In the Midst of Change, Record Numbers Attend ADISA Annual Conference
With the non-traded direct investment industry in a state of significant change wrought by FINRA 15-02 and the Department of Labor’s fiduciary rule, a record-breaking number of professionals descended on Las Vegas last week to attend the 2016 ADISA Annual Conference.
Below are a few key takeaways from this year’s event.
Industry advocacy: A key theme that prevailed throughout the conference was the need for greater industry advocacy. According to Inland Real Estate Investment Corporation president and CEO Mitchell Sabshon, “One thing I’ve learned is that we as an industry have done a poor job of advocating on our own behalf. We provide important investment options that are almost universally described in negative terms by the media. As an industry, we must do a better collective job of communicating what we do and why it’s important.”
Declining sales: While there has been a tremendous decline in sales of non-traded REITs and BDCs over the past few years, John Norris, Dividend Capital Securities’ national sales manager explained that this trend is not indicative of something inherently wrong with the programs. He said that while the media hypes the decline in sales of NTRs and BDCs, the fact of the matter is that sales are down across the spectrum, including variable annuities and mutual funds. Norris noted that due to the DOL’s fiduciary rule, financial advisors have largely “put everything on pause.” He said, “Whether it’s a traditional non-traded REIT, a daily NAV REIT or an interval fund, retail investors need direct real estate investments. No one structure is inherently better than the other, they’re just different and meet the differing needs of investors.”
Changing share class structures of non-traded REITs: The implementation of 15-02 has shifted favor from class A shares to class T shares which offer a smaller up-front commission and an annual trailing commission thereafter. “The T-share was a happy accident which results in more money put into the ground [by non-traded REITs],” said Securities America’s Peter Magnuson. “The T-share will always beat the A-share from a client perspective… and I-shares are great, allowing us to open non-traded REITs to RIAs.”
Equity flowing into private placements and interval funds: While non-traded REITs and BDCs have seen a large decline in sales, private placements and interval funds are flush with equity. Griffin Capital’s Randy Anderson noted that, “The first time I spoke on an ADISA panel about interval funds, just a few years ago, I think there were about six people in the room. This year, it was a packed house.” No wonder – Griffin’s interval fund recently surpassed $1 billion in assets under management, and more than a dozen sponsors have either launched an interval fund or have one in registration with the SEC.
Several sponsors who focus on private placements remarked that they are attracting more investor equity. In particular, 1031 exchanges under the Delaware Statutory Trust model are very popular. The industry is expected to raise $1.5 billion in 2016, up from just under $1.1 billion last year. In 2006, at the peak of the tenant-in-common 1031 exchange market, more than $3.5 billion of equity was raised, which slowed to a trickle after the Great Recession.
Louis Rogers, founder and CEO of Capital Square 1031, said, “Multifamily DSTs are most popular these days. Suburban office buildings, which were the most popular asset class in the TIC era, are almost nowhere to be seen.”
Overall, the atmosphere at the conference was one of optimism tempered by concern over the seismic changes underway in the industry. Perhaps John Norris put it best when he said that it is a “remarkable time” in the investment community, and the market will adjust to the new regulatory environment.
