Weathering the storm Featured

8:00pm EDT March 26, 2008

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 will.yowell@cbre.com.