still a world of low interest, income producing real estate provides yield that capital seeks. This has tended to keep cap rates down as deployers of capital compete with one another.  Interest rate policy, on the other hand, has been pushing short term rates upwards, while revised expectations of inflation appear to be pushing long term rates upwards too. In a higher interest rate world, cap rates feel upward pressure.

Which force will dominate? The answer will be in the data, but for now, with the exception of perhaps the Hotel sector, cap rates in many property types and geographic areas still appear to be holding flat (for many places, at historically low levels).

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