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