High Demand, Debt-Equity Imbalance Create Complexities For 2012

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) February 6, 2012 -- A desire for alternative, fixed-income yields beyond that available in the bonds and government securities, and recent turmoil in sovereign debt markets has created incredible demand among commercial real estate investors. At the same time, the New York tri-state region remains flush with equity capital. As such, heading into a new year the market appears ripe for a surge in transactional volume for broad-class acquisitions across all sectors.

Yet as money swells on the equity side, it is not being matched by broad-based interest in the debt capital markets. So while equity interest in real estate is growing, the overall conservatism in the lending markets persists, and capital for debt financing remains stratified and highly selective. To the extent that financing is available, almost exclusively for stabilized assets, pricing is very attractive. However, it is not broad based. It is not available for everyone, and it is not coming from everyone. Lenders, themselves, seem to rethink their strategy on each deal, day in and day out.

With the CMBS market - having been pigeonholed into a corner - taking a timeout and wearing a dunce cap, the demand for broad-based financial lending flexibility is not being met. While most borrowers would like to be borrowing on the long end of the curve in order to take advantage of the historically low long-term yield curve, banks are primarily interested in two- to five-year money. However, most banks, especially domestic institutions, are only marginally involved in new deals. Insurance companies, which are more willing to lend on the long end of the curve, have little effective competition and are able to achieve outstanding spreads to real treasury rates. And given their balance sheets, they are playing for the larger, higher-quality, more visible deals.

This imbalance between debt and equity clearly points to continued deleveraging in the real estate markets. Only well-heeled investors with access to cash will successfully pursue opportunities. Those investors are seeking stabilized properties regardless of asset type.

Within this context, this market seems to favor investors plying their trades on opposite sides of the spectrum: macro strategists and local operators. Those funds with large hoards of cash are finding opportunities playing on mega deals and portfolios both domestically and internationally (especially as most of Europe battles to contain its self-created debt crisis). On the other hand, niche operators, to the extent they have cash, are seeing many opportunities in their own backyards. And since the markets lack clear direction, only those enterprises that are intimately involved in their local markets are able to identify the most appealing investment situations.

On the other end of the spectrum, risk trades remain limited. Turnaround stories by companies involved in opportunistic investments are tepid in conjunction with the generally weak economic rebound. That being said, we continue to see evidence of improving corporate profitability, which is generating additional market recovery in the office and industrial sectors. Those of us who do focus on value-add projects recognize that the right opportunity at the right price can still be found. This time around, knowing it when you see it is far more difficult.

For example, in 2010 our firm re-acquired 399 Jefferson Road, a 180,000-square-foot, Class A office building in Parsippany, N.J. We initially owned the property in a joint venture from 2003 to 2006, but sold it to a user when the sole tenant chose not to renew. That user never took occupancy. We made the repurchase at a significantly advantageous price, once again drawn by the property's quality, highly desirable market and excellent accessibility.

Within months, we leased 85,000 square feet there, to Pinnacle Foods Group, LLC. The firm recently expanded, adding another 20,000 square feet to its commitment, and we are in active negotiations for the balance of the building.

The bottom line remains that opportunities always exist. The landscape is continually changing, and those of us who want to be involved may have to sit patiently in traffic, changing lanes waiting for a shift in flow to rapidly move ahead.

At the same time, we need to make some adjustments to our new reality. Slow economic growth, lack of broad-based debt capital and competition in the equity space all are combining for moderated returns. As such, we need to get comfortable with a new normal for investment returns. These numbers won't touch what we were seeing prior to the market crash, but, in relative terms, real estate will continue to be a pretty good investment.

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