Aaron Jodka
Director of Research | U.S. Capital Markets
Years experience: 19

Federal Reserve Chair Jerome Powell has hinted at possible rate cuts in the fall that would provide some relief for the commercial real estate market. And after last week’s international stock market troubles some prominent observers have even called on the Fed to make multiple quarter-point cuts to its benchmark interest rate this fall.  Observing all these developments has been Aaron Jodka, the Boston-based director of U.S. capital markets research at Colliers and former Boston-area research director for the commercial brokerage.

Before joining Colliers, he spent 11 years with Property & Portfolio Research, now CoStar Portfolio Strategy. There, he advised institutional clients on their commercial real estate investment strategies across property sectors. Jodka also led and directed a team of economists who monitored property markets across the United States. He also helped establish a new business unit at CoStar, leading in the hiring, training, and coaching of a team of 50 market analysts.

Q: How much impact will potential interest rate cuts have on capital markets’ interest in real estate investment?
A: From a real estate capital market standpoint, it will be very significant, in the sense that rates have peaked, they’ve come down a little bit and the expectation is, they are going to continue to fall, meaning that I can price in lower cost debt into the future, where up until now, we’re in a little bit of a wait-and-see position. With more clarity, and an ability to project interest rate movement, that should unlock some of the capital that’s sitting on the sidelines. To me that is one of the strongest storylines in CRE investing right now: There is a mountain of capital waiting to be deployed, and that could very well be the trigger to help get us going.

Q: Many developers are arguing, as they try to drum up cash, that this is a stellar time for investors to get into real estate. Is it really, when debt is still expensive?
A: It’s going to depend on where you are in that sort of capital stack. Are you an equity investor? Are you a debt fund? Are you the main lender, a bank or life company? CMBS [or] things of that nature? And, really, what is your real estate strategy? If I am a buy-and-hold investor, I may be looking at this price reset and I’m super excited. If I’m a short-term holder, there’s a different sort of potential strategy there, and even the types of assets I may be looking at.

As a developer, it’s really challenging today to build. Interest rates are higher than they have been, the cost of capital has gone up, you need more equity in a deal than you needed before and in a lot of cases, the deals no longer pencil. I may have the land, I may have the permits, and everything’s ready to go. But I do the math, it just doesn’t yield the return that’s necessary for development. So right now, there’s a real tricky balance there. We’re seeing more land deals coming about across the country, the deals no longer pencil, so maybe someone else can come in at a lower basis, and all of a sudden that resets and creates new opportunity.

Q: How are investors reacting?
A: As an equity investor, there’s a price reset that’s taken place which allows buyers today to potentially acquire assets at below replacement cost, which is tremendous. If there’s no new supply coming, and I can buy buildings for less than I could build them, that’s a pretty good recipe. Cap rates are still, depending on the asset class, below borrowing costs – which is typically not common. Historically, cap rates are above borrowing costs. You can have them dip below if you have an expectation for tremendous right growth or occupancy gains, NOI growth, things of that nature. Most asset classes, you’re probably not expecting rapid changes in those; they may improve but I don’t believe we’re expecting a night-and-day change in some of those aspects.

Right now, more and more discussion is on the basis of acquisition: I can buy it at a price per square foot or price per unit – whatever it might be – that’s attractive and know over the next couple of years interest rates are going to come down. But as of right now, the math sometimes doesn’t quite work. But if you have a longer-term horizon, it starts to feel better.

Q: Boston-area banks have historically been a big source of development and acquisition financing, but many are clearly rebalancing away from CRE. What other sorts of debt sources could fill the gap?
A: Private capital is what we need to rely on to fill that gap. You’re going to be looking at debt funds, you’re looking at preferred equity positions, mezzanine debt, other types of sources within that capital stacking. Some of these groups are the same names that you would see as your major investors in and around Boston and across the country, who are shifting from an equity position to a debt position so they’re willing to put in preferred equity, that mezzanine debt and fill that gap. They feel that they’re in a safer position in the sense that the equity is the first-loss position and it works its way down, but they’re able to get an attractive return, which makes them feel comfortable where they are.

Over time, banks will work through whatever challenges they may be facing or regulators are going to determine, whatever ratios that ultimately need to be balanced and then that market will unlock itself. CMBS has been a strong angle, not so much on development, but it’s usually going to be used for an existing asset with cash flow. CMBS has proven to be a very resilient and even strong source of capital this year, where issuance is up substantially from last year. We still have life insurance companies that are out there lending. They tend to have a more narrow sort of sandbox that they play in. But if you play in that sandbox, you can find capital there as well.

Jodka’s Five Favorite Things to Know About Him

1. He coaches his daughter’s lacrosse team.
2. He’s often found cheering at his other daughter’s field hockey games and track meets.
3. His family’s favorite spot is the lake.
4. He’s a lifelong Boston sports fan.
5. He and his wife are celebrating 20 years of marriage.