Comments from Dealmakers: Opportunities

This is the final of six installments of my notes and comments from Institutional Real Estate, Inc.’s Dealmakers Summit (Sept. 14 – 16, 2009). This section describes some of the opportunities that will likely get traction over the coming quarters.

OPPORTUNITY IN CRISIS

Consensus is that this might be the best opportunity for buying real estate in our lifetimes. However, the early mover advantage this time is fraught with peril.

The economic downturn may have been caused by a credit crisis, but the collapse of credit created real problems for the economy and in turn for real estate. Not only are most deals gasping for capital like a fish out of water, now we are dealing with deteriorating fundamentals. In some cases it is a sharp decline. Therefore, it probably goes without saying, but current deals need to have a distress component to attract any capital at all.

As evidenced by the enormous amount of capital flowing into the public REIT space, however, capital will not sit on the sidelines forever and deal making should begin once investors feel values are at the bottom.

POTENTIALLY HOT SECTORS

Given that there is a consensus that there is a once in a lifetime buying opportunity forming, it makes sense to gear up, but there is no consensus on where opportunity will strike first. Given that multifamily has held up well, most people are viewing those buys as core. Given that retail was likely overbuilt in most markets, that sector is likely the most opportunistic. The other classes are likely somewhere in the middle and heavily dependent on where the economy starts to rebound first.

Sector – What to Watch

Retail – Consumer Spending

Office – Jobs

Multifamily – Housing

Industrial – Consumers and Inventories

It will not be uncommon to hear entrepreneurial investors state that their goal is to control as much real estate as possible through 2015; especially when coupling the idea of a buying opportunity with almost certain inflation on the horizon. Therefore, real estate professionals should stay positive – the future is likely bright.

The most confounding part of the next few years will be how difficult each and every deal will likely be. Buyers will likely be negotiating with several parties including the seller and the seller’s bank, but also lien holders, tenants, and other people with interests in the property. Deals are going to be messy – and those who are good at dealing with messes should get the lion’s share of the opportunities.

Because of this messiness, mezzanine and/or senior equity may be the best opportunity over the next 12 months. Given that there is a capital vacuum in most deals right now, a group could control a lot of real estate for a low investment.

WHAT TO DO NOW

It is time to get ready, time get your house in order and build relationships. There may not be a tidal wave of deals over the next few years, but there is strong consensus that volume will pick up from where we are at now. Your old relationships are not the ones you need in this new environment.

The best advice is to choose your opportunities and create a three to five year plan. One person at the conference commented: “If you are not at the table, then you are on the menu”