Weekly News & Capital Markets Perspective

This week’s perspective is provided by Mike Sullivan:

Michael_Sullivan_OptimizedI would like to thank those of you (and there were many) that offered your condolences for the performance of Notre Dame in the BCS championship game a few weeks ago.  And I would be remiss if I did not at least acknowledge those of you (and there were many, many more) who took at least some small measure of delight in the performance of Notre Dame against Alabama.  I will assume the old adage “we kid because we care” holds true, at least for some of you.

So as I reflect on the three days I spent in South Beach, I can’t help but think of a few similarities between my trip and the commercial investment real estate world.  With a bit of poetic license in tow, here goes:

  1. While on the surface it may not seem to be the case, sometimes overpaying for something is worth it.   Yes, I paid a bit of a premium for the ticket which allowed me to cheer for the opening kick-off and not much else.  And if considered in a vacuum, it was a fiscally irresponsible decision.  However, the three days spent in South Beach in early January with close friends provided memories I will cherish for years.  I cannot put a price on the experience.  I am reminded of the many properties we have sold whereby the buyer seemed to pay a bit more than was justified.  However, looking back on the overwhelming majority of those transactions, I can guarantee that the buyer made the right long-term decision.  I applaud those investors with vision who are willing to take a chance when others won’t.  Yes, it might seem a bit irresponsible in the short-term, but just as cap rates are a useful but limited measure of a property’s value, it is only a one-year snapshot.  Look longer term and you might be surprised at the returns.
  2. Just as South Beach in early January is a much more desirable and comfortable location than Cincinnati (especially on days like today where the temperature is holding steady in the low 20’s while snow falls), so too are some property types more desirable than others.  Multi-family is still the darling of the investment world.  And based on conversations I have had recently with some of the top owners in the region, that does not appear to change anytime soon.  With debt still cheap and the housing market in a slow recovery mode overall, the fundamentals are strong in the multi-family market.  Industrial is another property type that seems to be on the rise.  With the economy making a modest but seemingly steady recovery (many feel that GDP will increase from 2.0% to 2.5% in 2013 with most of that growth in the latter half of the year), the demand for industrial space, both distribution and manufacturing will follow suit.  And investments will logically follow that trend.
  3. Situations can change quickly.  Just ask any fan in attendance that happened to be supporting Notre Dame.  An undefeated season and number 1 ranking had optimism running high entering the game.  That is, until yet another juggernaut SEC team provided a demonstration of how real football was played.  We have all seen it in our industry – a transaction seems to moving along uninterrupted to a closing until a hiccup, or curveball, or (insert metaphor here) happens, delaying or derailing a transaction in an instant.  Can we prevent some of these?  Perhaps.  Maybe Notre Dame could have prepared a little better or maybe some of their key personnel could have been focusing less on imaginary girlfriends and more on tackling.  Similarly, maybe we can do a better job of identifying signs of stress earlier in a transaction.  Or maybe landlords can do a better of job of proactive tenant relationships instead of reactive.  Whatever the case, we need to understand the situations can change in an instant.  Hopefully we have a back-up plan in place.

Mike Sullivan

ARTICLES OF INTEREST___________________________

CMBS Reform Rears Head
The commercial mortgage-backed securities (CMBS) is in a state of delicate recovery and new rules regulating CMBS transactions and maintenance may threaten the market, according to some experts. The rules, which stem in large part from Wall Street reform bills passed years ago, take aim at risk retention and ability of CMBS buyers to leverage their buys to accommodate downside risk. Read more…

Analysis – The Great Rotation: a flight to equities in 2013
(Reuters) – One of the big investment shifts of our day may be at hand – regardless of how global markets actually perform this year.

What’s already known as the “The Great Rotation” – a tilting of pension and insurance funds’ strategic, long-term asset preference back toward equity from extreme positioning in bonds – has been one of themes of the new year so far. Read more…

Budget Deficit Not Our Only Deficit: Larry Summers
Harvard University professor Lawrence Summers told delegates at the World
Economic Forum in Davos on Wednesday that the United States was
right to focus on reducing its budget deficit, but that it should also make the
most of “negligible” long term interest rates to improve the country’s
healthcare and education systems. Read more…

Incoming NAREIT Chair Says REITs Well Positioned To Capitalize On Recovery In 2013
Recent data from the National Association of Real Estate Investment Trusts
(NAREIT) verifies that the beat continued to go on for U.S. REITs last year,
with share prices outperforming the broader equity market for the fourth
straight year.

The FTSE NAREIT All REITs Index, which also includes mortgage REITs, delivered a 20.14% total return for the year, while the equity REIT index returned 19.7%. That compares to the S&P 500’s 16% gain. Read more…

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