Murphy Real Estate Services is that extremely rare breed of developer that has been able to maintain its access to community bank financing, which is probably the lowest cost of capital available on the market. Unfortunately for many, though, these banks have been significantly scaling back CRE lending in the face of mounting industry woes and increased regulatory scrutiny.
“We have been quite active because of our ability to raise capital,” says Managing Director Chris Horney, who is also a participant in GlobeSt.com’s net lease event being held next week.
Currently the firm has six assets on the market and a couple under contract.
Murphy Real Estate has been focusing on the early education space and in the last 12 months it has developed 12 to 13 new day care schools, some of which are existing renovations and some are ground up development. It is a build to suit developer but on the back end it also sells these assets.
Like many others, Horney reports that while the second half of last year was slow, activity started to pick up in December and into this year. “Now we are seeing equity investors coming back to look at new projects,” he says, which he partly attributes to the growing certainty that interest rates have stopped rising. “Now most people believe we are done raising interest rates,” he says.
At the same time, a new buyer pool has formed for these assets, especially amid cash buyers that are taking advantage of the elevated cap rate environment.
“We have an environment where there are bargains to be found especially in built to lease.”
Because these are sub $10 million purchases, they are primarily local buyers, Horney explains, instead of the typical 1031 buyer that dominated the landscape before the run up in interest rates. But that group has held back because they mostly own apartment buildings that they can’t or won’t sell, he says.
Those that are selling are doing so at prices they don’t like because it is costing them money to hold.
“Fortunately we haven’t had to do that because of the low leverage loans we use as financing.”
The assets that are coming to market have been typically from sponsors with poor capital structures – some with great assets and capital that worked at a different time. In this environment not so much, Horney says.
“We have seen sellers of existing buildings starting to accept the reality that they might not find a tenant for office buildings so they are more willing to sell in order to change the user.” He reports that a little under half of the firm’s build to suits have been conversions, such as from medical buildings and restaurants.
However, Horney emphasizes that the deal needs to make sense even if interest rates don’t come down – which is becoming a growing possibility. “We don’t bet on cap rates coming down to make our numbers work. Betting against the Fed is a tough place to be and I don’t have a big enough balance sheet to do that.”