Cover Story
continued from page 48
PUMPER: What investment opportunities do you see
moving forward?
ZAMMITTI: You can do well if you’re smart and pay attention
to the fundamentals in just about every market. We try to
pick high-barrier markets, premier locations and key traffic
points. I do agree that we’re getting back to the basics of this
business. I just hope that we don’t have another situation that
leads to too much money chasing after too few deals. The
next year and a half or so is going to be pretty exciting, but it
will be a very different environment.
MCINTYRE: Now is the time when your human capital, core
competencies, traditional underwriting and ability to execute
really pay off. That’s what we’ve always built our franchise on.
We are comfortable in this environment of turmoil, but we are
cautious.
DUNCAN: If you have a strategic model, this is the time to
adhere to it. It’s a time to be careful and selective. The problem is that many very smart developers and Wall Street keep
trying to financial engineer the transaction. The pain is going
to get much worse because of this. But if you have capital,
enjoy the next few years. Just think of all the real estate in the
past 18 months that was purchased with high leverage. There
will be a day of reckoning for those deals, and hopefully we’ll
be able to find some great opportunities.
VOGEL: There are two things helping us this time around as it
relates to property evaluations: reproduction costs and the
spread over Treasuries. It still is very expensive to build and
that’s done wonders in terms of propping up current values.
You can argue that in certain markets land values should,
could or will drop and put some downward pressure on costs.
But all in all, reproduction costs are going to hold up property
values.
The other thing we look at is our spread over Treasuries.
We’re valuing core real estate deals at a 400-basis-point
spread over the 10-year Treasury, which is now around 4%.
That means an unlevered 10-year IRR is approximately 8%,
and that’s where we’ve marked our
portfolio. A year ago, the 10-year
Treasury was close to 5%. Now, if you
were buying properties then at a 5%
or 6% cap rate, there is going to be
pain, as Pat described, relative to the
excess leverage that was put on some
of these transactions. There’s a lot of
money waiting for that to happen, but
the transfer price is not going to be 30
to 50 cents on the dollar. However,
due to the de-leveraging of commercial real estate, investors may see
some opportunities to buy distressed
debt or purchase assets at a discount
to reproduction costs in the next 12 to
18 months.
KAUFFMAN: Rod’s point about cost is
critical. Like any consumer product,
value is a function of cost with real
estate, and absent a collapse in world
commodity prices, there’s no reason
to see values dropping dramatically.
Over-capacity is an issue in anything that’s transaction-oriented, be it
legal, title, mortgage, investment sales and development. A
number of people have talked about how many calls they get
from developers. It’s the same for us. That tells me capital has
left this space, and there’s excess capacity on the production
side that has to be wrung out of the system. That’s the type of
distress I see as opposed to capital structure or property- or
market-level distress. How long that takes to work itself out, I
don’t know.
CLARK: Within our equity portfolio, net operating income is
flat and occupancy is stable. On the debt side, we have only
one delinquency, which was caused by a construction problem rather than market weakness. Fundamentals are good.
This is a great time to reinforce relationships and to create
new ones. Having a stable and growing platform will also
enable us to hire some high-quality employees.
GERBER: If you look at some of the information coming out
of Europe, they’re predicting the US to be in the 2% to 2.5%
growth range in the next couple years versus 1% to 1.25% at
the most for Europe. So there’s an influx of foreign capital
that’s probably going to tee up on US real estate before the
US institutions do. They’re going to be the first to start setting new value benchmarks. The market is done with highly
leveraged buyers, who caused the institutions to move to the
sidelines. And while most institutions are still waiting to
come back in, foreign investors are starting to make their
moves.
There’s about 70 countries now doing cross-border transactions, and that’s a big number compared to just four or five
years ago. The whole Middle East is coming up really strong,
so are Asian companies, along with Australia and Spain.
Much of this global capital is coming into the United States.
We’re going to see these investors getting aggressive as soon
as they feel comfortable that the market has bottomed. This
may set the low benchmark needed for the US institutions to
come back into real estate. We’re keeping our eyes on it.
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d index
ALIS, 47
AMB Property Corp., 36
Buchanan Street Partners, 1
Capital Source Funding, 6
Choice Hotels, Cover II
CIBC World Markets, 7
Double Tree, 52-53
First American Title, Cover IV
Goodwin Procter, 19
Inland American Lodging Corp., 60
Inside Track Real Estate Brokers, 34-35, 37
LandVest, 60
Lodging Conference, 43
Marcus & Millichap, 5
NorthMarq Capital, 42
Pyramid Advisors, 61
Select Leaders, Cover III
Silverton/Specialty Finance Group, 14
TICA, 55
Transwesterns, 3
USAA Real Estate, 9
Wells Fargo, 26
This advertising index is provided as an additional
service. While every attempt has been made to
make this index as complete as possible, the
accuracy of all listings cannot be guaranteed.
