By Michael Seton, executive vice president, Carter
Real estate transaction interest is extremely high right now, especially in the major “football” cities. However, there is a clear delineation in the market between major and secondary markets. Even so, in light of reduced transaction volume levels, we are seeing investors pushing into the secondary cities and tertiary markets with the expectation they will obtain a higher return level.
The hottest property types for purchase seem to be multifamily and hotel, which has clearly been a theme over the past year. Office and other property type trades are happening, but with fewer bona fide bidders. It is widely reported that multifamily trades in major markets are typically taking place at 4 percent to 5 percent cap rates, or “height of the market” levels. This is primarily due to the availability of government-sponsored enterprise (GSE) financing and the perception multi-family is a good inflation hedge.
Hotels, on the other hand, were so “beaten down” on values that opportunity investors thought they were purchasing these assets at significant discounts with respect to replacement costs, especially with the rise in commodity prices and assumption business travel will resume prior to leisure as the economy recovers.
Debt is readily available for most deals. However, either full or partial recourse is required for less stable, value-add properties. Even though many debt funds had been raised over the past 24 months to fill the “liquidity void,” many of these funds have not been fully deployed due to high costs, which discourage bidders from being competitive on property sale. In addition, bid/ask spreads have tightened dramatically to allow for recent activity and life companies and banks are starting to stretch a bit more to put out money.
The CMBS market is slowly coming back, having recorded about $11.8 billion in volume in 2010, up from virtually zero in 2009. This is still way down from $230 billion in 2007, but this market is making its way back by mainly sticking to the major food groups and more traditional “conduit sized” loans versus large loans. By doing so, these smaller loans are clearly not allowing large assets to trade.
Interestingly, I think a lot of the volume in 2011 will come from bank note sales for a number of reasons.
1) Bank sales tend to be executed quickly. Many of these sales are completed within 8 weeks compared to property sales that drag on with all cash purchases.
2) Bank note sales are easily executed. Note assignments do not have reps, warranties by lender or a servicer.
3) They get good results. First, bank sales receive good bids because bidders think they are getting a deal since they are buying a note. Secondly, trades are occurring at 100 percent of underlying real estate value, making the execution good for the seller and buyers don’t seem to pricing in foreclosure, cost or time.
Mr. Seton is executive vice president of Carter and head of the company’s Manhattan-based capital markets group. He is involved in all aspects of equity raising and debt financing for Carter.