Foong on Finance: CEO’s Observations

Last month, I attended a press briefing given by Prudential Real Estate
Investors (PREI), which invests in real estate on behalf of
institutional clients.

Here is what PREI CEO Allen Smith said. The company has sold more than
$1 billion in commercial real estate this year, and Smith said that a
lack of liquidity has not been a problem with its buyers.

Buyers in these transactions were able to do get financing, if they
were willing to pay a price for it. We are talking about commercial
real estate in general, and not only about multifamily.

One encouraging sign in the market, says Smith, is that some buyers
have been willing to pay all-cash in some instances, and this has been
the case even on the large deals. But he notes that although the
bid-ask spread is narrowing, the volume of investment sales
transactions is still coming off of a small base.

Where financing is concerned, Smith noted that for now, those involved
want to avoid the problem of maturing loans that may not be able to
refinance for one reason or other. Borrowers and lenders are “engaged
in a delicate dance” in which neither wants to “rock the boat” unless
there is payment default, Smith says.

The strategy is to try to “kick the can down the road” to a point where market conditions are more favorable than today.

Cap rates today are in the low-6 to low-7 percent range for apartment
properties, compared to 8.5 to 10 percent range for commercial
properties, reports Smith. Most investors are looking at IRRs of 9.5 to
11 percent.

As for fundamentals, Smith notes that they are deteriorating across the
board. As long as unemployment increases, commercial real estate will
not recover, says Smith, and unemployment is not set to decline until
the middle of next year (2010).

Smith sees opportunities in three areas: debt related instruments,
public securities and distressed property investing. But he says the
distressed property market is “slow to reveal itself,” and it will take
some time before opportunities will be available “in scale.”

(Keat Foong is executive editor of Multi-Housing News. She can reached by email at Keat.Foong@nielsen.com)