Investors Find Improved Market Conditions and Deal Opportunities Encouraging, But Not a Case for Over-Exuberance
Sensing that commercial real estate markets are near a point that properties are not going to get any less expensive, there is a strong temptation to jump in and grab deals while the getting is good and real estate is still affordable.
However, CRE brokers and advisors who have been refined by five years of recession are cautioning their clients against over-exuberance. Instead, they are encouraging clients to measure their risk tolerance and move forward at an unrushed pace.
"There are a tremendous amount of deals available, some riskier than others; some short term and some long-term turnarounds,” said Gregory P. Schenk, president of The Schenk Co. in Columbus, OH. “The first thing we do is judge our clients risk tolerance and how much capital they have on hand. We need to find out if the client is looking for immediate monthly income, or seeking longer term appreciation on a sale.”
“Once we know those items, we can find what properties suit them best and align them with like-minded individuals,” Schenk said.
“We are seeing a faster pace of activity combined with an urgency,” said Adelaide Polsinelli, senior director of Eastern Consolidated in New York. “The momentum is continuing due to 1031 exchange buyers who have dollars to place as a result of last quarter dispositions. Clients are approaching the market with fervor! There is no time to waste. However, every deal must be properly vetted and pricing razor sharp."
Benjamin Phillips, director of operations at Phillips Commercial Real Estate Services Inc. in Dallas, said multifamily is seeing strong demand from buyers in DFW. "Investors have voiced concerns regarding the overbuilding of new units but I don’t think it’s there yet, athough developers always seem to know how to rain on our parade when demand climbs," said Phillips. "Generally speaking, my most common advice is get good management, get long-term fixed interest, non-recourse, fully assumable financing (another reason I like multifamily), and be realistic with what the numbers are going to take to do what you want to do."
Brokers are also sharpening their skills in anticipation of increased deal volume, and telling their clients to sharpen their pencils so that they don’t overpay.
“To prepare for the eventual market turnaround, I have attended educational courses, expanded my referral network, re-established connections with local lenders, purchased a new laptop and become proficient with CoStarGo on my iPad,” said Bob Zavakos, principal of NAI Dayton in Dayton, OH.
Steve Collins, executive vice president of Environmental Liability Transfer in St. Louis, MO, said there are clear signs that more people are trying to clear out distressed assets.
“We are seeing more deal opportunities,” Collins said. “We are traveling more to tour sites, meet brokers and sellers, and attend networking conferences. Although the information available online is helpful, we believe it is still important to meet brokers and owners face-to-face to build the strong relationships that help close deals.”
More Distressed Properties Coming To Market
“In Dallas, our group is keeping an eye on troubled assets, which we believe the lenders are now prepared to take control of and bring to market,” said Robert Deptula, principal, Tenant Advisory at Transwestern in Dallas. “But we are focused on getting assets with significant vacancy, and positioning tenants who can purchase the building and occupy that vacant space.”
“The institutional community is not looking kindly on these buildings when valuing for purchase. That provides our owner occupants a chance to buy the building at below market prices and underwrite the vacancy favorably with their tenancy,” Deptula said. “We believe that 2013 will provide our clients with other opportunities to acquire equity ownership in properties in return for bringing their lease to the table either as the purchaser or part of a partnership. Low financing rates coupled with a low purchase price makes for an excellent economic opportunity for our corporate users who have the ability to purchase or be part of a partnership.”
Meanwhile, the availability of distressed assets is expected to had a direct impact on deal volume.
"Banks have finally decided that 'commercial short-sale' is not a dirty word and won’t get you fired,” said David S. Miller, vice president/National Accounts at Chicago Title Insurance Co. in Scottsdale, AZ. “That will shrink the pool of buyers as the risk-reward buyer will not be wanting to pay non-distressed prices. "
As the values rise, fewer properties will be subject to material defaults and replacement financing will be more available, further shrinking the amount of product coming to market, added Miller.
“With the re-entry of financing by the commercial banks, more buyers will want leverage to increase their yields as cap rates continue to be compressed," Miller said. “This will slow down transaction volume as sellers and buyers will start to reach an impasse on price and terms. If buyers can’t get a lower price for cash, they’ll be turning to the capital markets for leverage.”
Nudging Values A Little Higher
“On the assumption there is a recovery underway, with the inevitable rise in long-term rates from their historic lows, we plan to 'reach' on acquisition values in 2013, and anticipate an inflationary rise in rents, particularly because of the supply-constrained character of the market in eastern New England,” said Leonard Bierbrier, president of Bierbrier Development in Lexington, MA. “We believe the competitive position of a cost basis built on low cost debt, versus players who delay entering the market, will be well rewarded.”
Neal Jernigan, partner in Crossley, Jernigan & Ellison Inc. in Alpharetta, GA, is advising clients that the industrial market is in the beginning stages of recovery and that the office, while slightly behind in the recovery process, is also likely on th emend as well.
"With the anticipated general lower risk profile in both investment products, we are encouraging them to be a bit more aggressive in their underwriting while tempering their yield requirements for selected investment opportunities, be it core, value add, or opportunistic plays, in well located, dynamic markets,” said Jernigan.
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