COVER STORY, JULY 2010

INVESTMENT MARKET ON THE RISE
Investment sales are slowly returning to form.
Jon Ross

In the past 6 months, investment sales in the Southeast have started to awaken from their recession-induced coma. Deals are not flowing with unbridled velocity, but sales are happening with increased regularity. Institutional money is entering the market, and, during the rest of the year, there will be a lot more cash in the arena with which to buy real estate. Distressed assets and note sales will pick up as well, but the flood of distressed transactions will in fact feel more like a trickle than a deluge.

For this issue of Southeast Real Estate Business, three brokers from key cities in the Southeast shared their view of the current markets, what investors are looking for and what the future may hold. 

WASHINGTON, D.C.

In D.C., buyers and sellers of investment assets are cautiously optimistic that deals are once again starting to move. In the last 120 days, David Feldman of Marcus & Millichap has seen a number of new listings. These marketed properties are also receiving written offers from buyers and are going under contract.

“It seems like the market has thawed a bit, and the parties are willing to take a risk and move forward,” Feldman says. “The perception in the marketplace is we’re starting to come out of this. Similar to jumping into a cold pool, you’re going to get used to the water eventually.”

Where 12 months ago the market was at a standstill, today buyers are hunting for the right property for their portfolio. Private investors are out leading the initial charge, and the only real presence of institutional or hedge-fund money is in concert with this private capital. The assets that are attracting the most interest are mostly in the multifamily and retail sector. But nearly every property getting looked at in today’s market is of a high-quality vintage.

“As we begin to shake loose from where we were, we’re going to start off with a flight to quality,” he says. “The perception in the marketplace is there’s a high degree of safety and security with an appropriate level of risk with well-located, multifamily, retail and single-tenant assets.”

Note sales have started gathering steam in the market, but financial institutions are holding on tight to their commercial assets. Feldman says the D.C. market hasn’t experienced an influx of distressed properties and probably won’t in the near future. 

Buyers and sellers in D.C. are starting to get over their recessionary hangover and will start pursuing more and more deals. Feldman thinks the market will continue to improve barring some unforeseen economic calamity. 

“I don’t expect to see a steep slope in terms of transaction volume. We’re just going to continue to pick up steam,” Feldman says. “As deals are getting done, it will add to the comfort level in the marketplace, which will allow other deals to come to fruition.”

ATLANTA

Whitney Knoll of Lavista Associates has seen a shift in attitude toward the Atlanta investment market. People are more comfortable thinking about investing in commercial real estate because rental rates have started to stabilize and buyers and sellers have started to see new true values for properties. The most movable pieces are REO assets and grocery centers.

“The biggest thing that’s happened is rental rates have been rewritten much lower than they were 3 years ago,” Knoll says. “That provides a much more realistic pricing for investors. Also, what felt like a free fall for the last 2 years in the investment market, all of a sudden, there is activity and people are seeing what we would call aggressive cap rates.”

REITs and pension funds are taking advantage of these cap rates and are exploring the market, looking for investments. Knoll says Weingarten Realty Investors, Equity One and Regency Centers are in Atlanta looking for retail assets, and LaSalle Investment Management is an example of a pension fund looking to make some deals. A portion of the institutional dollars are also being used as backing for smaller investors.

On the other side of the deal, banks are holding onto their more noteworthy properties and are waiting for the market to get better. But that doesn’t mean some unanchored strip centers or smaller assets being pushed through the foreclosure process can’t be had for the right price.

“There will continue to be good opportunities from banks,” Knoll says. “Most of the opportunities are going to be in the smaller deals. We’re also seeing an increased velocity in note sales.”

The one issue with Atlanta is that once the Class A properties are spoken for, debt seems to be hard to come by. Knoll says its easier to get financing to purchase a grocery-anchored center in a good location than an asset of lesser value because dealing with the unseemly property is much more risky.

Even with Atlanta’s issues, it will be hard to stop an increase in investment spending. Knoll expects the rest of the year to be very active; additional REO properties will be marketed carefully, and buyers will enter the market looking for well-priced assets.

“There is a lot of money in the market to buy real estate,” he says. “People are tired of sitting on their hands.”

MIAMI

Investment buyers and sellers in Miami all have a different mind. If you ask Jeremy Larkin of NAI Miami about the current market, he’ll call it schizophrenic. Buyers still demand bargain-basement 2009 pricing for properties; sellers want to trade assets at cap rates that are lower than what the market is demanding; and the distressed market, well, that has a mind of its own. He says the distressed arena is broken down into two more categories: those who are in denial and those who realize what the current market will bear.  Thankfully, the latter category is creating some movement in the area.

“The first quarter on the investment sales market, things really didn’t trade much. This quarter, we’re seeing more distressed assets moving and a limited amount of activity,” Larkin says. “A lot of the smarter money, rather than going into the foreclosure situation, have sold their notes and taken the hit, and the guys buying the notes negotiate a friendly foreclosure or ultimately foreclose the property.”

Opportunities for investment abound in Miami, and most of the deals are occurring in land or fractured condos. Additional assets coming on the market will be driven by pension funds that have a fixed maturity date. Equity owners will also enter the market if they need to unload a few assets in order to reorganize their assets either geographically, by changing the product type or by investing in a completely different industry.

This investment cycle has made it apparent that Miami is at a separate stage than the rest of South Florida. The vacancy rate is smaller and rental rates have not been as adversely affected as those in cities like Fort Lauderdale and Palm Beach. A lot of this has to do with those cities having more residential housing problems than  Miami.

“If you take a look at vacancy rates and rental rates, etc., you see a completely different cycle than we did the last time,” Larkin says. “Miami is a much more insulated market through an upturn or a downturn than Fort Lauderdale or Palm Beach. We have a much stronger economic engine that can drive activity.”

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