Recent news articles on a variety of fronts indicate that “market conditions” are beginning to stabilize.  Others report “modest recovery”.  Some “re-fi work” is, actually, getting done.  A few sales in different categories are starting to occur. On the other hand, RCDH would advise investors to be extremely careful at present.  Why?  There are several reasons.  They are: Recent world events (Eurpope, Thailand, etc) seem as complex(and intractable) as ever. Commercial real estate forces are only “less bad”, especially as it relates to “non-core” or “trophy properties”.  Most submarkets continue you have “special market challenges”. As importantly, banks are still in dire straits, with virtually no profits other than gaurantted retruns generate by zero interest rates. Owners are or soon will be in a situation where cap costs will start to become a major problem (lease expirations are now starting; absorption is down; physical work is need; functional changes are

Recent press reports have widely and wildly chronicled “meltdowns” in the real estate market as a function of the financial market crisis.  Sub-prime, land, condo, not to mention most residential loans…all have been very “stressed”.   “Writedowns” (by lenders) have been widely reported at 10-50% loan loss levels, depending on the gory details.  Most of these loans have been on first (most secured) position loans. One arena under the radar screen, however, may have even larger consequences.  Privately negotiated joint ventures between institutions and local developers/private equity players, a popular investment vehicle over the past several years, may fill tomorrow’s headlines.  In up markets, these joint ventures appear effective, generally meeting pro-forma return hurdles set by the institutional money source.  However, in down markets, the institutional investor is exposed to substantial downside volatility, as the entrenched fees paid to their “partners” and leverage combine to create poor equity returns.  What’s more,

As most investors know, “cap rate compression” has been inexorably moving lower for the past 2-3 years.  Recently, however, interest rates have moved sharply (50-75 bp.; or 10-15%) higher in the past few months.  Have cap rates followed, as per tradition? The answer, apparently, is…no.  Since mid 2004, interest rate increases have begun a slow, steady climb.  Most investors have expected a corresponding increase in cap rates as well.  Yet, it has not occurred. Traditional analysis has tied cap rates to underlying interest rates, with adjustments (b.p. spreads) for cap exp, appreciation, real estate risk (liquidity), etc.  Will that general “formula” remain in place? Approximately 2 years ago, RCDH commented to its clients that “sustainability” (for low cap rates) was expected to remain in place.  Happily, it did.  Will the same scenario occur again, now that underlying interest rates are still on the rise? The answer, we expect, is yes.