Money isn't everything - but big deals in commercial real estate become big deals when the numbers get into eight or nine digits. Looking back on all the transactions included in Commercial Investment Real Estate, office proved to be the top market - with 72 deals totaling $929.2 million. Multifamily, retail, industrial, and land sectors all had another strong year. We spoke to CCIM designees behind the year's six biggest deals to see how they came about, what the market holds for 2020, and how to close big-time transactions.
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CIRE: What recommendations do you have for CCIMs looking to identify, develop, and close big deals in their markets?
Ricardo Cordido, CCIM: Cultivating strong relationships and a deep knowledge and understanding of the market in which the big deal is located. The CCIM designation brings the credibility, but one must still be able to back it.
Richard Knutson, CCIM: Most large assets are institutional. If you are focused on the private capital markets, then prospect for owners with portfolios versus single assets.
Neil Merin, CCIM: Approach each opportunity as a partnership. In the case of 1 East Broward, it was necessary to create several connections of partnership relations.The seller had been a former client, and the buyer had partnered with the seller on a previous purchase. By choosing to work with three parties (seller, buyer, and broker) all known to each other, the CCIM broker was able to establish immediate credibility and trust.
Reid Davis, CCIM: Digging up and closing big deals is no different than the digging up and closing the small ones. Most but not all good deals are going to be off market, so you have to proactively turn over every rock in order to find the opportunities. Finding the buyers and the money is the easy part - the trick is finding good deals with an upside for the buyer.
Devin Lee, CCIM: Know who is looking and always keep contact with owners.
Andrew Cheney, CCIM: Have a plan and stick to it.
CIRE: What is the greatest challenge in closing big transactions?
Cordido: I believe the biggest challenges in any deal are control and timing - maintaining the ability to control all aspects and parties involved and being able to navigate any unforeseen issues that come along the way all within a timeframe that meets the needs of the buyer and seller.
Knutson: The capital stack is different in large deals - different sources of debt and equity. You need to understand the motivations, capabilities, yield hurdles, and risk-tolerance of the bigger money.
Merin: This particular transaction was for a high-rise, urban-core office tower. This created multiple challenges including title and encroachments, non-conforming leases, mechanical issues, and more. The original closing was scheduled to take place 60 days after contract execution, but eventually it took 150 days to get to a closing.
Davis: Jumping through all the hoops required for financing. There is a constant addition of hurdles being added to the process of borrowing money. In addition to making it more challenging, it takes a much longer time to get a deal closed.
Lee: Inspection can be a bear as our transaction was lower-end workforce housing. Multiple days of inspections and criticisms of the physical plant are a challenge to negotiate.
Cheney: Decision makes change. You have to understand the whole story and all the players - even when they change.
CIRE: What current market forces are creating big deal opportunities?
Cordido: A strong economy, low interest rates, and the demand from investor for acquiring deals are creating an environment for big deals.
Knutson: Institutions are under pressure to deploy capital and will accept lower returns to get their money working. Commercial real estate allows investors to deploy large amounts of capital efficiently.
Merin: Historically low interest rates are making leverage real estate purchases more attractive than ever. In addition, the low interest rates are making the returns in real estate considerably more attractive than fixed income or equity returns at this time.
Davis: Sellers are taking advantage of top of market pricing, and the buyers are taking advantage of the record low interest rates.
Lee: Debt markets flush with capital on equity and debt sides.
Cheney: In Arizona, our business-friendly climate compared to other states creates a ton of momentum coming our way.
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CIRE: What's the key to being involved in big deals?
Cordido: Hard work, creativity, knowledge of the asset and trust amongst the parties involved.
Knutson: All business is based on relationships. Make friends with the large owners, and you will work on large deals.
Merin: Knowledge: Know your market and product better than anybody else. Expertise: Become an expert at whatever segment you deal in. Credibility: Make sure you have a reputation for honesty, integrity, expertise, and knowledge.
Davis: You have to create value on every deal... big or small!
Lee: Knowing your market and adding value to the transaction.
Cheney: Responsiveness and credibility.
CIRE: What does the future hold for closing big deals?
Cordido: When ground is gained, stay in the seat! The bigger deals you complete, the stronger relationships that you build, and the harder you work will allow for these big deals to be presented to you.
Knutson: Brighter than ever. Deals over $100 million are becoming common these days.
Merin: Real estate investments markets are cyclical. They go up, down, and flatten. Near term we should be at a flat part of big deal transactions, except that falling interest rates have pushed up market activity. But there is always opportunity for a deal-maker whether the markets are going up or down. Just stick to the key elements of knowledge, expertise, and credibility.
Davis: It has been a sellers market for a long time, so we should expect for that to start moving towards a buyers market within the next 12 to 24 months.
Lee: In our market there, is a lot of trading as the economics of Las Vegas show demand outpacing supply for housing in future years. The larger players understand that and have driven going in cap rates down significantly.
Cheney: The future holds increasingly grand opportunities.
CIRE: How has your CCIM training prepared you for closing big deals?
Cordido: The CCIM education and training provided me the confidence and the advanced skills needed in order to discuss, analyze, and to successfully close large transactions.
Knutson: Advanced education, knowledge of the special vocabulary of institutional real estate, and competence with numbers are critical to conducting transactions at this level.
Merin: Understanding valuation of real estate and being able to forecast and explain financial implications of a large investment are a key component to closing big deals, and nothing short of an MBA from a top university comes close to the education that comes out of the CCIM curriculum. Being a trained CCIM gave me the knowledge, expertise, and credibility to close over $10 billion of deals in last two decades.
Davis: The CCIM 101 class is the best classroom opportunity for anyone looking to understand the financial component of commercial real estate. It provides a great foundation for the entry-level person all the way up to the 30-year veteran.
Lee: Deal economics are so important, and the CCIM education is the best for cash flow economics.
Cheney: Confidence in my ability to understand all components of the process.