COO, Coldwell Banker Commercial
Advice for future real estate professionals.
Is there a secret or a primary factor to which you attribute your success?
Passion, fun, and good health. I am extremely passionate about what I do. As such, I am highly energized, have a lot of fun, and I think that energy and enthusiasm feeds the energy of those around me. Also, with the amount of hours we work and an extensive travel schedule, good health and physical conditioning is the key to mental toughness. This is a highly competitive business and you have to be mentally prepared at every turn.
Do you have a prediction about the commercial real estate market for the end of 2008?
The industry today is a tale of two markets: Investment sales and related pricing; and the overall fundamental picture of the market. Normally, they run in concurrent cycles, but this cycle is different. The value cycle is accelerating into a down market much faster than historical norms would suggest, as the debt markets impact the overall deal flow and subsequently establish a less competitive investment sales market. On the fundamental side (vacancy, absorption, supply, and rent growth), the market has been disciplined and, as such, is relatively healthy overall. Demand for space will decline, but supply has been kept in check and the market will continue to perform through 2008.
Here are some highlights:
• Continuing influx of capital in the sector as a result of the volatile equity markets
• Increasing positions in the U.S. markets by foreign investors (led primarily by European, Australian, and Middle East investors)
• Declining prices further (8%-15%) for investment properties
• Leverage remains scarce (primarily balance sheet lenders only)
• Underwriting standards remain tight for both debt and equity
• Deal volume down significantly
• Increasing sale inventory significantly, but no “fire sales”
• Leveraging of increasing capitalization rates by institutions and other low leverage buyers, who are also taking advantage and being very active in the market
• Flight to quality assets for investment as CAP rates rise and rental increases slow• Fundamentals remain sound; a transitioning market, but the picture is not unhealthy.
What advice would you give to up-and-coming real estate professionals regarding the current state of commercial real estate?
This is a great time to learn. Any transitioning cycle will always present challenges. Most can succeed in a rising market, but it takes the wisdom of riding the cycles to succeed long-term in this business. The advice I give myself anytime there is something to learn: be a sponge— absorb everything you can from those who have been around. Know that this is a cyclical business and whatever cycle we are in today will return in the next seven to 10 years.
What do you consider to be the greatest challenge a commercial real estate professional or the market as a whole will be facing today, and do you have any recommendations on how to overcome these challenges?
Debt capital. Yes, we are in a declining economic cycle; however, the CRE market remains fundamentally healthy overall. Values and pricing are declining at a pretty significant rate, (5-15% this year) tied specifically to the availability of debt capital. According to Real Capital Analytics, the volume of sales in the first quarter of 2008 are off by as much as 71% (less competition will lead to lower pricing). The debt markets are feeling the effects of the credit crunch, which for the commercial business started as a spillover effect from the residential sub-prime issue. That led to the spigot being turned off in the CMBS and CDO markets, and as such, the overall availability of debt capital from securitized sources. Also, we may expect to see further deterioration in the debt markets as properties are marked to market and the underlying asset values decline, impacting not only CMBS, but balance sheet lenders as well.Many properties will require refinancing in the short-term and there may be a problem finding the right capital source. If so, obviously there will be pressure to recapitalize at values less than the market may suggest, which will result in further price declines. The debt market is also impacting equity pricing as many REIT’s use debt capital to bolster yields and grow their portfolios.
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