- The past few weeks have given rise to a discernable change in the mood.
- Suddenly, deal flow is improving and we continue to hear that “deals are making sense.”
- The market for stable assets with secure income is quite frothy, with anecdotes of pre-crash pricing levels and numerous competitive bidders.
- Every day we read about assets being acquired at prices that are surprisingly high.
- Debt is once again becoming plentiful, and unlike before, it is now available in size.
- Sounds positively rosy. So, why is there still so much uneasiness and, certainly within our shop, the sense that this renewed wave of investment and optimism defies the cold fact that most existing US portfolios held privately remain over-leveraged, undercapitalized and illiquid?
- Closer to the ground, little has improved in the real estate market.
From the perspective of real estate pricing fundamentals, NOIs, especially in the office sector, are poised for several more years of declines, given the overhang of space (primary or sublet) in nearly every market, and weak tenant demand.
- While a few property types are doing better than others (multi-family, hotels) in terms of stanching the decline in revenues, even these sectors face the challenges of sluggish economic growth and reluctance by businesses and consumers to spend. And decline in NOIs is going to be met head-on by rising debt maturities over the next 12-24 months.
- Within institutional portfolios, in particular the real estate private funds invested in the 2004-2008 time frame, we have not seen widespread improvements.
- As we enter the third year of this market correction, some managers may be starting to run out of steam and we believe that 2010 will be the year that these businesses will have no alternative but to evolve.
- With little or no new capital on the horizon, human resources and other assets will have to be stretched further.
- The overall market has not really corrected and attractive investments remain pretty scarce today. Without indications of economic growth on the horizon, the risks of investing remain very, very high.
- there are many positive steps that can be taken now to better position businesses and teams in our rapidly changing industry.
- To the list of “R’s” that define our industry today: Re-structuring, Re-positioning and Re-capping, let’s add a few that keep with our spring theme: Rebirth and Rejuvenation. Let’s all find ways to channel our collective energy into improving our businesses and positioning for the future, and maybe worry a little less about missing deals in a highly volatile environment.
Enjoy your weekend.
These are my views and not that of my employer.