Pembrook’s Boesky raises concerns on cap rates, valuations 

Pembrook Group is keeping a close eye on the relationship between on cap rates and valuations, with interest rates expected to rise throughout the year, affecting both burgeoning and well-established property markets.  

Stuart Boesky, chief executive at the New York-based commercial real estate private equity manager, told Real Estate Capital USA the biggest question for bridge lenders like Pembrook as they try to maintain last year’s return momentum will be the sustainability of valuations, given the assumptions on which buyers are now basing their purchases and investments.  

“People seem to be buying properties assuming that the rent increases we have seen over the last 24 months are sustainable, which we don’t really believe they are,” he said, noting Pembrook does not think a buyer can purchase a property at a 3 percent cap rate and earn out of it by increasing rents.  

Rising interest rates further muddle the return potential, in Boesky’s view. He said if rents were to ease back to more traditional average annual increases of around 3 percent in tandem with rising interest rates, collateral will not be nearly as valuable as it was once thought to be.  

“Unfortunately, what tends to happen is there’s lot of money out there and it’s burning holes in fund managers’ pockets,” Boesky said. “If they told people they’re going to go buy apartments in Florida, they’re going to go buy apartments in Florida, even though the cap rates are probably not sustainable.” 

Pembrook, which typically focuses on apartments and acquisition rehab loans, has sold several Florida properties in which it had participating loans and equity at prices Boesky said the firm cannot even fathom.  

Boesky said the amount of interest rate movement – whether gradual or steep – could prime more developers and owners to move off the fence and finance deals on a more urgent basis.  

“A moderate or an orderly increase in rates is probably not a bad thing,” Boesky said. “A dramatic increase in rates in a very short period of time is obviously a bad thing for all asset classes.” 

What’s next on Pembrook’s radar 

Amid the rate environment concerns, Pembrook is looking to double its volume from 2021 and lend $400 million to $500 million in deals this year. 

Boesky said the firm will generally look for more acquisition rehab loan deals within the affordable realm and is not looking to finance a high-end product. Pembrook has notably sought to work with more diverse developers in recent months atop its existing efforts to bridge racial and economic inequalities exacerbated by the pandemic. 

Pembrook prefers the affordable market because of its defensive nature and performance through turbulent economic times, according to Boesky, making the asset class a safer spot for investment. 

First mortgages, mezzanine loans and preferred equity are fixtures in Pembrook’s current strategy. Boesky said cap rates of apartments in the state have dropped dramatically into the low three-percent range, making them incredibly valuable to a potential seller.  

Pembrook is also looking at several industrial properties for its next opportunities amid the rapid rise in e-commerce and last-mile delivery depots, which have only gained more traction throughout the pandemic. 

Boesky said the firm has recently been interested in hotel-to-apartment conversions but the market has not developed as the firm thought it would, and few deals have materialized so far. Zoning issues and conversion costs are two primary concerns for participating fully in that subset of the apartment market, he added. “We’re sticking to our bread and butter: affordable housing finance,” he said.

Pembrook could potentially increase its construction lending business this year relative to years past, and Boesky said the firm is looking at senior housing for additional opportunities, but has not pulled any triggers yet.