Is the Next Commercial Bubble Imminent?

I hate to post articles that could scare away the investors I have, but the opinions of the people calling the shots matter. If there is a commercial real estate bubble coming, be smart. If you're planning on buying land- be ready to hold it for 20 years. Are you planning to retire in the next 10 years? Chances are you won't want your retirement tied up in land. An investment in multi-family housing would be better because you'd be getting an immediate return on your investment. In case of a bubble, I advise against investing in retail. Here's why. With all that in mind, read on...

By Jacqueline Hlavenka

Penner, Smith and Buckley

NEW YORK CITY-While the transaction market is expected to continue picking up over the next two years, panelists at yesterday’s “Investment and Finance Strategies for New Acquisitions and Development Today” conceded that enough is enough with the recovery chatter. As part of the Urban Land Institute’s “Real Estate Finance and Investment 2011” conference at the Sheraton New York Hotel & Towers in Midtown Manhattan, participants from CBRE Capital Partners, Prudential Real Estate Investors, Dune Capital and Bank of America Merrill Lynch agreed that investors with money burning a hole in their pockets should cool it, for now, at least.

“We are in the same bubble that led to the last crash,” said Ethan Penner, president of CBRE Capital Partners, explaining that FED is leading the industry down the same troubled path that led to the downturn in the mid-2000s. “It’s incredible to me that we mistakenly believe that pumping untold amounts of liquidity into the market is the answer to the problem to get asset values up.”

Thursday’s discussion was a stark contrast from Wednesday’s “Private Equity Capital” ULI panel, where participants predicted that core assets and CMBS would lead the recovery, as reported by GlobeSt.com. Penner said that investors are taking “massive and imprudent risks” to deploy the capital to get the returns they need. “Most money in the world is retirement savings, and most retirement savings are predicated upon achieving a certain actuary return,” he said. “When the FED does what they are doing, it takes all that hard-earned money that wants, craves and needs lower risk profiles, and all of us will end up paying them back in the form of higher taxes. It’s just a sham.”

While CMBS is coming back, Penner said it is only $14 billion year-to-date, which is “hardly in line” to plug a deep financial hole.” Most of that money, like 90% of it, addresses the top 55% loan-to-value on today’s value,” he said. “When you coming in the market $1.7 trillion of 125% LTV, and the CMBS markets address 55% LTV of that, even if it addressed the whole trillion, you have a big void to fill.”

On the REIT side, Ron Sturzenegger, managing director and global head of real estate, gaming and lodging, Bank of America Merrill Lynch, said due to opportunistic lending, he saw several mortgage REITs go public due to initial IPOs. “Many of these REITs raised equity in 2009, share prices went way up and then those REITs went on a buying spree,” Sturzenegger said, explaining that the biggest investors over the last 24 months have bought core assets with low leverage. “They want returns of high single-digits or low teens, and that was available in the marketplace,” he said. “Again, what has been surprising is how quickly those REITs rebounded, how quickly their share prices came up.”

And with a “monstrous” wall of volume expected from the fallout of the Bank of Ireland and Anglo Irish Bank Corp., several investors are hanging out on the sidelines, like J. Allen Smith, chief executive officer of Prudential Real Estate and Cia Buckley, senior partner of Dune Capital. Buckley explained that Dune’s strategy involves a strict equity focus. “We are not really spending time on those deals that might have these multiple assets, where your upside is to restructure,” she said. “Worst case scenario would be a foreclosure. We have found that capital markets have become much more liquid for some of that. The hedge funds fall into that market.  We are focusing much more on purely the equity."

Smith said despite having a large open-ended core fund, the company is more focused on delivering as opposed to buying at the market today, concentrating on apartment development and niche-sectors like senior housing. “There’s no reason for us to be pushing to levels we are uncomfortable with, so we are backing off,” he said.