Commercial Realty Advisors

Good prospects for commercial real estate in 2007

I had the opportunity to serve in the International Council of Shopping Centers (ICSC) annual "Power Breakfast" that featured some high-powered institutional investors as panelists. They included Erwin Aull, Director General of Transwestern Investment Company, Stanley L. Iezman, president of American Realty Advisors, Inc., and Glen Sonnenberg, president of Legg Mason Real Estate Services. The debate was moderated by Mark Schurgin, president of the Fesitval Companies.

Some high-power commercial real estate fund managers who are not even out of bed for an agreement at least 50 million dollars! They were there to give us some ideas on how the economy will impact commercial real estate investment, where interest rates might be headed in the coming year, and how the purchase and selling parameters have changed for the owners of the mall.

Some of these thoughts that came from these guys were fairly insightful. Here is what I have to leave the breakfast that I think you will find interesting:

1. Commercial real estate lenders are awash in money thanks to Collateralized Debt Obligations. These are derivatives of the debt to lenders to significantly increase their ability to raise funds at low overall cost.

2. The aging population and the retirement of baby boomers means there is a large part of the retirement money looking for alternative income opportunities ... think "property income."

3. Large funds are taking more properties, making it a legitimate investment class "such as stocks and bonds.

4. The REIT index was up 35% last year, beating the S & P 500. Large urban areas can expect cap rates lower in coming months, which means that there are opportunities in secondary areas, but you still need to beware of "tertiary" markets, such as Detroit and St. Louis.

5. The oversupply of commercial properties is not yet in evidence.
1031/Tenants-In-Common buyers are drying up, slowing price increases.

6. 'A' quality of commercial buildings are more "undercover, which means that there are real opportunities in" B "and" C "product.

7. The big players are out of product ownership to significant discounts to asking price original (which means you could get a nice house for cheap). This was in evidence in San Diego and southern Florida. Residential projects are taking a back seat to trade in the minds of investors.

There is some good information in those observations for anyone serious to invest in commercial real estate this year.

The last minutes of the session were devoted to a group consensus on where interest rates and cap rates would be one year from now on. While not predicting a real sense of the room was that the prime rate would be .75% to 1% lower, mortgage rates commercial for "product" would be about 0.25% to 0, 5% more than today, and cap rates for Class "A" properties are essentially identical.

My conclusions are that there will be some opportunities to make money in small commercial properties in outlying areas and small urban markets. New construction and other "value added" of projects should also do the same. One caveat is to not make the mistake that rents will continue to trend upward, though. Remain conservative in your projections and you should be able to run any recession that might follow in the wake of possible tax increases of Congress.