Slow Growth in 2012 and Commercial Real Estate Investing Strategies for the 'New Normal'

By Dan Pryor

Summary: The "new normal" is limited growth for 5 more years, income producing property is key, be prepared to reduce lease amounts to meet changing market conditions.

Key Quotes:

• We are in a balance sheet recession that likely will limit economic growth for 5+ years. Ubiquitous acquisition strategies targeting 15% to 20% IRRs driven by terminal valuations may not be viable;
• Projections for new tenants in vacant space and lease renewals remain challenging with a potential slowdown in the U.S. economy. Consider focusing your investment thesis on cash-on-cash returns supported by existing leases;
• Segment your asset projected cash flows and handsomely value in-place leases and whack pricing related to vacant space and lease renewals;
• The 10-Year Note and 30-year Bond yields, at approximately 2.1% and 3.1%, respectively, are likely to stay comparatively low. If your projected cash flows are largely dependent on in-place leases, IRRs in the 10% to 15% range may be ample with a conservative capital structure;
• Four and five handle capitalization rates do not work as in most cases cash flow growth will be insufficient to save pricey acquisitions from adverse factors;
• All real estate is local and pricing will vary, but the majority of buyers should be targeting 8 to 11 caps for most non-core properties to accommodate an apparent lack of prospective cash flow growth and the potential of higher interest rates in 5+ years;
• This is a Buyer’s Market. As such, there is rarely need to accept unreasonable P&S contract language that became common during the real estate bubble of 2006-2007;
• Due to capital markets liquidity risks, financing contingencies should include a requirement that banks can and will fund at closing; and
• Shopped deals are now okay. In many markets, the transaction volume is so limited, price discovery created by a brokered deal is necessary for Seller’s to understand reality and not waste your time.

However, there is good news that can be applied to the Savannah marketplace. According to Jones Lang LaSalle:

• Distribution hubs and ports will lead the industrial recovery in 2012.
• Total investment transaction volume to increase by 15 to 20 percent to $190 billion in 2012 – a slower increase than the last two years.
• Businesses will take real estate into greater consideration in 2012, focusing investments on efficiency and productivity. Additionally, businesses will consider corporate real estate as a greater contributor to corporate social responsibility initiatives in 2012, shifting investments from new construction toward retrofitting existing assets.
• Hotel demand is expected to continue to rise in 2012, but likely on a more cautious trajectory than in 2011, with private equity groups at the forefront of asset bidding.

Read the full articles at Commercial Real Estate Investing Strategies for the 'New Normal' and Slow Growth in 2012 for Commercial Real Estate, According to Jones Lang LaSalle.

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga