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PCCP sees inflation as critical factor for value-added property plays

PCCP sees opportunity in the industrial and multifamily sectors, but is looking analytically throughout the broader commercial real estate market.

PCCP, a Los Angeles-based real estate private equity manager, is concerned about the impact that higher inflation could have on borrowers looking to execute a value-added business plan.

“The concern is that inflation could affect the cost of a borrower’s business plan execution,” said Brian Heafey, a partner and head of debt investments at the ~$17 billion manager, told Real Estate Capital USA. “For us, it is about trying to understand what the cost is of the work that has to be done and how that could affect their business plans.”

The inflation rate has been steadily rising over the past year, with a report this week in The New York Times citing consumer prices spiking 8.5 percent through March – the fastest clip since 1981. At the same time, material costs have risen substantially as well.

“Inflation impacts the cost of executing a business plan but also the tenant. If you’re looking at multifamily and you’re looking to increase rents, you’re now competing with higher costs at the grocery store and the gas pump,” Heafey said.

The commercial real estate market is taking these factors into account as it assesses risks in today’s world, along with bigger picture economic and geopolitical uncertainty. Rising rates is another area of concern for PCCP, which is a value-added lender that originates short-duration, floating-rate loans, Heafey added.

“Everyone is taking a more conservative approach to transactions right now and you’re seeing that interest rate spreads throughout the capital markets are no different than real estate. You’re seeing spreads move out and you’re seeing advance rates either holding steady or declining a bit,” Heafey said.

PCCP, which opened its doors in 1998, draws on its experience in the market, its geographic reach, and ability to look across the capital stack and make both debt and equity investments. In addition to its Los Angeles headquarters, the company also has offices in New York, San Francisco, and Atlanta.

The firm focuses on senior loans, originating over $4 billion of new loans last year and expecting to complete a similar amount of activity in 2022.

PCCP sees opportunity in the industrial and multifamily sectors, but is looking analytically throughout the broader commercial real estate market. Within retail, PCCP sees potential in grocery-anchored retail or potentially power center-type properties.

“I think retail opportunities are starting to emerge as is office,” Heafey said. “Office loans are obviously more challenging to underwrite than they were pre-pandemic.”

The firm is active in the top 25 MSAs around the country, opting for very high growth-markets and gateway cities. PCCP has the potential to originate loans across the capital stack, but mainly focuses on senior loans that are similar to what a bank might originate.

“On many levels, being able to lend across the capital stack really increases deal flow,” Heafey said. “You see a lot more deals, you see a lot more activity and this also makes you much more relevant to your borrowers. It allows you to get to know them better and creates more of the relationships that bring us repeat business because we are looking at the whole of the investment.”