October 28, 2011
By Suzann D. Silverman, Editor-in-Chief
While respondents to this year’s Emerging Trends poll took a somewhat pessimistic view of the market, panelists commenting on those results at the ULI Fall Meeting on Thursday took a less negative stance. In fact, Michael Covarrubias, chairman & CEO of TMG Partners, stated outright that he felt the respondents were more pessimistic than they should be. And all of the panelists see opportunities for investment, although most of them did not agree on the best point of focus.
For Covarrubias, property rehabs are a good place to focus, while David Lynn, managing director of Clarion Partners, named recapitalization his favored investment target and Diana Reid, executive vice president of PNC Real Estate, selected opportunities in infill, walkable cities. Survey researchers participating in the panel discussion offered their own views: Jonathan Miller, partner in Miller Ryan L.L.C. and author of the study for the past 20 years, named apartments as the place to invest, while ULI senior fellow Stephen Blank listed properties with “upside-down financial structures” and PricewaterhouseCoopers director Charles DiRocco said he likes land.
The presentation of results and panel discussion, moderated by Bentall Kennedy executive vice president Douglas Poutasse, followed a media presentation on Wednesday during which Miller, Blank and DiRocco pointed out some key findings of the study. Among them: “Don’t let the availability of capital cloud judgments” and “when there’s too much capital, there are always issues.” Perhaps most importantly, “recovery is slow.” Blank noted that while real estate looks like a good play because of its classic spreads over Treasuries, fundamentals could start to react to the difficult economy, leading to stagnating rents. And the study authors agreed that transaction activity will remain restrained, as prices and values get ahead of themselves and ahead of leasing and rental rates.
Even the relatively solid apartment market is seeing “very rich” pricing, Blank noted, and developers have to compete with older properties. Meanwhile, respondents expect a continued shortage of capital to finance the deals that do surface, with the CMBS market still slow to return, banks still focused on their “extend and pretend” practice and insurance companies sticking to high-profile deals and markets.
Warned Blank: Investors would be wise to follow the money, and when it looks out of control, retreat.
REITs are currently in the strongest position relative to other investors, pension funds will be disappointed as they strive to achieve necessary asset allocations and foreign investors are finding the United States favorable to their own backyards.
Most of the capital in the past year has flowed into what Emerging Trends has termed the “wealth islands,” including the long-popular 24-hour gateways, energy and technology markets, and the apartment sector. Apartments remain the most attractive property area, with even Class C making sense today, since it can be upgraded. “Spend a little more, hold a little longer and demand will be there,” DiRocco advised. Industrial markets will be most influenced by the new Panamax lock and larger, deeper-water ships—something to watch.
Summed up DiRocco: “Things are getting better, but there’s still going to be that long, hard grind.”
Watch a discussion of the results by report authors Jonathan Miller and Stephen Blank on CPE TV.