Evaluating Options

It’s a frustrating time for investors. Those with capital are eager to invest, seeing opportunity in a down market. But with that market still weakening, owners are reluctant to sell their properties, which reduces the number of available options. And while some properties are expected to go up for sale

It’s a frustrating time for investors. Those with capital are eager to invest, seeing opportunity in a down market. But with that market still weakening, owners are reluctant to sell their properties, which reduces the number of available options. And while some properties are expected to go up for sale by midyear out of necessity—many of them properties with short-term debt and just enough issues to render them unlikely to be refinanced—the dormant financing markets make competing tough for any buyer that can’t proceed with cash alone. Meanwhile, those that can take the all-equity route are in the catbird seat, ready to snatch up the right deals.Frustrated investors can expect to feel that way for a while. This situation is not likely to change anytime soon. Real estate finance experts do not expect the capital markets to return to stability earlier than next year, as we report in “Watch & Wait,” the financing portion of our cover story, on page 22. At the same time, Federal Reserve System chairman Ben Bernanke has forecast an economic contraction for the first half of the year. And Martin Feldstein, president of the National Bureau of Economic Research, while not officially declaring us in a recession, offered the opinion in early April that we are indeed in one and have more than a year to go before we hear a better R word: recovery.But perhaps we shouldn’t be surprised. After all, how often does the Fed ensure the bailout of an investment bank? (By the way, if you’re curious what your peers think of this decision, check out the results of our latest online poll, which will appear in the May 1 issue. And if you want to weigh in on our next poll question, scroll to the bottom of www.cpnonline.com, where you’ll find it on the far right.)So what’s an investor to do in this marketplace? While that may be an individual question, it also broadly depends on the type of investor, the type of property and the location under consideration. Buyers based outside the United States and domestic institutional investors may be the most likely to buy, as discussed in our cover story, “How Long a Climb?” Then again, REITs are likely to become more active again, as well, given their propensity for low-leverage deals (for more on this, visit cpnonline.com/search and enter key words “Right Stuff” in quotation marks). Of course, there are exceptions to all of this, such as Hines’ recent purchase of the One N. Wacker Drive office tower in Chicago from a German investment fund.Some development projects, even large ones, also continue to move forward. The brakes that have been put on some high-profile deals like Manhattan’s Moynihan Station act as a counterweight to those that are progressing. But about the same time that this news came out, CPN also reported groundbreakings on a number of mixed-use projects, including Constitution Square in Washington, D.C., and The Banks in Cincinnati.As for the property types that have received the most favor, multi-family assets are generally receiving the highest marks, but other sectors also offer benefits—although opinions differ as to the fate of consumer spending and, therefore, retail property performance (for more on this, search our Web site for key words “Most-Favored Investments”). Certainly, rising unemployment may impact any of the major property types, as well. Thus far, though, the unemployment rate, like defaults, remains relatively low.The best news for commercial real estate continues to be fundamentals that have largely remained at healthy levels despite reverberations from financial market performance in bastions like New York City (see our Big Apple market profile on page 16). With economists’ predictions growing ever more dire, let’s hope the conscientious attention to market data that has marked recent commercial real estate activity continues—and gives rise to more opportunity.