Jackson Safrata is keenly aware of the important role relationships play in commercial real estate.
Safrata, a vice president and practice lead for JLL’s private capital group in downtown Toronto, brokers deals for private investors on urban retail, office and development land assets. It’s a corner of the market that has been relatively more active as of late than the institutional space.
Safrata sat down with Green Street News to talk about private capital’s take on office assets, the trends influencing transactions and how his clients differ from institutional investors.
What’s attracting private capital to the office market right now?
Office is certainly a challenged asset class at the moment. There are a ton of headlines about it, but overall, it can’t be painted with a single brush. There are varying opportunities for specific assets, and those have led to sales for our group.
There are really three cohorts of investors that are looking on the buy side. The first one being owner-users, the second one is income investors, and the third one is developers who are buying office assets for their underlying land value.
Has one of those cohorts been more active lately?
In the last 12 months, we’ve sold seven office buildings. Over half of those have traded for the underlying land. The balance sold to income investors or users.
Are you seeing more private buyers get into the office market for the first time?
I wouldn’t say it’s a major trend that we’re seeing; there hasn’t been a wave of new buyers making net new office acquisitions. But they’re certainly out there.
There are opportunistic buyers that have become interested in this space, kind of as a contrarian investment over the last two to three years. Really, everything changed after Covid.
There are developers that aren’t buying land to redevelop sites in the next one to two years. So, some have shifted their focus and started looking at assets that are well located, that have cashflow that offsets the holding costs, and that can be rezoned and redeveloped at some point in time.
We have sold several assets to what I’ll call net new office buyers. Those have really been asset- or location-dependent. These ‘new buyers’ have been users who have historically been leasing space and are now looking to buy and move their business into an asset they own, maybe closer to where they live or close to their employees. These have been in urban and suburban locations, but always on transit. Everyone says it but it’s true, really, the number one criterion [for an office] is transit oriented and close to other amenities.
How far are those private buyers willing to stretch for an office asset?
In our experience, and we have been closely monitoring transactions since the onset of Covid, we’re seeing most transactional activity take place in the sub-$30m range. Not many of those buyers are looking to acquire an office building for the first time north of that.
I wouldn’t say that groups are stretching for larger deals and whatnot. It’s more that there is a smaller cohort of our clients that have become opportunistic buyers within the asset class.
What is influencing private capital transactions right now?
There are a few main trends we’re seeing. The first one is interest rates, the second is investor confidence, and the third is bid-ask spread.
Pretty much all we read or talk about these days is about how we’re battling a high interest rate environment and general market uncertainty that goes along with that. With the recent rate cuts we’ve started to see a bit of optimism and confidence returning, but it’s slow. I think it’s important to keep in mind that we’re coming out of a two-year period of raising the target interest rate from 0.25% to 5%, and that has had significant impacts for real estate, some asset classes more than others.
Many buyers remain on the sidelines. They’re keeping tabs on the state of the economy, inflation readings, unemployment and so on. We know that some players will become active again as the market shows signs of stabilizing. It’s not going to happen overnight, but we’re optimistic that in the next six to 12 months more of our clients will become seriously interested and active again and start looking at deals, because, candidly, it’s been tough to get some of them to engage at times.
And we’ve been battling bid-ask spreads for two years as interest rates rapidly rose. It’s always a factor, but as interest rates started to increase, that gap widened, and buyer demand fell off. So, as rates start to come down again, we’re hopeful we’ll see the inverse of that and confidence will return, and that’ll lead to more transactions and narrower bid ask spreads.
You mentioned investors’ sentiment there. What is the attitude amongst private capital right now?
It’s tough to generalize, but there are groups that are always active, that are focused on a certain geography or a certain asset class, and they’ll find the right deal. Others are kind of taking a wait and see approach, or are deep value hunting if you will, and therefore they just have not been active.
How does working with private capital clients differ from working with institutional buyers?
Typically, private capital clients have a longer investment horizon. They’re buying and holding for wealth preservation, for passive income or for future upside in the land. This means that they’re less impacted by market cycles. I think we’ve experienced that in a major way in the last two to four years, where institutions have been on the sidelines or have offloaded assets, and private buyers have accounted for up to 80% of the transactional volume across the country.
