Ballast Rock, a Charleston, South Carolina-based diversified management company, is seeing more individual investors allocating capital to real estate portfolios to lower risk and increase diversification.
“We believe investors are increasing their allocations beyond just real estate – it is all private market asset classes,” Tom Carroll, founder and CEO, told Real Estate Capital USA. “Those are simply the markets where there’s generally lower volatility, and over time, higher performance, but in exchange for that lower liquidity.”
This includes real estate debt, an area within which the 2018-founded firm’s activity is closely entwined.
“We certainly have our finger on the pulse of what’s going on in the debt markets, because it’s our biggest single expense in any acquisition,” said Carroll.
The firm, which has an asset management division, a broker business and a separate, independent registered investment advisory firm, typically executes one acquisition every two months. Other times, however, it can work on multiple deals simultaneously.
“We are very active, which means that we’re also very active in the debt markets and are very thankful that we have got great coverage from a variety of different lenders.”
Still, the specialists are feeling the impact from tightening borrowing credit terms stemming from the lender pullback across the market with Carroll citing agency lenders Fannie Mae and Freddie Mac as the most active lenders right now.
But even so, deals are not pencilling out.
“You’re not getting adequate cash-on-cash, and you are not getting adequate cap rates to make it attractive enough,” said Carroll. “Even with substantial value-add, [it is hard to] get to an internal rate of return that we look to achieve for our investors, so that is a quandary [where] something has to change.”
In the medium term, there will be some potential for distress.
“There are always bad operators out there, that with a higher cost of borrowing. But there is always some potential for distressed acquisitions and there is a monstrous amount of equity on the sidelines waiting to be deployed.”
The idea that there are huge levels of distress coming down the pipe is unrealistic for Ballast.
“There is just too much capital; too many professional operators that are happy to snap up those distress opportunities as a turnaround. I’m very dubious that there is massive potential for disruption.”
Beyond increased cost of borrowing, Carroll highlights the shift being felt in the cost of insurance. Historically, that was a much smaller percentage of a business’ total operating expenditure than it has been for the last six to 12 months, where it has become a much more material percentage.
“So simultaneous to rising cost of borrowing, you have actual genuine higher operating costs, as well as inflation across the board.”
Sector by sector
Ballast believes the way to navigate the current environment is to focus on the certain areas within real estate.
“We wish we saw more distress because that would present some sort of buying opportunity,” said Carroll. “While there’s a lot of disruption right now, there are there are certainly pockets of that market that have held up fairly well.”
Ballast is seeing market participants moving away from office and into the darling sectors within real estate – multifamily.
“[We are seeing] this reallocation within the asset class, simultaneously, you’re having this broader allocation.”
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