Bifurcation Will Define CRE in 2012

March 26, 2012
Globe Street Raines Feldman

LOS ANGELES - "There is certainly a bifurcated real estate market." So said Andrew Kirsh, a partner at law firm Raines Feldman LLP. "If you are buying multifamily in core areas, there are plenty of aggressive lending options for borrowers. However, it is still a challenge to finance other asset classes or less concentrated geographic areas."

Kirsh served as moderator of the capital markets panel on Thursday at RealShare Real Estate 2012, an event produced by ALM's Real Estate Media Group, which drew a crowd of roughly 900. The good news, according to Kirsh, is that there are more private lenders than ever before who are real viable alternatives for borrowers.

Kirsh’s comments were on point with other panelists and moderators throughout the day. During the industry leaders panel, for example, John B. Kilroy Jr., president and CEO of Kilroy Realty Corp. also used the word bifurcated when talking about the office market. Office is hot in some markets today, he said. In places like San Francisco, for example, its tech demand that is driving it, he said.

"There is certainly a bifurcated real estate market," said Kirsh.

Richard Ziman, chairman of AVP Advisors, only hopes that there isn’t another dotcom disaster. When talking about cap rates, Ziman said that there are two cap rates that are important and people, many times, forget about the second one-the exit cap rate. "When we all do our underwriting, we have to put that exit cap rate into the formula," he said. "We have to look down the road and ask what you think it will sell for."

From a broad perspective, Jeff Hanson, principal of American Healthcare Investors, said that "we are at the front end of the recovery." According to Hanson, "It is still choppy and we can expect moderate signs of continued growth through 2012, 2013 and beyond" thanks to the positive fundamental trends across all of the sectors.

"When we all do our underwriting, we have to put that exit cap rate into the formula," said Ziman.

On another topic, according to moderator Lew Feldman, a partner at Goodwin Procter, despite REIT’s success in raising capital, IPOs are still rare. According to Kilroy Jr., if you are looking to invest in REITs, if you are buying core, you will have a low return and probably not much upside for a period of time. "But it might be the most desirable asset in the future," he said. "Buy in the primary markets where there is value add," he added.

Ziman's advice is that "in this day in age, everyone should load up on debt." He added that "We are never going to see this again potentially in our careers..." he said, adding that "When you can borrow money, and you are a public company for 10 years at 4 4.2%, it's unheard of and you have to take advantage."

During the day’s distressed panel, titled "Distress-still an option?" moderator Jess Bressi, a partner at McKenna Long & Aldrige LLP, pointed out that the distressed window is still open. "There is still opportunity," he said. "There is a lot of opportunity in loans that are maturing."

The different kinds of viable options panelists pointed to include: Buying loans from lenders; buying properties from distressed owners; buying at foreclosure sales; buying as REO from lenders; buying at bankruptcy court sales; buying from state court receivers; buying tranches of CMBS and engaging in tranche warfare; and buy a bank and getting the loans.

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