For the last five years, experts in real estate accounting and commercial real estate investment have encouraged people and institutions to buy. Now we are starting to hear whispers as to how long a real estate bull market will last. Are we headed for a bust?

Not so fast. The U.S. economy is in a far different place than it was 10 years ago. Real estate developers, lenders and private equity investors have adopted a more cautious mindset that is demonstrated by bullishness on mixed use and re-use and a focus on mainstream methods of financing.

The Federal Reserve is expected to hold the line on already historically low interest rates. Plus, developers as well as their tenants are keeping more “rainy day” cash reserves for reinvestment. For these reasons and others, private equity investors and real estate analysts are predicting an extended positive cycle of growth in the Dallas/Fort Worth area and elsewhere.

 Neither developers nor investors are interested in extending financing any longer than necessary. They also are cautious about higher risk financing. Post-Recession, vehicles such as mezzanine financing are rare for mid-size to large enterprises. In fact, a new version of financing known as “unitranche” is combining senior and subordinated debt into one financing vehicle, making it more attractive and cost-effective for developers and less risky for investors.

Mezzanine’s one sweet spot appears to be among small deals where traditional bank financing comes up short and private equity can’t make up the gap. But the number of dedicated mezzanine players has also dwindled as they adapt their investment strategy to market demand.

There is also more competition. Real estate investment trusts (REITs) are sustaining popularity as a way to fund and invest in real estate while mitigating risk. Since 2009, investors have replaced bonds with investment in REITs and realized returns of 4-6% each year in dividends, according to CNN Money. Although any announcement of raised interest rates affects REIT prices — signaling investment volatility in 2015 right along with the stock market — long-term pragmatists are advising clients to hold onto their REITs and even add to them because a stronger economy equals a stronger real estate market.

The newest form of investment, crowdfunding, is also taking a small portion of the market. Vehicles for crowdfunding satisfy the DIY developer and investor who wants more options and more transparency. With minimum investments of $5,000, more individual investors have access to real estate investments, and can use it as a form of portfolio diversification. More access to cash from diverse sources can support a more stable real estate market, coupled with strategic development. Laws regarding crowdfunding investment vehicles are still evolving with the technology itself, so investors and developers alike need to thoroughly review the pros and cons.

Cautious About ‘Overbuilding’

With interest rates remaining fairly steady and reduction in inventory in both the commercial and residential markets, the National Association of Realtors projected $500 billion in commercial real estate investment closings by the end of 2015. Properties are trading at 6.6 percent higher average prices compared to second quarter 2014.

In the Dallas/Fort Worth area, one of the hotbeds for commercial real estate development is Uptown. Investors are contributing millions for new office development and remodeling, the first of which to open next year is the new $225 million McKinney & Olive office tower. It will connect to The Crescent and Ritz-Carlson Hotel with plans for a major pedestrian area and park as part of Crescent Real Estate’s bullish push in Uptown.

As for the five or six other competing projects planned in Uptown, it makes sense long-term, but may take a while to fill them with tenants. Investors and developers are expected to shy away from projects that focus too much on one type or class of commercial development in order to keep their portfolios properly diversified.

Want more real estate accounting trends? Download the full Whitepaper or read our next blog post:  Dallas Developers Focus on Flexible, Multi-Use “Communities”

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at Gary.Jackson@cornwelljackson.com or call 972.202.8000.