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Moving Forward July 29, 2010

Posted by Sean Tufts in Articles, Retail News.
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Whether we are at, past or approaching the bottom of the retail real estate cycle continues to be debated.  One thing everyone agrees on is the building anticipation for moving beyond the current environment.  Rents have fallen 30%, values have dropped 40%, pessimism is the generally accepted attitude, there is very little appropriately priced product on the market and banks continue to refuse to unload properties and debt at market values.  Frustration is building from all sides as we fight our way to find a new direction.  

There is little doubt that relaxed bank regulation, marginal lending standards, nearly free debt and the general euphoria of real estate ownership created an unsustainable environment that made tons of people extremely rich.  It was hard to mess up.  Until it all came crumbling down.  Some of the region’s most recognized owners, developers and speculators are out of business.  Some are gone for now as they reinvent themselves while others are out for good.  Looking back and criticizing behavior is easy.  It is easy now, as a Tuesday morning quarterback, to say we should have done things differently.  The real test is how to navigate the market moving forward.  As Colony Capital CEO, Tom Barrack, Jr, says in his latest post,

“The fast money, high velocity, handsomely leveraged, quickly appreciating days of real estate investment are not in the near-term tea leaves. Real estate has returned to the hands of real estate professionals, not financial arbitrageurs, and most real estate opportunities in the US involve hand-to-hand combat on restructurings or intensive value-added implementation. In either of those two circumstances, the process is slow and low. It is an era of what real estate is supposed to be – singles and doubles.” Source

One of the coming changes is the Financial Regulation reform that hopes to prevent the next unsustainable bubble and resulting crisis.  Whatever side of the political fence you are on the realities are that this will have an effect on commercial real estate.  Even as lenders begin to loosen their purse strings, it will remain more difficult to obtain financing than it was in the past.  Some of the regulations will surely create barriers to entry for some private equity.  How much is yet to be seen, but perhaps that barrier will keep demand at a more reasonable level and prevent the value inflation that got us to the point of collapse.

Costar has a good article out this morning about the potential impact of the Dodd-Frank bill that was signed into law last week.  I recommend reading the entire article here but the summary is that it will be a long time until we know how the new regulations affect the CRE market.

As we trudge through these difficult times we remain hopeful for a new reality and optimistic about the opportunities that will present themselves over the next couple of years as values are reset.  The euphoria may be gone but we look forward to better and more stable days ahead.

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