The margin for error investing in commercial real estate in most major cities is slim to nonexistent as a result of rising prices, according to a Denver-based executive with Wells Fargo & Co.'s real estate asset management group.
Research not just into the target property, but also the real estate market and economy of the city where it is located, is the key to avoiding losses and making sure investors get a reasonable return, said Adam Doud, a Wells vice president who heads sales and business development efforts for the Wells real estate group in an eight-state region. He made the comments Thursday during a "wealth summit" the banking giant's wealth management unit held for clients at the Cheyenne Mountain Resort.
"This isn't 2009-11, where the correction in valuations were so severe that you could underwrite a deal on the back of napkin and know it would work out," Doud said. "To justify these kinds of values, you have to make some pretty aggressive assumptions on rent growth and the local economy. The margin for error is not significant right now, and that is true nationwide, generally speaking."
The Wells Real Estate Asset Management group oversees a $6 billion portfolio of commercial real estate, ranging from apartment complexes to shopping centers, in major cities and nearby secondary cities, including Colorado Springs, in all 50 states through regional offices in Denver and seven other cities.
"A lot of the markets (where the group operates) are feeling overheated. We are seeing historically high prices that exceed precession levels and require rental rates at levels we have never seen before," Doud said. "We would have to underwrite (investments) at rental rates that we've never seen. It is a little daunting, so we look for markets where we don't have to reach to achieve a reasonable return on our clients' investment."
That doesn't mean there are good investments, even in hot markets like Denver, Doud said. The risk has increased because the real estate market "is closer to the peak and we don't know when a correction might come or how severe it could be, so we have to do more due diligence to make sure we don't lose money for our clients."
Doud doesn't believe the real estate market isn't headed to another meltdown.
"The factors that contributed to the last recession - the amount of debt on real estate investments - has been somewhat kept in check. We are not in a bubble in that respect," he said. "Values are starting to moderate. The growth rate a year ago wasn't sustainable and have cooled off a bit, but there hasn't been a correction."
Contact Wayne Heilman: 636-0234
Facebook Wayne Heilman