The economic forecast has looked
gloomy for almost a year. The clouds
over the real estate market have included higher-priced debt and lower property
value, which have made buying and selling a
less favorable proposition. For commercial
real estate investors, the path to success may
not seem as clear as in the past. But glimmers
of possibility still exist for those who stay
calm and focus on their long-term objectives.
“In many respects, there could be opportunities that come about because of these circumstances,” says Will Yowell, vice chairman
within the Investment Properties Institutional Group at CB Richard Ellis, Atlanta.
“It’s a time to be prudent, to not panic and to
make calculated decisions.”
Smart Business spoke to Yowell about
how to successfully navigate through the current storms in the real estate capital markets
by focusing on your long-term strategy.
What’s happening in the capital markets?
The current capital markets are in a time of
transition. Right now, there is plenty of equity capital but not much debt capital. This has
put the markets in dislocation after a very
robust period from 2004 to 2007. In 2006, capital and credit was perhaps too free-flowing,
and now the pendulum has swung to the
point where both are very constrained now.
What does this mean for investors?
The challenge everyone faces is trying to
figure out when the capital markets will
become more liquid and more accurately
reflect real risk. Looking back historically, the
2001-2002 recession was driven by the technology bust and Sept. 11, versus the current
recession, which seems to be driven by a
housing downturn and global capital constraints. This downturn can also be compared to the capital crunch of 1998, yet the
current downturn appears to be lasting
longer and may be more widespread.
How should buyers and sellers think about
the short term?
Many commercial property investors are
restricted today due to a repricing of debt
that has negatively impacted overall returns.
Also, some sellers realize that after the large
debt component of their property was
repriced, their holdings have a lower value
than in 2007. The best short-term strategy for
people in these scenarios may be one of holding and waiting, and not making rash decisions. With all real estate investments, a thorough review of the fundamentals and an
understanding that real estate is generally a
long-term investment should guide decisions.
How should long-term strategy determine
investment decisions?
If you’re considering buying an asset and it
fits into your long-term strategy, it probably is
still a good investment decision. You need to
act prudently and ensure you can afford it,
but always be willing to execute based on
your vision.
Play the real estate game, not the capital
market game. Finding fundamentally sound
real estate in a good location with good credit tenants and having a long-term horizon are
key to overall investment success. Obviously,
one must be aware of short-term fluctuations
in borrowing rates and must act prudently so
as not to lock in long-term financing at unattractive rates. But, in general, fluctuations in
the capital and financial markets should not
drive your overall strategy. In this market,
you may even find excellent opportunities to
purchase prime property from sellers at
attractive prices.
What mindset will help investors succeed?
As I said before, always play the long-term
game. Investors in commercial properties
need to always remain in the market and constantly look at the hold versus sell options for
all of their investments given their overall
investment plan and time horizon. A very
successful developer and investor advised
me to never become too emotionally
attached to any real estate. You always need
to be ready to make the right decision to sell
given the market and your strategy in order
to maximize the benefit of the investment.
What positive trends have you seen in commercial real estate investment?
I’ve been in the business going on 20 years,
and, in the past four or five years, I’ve noticed
a significant shift in investor mentality
toward commercial real estate. Real estate is
still a local business by its very nature, but it’s
become a much more secure and accepted
mainstream investment vehicle. Many large
institutional investment firms that invest on
behalf of retirement plans have moved a larger portion of their assets into commercial
real estate investments, reflecting their overall confidence in this sector of the investment
market. Also, more individual investors are
choosing to have these types of funds as part
of their personal investment and retirement
accounts than in the past.
Another favorable change in the overall
market is the increased discipline in development decisions. In the past, when free-flowing capital became available in the ’70s, late
’80s and early ’90s, developers built to build
instead of building to meet increasing
demand. Now, there tends to be a much more
disciplined, institutional mindset in the development community. This helps avoid wide
disruptive swings in the real estate cycle.
WILL YOWELL is vice chairman with the Office Investment Properties Institutional Group at CB Richard Ellis, Atlanta. Reach him at
(404) 923-1475 or [email protected].
