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The Real Estate Capital Scoreboard – June 2008


Chicago, Illinois, June 2, 2008 – Despite unprecedented measures by the Federal Reserve to control housing policy, the credit crunch continues to spread from the residential sector to the commercial real estate sector. The volume of real estate transactions remains light and credit spreads have recently started to tighten while overall rates are rising -- with a net effect of mortgage rates climbing about a quarter point. Return requirements continue rising as do construction costs, greatly limiting new construction projects.

As far as key developments during the month, the following are noteworthy:

Private Equity – Raising private equity in light of lower conventional leverage is a top priority among developers. Most funds require at least 15% or more for value-add properties.

Deep discounts - Most sectors within the conventional income-property arena are fairing reasonably well in maintaining pricing with pricing off as much as 20% in some sectors. However, vacant land values have plummeted as new-construction projects are nearly at a standstill. Discounts of 50%+ are not uncommon for motivated sellers.

Fund Supply – Given the vacuum left by CMBS lenders retreating from the capital markets, many life companies and banks expect limited fund allocations for the remainder of the year.

Mortgage Rates – While mortgage spreads over treasuries decreased by about 10 basis points or more, higher benchmark treasuries absorbed any gains as rates remain relatively similar – starting at 5.75% for terms of 5 years and longer. Libor-based funding is still available at lower levels, but reduced leverage and recourse tip the pricing scale.

The Real Estate Capital Institute’s Editorial Advisory Group’s member, Aaron Gruen, suggests, “The resulting reduction in new supply, continued export growth, and the Fed’s highly aggressive monetary policy/fiscal stimulus, should limit the scope and length of the effects of a [real estate] recession in many parts of the United States.”


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