“There is no
sense of
desperation
on behalf of
sellers to accept
unreasonable
discounts.”
HESSAM NADJI
MARCUS & MILLICHAP
very good shape. Because of that, there is no
sense of desperation on behalf of sellers to
accept unreasonable discounts,” he states.
“Pricing is readjusting to the realities of the
lending requirements and the thinner buyer
pool. But buyers should not expect wholesale, across-the-board discounts.” The executive expects this readjustment period to last
through the first half of the year.
Halter, too, anticipates a drop in deal volume. “The level of activity just won’t be as
robust or dynamic as it was in 2006 or ’07,”
he states. “But there will be transactions in
the marketplace. The buyer-seller base will
be there, but at much lower levels.”
Price adjustments differ by location and
asset quality. “In secondary markets or in
properties that are more or less class B, we
have probably seen valuations decline by
10% to 15%,” Halter says. “For class A assets
in high-quality markets, valuations have
adjusted very little or decreased by 5% so
far. It’s been quite interesting to see the market be more discerning and surgical as to
how it’s adjusting valuations.”
Both experts agree that as prices
decrease, overall cap rates should rise. Nadji
notes that cap rates for high-quality assets
are likely to jump 20 to 50 basis points,
while some “true top-tier” properties could
see a lower increase of 10 to 25 basis points.
Properties of B and B-minus quality could
see as much as a 50- to 75-basis point cap
rate adjustment. Lower-grade assets or those
in secondary or tertiary locations are facing
steeper cap rate hikes because lenders are
far more sensitive to the risks involved in
those assets and have tightened underwriting standards, he continues. As a result, he
says, deal volume will continue to decline in
those markets.—Jennifer McCandless
Will debt and equity capital
continue to flow into real
estate?
Investors were hot for commercial real
estate until late last summer, when the cash
spigot was suddenly turned off. New
CMBS issuances continue to decline.
Volume in the third quarter of 2007 was
half of what it was for the first six months of
the year, and fourth-quarter issuance was
down 50% over the third, Fitch Ratings
noted during its recent US Structured
Finance 2008 Outlook conference call.
Similarly, Bank of America predicted only
$100 billion of CMBS issuances in 2008,
down from $230 billion in 2007, in a
recent REIT investor conference call.
Despite this lack of capital from CMBS
lenders, there is still plenty of money flowing into commercial real estate. As BofA
analysts note, “While the CMBS shops have
substantially slowed new deal volume, commercial banks, life insurance companies and
portfolio lenders have picked up the pace,
given pricing opportunities.”
Equity is also a major factor. “There is
no shortage of equity funds,” says John
Fowler, executive managing director at
Holliday Fenoglio Fowler. “Everybody is
raising money.” Much of the capital coming in is from foreign investors looking to
take advantage of the weak US dollar.
Other players still looking at opportunities
in the sector include pension funds, high-net-worth individuals and endowments,
the New York City-based executive adds.
“Structured
finance deals,
like mezzanine
loans, are very
appealing
defensive plays
given the
uncertainty in
the market.”
ALLEN SMITH
PRUDENTIAL REAL ESTATE INVESTORS
Allen Smith, managing director and
head of US business for Prudential Real
Estate Investors in Parsippany, NJ, relates
that while this year will be challenging for
the debt markets, institutional investors will
continue to allocate substantial amounts of
equity into real estate.
With the capital that is flowing into commercial real estate, Smith says investors will
be looking at value-add, opportunistic and
global strategies, moving away from the
“There are a
lot of people
looking at
this as an
opportunity
to recapitalize
these maturing
assets.”
JOHN FOWLER
HOLLIDAY FENOGLIO FOWLER
core tactics they previously employed.
“Structured finance deals, like mezzanine
loans, are very appealing defensive plays
given the uncertainty in the market and the
risks of holding equity,” he adds.
Investing in mezzanine loans is an ideal
play right now, he explains, because of the
potential for high cash returns and a cash
flow that is not based on potential future
earnings. “What you see is what you get in
terms of cash flow,” Smith says. “ You have
the protection of a substantial amount of
equity behind you.”
Fowler agrees investors will be interested in buying real estate debt, seeking to
capitalize on maturing loans, which offer
desirable yields in today’s constrained
environment. Investment banks are holding onto commercial paper they can’t sell,
which is leading to significant write-offs, he
explains. Though the loans are performing
well and the commercial market is in very
good shape, the problem lies in the fact that
many properties had changed hands with
high leverage and short-term paper. Those
loans are now coming to maturity, and it’s
going to be a challenge to refinance them.
“There are a lot of people looking at this
