Talk about short memories. Some investors appear to be already overpaying for real estate in markets only recently lurching off bottom. The “richly-priced” deals are few and far between, concentrating in the very best, most resilient markets: Washington DC, New York, and San Francisco. But buyers are placing bets again on tomorrow’s hopeful cashflow assumptions, ignoring current anemic revenues while stepping over the carcasses of yesterday’s overly optimistic players.
Now, if you’re going to overpay, market bottom is the time to do it, and many of these deals are modestly leveraged or even all cash. And since interest rates can’t go any lower and the stock market looks rocky, a six cap or under deal can be rationalized when you’re talking buying up prime real estate in the best markets.
Buyers have been mostly investors with cash burning holes in their pockets: the odd REIT needing to put IPO proceeds to work, German institutional funds eager to market time, and carefully disguised Middle East money. The targets are typically well-located office and recently beaten up prime hotels. The office investors assume core style single digit returns even if still falling rents suddenly spike in three or four years. The hotel players may hope for bigger pay days in this always volatile sector, but face a steep arc to increased revenues.
Notably all the opportunity fund stashes can’t compete and remain sidelined. Once expecting plenty of bargains, they are effectively shut out of the prime markets by the dearth of deals and the bevy of core investors circling anything of high quality.
Shunted to secondary and tertiary markets, opportunity players have essentially been left with an unpalatable choice— go after the flood of busted Florida condos, take a chance on the FDIC’s foreclosed property pools, wait for the inevitable wave of bank foreclosures and owner capitulations, or give money back to their investor clients. None of these alternatives is particularly appealing. Florida condos, especially the well-built seaside variety, will likely rebound, but not immediately and may need to be turned into rental apartments in the meantime to secure any income. The early FDIC offerings include some of the worst of the worst, the highest of high stakes bets. Patience doesn’t match the immediate-gratification opportunity investor mentality, especially when mistimed legacy investments continue to produce heartache with virtually no chance of recouping lucrative promotes. Without various ongoing acquisition and asset management fees, they might as well run for the exits and return commitments.
A depressed sounding acquisition pro laments how he’s been hitting his head against the wall chasing after deals, while “a thousand other really smart former colleagues” are out of work and without prospects. He wonders how the buyers landing high priced deals today can be successful in an environment where either rock bottom interest rates go up in a slow economic recovery pressuring cap rights higher or deflation sets in to challenge overly sanguine revenue assumptions.
A leading offshore investor, who had been in the thick of recent bidding, now tells me he is backing off. “I’m really torn,” he says. “But the prices have gotten too steep.”
Imagine… and most markets experience a continuing fall in office, retail, and industrial rents.
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.
