Jones Lang LaSalle
CS Capital's Paul Saylor
February 17, 2006
By John Salustri
More of the same. That's the bottom-line prognosis for the investment community as seen through the eyes of CS Capital Management, the investment advisory arm of Los Angeles-based Chadwick, Saylor & Co. The parent firm just recently released its investment trends projections for the year, and while 2006 isn't shaping up to be a watershed period, there are some subtle changes that will help to color the national investment scene in slightly different hues. In a recent, exclusive interview with GlobeSt.com, CS Capital chairman Paul Saylor, filled in those details.
GlobeSt.com: So what's in store for the investment community in the months ahead?
Saylor: We'll be seeing a continuation of '05, meaning that the trend of capital excess remains and it's growing. There'll be more capital chasing fewer quality deals, which drives up prices and drives down yields. Also the stronger markets are getting stronger and the weaker markets will remain weak.
GlobeSt.com: So there'll be more investors looking for alternative plays?
Saylor: There's been more allocation by those institutional investors who have not previously been in real estate as well as increased allocations by those who have. The market is awash in cash from domestic and foreign institutional investors as well as individuals. Most of those investors--especially those with prior real estate experience--are on a yield quest and have expanded their definition of real estate into foreign as well as domestic, debt as well as equity, development as well as existing properties. They're getting out there on the risk spectrum.
GlobeSt.com: What's your take on the de-emphasis of cap rates as a money-making tool?
Saylor: The traditional concept of cap rates is being used less for investment purposes. In part that's because institutional real estate managers have a hard time looking their clients in the eye and saying you should buy this at a four-, three- or 2% cap rate. It just doesn't make much sense. So they're much more focused on discount rates, residual cap rates and overall rates of return. But, unfortunately, this brings us back to some of the same comments investment managers were making 10 years ago: "Don't worry if you get only a four or five cap rate going in. We're going to manage the hell out of this thing, and 10 years from now you'll have a 15% IRR."
That's just not so. Unless there's some really intensive management activity that can be done, such as renovation, redevelopment, retenanting, what you see is what you get. If you get in at a five or six cap today, you're probably going to get out in seven or 10 years with an 8% or 9% return. People are more focused on enhancing their portfolio by taking a little more risk.
GlobeSt.com: And you see no surprises in the interest rate environment?
Saylor: They'll continue to edge up but only moderately, and it won't have any impact on the amount of capital aimed at real estate.
GlobeSt.com: What’s happening in the public markets and what do you make of this apparent trend toward privatization?
Saylor: Sarbanes-Oxley is bugging the hell out of most people who run public REITs because they--or their fathers--were entrepreneurs, syndicators, developers. They went public for a variety of reasons and most of them in candid moments will admit that managing a public company on a quarterly basis to adhere to an analyst's requirement and reporting disclosure requirements is not really consistent with their original intent. It's a concern over who's looking behind the curtain and how far do I want them to look?
There's also a more practical aspect to this. The market's changed now and a lot of REITs have come to realize that the acquisitions they make in this competitive market may well be dilutive to earnings rather than accretive. They're just not able to find properties at attractive pricing. They don't want a lot of land on their books for future development because that's a drag on earnings. Sometimes the development process itself is a drag on earnings. So how do you expand or buy without at least temporarily impacting earnings? Some REIT executives see an opportunity to get back into the private sector. They see the opportunities represented by private capital as being in the best interests of their shareholders.
General Growth has gone public and private three or four times in the past 15 years or so. There's a public-to-private trend now that will continue. And then the private sector will see the public sector as more appealing and there'll be more IPOs and mergers.
GlobeSt.com: Let's talk about markets for a minute. In your projections, you list Chicago as a good prospect but not DC. Explain.
Saylor: DC's not on our hit list because it's on everybody else's. DC is like Atlanta. It's on everyone's shopping list and there's always a flood of capital coming in. It's so hot in terms of investor priorities that it's due for a cooling, and again, it's not a question of values plummeting but just becoming less than they once were. The inverse is true of Chicago, which is overbuilt in office and in the CBD. Yet, in terms of the economics, it's an extremely vibrant city. There's only so much land available that can be built on. You have to take a little longer-term view with Chicago. We wouldn't go in with the intent of selling in one or two years. But it's the only non-coastal city we're really enthusiastic about.
GlobeSt.com: What does all of this mean for Chadwick, Saylor?
Saylor: It means more of the same for us, too. Where we see the trends dictates how we operate our business. We're a little different because we have less than 20 people in our company and we're going to keep it that way. We don't have to worry about how much market share we can obtain.
Copyright © 2006 Real Estate Media. All rights reserved. Reproduction in whole or in part without permission is prohibited.
CS Capital's Paul Saylor
February 17, 2006
By John Salustri
More of the same. That's the bottom-line prognosis for the investment community as seen through the eyes of CS Capital Management, the investment advisory arm of Los Angeles-based Chadwick, Saylor & Co. The parent firm just recently released its investment trends projections for the year, and while 2006 isn't shaping up to be a watershed period, there are some subtle changes that will help to color the national investment scene in slightly different hues. In a recent, exclusive interview with GlobeSt.com, CS Capital chairman Paul Saylor, filled in those details.
GlobeSt.com: So what's in store for the investment community in the months ahead?
Saylor: We'll be seeing a continuation of '05, meaning that the trend of capital excess remains and it's growing. There'll be more capital chasing fewer quality deals, which drives up prices and drives down yields. Also the stronger markets are getting stronger and the weaker markets will remain weak.
GlobeSt.com: So there'll be more investors looking for alternative plays?
Saylor: There's been more allocation by those institutional investors who have not previously been in real estate as well as increased allocations by those who have. The market is awash in cash from domestic and foreign institutional investors as well as individuals. Most of those investors--especially those with prior real estate experience--are on a yield quest and have expanded their definition of real estate into foreign as well as domestic, debt as well as equity, development as well as existing properties. They're getting out there on the risk spectrum.
GlobeSt.com: What's your take on the de-emphasis of cap rates as a money-making tool?
Saylor: The traditional concept of cap rates is being used less for investment purposes. In part that's because institutional real estate managers have a hard time looking their clients in the eye and saying you should buy this at a four-, three- or 2% cap rate. It just doesn't make much sense. So they're much more focused on discount rates, residual cap rates and overall rates of return. But, unfortunately, this brings us back to some of the same comments investment managers were making 10 years ago: "Don't worry if you get only a four or five cap rate going in. We're going to manage the hell out of this thing, and 10 years from now you'll have a 15% IRR."
That's just not so. Unless there's some really intensive management activity that can be done, such as renovation, redevelopment, retenanting, what you see is what you get. If you get in at a five or six cap today, you're probably going to get out in seven or 10 years with an 8% or 9% return. People are more focused on enhancing their portfolio by taking a little more risk.
GlobeSt.com: And you see no surprises in the interest rate environment?
Saylor: They'll continue to edge up but only moderately, and it won't have any impact on the amount of capital aimed at real estate.
GlobeSt.com: What’s happening in the public markets and what do you make of this apparent trend toward privatization?
Saylor: Sarbanes-Oxley is bugging the hell out of most people who run public REITs because they--or their fathers--were entrepreneurs, syndicators, developers. They went public for a variety of reasons and most of them in candid moments will admit that managing a public company on a quarterly basis to adhere to an analyst's requirement and reporting disclosure requirements is not really consistent with their original intent. It's a concern over who's looking behind the curtain and how far do I want them to look?
There's also a more practical aspect to this. The market's changed now and a lot of REITs have come to realize that the acquisitions they make in this competitive market may well be dilutive to earnings rather than accretive. They're just not able to find properties at attractive pricing. They don't want a lot of land on their books for future development because that's a drag on earnings. Sometimes the development process itself is a drag on earnings. So how do you expand or buy without at least temporarily impacting earnings? Some REIT executives see an opportunity to get back into the private sector. They see the opportunities represented by private capital as being in the best interests of their shareholders.
General Growth has gone public and private three or four times in the past 15 years or so. There's a public-to-private trend now that will continue. And then the private sector will see the public sector as more appealing and there'll be more IPOs and mergers.
GlobeSt.com: Let's talk about markets for a minute. In your projections, you list Chicago as a good prospect but not DC. Explain.
Saylor: DC's not on our hit list because it's on everybody else's. DC is like Atlanta. It's on everyone's shopping list and there's always a flood of capital coming in. It's so hot in terms of investor priorities that it's due for a cooling, and again, it's not a question of values plummeting but just becoming less than they once were. The inverse is true of Chicago, which is overbuilt in office and in the CBD. Yet, in terms of the economics, it's an extremely vibrant city. There's only so much land available that can be built on. You have to take a little longer-term view with Chicago. We wouldn't go in with the intent of selling in one or two years. But it's the only non-coastal city we're really enthusiastic about.
GlobeSt.com: What does all of this mean for Chadwick, Saylor?
Saylor: It means more of the same for us, too. Where we see the trends dictates how we operate our business. We're a little different because we have less than 20 people in our company and we're going to keep it that way. We don't have to worry about how much market share we can obtain.
Copyright © 2006 Real Estate Media. All rights reserved. Reproduction in whole or in part without permission is prohibited.
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