Industry deal makers sound depressed and look anxious. It’s the market bottom and they can’t make deals.
Well, they can make some deals, but if you’re buying, they think the price is much too rich to stomach when you’re at these cyclical market lows. All the sidelined money looks for “opportunistic returns, but” from prime properties in the best markets, so prices are bid up and the chance for a big score dissipates quickly. Most investors have no interest in any of the foreclosed crud, figuring the economy won’t provide enough of a boost in tenant demand to secure solid gains.
And opportunity funds realize without ample leverage the 20% returns they promise investors will be difficult to achieve under any circumstances, and today there’s no way they can get banks to pony up at 75% to 90% loan to values.
And then on top of all these hurdles, carried interest legislation will eat into general partner promotes.
Indeed, this is all pretty depressing, if you’re a dealmaker.
The conventional wisdom has been we’ll go through another cycle—money will eventually flow, lending restrictions will ease, prices will increase, more money will come in, things will get out of control again, and we’ll correct in about ten years. In the mean time on the way up, you can make a lot of money.
Dealmakers have been frustrated that conventional wisdom hasn’t started to play out by now and they begin to question whether the chance for quick money will be attainable at all this time. They’re coming to realize it’s probably more reasonable to expect that a combination of extended consumer de-leveraging and ongoing economic funk will temper lending practices and hamstring demand for years to come. Financial reform will proffer more restrictions on deal making too. In fact, as the stock market endures at least a mild correction, folks begin to worry more about a double dip.
Real estate investors might be better served to stop looking for the holy grail of outsized quick trading hits. We’re just not going back to the good old days of 2005 anytime soon. At this market bottom, you should be orienting around building lasting core portfolios of well-leased income producing properties, and looking to achieve year-in, year out returns in the high single digits where annualized real estate returns average out anyway. And if values escalate again, these properties will almost certainly jump ahead of the curve so you’ll be in a great position to sell out. That’s why the top properties in the best markets make sense.
You can try to play the yo-yo game. But let’s face it--right now the economy and lenders just won’t cooperate. This time round conventional wisdom may take a lot longer to play out. And that’s pretty depressing for dealmakers.
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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.
