Mining for Diamonds in Today's Commercial Real Estate Market

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"Diamonds in the Rough," the firm's most recent podcast, examines the current commercial real estate environment based on a variation of the four Cs used to evaluate what a popular song from 1949 called "a girl's best friend." However, instead of relying on cut, color, clarity, and carat, commercial real estate investors need to assess the current market based on clarity, conviction, cash, and closings.

Andrew R. Little

Lenders have increased pricing to the point that nothing's getting done. Private equity groups are loaded with cash. But why invest today when prices could be lower tomorrow? Tenants, meanwhile, are at a standstill. Retailers are scrapping plans to expand, even closing stores. And who wants to commit to more office space?

In its continuing effort to help developers and investors transact business efficiently and profitably, Richmond-based John B. Levy & Company has produced another in a series of podcasts that explains trends and issues affecting the commercial real estate market.

"Diamonds in the Rough," the firm's most recent podcast, examines the current commercial real estate environment based on a variation of the four Cs used to evaluate what a popular song from 1949 called "a girl's best friend." However, instead relying on cut, color, clarity, and carat, commercial real estate investors need to assess the current market based on clarity, conviction, cash, and closings.

"Normal markets possess all four of these features--clarity, conviction, cash, and closings," says Andrew Little, a principal at John B. Levy & Company. "Today, we're lucky to have one. Even in the depths of the RTC crisis, we had motivated sellers and opportunistic buyers who could find cash. They closed on some unbelievable long-term investments. Now, everyone is foggy headed. We have reluctant, emotional sellers, and buyers are acting like carrion beetles."

Several factors explain the lack of clarity. The high cost of gas and groceries affects nearly everyone, including retailers, so there's growing concern over retail rents and vacancies. With many condos standing empty, investors are wondering about the direction of apartment rents. The changing costs of transportation and imports affect warehouse and industrial markets. And as employment levels continue to shrink, office vacancies and rents become an issue.

"As for conviction, that's missing, too," Little says. "Lenders have increased pricing to the point that nothing's getting done. Private equity groups are loaded with cash. But why invest today when prices could be lower tomorrow? Tenants, meanwhile, are at a standstill. Retailers are scrapping plans to expand, even closing stores. And who wants to commit to more office space?"

Cash is a story of haves and have-nots. Nearly every corporation today--from GE to GM, Fannie to Freddie--is focused on liquidity. Few lenders are growing their portfolios, and most are trying to manage or reduce their exposure. As the amount of cash available for deals shrinks, the price of capital is rising for developers and lenders alike.

Without clarity, conviction, and cash, closings are out of the question. For that to happen, banks that are short on cash need to clean up their balance sheets and sell assets, perhaps at a discount.

"Today, the market is placing a premium on liquidity," says Little, "and that can work for both lenders and developers. For now, there's nothing we can do about clarity. But there is cash for high quality transactions, and conviction is up to the individual. Investors who make money in this environment will be the ones who get three of the four Cs. They'll secure cash and, because of strong conviction, they'll see their deals through to closing."

Firm Background
John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia. The firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients. Mr. Levy is the originator and author of the Barron's/John B. Levy & Company National Mortgage Survey, which Barron's published for 23 years. This monthly survey tracks more than 30 of the country's largest institutional investors, as well as buyers and sellers of commercial mortgage-backed securities, He is also co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry. Mr. Levy is also a member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc.

For more information about John B. Levy & Company, please visit the firm's website at http://www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.

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