Friday, April 1, 2011

The Real Estate Capital Scoreboard issued by the Real Estate Capital Institute


 CHICAGO, IL, April 1, 2011-- Modest economic growth steadily fuels the commercial realty markets with abundant debt and equity funds staying in step.

 Inflation pressures are under control in the short-term, alleviating concerns of a double-dip recession.

 However, maintaining modest growth proves challenging under current economic conditions as unemployment, weak housing conditions, cautious consumer spending, concerns about Europe and the Middle East and lack of liquidity for many business sectors still haunts
entrepreneurial investment appetite. 

Regardless, realty capital markets are undoubtedly back to more normal levels as evidenced by the REIT and CMBS market rebound.  The number of capital providers and financing structures are far superior to those provided a few years ago based upon several factors:

Solid Values:   Conservative investors flock to the best quality, best located properties, accepting lower cap rates in lieu of volatility.  For instance, multifamily properties support 6.5% cap rates on a national average.  Interestingly, same-property dynamics show about a 400-basis-point range within the Class A-B-C quality spectrum.

Public market demand:  The strongest evidence of solid gains in the commercial real estate ("CRE") sector rests with the public markets. Appetite for income properties via REITs offers strong performance and tight pricing.  The underestimated rebound in the capital markets allows these companies to sell stock at very competitive rates; few attractive alternatives are offered in conventional stocks and bonds.  Many investors firmly believe that the commercial property sector has bottomed-out and is set for a steady recovery.


Prudent underwriting:  Rating agencies have increased subordination levels, translating to higher-rated tranches, which are more appealing to investors. Furthermore, CMBS spreads dramatically tightened to more historical norms of about 250 basis points; B-Piece buyers are keeping new issues in-check. Borrowers now have more varied options in addition to life companies and banks. 

Real equity:  Pricing concerns plague non-stabilized properties, especially in competition with under-performing maturing loans.  Extremely conservative loans backed by substantial equity are the only panacea for this sector. That said, savvy investors purchasing such assets at reset prices on an "all cash" basis are expected to handsomely profit, if projects are well conceived and in strategic locations. 

Jeanne Peck (top right photo) of the Real Estate Capital Institute, forecasts "Spring capital markets are clearly in full swing as proof of REIT and CMBS dynamics." Adding, "CMBS [and other] investors are out in full force armed with lots of cash, but still maintain discipline as the memories are still fresh of the Great Recession."

Contact: Jeanne Peck, Research Director
Toll Free 800-994-RECI (7324)

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