DLA Piper Panelists: This Summer Took a Toll on CRE

Is the market recovery for real? The question seemed reasonable in the summer, but volatility is back in the capital markets, according to the panelists at DLA Piper's Global Real Estate Summit 2011.

October 6, 2011
By Dees Stribling, Contributing Editor

“When we were planning this conference earlier in the summer, the question ‘Is the Market Recovery for Real?’ seemed like a reasonable one,” Roy H. March, CEO of Eastdil Secured, explained at the beginning of the first plenary session of DLA Piper’s Global Real Estate Summit 2011 this week at the Four Seasons Hotel in Chicago.

The question “Is the Market Recovery for Real?” was the title of the session, and March noted that it isn’t quite as fitting as it was only a few months ago. “Since about mid-July, everything’s been slammed,” he said. “Volatility is back in the capital markets.”

Joining March for the panel discussion were Debra A. Cafaro, chairman and CEO of Ventas Inc., Michael D. Fascitelli, president and CEO of Vornado Realty Trust, and John R. Klopp, co-CEO and co-CIO of Morgan Stanley Real Estate. Randall K. Rowe, chairman of Green Courte Partners, moderated the panel.

Despite the volatility of recent weeks, March pointed out that some of the new paradigms haven’t been affected. “One is that of extremely low interest rates,” he said. “Bond markets are predicting an extremely low rate for quite a long time. So what do investors do with mountains of cash in a 0 percent to 2 percent rate environment?”

Some kinds of real estate will spark investor interest because of such an environment, March posited. “We all remember when a lot of investors considered 7 percent a poor return,” he said. “Now Class A core real estate with a 7 percent return is tallest midget in the circus.”

Klopp said that “we don’t see the market backing off on core pricing,” and that “people’s yield expectations are coming down. Even so, there are opportunities in the United States for both core and opportunistic plays.”

Over the next 12 to 16 months, Klopp predicted that Europe would see a rush of portfolio deals because of “deluge of distress.” He also noted that in this country, ground-up development is decidedly worth the risk. “We’ve been green-lighting a number ground-up multifamily projects lately,” he said.

Fascitelli reported that “we’ve had a difficult time adjusting our return expectations. IRR is hard to predict, so it’s hard to be enthusiastic about putting money forward in an aggressive way.”

The Vornado chief also likened the restructuring of commercial real estate debt that was contracted at the height of the boom to helping an underachieving child get through school. “You bring in tutors and put a lot of effort into it, and the kid goes back to classes and you call it a success,” he said. But the kid hasn’t actually graduated yet. Still, a lot of progress has been made.”

Cafaro explained that her company’s position is strong because there’s still strong demand for the properties that Ventas specializes in, seniors housing and health-care properties. “We’ve been very active,” she said. “The growing demand for health-care properties and seniors housing has meant a good upside without much of a downside.”

In the broader real estate market, Cafaro said that the events of this summer have definitely changed investors’ outlooks. “A year ago, everyone believed growth was back,” she observed. “Now no one’s sure of that. Still, even without rapid annual growth in valuation, the value of good properties still compounds over time.”