they got written up by 25% or 30% from where they would
have been at the end of last year. That’s typical for the high-est-quality apartments in the best markets, and the appraisers will see that. It’s one of the reasons my returns are going
to be positive in my funds this quarter.
HIGGINS: The people buying those assets are also buying
depressed NOIs, and that’s why they’re paying up for them
in terms of low yields, but while still at relatively attractive
prices per unit. We sold a deal in Orange County, CA a couple months ago that was great as a long-term investment for
us given our original cost about eight years ago, but it traded
around $240,000 a unit—a price I’m sure the buyer thinks is
below replacement cost. Apartments are trading off of
depressed NOIs in markets that many think will be the first
to recover. The question for us is “when?”
ZALE: We sold almost $1 billion in apartments over the past 18
months. There was a corporate urge to trigger some book gains, so
we sold a handful of Southern California assets at a cap of
7% or so. Admittedly, the NOI at that time was higher than
it is today so we theoretically left some money on the table.
But it was absolutely the right thing to do, because as a life
company we’re still triple-A-stable and our efforts contributed to that.
DESIATO: Could the European financial crisis benefit
us in terms of attracting capital into US real estate?
MICHAEL: There’s a lot of money in the Eurozone. But
notwithstanding the investment that’s still over there, there
is a focus on the US. Sovereign debt is a huge issue in
Europe, with the poor economies of Greece, Portugal,
Italy, Ireland and Spain. If you believe in the domino
effect, it’s going to affect the global economy. In Europe,
and in Japan, everyone is looking to the US economy to
bring the world out of this. For our sake, I hope that we do have
sustained growth here.
STOLPESTAD: More eyes are looking to the US. On a relative
basis, it looks like a real recovery here and while cap rates may
look shocking compared to 12 months ago, relative to global
investment alternatives, they actually make some sense. We expect
to bring a fair amount of capital to the US over the next three
years, and we’re prepared to pay market prices.
“If spreads materially widen
again, I worry if investors will
tolerate the volatility and
continue to provide
capital to the
that the 10-year
partly a result
of what’s happened in the
from an interest rate standpoint. We’re
trying to diversify our platform. This year,
fund in Brazil,
a fund aimed
at the emerging Mexican
“While US cap rates may
look shocking compared to
12 months ago, relative
to global investment
alternatives, they actually
make some sense.”
JAMES A. STOLPESTAD
Allianz Real Estate of America
business, and a UK equity-oriented fund. We’ve also launched a
European and a US debt strategy. Alot of the opportunities are, ultimately, in reworking the capital structures of a lot of the debt deals.
Banks “are not stupid. They
want a fair deal, but
sometimes they’ve already
taken the hit on their books.
If you can come up with
reasonable pricing, sometimes
you can make a deal.”
Prudential Real Estate Investors
DESIATO: It doesn’t appear as if we’re going to see the
expected opportunities in distress. Have any of you had
to alter your strategies at all?
STOLPESTAD: The long wait for more flow of assets out of financial
institutions is getting close to the end. There was a time when people
said, “I can’t afford to take the hit, and I can’t sell it anyway, so what’s
the point?” That last objection is now gone. People recognize they
can sell their assets; the ones who’ve survived and those the government has taken over can afford to take some hits, so we’ll start seeing
more product this year and next. If that happens, the question is:
How much more product will impact pricing? I don’t think it’s going
to have a radical impact on pricing. Pricing will be a function of asset
quality and, to an extent, the complexity of the transaction style.
ZALE: I don’t have a major strategy to pursue those assets because I
haven’t seen them come forward yet. But when they do, we’ve plenty
of capital to chase them. We’ll probably be reticent to buy see-through office buildings, but decent-quality assets that have capital-stack problems—that’s something that would be interesting to us.
But right now those opportunities aren’t out there, so in the short
run, we’re leaning toward being conservative and core-oriented.
PRATT: We were involved in a note purchase on a hotel in Santa
Clara, CA—and cap rates on hotels are meaningless right now. It
would probably look like a five cap, but in Santa Clara, you’re betting
the market’s going to recover, and you’d expect 12% or 13% annual
gross income for a few years. If that plays out, it cures a lot of things.
We’re in at about 50% of the development costs right now.
A lot of the deals aren’t broadly marketed, so you’re pursuing
deals where you’re already involved, or a partner was in, or you’re
working with the involved bank—and they’re not stupid. They
want a fair deal, but sometimes they’ve already taken the hit on
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