GOOD PROSPECTS FOR COMMERCIAL REAL ESTATE IN 2007
I had the opportunity to sit in on the International Council of Shopping Centers (ICSC) annual “Power Breakfast” which featured some high-powered institutional investors as panelists. They included Erwin Aullis, CEO of Transwestern Investment Company, Stanley L. Iezman, President of American Realty Advisors, Inc., and Glen Sonnenberg, President of Legg Mason Real Estate Services. The panel was moderated by Mark Schurgin, President of the Festival Companies.
These are some high-powered commercial real estate fund managers who won’t even get out of bed for a deal under $50 million! They were there to give us some of their thoughts on how the economy will affect commercial real estate investing, where interest rates could be heading next year, and how buying and selling parameters have changed for mall owners.
Some of the thoughts that came out of these guys were quite insightful. Here’s what I got for breakfast that I think you’ll find interesting:
1. Commercial real estate lenders are inundated with money thanks to collateralized debt obligations. These are derivative debt instruments that allow lenders to dramatically increase their ability to raise money at low overhead costs.
2. The aging of the population and the retirement of Baby Boomers means that there is a large part of the retirement money looking for alternative income opportunities…think “income ownership”.
3. Big funds are buying more real estate, making it a legitimate “investment class” like stocks and bonds.
4. The REIT index rose 35% last year, outperforming the S&P 500.
Large urban areas can expect low cap rates in the coming months, which means there are opportunities in secondary areas, but you still need to be careful in “tertiary” markets like Detroit and St. Louis.
5. There is still no evidence of an oversupply of commercial properties.
1031/Buyers of tenants in common are drying up, holding back price appreciation.
6. “A” grade commercial properties are “commoditizing,” which means there are real opportunities in “B” and “C” commodities.
7. The big players are coming out of the condo product at significant discounts to the original sales price (meaning you can get a nice house for little money). This was evident in San Diego and South Florida. Residential projects are taking a backseat to commercial ones in the minds of large investors.
There is some good intelligence in these observations for anyone serious about investing in commercial property this year.
The last few minutes of the session were devoted to a group consensus on where interest rates and cap rates would be a year from now. While not an actual prediction, the feeling on the floor was that the prime rate would be 0.75-1% lower, commercial mortgage rates for Product “A” would be 0.25-1% lower. 0.5% higher than current rates, and the cap on rates for Class “A” properties would remain essentially unchanged.
My conclusions are that there will be some opportunities to make money in smaller commercial properties in outlying areas and smaller urban markets. New construction and other “value-added” projects should also do well. One word of caution though, don’t make the mistake that rents will continue to rise. Stay conservative in your projections and you should be able to ride out any downturn that may ensue in the wake of possible congressional tax increases.
