Continuing on thoughts about the $300 billion said to be sitting on the sidelines, waiting to cushion the coming downslide in values, these fund sponsors who raised all this cash over the past few years must be struggling figuring out how to deliver the returns they promised investors. Their investment model was largely based on leveraging up performance in a sky's-the-limit pricing frenzy, providing 20% plus returns. It worked splendidly for more than five years in an almost free-money lending environment that suddenly evaporated 12 months ago. But without the leverage, the investment model no longer works and the sponsors can no longer make the promotes which drives their business bottom lines.
Given the depths of the credit morass, free-flowing debt will not be coming back any time soon. When lenders finally sort out all their issues and regulators finish with implementing stricter guidelines, borrowers will pay more for less. We're in a deleveraging environment for some time to come.
So what's the new model--filling the void in the debt markets, offering distressed owners loans that could provide equity like returns or loan to own features? Maybe. Or buying core-like properties in all or mostly cash transactions once the value floor looks like it's taking hold? That's a possibility. There are always homebuilder lots, going for cents on the dollar today.
But then investors will need fundamentals to improve quickly to push up rents and net operating incomes, and/or homebuyers who can obtain ready financing. Neither the economy nor the credit markets offer much hope for any sort of rapid recovery.
So either that $300 million accepts potentially lower returns than advertized in different investing schemes or maybe it goes elsewhere. That also goes for the investment bankers and advisors, sponsoring these funds.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
