AUSTIN, TX—The capital of the Lone Star State is ripe for investment as the city continues to experience a construction boom. Capital market rates have been compressed due to foreign investment and private lending, but most agree cap rates are bound to rise, probably sooner rather than later.
During a RealShare AUSTIN Capital Markets panel session held here on June 2, speakers declared Austin investors are bullish on the market, attributing much of that to strong activity in Dallas.
“I believe we’re having a ripple effect from Dallas,” explained Jeff Coddington, senior vice president and national director of JLL, Capital Markets Group, but went on to forecast a rise in capital market rates.
“Most of the people in the investment community know it’s going to happen, the question is how much and when,” Coddington said. “To some degree, it’s already priced into our underwriting deals now.”
Paul Rahimian, CEO of Parkview Financial, concurred. “We’re definitely going to see an increase in cap rates in June or July, but I don’t think it will affect long-term interest rates,” further announcing that an increase is viewed as positive as it shows confidence in the American economy and keeps inflation in check.
Even with the robust activity in the city, panelists said Austin is a remarkably complex market and development is the most difficult product to finance.
“Getting things through the regulatory environment here is difficult,” Coddington explained. “No deal is easy, but also having to manage the complexities that come with the regulations on development provides even more of a challenge.”
Many of the difficulties can be attributed to large banks pulling back on loans—both nationally and locally—during the past three months with the energy crisis being a major factor, Rahamian explained. “The number one thing large banks have pulled back on is construction, but as a private lender we help solve the problem.”
On the net lease side, Bruce Bentley, senior associate at Marcus & Millichap, said the universal answer to the question of why cap rates are compressed is not only due to interest rates, but also the private and 1031 investor which “is currently driving the market.”
Expanding upon Bentley’s statement, Rahimian raised the issue of foreign capital and investment continually flowing into the country.
“Austin is perfect for foreign investors and they aren’t worried about cap rates. In addition to interest rates, foreign capital is also a factor in the reduction of cap rates,” he says. The question of the hour seemed to be exactly how low cap rates would go. “Two years ago, many believed cap rates were at an all-time low,” Rahimian said, “but every year they seem to break the record. Foreign capital is coming in with all-cash buyers.”
To stress the significance and influence foreign capital has had on the Austin market, Coddington cited Austin as number 17 in the world in regard to foreign commercial real estate investment.