Real Estate Forum - February 2008

in terms of value-add and development deals. We strip out the cap rate compression and get down to the value created through the leasing effort, capital initiatives or development risk. In order to evaluate performance, we do the math and get to that unvarnished return to see how we’ve performed. Cap rate compression is over; today, it’s about driving income and managing expenses. So if you’re going to be operating value and/or opportunistic funds, you really have to have that boots-on-the-ground real estate

expertise to be able to drive leasing, create expense effi-ciencies and expense management. The market will not carry return; you have to have the ability to add value through hard work, putting your shoulder into a deal the old-fashioned way.

KAHN: I think you have to do that for all categories of real estate, even core.

“Cap rate
compression is over;
today, it’s about
driving income and
managing
expenses.”

PHILIP MCANDREWS

TIAA-CREF

STAY ON TOP OF THE COMMERCIAL REAL ESTATE

MARKET WITH...

INSIDE EACH ISSUE: Over the course of its 60-year history, REAL ESTATE FORUM has evolved into the most respected name in commercial real estate business journalism. Our core mission is to provide quality reporting and in-depth analysis of the issues, people and trends impacting the global property marketplace.

SUBSCRIBE TODAY
www.reforum.com/01

TO ORDER REPRINTS www.remreprints.com

TO ORDER BACK ISSUES www.reforum.com

But one differentiation is that value add is not necessarily a long-term horizon. Traditionally, pension fund investors are thought of as doing everything based on a 10-year cash flow because you may well hold an asset for 10 years—although maybe not in this environment. But value add has a much shorter time frame.

And it’s more than just leasing and renovating assets. I think all of us have gone into product sectors that we haven’t been in for many years, such as self-storage facilities, student housing, maybe even medical facilities. We’ve expanded to meet the demands of the capital, to be able to put it out there to work, and we’ve become knowledgeable about these sectors.

DESIATO: Looking at the year
ahead, what will be the good, the
bad and the ugly of the commercial
real estate market?

DALY: We’re big fans of Downtown Washington, DC office. Fundamentals there are holding up very well. We would take a look at any class A or trophy development Downtown that we could get our hands on.

I think the ugly is going to be suburban multifamily. If we’ve seen repricing recently, it’s primarily been the four-story, stick-built suburban multi-family assets. One of the odd things in the multifamily world right now is that developers are sending us deals where the projected stabilized cap rate is actually below where you could buy core product for today. So you’re actually taking development risk to get a lower return.