Investment Perspective
By David Sobelman
Today’s Market Requires a Broker’s Ear
“Now is the time to buy!”
“I want to wait and see what happens!”
“I’m shocked at how this is all playing out!”
All of these comments have come from savvy and sophisticated commercial real estate investors in the last several
months. Each has their own opinion on how they plan to proceed
in 2008, if at all. And most of them are very comfortable sharing
their thoughts with the one person they can always confide in—
their broker.
The current debt market has surely changed the
way that all investors have begun evaluating assets
and has proven that market dynamics will be different for years to come. However, what we’re all not
sure of is exactly what those investors may be basing
their decisions on at this turning point in the economic cycle that will, undoubtedly, be the source of
discussion for future decades.
Credit market shake-up, mortgage crisis, subprime debacle—call it what you will, but be aware
that fundamental data points will always paint the
picture of what is truly occurring.
Clifford Mendelson, senior managing director
of Transwestern’s Structured Finance Group, reports that in 2006 roughly $203 billion worth of
securitized conduit debt, or commercial mortgage-backed securities (CMBS) debt, was attained for commercial real estate assets. Last
year yielded $237 billion of CMBS debt, albeit most of that
was procured through the first three quarters of 2007. Addi-
tionally, it is estimated that a mere $7 billion of CMBS debt
will be consummated in the first quarter of 2008.
CMBS, once known as the loan of choice for both institutional
and private market investors, came to a theoretical standstill and
ultimately affected the volume of transactions. When you are buying an aggressively priced asset, you typically need aggressively
priced debt; in comes CMBS financing. When the people providing that aggressively priced debt take an involuntary vacation,
all of a sudden we see a drastic turn of events. Financing a property in today’s market no longer falls into one’s pro-forma using
this form of leverage.
So what are the investors thinking at this stage of the investment global cooling? From the brokerage perspective, a “back to
basics” approach has become the norm. Investors are looking for
true intrinsic value in the land and improvements they are purchasing. They ask themselves, “If this property is vacant, what is
it worth and what can I do with it at that point?”
If it’s an income-producing property, buyers are leaning toward
higher credit tenants to occupy their investments. Therefore, a
more concerted effort is being made to purchase assets in primary
markets with good exposure and strong tenancy, similar to the
“flight to quality” adage.
Gone are the days when an e-mail could go out to a few thousand potential investors and hours later a half-dozen full-price offers could be waiting on the seller’s desk. Quality, value and
overall yield are now in the forefront of investors’
minds as they wade through the choices of assets
currently available to them.
However, it should be noted that Florida is
still one of the top areas of the country to invest.
Real Capital Analytics recently reported that retail property transactions in the top twenty cities
in the country, ranked by sales volume, had five
markets in Florida; Broward ( 4), Miami (9),
Tampa ( 14), Palm Beach ( 17) and Orlando ( 20).
What should sellers/owners also consider at this
point? It’s an election year! One point that all but
one candidate has tried to tackle is the position that
long-term capital gains will increase under their
leadership.
Real estate investors know the IRS Section 1031
tax-deferred exchanges drove the investment market for several years. If the rate is currently 15%,
the lowest it has been since the rate’s inception in the 1930s, then
we can assume that an increase in capital gains taxes will only
foster more exchange transactions in years to come. With some
candidates threatening to raise the rate as high as 28%, it is an almost assured outcome that the investment market will regain momentum.
While transaction volume is down, it has not stopped. Investors
should note that some of our best economists are explaining an
economic slowdown, not the “R” word. Things are looking
brighter on the distant horizon, but it will take time to get there.
Don’t hold back just yet. Keep abreast of the salient economic
indicators as they will most likely trend upward this year.
“Investors are
looking for true
intrinsic value in
the land and improvements they
are purchasing.”
The views expressed in this article are those of the author and not Real
Estate Media or its publications.
David Sobelman is VP of Calkain Realty Advisors in Tampa and
a member of the Real Estate Florida editorial advisory board.
