Joe Berko, President of Berko & Associates, Makes the Case for Mitigating Risk

Published: Nov 1, 2017
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Mitigating risk is on Joe Berko’s mind. With cap rates being so compressed, he sees prices remaining steady and financing fundamentals becoming a little more conservative. The U.S. is still a real estate safe haven and cash is coming here, but not as freely as it used to from places like China, Russia and South America. Because many parties are taking a hold position, Joe suggests strategies like considering short-term bridge financing and not overleveraging in order to get a solid yield.

Transcript

The last two-year period has been very difficult for investors looking to buy. While prices have pretty much kept steady, the rest of the fundamentals, such as money and banking, have shrunk back and became a little bit more conservative and probably rightfully so.

So a lot of our investors are actually looking to put money … alternative financing is now becoming more of the norm because it’s very hard to buy because CAP rates are so compressed. There’s still a very wide gap between bids and ask. Sellers are sitting on properties and are still asking for prices that are not as attainable under the current environment.

It’s very hard to say what will come, but definitely the next 24 months are going to be very interesting both politically and fundamental-wise as to where cash is coming in. We’ve seen some constraint from places like China where capital is not as freely coming in as once before – the same goes for places like Russia and South America. A lot of the flight of capital that was seeking safety is now finding it extremely hard or more difficult than a few years ago to enter the U.S. market. The United States is still a safe haven: things are transparent, and the politics and business philosophy as a whole say that this is still a place to put money.

New York is still one of the first stops for foreign capital. So how will that affect the industry? How will the banking environment and additional regulation that’s been going on for the last few years impact things? What we’re seeing more so today is groups that have not traditionally performed as lenders or as alternative lenders and are seeing their yields through that type of transaction. So instead of buying, they basically are providing the type of capital needed for investors who acquire assets. So sort of holding a position and taking less of a risk and also being in a much better cost basis than acquiring opportunities and acquiring properties. I think that’s an area that will continue to flourish as more banks are scaling back and providing less capital. More of the MES financing, more of the short-term bridge financing is becoming the place to be right now. So long as you don’t over-leverage or over-capitalize, I think it’s prudent to take a very safe position in order to perform well to get a very solid yield and not to take on the additional risk.