Home Alts News Sponsored: Inland Private Capital’s Keith Lampi Shares Outlook for 1031 Industry

Sponsored: Inland Private Capital’s Keith Lampi Shares Outlook for 1031 Industry

President, Director and COO of Inland Private Capital Corporation talks how investor demand, product diversity and the impact of rising interest rates will affect the 1031 exchange industry in 2019.

President, Director and COO of Inland Private Capital Corporation talks how investor demand, product diversity and the impact of rising interest rates will affect the 1031 exchange industry in 2019.

Fresh off another record-breaking year, Inland Private Capital Corporation (IPC) remains the industry leader in securitized 1031 exchange transactions. And Keith Lampi, president, director and chief operating officer of IPC, believes 2019 will be another active year for the industry.

“As we enter 2019, I see continued growth in investor demand and additional expansion in product diversity,” said Lampi. “Strength in asset pricing coupled with a product’s strategic play on demography will have a key role in sustainable growth in investor demand.”

Lampi believes the aging Baby Boomer cohort of investors has demonstrated an increasing desire to sell highly appreciated properties that had been actively managed, and exchange proceeds into a passive ownership vehicle, which is a financial planning phenomenon that should drive investor appetite for securitized 1031 product for many years to come.

Additionally, expansion in product diversity has been a long time coming as investors have been left hungry for more options in recent years. In 2018 alone, the securitized market was weighted heavily in the apartment sector, with more than 60 percent of offerings brought to market falling into the multifamily category.

“At this point in the market cycle, I believe apartments are a great long-term buy, however, broader diversity that provides investors access to a wider spectrum of options is a healthy aspirational goal for our industry and is a goal I believe to be attainable in 2019.”

When it comes to assets that will be favored in 2019, IPC is bullish on asset types with attributes that have a lower correlation to near- and mid-term economic growth. These assets are often necessity based, meaning irrespective of the overall economy, the consumer’s innate need for the product will drive performance. Asset types that fall into this category can include residential, healthcare and self-storage properties.

One area impossible to ignore in the next year is the myriad of macro-economic trends that have already begun to reset return expectations in the securitized 1031 marketplace, as well as the general investing market as a whole.

“One of the headline trends I foresee in 2019 is the potential for yield compression as it relates to new products brought to market,” added Lampi. “Interest rates have been trending upward for the past 12 months, with little to no adjustment in asset pricing. While one might make the argument that asset pricing on a capitalization rate basis has historically tracked with fluctuations in interest rate pricing (meaning as rates rise prices drop), we are not seeing that occur.”

Much of this is driven by the fact that investment capital continues to aggressively pursue a healthy allocation to real estate. Foreign capital, private equity and institutional capital have all increased their participation and allocations in commercial real estate, which has kept valuations strong. This is a positive sign for the real estate market but will have an inevitable effect on cash flow and expected rates of return.

“In my opinion, this year will be an inflection point for our industry, leaving product sponsors with one of two options – continue to structure programs that generate cash on cash returns that track with prior years by purchasing lesser quality assets or incorporating more aggressive underwriting assumptions into financial projections, or factor the current macro-economic climate into new product offerings and work toward educating investors and resetting expectations with respect to cash on cash return projections.”

IPC believes opportunities best positioned to generate income, while also striking a balance toward preservation of capital in this current economic environment, are assets that have inflationary protected characteristics. In many instances, these are operating assets that provide more frequent opportunities to increase rents through shorter-term leases and allow the sponsor to manage the expense side of the NOI equation. From an investment management perspective, scale can also play a role in providing investors the benefit of acquiring properties in markets where a management footprint currently exists. This approach can create efficiencies, which can help in reducing expenses and increasing the NOI and overall performance of the property.

IPC’s management team prides itself on being nimble and dynamic in its ability to respond to the ever-changing market trends. As a result, the company’s asset selection process has evolved dramatically over the years.

“During IPC’s early years, we focused predominantly on long-term net-lease assets in the retail and office sectors. Today, we have shifted our concentration to the multifamily, self-storage and healthcare sectors,” said Lampi.

“Additionally, the structure of our products has been fluid to say the least, with the most notable change tied to the products’ fee structure. Over the past several years, we have reduced the upfront cost structure associated with product offerings, which can have a beneficial impact on the back-end performance.”

IPC plans to attract investors by providing a menu of differentiated product offerings, in the form of different leverage points, financing structures and asset classes – helping to provide investors access to a variety of investment strategies and asset types.

“Having our finger on the pulse of the market allows us to uncover opportunities that meet our specific criteria in a hyper-competitive environment. The key that ties all of this together is maintaining a long-term minded, disciplined approach when evaluating opportunities in the marketplace. This approach has driven our success through various market cycles over the years.”

As a part of The Inland Real Estate Group of Companies, Inc. (Inland), IPC provides private placement real estate investment solutions to accredited investors as an alternative to traditional stocks and bonds. Many of its offerings are designed to qualify as replacement property for an IRS Section 1031 exchange through multiple-owner investment structure. Inland is one of the nation’s largest commercial real estate and finance groups, which recently celebrated 50 years in the real estate industry.

The opinions in the preceding commentary are those of the author alone and do not necessarily reflect the views of The DI Wire. Inland Private Capital Corporation is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.

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