While commercial real estate fundamentals are clearly in the early stages of a long healing process, the large amount of debt and equity that’s already being deployed in the industry following the Great Recession is raising eyebrows. Jamie Dimon, CEO of J.P. Morgan Chase, recently stated that the expected buildup of capital in the banking system over the next year “may make people do stupid things.”
There also are signs everywhere that transaction volume is on the rise. The Westfield Group, a shopping center owner, is mulling the sale of stakes in some of its top-performing U.S. assets to joint venture partners.
It is also stepping up plans to completely sell off its less-productive assets around the world. According to Westfield’s CEO Peter Lowy, the group wants to both raise and free up capital for more acquisitions now that market conditions have improved.
American International Group’s recent sale of portions of the Atlantic Station mixed-use project in Atlanta provides more evidence of how capital is finding its way into secondary markets.
AIG’s financial troubles in 2008 required a capital infusion from the U.S. Treasury Department. AIG sold a piece of the development’s retail, office and even vacant land to CBRE Strategic Partners U.S. Opportunity 5 Fund.
The sale came at a steep discount. Even so, a vacancy rate of over 55% in the retail portion of the complex has not deterred investors. This transaction proves that investors are willing to reach for bargains beyond the well-worn path of expensive primary markets.
Even though this total is a mere shadow of the $315 billion peak of 2007, it is more than double the $18.3 billion reached in 2010, according to industry newsletter Commercial Mortgage Alert.
As further optimism on the CMBS front, Minneapolis-based U.S. Bancorp just closed its $75 million acquisition of the securitization trust administration business of Bank of America Corp. The unit provides securities packaging and sales that include CMBS bond services to investors.
The fact that U.S. Bancorp would make a substantial investment in a business with a $1.1 trillion exposure to securitization assets is testament to the industry’s confidence in the future of the bond issuance business.
Growing too quickly
In the world of real estate finance and investment, however, the best bargains come during a bad market, as has been the case over the past 18 months. A surge in the number of announcements from lenders heralding completed transactions confirms that capital is flowing through the economy at a faster pace than is apparent to Main Street.
Relatively stable interest rates tend to attract large-scale institutional capital, and current conditions confirm Jamie Dimon’s concerns about safeguarding his bank’s capital.
Thus, one can’t help but pay attention to the velocity of the next real estate cycle. Should rates remain stable, institutional capital will be drawn to weaker, higher-yielding transactions, setting the stage for another potential real estate bubble (see table).
Meanwhile, investors’ bold initiatives continue to make headlines. From AREA Property Partners’ plan to deploy $500 to $800 million of equity in the U.S. in 2011 to Blackstone’s planned seventh global opportunity fund, the real estate recovery appears to be here to stay. AREA is targeting recapitalization deals and Blackstone is leading the revival of the real estate mega funds.
It’s not by accident that a number of large M&A deals, most notably the merger between warehouse investment giants ProLogis and AMB Property Corp., are occurring now.
Market participants don’t want to miss the boat when it comes to bargains and high returns. Expect to see more jaw-dropping news releases and activity in the coming months.
Joe Caton is a South Florida journalist who provides training and development services to real estate finance professionals.