Bid/Ask Gap Continues to Vex Investors

For months, a yawning gap between buyers' and sellers' expectations combined with a drop in available financing for highly-leveraged buyers has led to a massive drop in investment sales volume on retail real estate properties. In early months of this year, year-over-year volume dropped by as much as 85 percent.

Many in the industry had been looking to ICSC's RECon as possibly easing that impasse. The logic? With more than 40,000 pros getting a chance to sit face-to-face for the first time since the credit crisis broke, perhaps buyers and sellers would come to a better understanding of fair valuations. But based on the sorts of conversations and dealmaking occurring, it doesn't seem that the convention will ultimately serve as that panacea. Anecdotally, full service brokerage firms like CBRE and Jones Lang LaSalle are reporting that while leasing activity remained robust at the conference, there wasn't nearly as much activity on the investment side.

"Transactions are still off 80 percent," says Paul Andrews, CFO for Washington, D.C.-based developer, owner and manager Madison Marquette. "The stuff that's trading is at least 5 to 10 percent off its peak. And there's another tranche that's not trading at all. I think it may take two, three or four years for all this to work its way through the system."

The deals getting done are also different from the sorts of deals that were happening 12 months ago, according to Mehran Foroughi, senior vice president of Sperry Van Ness, an Irvine, Calif.-based commercial real estate firm.

"The way Southern California is changing, in the past few years, geographically, there was not much difference between properties located in Los Angeles and properties located in San Bernardino," Foroughi says. "Today, there is. San Diego used to be the hottest market, [you could sell anything], but now people are looking at the location and the tenants. The cap rates on C properties are spreading. People are looking at the residential sector and all the foreclosures in [high growth areas] and all the speculators are scared."

As a result, there's no agreement in the market at the appropriate pricing for retail real estate. "We don't have statistics today to tell you what a good cap rate is," Foroughi says. "Up until a year ago, we pretty much knew what the cap rates were. But now you have to look at every property individually. We closed a deal recently in Laguna Beach at 5.2 percent because it's what we call a 'sexy' property. But in today's market, there is at least half a cap to one cap difference between what the sellers expect and what the buyers expect."

A major problem remains financing. Banks lending volumes are way down. And commercial-mortgage backed securities (CMBS) issuance remains at a standstill. Gary E. Mozer, managing director and principal of George Smith Partners, a Los Angeles-based real estate investment banking firm, confirmed that view. Of deals worth $25 million or more, the firm did about $20 billion in volume in 2008 down 83 percent from the $116 billion in volume during the same quarter in 2007. "Wall Street, through which we did two-thirds of our deals, is gone for all intents and purposes," Mozer says. "Larger deals are hard to do, though we are still able to transact the deals under $25 million because the regional banks pick up a lot of that volume."

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