Joint Ventures All Around

It seems like not a day goes by without some new joint venture being announced. Last night, Kimco Realty Corporation announced its second joint venture with Israeli investor BIG Shopping Centers. The new joint venture will acquire a portfolio of 15 neighborhood and community shopping centers for approximately $422 million including $385 million in mortgage debt. The two firms announced a smaller joint venture just about a month ago.

In addition, last week we had PCCP LLC, Alberta Development Partners LLC and Walton Street Capital LLC coming together to complete a $300 million recapitalization of the The Streets at SouthGlenn as well as Inland Real Estate Corp. forming a new joint venture with PGGM, a Dutch pension fund administrator and asset manager, to acquire up to $270 million of grocery-anchored and community retail centers in Midwest U.S. markets.

In late May another Inland entity, Inland Western Retail Real Estate Trust Inc., signed definitive agreements to form a joint venture with RioCan Real Estate Investment Trust. That's just one of a handful of joint venture deals that RioCan has entered recently.

So what's with all the joint ventures? According to a new report from Morningstar that Business Insider pointed to this morning this may be the tip of the iceberg as we enter a buying spree in commercial real estate. Joint ventures may continue to be an extremely popular tactic for REITs looking to capitalize on the opportunities, especially with the availability of financing still constrained.

In our opinion, the environment will support commercial real estate purchase transactions, perhaps for many years to come. In its February report, the Congressional Oversight Panel concluded that about $700 billion in commercial real estate loans that come due between 2010 and 2014 are underwater. We think a sizable amount of the additional $700 billion in commercial real estate loans coming due during that time frame are loans that could not get refinanced at existing levels in the current lending environment. This suggests that there are at least hundreds of billions of dollars of incremental equity capital that need to be injected into commercial real estate to establish a "proper" leverage level. In fact, The Real Estate Roundtable, an industry group comprised of representatives from public and private real estate firms, has estimated this equity gap at about $1 trillion over the longer term.

We believe the industry's need to deleverage over the coming years will create an environment that fosters outright asset sales and joint venture transactions. We expect 2011 and 2012 to be particularly active years, as that's when many of the loans made in 2006 and 2007--years when property prices and lenders' risk appetites were simultaneously peaking--will start to come due.

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