GlobeSt.com: How do you see the debt crisis impacting commercial real estate?

Pryor: For this conversation, let’s define the “debt crisis” as incurring way too much debt in relation to the nation’s GDP. The debt ceiling is just a component of the crisis. We can’t take on more debt than that we can service. This is home economics 101. I believe the indirect impact on real estate is sluggish economic growth and reduced government services, and the direct impact is higher interest rates. The Peterson Institute projects interest rates increasing from 2.8% in 2010 to 4.4% in 2015 due to increased U.S. government debt. They project approximately 5% in 2020. You need to be thinking about this when investing today.

GlobeSt.com: How should investors evaluate exit valuations when considering an investment?

Pryor: The predominant concern in regards to exit strategy is the downside. Ask yourself what would negatively impact the valuation of the asset during the anticipated hold period? For example, interest rates, debt and equity capital markets, new construction, political governance, tax rates, unhappy tenants, obsolescence, etc. The greatest protection against downside risks is location, location, location. Target supply constrained markets. Also you should target cities and adjacent areas that offer advantages such as technology investments, international trade, mass transportation, leading education, and good government.

GlobeSt.com: You’re a fan of secondary markets. How can one avoid risk when investing in them?

Pryor: If there was ever a time to buy CRE at sensible price, it is now. We’re consistently finding owners who overpaid for assets and got in over their heads. Most don’t have the money to pay for tenant improvements and brokerage fees to increase occupancies. But, the hot cities like New York and San Francisco are really pricey. Target secondary cities that have one or more of the following attributes: 1) venture capital investments; 2) economic growth potential; 3) high profit-margin industries and S&P 500 companies in the tenant base; 4) elite educational institutions, 5) existing or expanding public transportation, 6) global trade route presence; and 7) barriers to new construction. As we tell folks, you’ll find these attributes in the few office investment markets that have witnessed a rebound in valuations.

GlobeSt.com: Do you see any sectors getting as hot as multifamily?

Pryor: Any sectors or regions of the economy that are exposed to economic growth will fare well. At the 10,000 foot level, multifamily, student housing, medical, lab, and data centers will prosper across the United States. All real estate is local. Thus, for example, while the moribund consumer prevents any aggressive moves in retail assets, there are opportunities to be proactive in retail buildings located in growth regions such as Cambridge and San Jose, to name but two.

GlobeSt.com: Are you afraid of a double dip?

Pryor: It’s a concern that we weigh in our investment decisions. Yet, a double dip would not change our investment strategy of finding well situated assets at reasonable valuations based on current cash flows. The bigger concern over the next 5 to 7 years, the typical hold period of an asset, is higher interest rates and cap rates, and the impact of these increases on exit valuations. A safer play is to make your money on the buy.

Dan Pryor's blog is the newest addition to the GlobeSt.com Thought Leadership team. For more information on being a Thought Leader, contact Scott Thompson at [email protected].