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Bifurcated Market March 17, 2011

Posted by Sean Tufts in Articles, Investment Tools, Research/Data, Retail News.
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I had to stop myself from mocking yesterday’s NREI article titled “Real Estate Returns Bounce Back, Index Shows“. They started off by saying that “U.S. real estate investment performance for 2010 delivered its third strongest annual returns over the last decade.” That statement, taken out of context, is a slap in the face to most investors that have continued to struggle in a market with fewer tenants and market rents well off of the high times leading up to the crash.

When you look at the data set for their analysis it provides some relief to my frustration: “IPD’s Annual Databank measures the performance of 46 mainly core funds worth $119 billion in annual return. The annual property index gauges returns on direct investment in U.S. commercial real estate by calculating the total return on capital employed in market investments, excluding transactions and developments.” Right. If you own core assets in major markets and don’t include your failed development projects, you probably did pretty darn well in 2010. Especially, because you could probably find debt at historic lows.

On the other hand, if you do not tour your portfolio via private jet or helicopter it remains challenging to finance new acquisitions or take advantage of the distressed marketplace. It is challenging enough trying to hold on to anything that was purchased in the last 5 years. Thankfully, for my sanity, Costar sums it up correctly in the title of this morning’s article, “The Recovery Will Be Bifurcated“.

These are the best of times for cash-rich borrowers and lenders, but they continue to be tough times for less well-funded borrowers and lenders. Just as the investment markets are bifurcated with top-notch properties in top-tier cities commanding escalating prices and lower tier properties and cities still fighting uphill climbs, so too does it appear that the capital markets are split between the haves and have-nots.”

The smaller banks continue to struggle and are reluctant to lend on CRE. The lack of debt continues to limit transactions under $10MM, which is one of the factors holding down a value recovery on smaller properties. At the end of the day it takes money to make money.

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