DEBT-EQUITY IMBALANCE, SLOW GROWTH CHALLENGE INVESTORS
Yet Within Complex Landscape, Opportunities Still Exist for Realistic Players
ENGLEWOOD, N.J. – October 11, 2011 – (RealEstateRama) — The New York tri-state commercial real estate investment market is flush with equity capital moving into the final months of the year, and interest in broad-class acquisitions across all sectors has risen dramatically. The primary driver for this demand stems from a desire for alternative, fixed-income yields other than what is available in the bond and government securities markets. The recent turmoil in sovereign debt markets has further fueled this trend.
Yet as money swells on the equity side, it is not being matched by broad-based interest in the debt capital markets. As a result, while equity interest in real estate is growing, the overall conservativism in the lending markets remains, and capital for debt financing remains highly stratified and particular. To the extent that financing is available, almost exclusively for stabilized assets, pricing is very attractive. However, it is not broad based. It is not available for everyone, and it is not coming from everyone. A bank may like a deal one day and not the next.
This imbalance between debt and equity clearly points to continued deleveraging in the real estate markets. Only well-heeled investors with access to cash will successfully pursue opportunities. Those investors are seeking stabilized properties regardless of asset type. On the other end of the spectrum, risk trades remain limited. Turnaround stories by companies involved in opportunistic investments are tepid in conjunction with the generally weak economic rebound.
That being said, we continue to see evidence of improving corporate profitability, which is generating additional market recovery in the office and industrial sectors. Those of us who do focus on value-add projects recognize that the right opportunity at the right price can still be found. This time around, knowing it when you see it is far more difficult.
For example, last year our firm re-acquired 399 Jefferson Road, a 180,000-square-foot, Class A office building in Parsippany, N.J. We initially owned the property in a joint venture from 2003 to 2006, but sold it to a user when the sole tenant chose not to renew. That user never took occupancy. We made the repurchase at a significantly advantageous price, once again drawn by the property’s quality, highly desirable market and excellent accessibility.
Within months, we leased 85,000 square feet there, to Pinnacle Foods Group, LLC. The firm recently expanded, adding another 11,000 square feet to its commitment, and we are in active negotiations for the balance of the building.
The bottom line remains that opportunities always exist. The landscape is continually changing, and those of us who want to be involved may have to sit patiently in traffic, changing lanes waiting for a shift in flow to rapidly move ahead.
At the same time, we need to make some adjustments to our new reality. Slow economic growth, lack of broad-based debt capital and competition in the equity space all are combining for moderated returns. As such, we need to get comfortable with a new normal for investment returns. These numbers won’t touch what we were seeing prior to the market crash, but, in relative terms, real estate will continue to be a pretty good investment.
By Eugene Diaz, Principal Partner
Prism Capital Partners, LLC
Englewood, N.J.
###
Media Contact:
Evelyn Weiss Francisco: evelyn (at) caryl (dot) com, (201) 796-7788, www.twitter.com/carylcomm
