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The Real Estate Capital Scoreboard – August 2009


Chicago, Illinois, August 3, 2009 – Mid-summer market madness clouds the real estate capital industry, yet bursts of hope glimmer as more properties are sold and investors are beginning to see a bottom. As short term rates remain near the bottom, with LIBOR sinking to a record low, plenty of funds are available. However, funds are sidelined in anticipation of even more favorable pricing in the coming months as distress deals are predicted to flood the market within the next two years. Other market highlights include the following:

• Pricing readjustments of 20% to 30% below 2007-08 levels emerge as new benchmarks. With rare exception, pro forma valuation is replaced with direct capitalization of actual income. In fact, most investors are revamping net operating income figures with downward income expectations, while expenses are expected to rise -- particularly property taxes and utilities.
• The yield curves for secondary-market and older properties are substantially steeper as investors focus on prime-location assets at relatively attractive price levels. Such assets are sized based on overall yields often in excess of 15% or more.
• Mortgage pricing substantially favors multifamily assets as debt is still available at 6% or less for higher leveraged the assets via the Agencies. Conversely, commercial properties are financed at levels of 60% of value or less with strict cash-out requirements and other provisions (e.g., recourse) previously thought too onerous as lenders cherry-pick deals.
• With distressed debt deals offering very appealing rates and principal reduction, astute investors redouble efforts in this investment arena. “Loan to own” opportunities appeal to such buyers, especially those with development and management expertise. Banks and other distressed financial institutions provide an ongoing pipeline of deals.
• “Hidden” prepayments plaque many acquisition deals with existing, assumable debt as lenders force pay down – along with corresponding penalties – in those cases where the purchase prices create unusually high leverage due to the denominator effect. Less evident, although just as critical, the same issue applies for lenders requiring pay downs from borrowers, even if no new recapitalization occurs as balance-sheet cleansing continues.

Gary Duff, an Advisory Board Member of the Real Estate Capital Institute, remarks that "More market clarity is expected in the fall when investors return from the summer holidays. For now, most institutions consider asset management as their top priority.” He suggests, “Many legacy owners are more concerned about losing income stream rather than capturing new opportunity plays.”


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