Scott MacComb, president of Allocation Advisors, joined REIT.com for a video interview during REITWise 2015: NAREIT’s Law, Accounting and Finance Conference held in Phoenix.
Allocation Advisors prepares purchase price allocations for real estate acquisitions. MacComb gave an overview of the current regulatory environment facing REITs.
“We are still in a situation where the pendulum is swinging in the direction of increased regulation,” he said.
With regard to purchase accounting, MacComb noted that during the last several years there has been increased interest from various parties in seeing evidence of the assumptions of due diligence that go into setting the initial starting values for all the components of an asset.
“Sometimes people don’t appreciate the level of documentation that has to go into it,” he said.
MacComb also noted that cap rates have become compressed in a number of sectors. “Almost all sectors have had a good, healthy decrease in cap rates,” he said.
He pointed out that the multifamily sector is probably the most extreme, with cap rates in the 4.5 percent to 5 percent range.
“That’s at a rate where rental growth is really required over the holding term in order to make your target return on the asset. The good news is that every indicator is that those rents will rise, but you’re putting yourself in a situation where that is a requirement,” he said.
The same situation is occurring in the office and industrial sectors, according to MacComb. “It’s very hard to find a good core asset that offers a return that investors can live with, unless you find some level of opportunity play,” he said.
Meanwhile, MacComb said the number of distressed sellers has decreased, especially on individual asset transactions. At the same time, some portfolio assets are still being worked out internally, according to MacComb.
“You’ve got multiple investors, and they are bringing new money in and everyone is agreeing to take a haircut on the deal internally,” he said.