As a real estate professional, we always hear about the four basic food groups of commercial real estate: multi-family, office, retail and warehouse properties. These four categories of assets are the most sought-after property types and usually the easiest to finance in the capital markets. But, why is that? For two main reasons: (1) they are less complicated to underwrite, and (2) they have a wider buyer pool. But, with more demand and players, values are driven up and yields decrease.
Many of MCA’s clients seek diversification and higher yields in various non-traditional commercial real estate property types. Some of these property types require a higher level of underwriting and a deeper understanding of the property dynamics in order to sell them correctly to lenders and investors. Below is a list of some of the “other food groups” and some commentary on each:
- Self-Storage – Fairly simple to underwrite the economics, and cash flows are stable. Consumers hate to move their bulky stuff, and payment is usually processed via credit card. So, once one a self-storage property is stabilized, it’s pretty difficult to lose that cash flow stream. A couple major items to consider when buying or lending are barriers to entry for competitors and proximity to residential rooftops.
- Hotels – Hotels come down to two “must haves”: Operator and Market. Without a strong operator or a market that drives demand, the hospitality space can be very difficult to finance. Moreover, most capital sources like to have a national “Flag”. It is much easier to obtain a branded franchisee if you have a good operation and strong market. On the flip side, many successful boutique hotels don’t have a “Flag”, but again, the market, location and operator create the “experience” instead of a Flag. The San Jose in Austin, Texas, is a perfect example.
- Medical – ALF, MOB, IL, ALZ, MC, LTAC, CCRC, SNF, IRF…. You get the picture… the healthcare real estate sector is comprised of hundreds of acronyms. There are many different product types that fall under the medical real estate umbrella. Without a financier that understands this space and who can navigate intelligently through all the acronyms mentioned above, you will be swimming aimlessly in a medical alphabet soup! MCA has closed hundreds of millions in financing for healthcare property types and believes it will continue to be a growing allocation of our production.
- Residential Lots – Land is usually the “other 4-letter word” in commercial real estate… unless an immediate sale exit is clear. Residential lot development deals are a great example of a land transaction where builders are lined up to “take down” lots for single family homes. At MCA we have been very successful raising both debt and equity in markets with high demand for new single-family homes with a clear exit strategy. Since coming out of the Great Recession, many markets have a slim supply of available or developable residential lots. Now that the economy is back in full swing, home builders are stocking back up on their lot inventories with an expectation to immediately sell homes and build houses. Our shop has recently closed several deals in this space.
Other types of non-traditional real estate types that we have experience in financing include Mobile Home Parks, Marinas, Single Tenant (NNN), Entertainment Complexes and Owner-Occupied Properties. With the capital markets heated up, lenders and investors are chasing yields outside of the traditional assets classes. MCA is constantly monitoring and navigating the capital markets and finding capital sources that will consider these alternative investments. Although these property types don’t fall into the four basic food groups of CRE, it doesn’t mean they aren’t edible!
The author, Sunny Sajnani, is a Senior Director at Metropolitan Capital Advisors and a seven year veteran of the firm. Sunny can be easily reached at email@example.com