Finance N Illinois

Foresight is 2020: Financing trends in the new year

Foresight is 2020: Financing trends in the new year,ph1
Where will investors and borrowers focus their efforts in 2020?
Foresight is 2020: Financing trends in the new year,ph02
Gary Bechtel of Money360

Trade wars. Political uncertainty. Combined with an exceptionally long bull market that has to slow down at some point, these factors have many wondering if the cycle will finally begin to wind down…and how much capital will flow toward real estate in the new year.

“I think 2020 is largely going to be a repeat of 2019, barring some black swan event,” said Gary Bechtel, president of Money360. “However, things will maybe get a little bit more interesting as we get closer to the election.”

In his more than 30 years of experience in the industry, Bechtel has endured many swings in the market. There’s always the chance of an unforeseen event akin to the 2008 housing crash, but aside from that, he doesn’t expect the economy to dive in 2020 the way it did in 2008/2009.

The real estate market’s performance in 2019—especially in regards to industrial, multifamily and office properties—should be mirrored in 2020. Those holding onto capital will still place it into real estate assets, according to Bechtel, with investors showing particular demand for CRE collateralized loan obligation within the bridge lending space.

On the transactional side, sales velocity did slow down a bit in 2019 and this trend will likely continue to a certain degree in 2020. “That said, there’s a lot of capital coming into the market or sitting on the sidelines looking for opportunity,” said Bechtel.

According to Bechtel, a lot of the foreign capital is now focused on equities and acquiring properties. Much of the debt that’s coming into the market, on the other hand, has migrated to the bridge lending space, which has a higher return and a shorter duration of paper.

“Equity has a much different strategy than debt, especially bridge debt which has maybe a five-year term compared to equity which can have 10-year horizon or more,” said Bechtel. “Depending on what they’re investing in and how they’re investing—whether it’s value add or more of a stabilized asset—they’re putting capital into that for a longer-term return.”

Because larger markets like Chicago provide the most stable returns, they have historically been a huge beneficiary of much of the equity capital out there; debt capital to a lesser degree, perhaps, as that is spread around to secondary and tertiary markets. But should the economy finally start to slow down significantly in 2020, the bigger markets are better positioned to weather the storm.

“The challenge is that as capital has flowed into the market, cap rates continue to be pushed downward and the returns aren’t what they were a few years ago,” Bechtel said. “However, large cities like Chicago have always been, and probably always will be, a preferred area of investment or debt.”

In terms or specific asset classes, industrial still rules in many markets. Capitalization rates on industrial haven’t gotten quite as crazy as multifamily, but they are getting close in markets with major ports and large distribution hubs. Bechtel believes that multifamily, industrial and office—more or less in that order—are the asset classes that equity investors and debt providers will continue to focus on in 2020.

He also points to expectations for a relatively low interest rate environment moving forward. The Fed has been fairly transparent in its activity over the past few years and few foresee a major hike in interest rates this year.

“It’s a good time to be a borrower,” said Bechtel. “There’s a lot of capital in the market and relatively low interest rates help make it easier to pencil out deals.”