On the Road with Steve Felix: "Core assets generate good, stable income together with potential appreciation"

Friday, September 24, 2010

"Core assets generate good, stable income together with potential appreciation"

What's going on in commercial real estate investment sales? Here's a snapshot taken from RCA's recently released U.S. Capital Trends reports:

Core Assets in Major Markets Dominate Sales
Across all property types, an overwhelming majority of transactions are occurring in select primary markets.
Capital has become extremely concentrated to a handful of “major” markets.
In addition to these strong geographic preferences, there is also a focus on core/stabilized properties.
Investors continue to avoid market risk by pursuing high-quality properties with strong occupancy and long-term leases.
Consequently, bidding for core properties in these “major” markets is highly competitive and the assets enjoy a signiﬁcant premium in price.
On the ﬂip side, a value-added situation in a tertiary market will trade at a signiﬁcant discount, if it is even lucky enough to ﬁnd a buyer. Valuing a property that falls in between these two extremes can be a random walk.

Has the law of supply and demand that many of us studied in school actually returned to real life? The answer is a resounding and simple, "YES." There are only a certain number of properties whose personality includes major market, high quality and stabilized....the definition the industry has adopted as 'core.' And, thus, prices are being driven up. But wait a minute: if you're looking to make a 'safe' investment and if we all agree that the money in real estate is made on the buy, then if you pay a lot for an asset, assuming that just because it meets certain criteria today that you'll make money when you sell it in, I don't know, three, five or seven years then I guess, duh, that you're simply paying up for reliable cash flow. And, that my friends, is the simple story of our industry today. Cash flow is king but cash flow can be found in other ways; it's up to those who are creative to unearth the potential. And that is where future kings of the real estate industry are found.

A good friend of mine shared something he wrote this past week after he attended the funeral of one of his cousins this past week at Arlington National Cemetery. His cousin was a soldier, and died at the age of 46 of pancreatic cancer. He spent 3 years in Iraq, received a purple heart as well as a number of other decorations. I wanted to share some of this with you:

"We read the markings on the gravestones closest to us. All military personnel: WWII, Vietnam, Korea, Operation Iraqi Freedom, Operation Enduring Freedom. These rows of tombstones are for those that have died since 2005. Some were born in the 1920s, others in the 1980’s. It is clear that some were 19 or 20 and died in Iraq. So sad. How can this be?"

"We pay our respects to his family. There is so little one can say. I hope our presence there gives some comfort. But how can it? By tomorrow we are all back to our normal routines, they will not. Their spirits will have to be rebuilt. Will it be possible? The agony from the loss of a child seems so insurmountable."

"I came home rather than stay one more day with my parents because I have an appointment that I don’t want to miss, and I’ve got important work to do tomorrow. But isn’t there always something? Shouldn’t I try to spend more time together with my parents at least? The tension’s always been there – work or play? Work or family? How else could I fulfill financial obligations, etc? I have responsibilities...In the end, I suppose it’s about balance. I will try, probably not very successfully, to see more of my cousins. I will try to remember what counts."

Beautiful words but also words questioning what is really important in life. Since my father died last November I have been thinking, even more than usual, about what is important in life and as my friend says, when we experience someone close to us dying, we start thinking about what we can or should do differently. But then we get back into our routines and those ideas and feelings get pushed to the side in our struggle for the legal tender (Jackson Browne, "The Pretender"). I've heard from enough of you to know that you too think about these things and, given the demands that we put on ourselves, sometimes we're able to do things that matter to us rather than things that matter to others. But, as my friend says, it's probably about balance and maybe we all just keep trying to remember what counts.