And There's the Truth About Current Market!

[Ben Leybovich]

This article in the Globe tells the absolute truth about what @Wendell De Guzman - do we buy into the upswing and thus speculate on the power of the wave (and in the process overpay relative to fundamentals), or do we continue to underwrite the exit based on fundamentals in the face of the reality that nobody cares about the fundamentals and in underwriting this way we, while ensuring safety fir our investors, are pricing ourselves completely and utterly out of the current market?

Thoughts?

[Joel Owens]

You can't blame brokers really.

Even the ones who know how to analyze numbers. If buyers are clamoring to buy property just to park money SAFELY in their eyes at high purchase levels then the brokers listing for the sellers are all for it.

Syndicates are a very tough nut to pull off. Back when the markets were frozen and you could pull cash together they were the golden child because lenders were not lending. Today too many direct buyers out there with a bunch of cash.

I can tell you what investors tell me. If they are foreign investors they want to park money in the United States. Our worst economy looks amazing compared to the countries they are in. Even though they might like or love their countries they do not want to hold their long term wealth there. Many countries are tightening money restrictions on their citizens flowing money into the U.S. so it's creating a frenzy for foreign investors to move money while they can. Also the U.S. dollar is strengthening from it's past position so foreign buyers want to capitalize on exchange rates while they can.

Another factor at play is the stock market. Fluctuations in earnings and returns for investors who already have a lot of money ( millions ) is not something they want to stomach. They like the idea of owning a commercial real estate asset with somewhat more predictable returns and corporate tenants.

With stock one day it can be worth 30 a share and the next 15 a share when something bad happens. With a physical asset in real estate you at least know what it is. With these stock companies you have to worry about what are they HIDING that you don't know about that will make values plunge.

It's a roller coaster ride many who are already wealthy do not want to take.

I still think there are properties out there that make sense to buy. For syndicators who have to price in extra returns above market conditions to make money for themselves it's a tough sell to sellers.

Think about a single property syndication in a sellers eyes. The syndicate doesn't want to put much down generally. They want more time then market averages from a standard buyer to close. They want outs in the contract because some of the investors might back out at the last second and they have to get back up investors or the deal falls apart on them. The price also has to be much lower to give the returns the investor wants and leave enough meat on the bone to make it worth the syndicators while. All of these factors making closing a deal less and less viable especially if the syndicator has unrealistic expectations in the marketplace.

For example if a syndicator says they want a B asset at a 10 cap then really they are not being very realistic. Their choice is to reassess how they can still do deals and make money in that asset class, buy another asset class at a different point in the cycle that is more advantageous to what they want to do, or wait for the asset class they are in to cycle down to do something ( could be 3,5,10 years - nobody knows for sure ).

Right now debt is really cheap with the oil prices falling. As people clamor to bonds, gold for security etc. the rates are going down. My commercial lenders tell me that once it drops to a certain point they will have a floor they will freeze the rate at. Anything below the floor they will not do a loan or will just wait for rates to go back up because at certain rates they loose money lending or selling off.

So those of you watching the commercial real estate markets and the rates dropping it will soon be at a point where it will not drop further in a lenders eyes. I personally think now is a good time to buy because many buyers come out in the summer time. I am seeing sellers wanting offers now on good properties. The interest rates have dropped 30 to 40 basis points but sellers have not adjusted and have even lowered asking prices. That can give a 100 basis swing in the buyers favor right away.

2015 is a buy year for me. I am looking at possibly setting up a fund myself.