You Need To Change The Basis Of Your Analysis

Thanks to the Fed, the workout business and restructure business is almost done and people engaged in those endeavors are moving on. The major advisory groups focused on restructuring advice, bankruptcy and related matters are being disbanded and reassigned to other roles. Bankruptcy attorneys focused on real estate are idle and looking for new litigation to occupy their time. Funds and investors seeking distressed deals are struggling to find anything that makes economic sense or is worth buying. Mostly properties are now over priced, too old and costly to renovate, or just badly located and hopeless. If you want exterior corridor roadside motels there are some, but who wants them. Office buildings in very secondary cities that cannot command decent rent can be found, but who wants them unless the price is very low and you are a local operator. In summary, the distressed game is essentially done and now it is mainly foreign capital paying cash at too high cap rates in new York, San Francisco, LA and Washington that drives many large transactions. Other deals are heavily dependant on the Fed keeping rates unrealistically low.

Most investors I speak to say they buy things where they can get 4% or sometimes lower debt, buy at an 8% cap and make a spread on current return. Most of the more sophisticated understand there is not a lot of likelihood of a big capital gain when they sell since rates will go up and cap rates will follow. They are seeking a current return in the 12%-15% range, and maybe a tiny pop at sales. At least we seem to have gotten over the legend of everything needs to make a 20% IRR or it is not acceptable, now that many learned just because their model says 20%+ return does not make it so, I continue to enjoy talking to my clients and friends who do deals on experience getting their hands dirty, and not based on some MBA’s version of spreadsheets based on unreality.