Monday, August 10, 2009

A Real Estate Defibrillator?

Posted by: Scott Beggs
Investment Specialist
775 336 4644

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

If you’re at all involved in the arena of commercial real estate investment and finance, the most common questions asked is , “How can the deal be financed?” My first answer is that there is no rule that debt financing has to be used to acquire commercial real estate. There was a time when most institutions bought assets with 100% equity. In those days debt was viewed as adding risk and that these conservative institutions were not too excited about increasing the risk of an investment, even if it increased the returns. What a novel concept, there is a trade-off between risk and return.

However, for most investors the use of debt financing is a foregone fact of life. The use of debt allows investors to ration their equity and potentially enhance their returns. Unfortunately for these debt-hungry investors, the CMBS market has come to a grinding halt, banks are hoarding cash, and life companies are focused only on the top-tier of the commercial real estate investment universe. The net result is that debt financing has become more rare than the Atkins Diet.

So does that mean that real estate investment will go the way of floppy-discs? Not hardly. Already we are seeing signs of the public market filling the void. There have been no fewer than 25 IPO registrations for mortgage REITS. On average these funds would raise between $500M and $1.0B. While this is a drop in the bucket compared to the issuance of CMBS during the go-go days of 2005 and 2006, this capital will partially satiate the needs of the commercial real estate industry. Also, there are rumors that there may be a new CMBS issuance by the end of this year. This issuance will likely reflect the more conservative underwriting standards required by today’s risk averse investors.

Regardless, there is no doubt in my mind that capital will once again begin moving through the veins of the comatose real estate investment industry.

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