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Waiting Game

Concerns about the broader economy, a yawning bid-ask gap between buyers and sellers and scarce credit have created an incredible shrinking volume of investment sales so far in 2008.

But according to one corner of the market — managers of pension funds that invest in real estate — the conditions are not yet as dire as 1980s when owners flooded the market with distressed assets and sold at fire sale prices. “In the 1980's, there were massive vacancies in all the property types and there was massive construction,” said Neil Bluhm, principal, at Walton Street Capital, LLC, a Chicago-based private real estate investment company. Bluhm was a panelist for the “State of the Market” session at the 2008 Pension Real Estate Association's annual meeting in Boston in March. “Today, we have a problem, but it isn't nearly as bad. We don't have massive downturns in cash flow. We will recover.”

The consensus opinion: Commercial real estate will take a beating over the next 12 to 24 months, but will ultimately weather the storm. The biggest problem will be the pain caused by aggressive lending practices that permeated the marketplace over the past five years. Highly leveraged buyers who will have trouble refinancing may be forced to sell. (Think Maguire Properties or Centro Properties Group).

What's happening now, said Dean Adler, CEO and co-founder of Lubert-Adler Partners, LP, a Philadelphia-based real estate private equity firm, is commercial real estate prices are coming off a high brought on by lax underwriting standards that too often had little to do with the performance of underlying assets. As lending institutions take a closer look at real estate fundamentals, Adler said, it will no longer be possible to justify the excessively low cap rates typical of the past few years. “With good assets, once you get them leased [and repositioned], is there an opportunity to sell them at a 7 percent yield? Yes,” Adler said. “At a 4 percent? No.”

As most office and retail properties continue to experience stable cash flows, those sectors will be able to retain equilibriums. Also, real estate prices moving down could be a boon for cash-flush institutional investors interested in commercial real estate, said J. Bruce Flatt, managing partner of Brookfield Asset Management, Inc., a Toronto-based global asset manager with a $95 billion portfolio.

Brookfield plans to begin its search for North American acquisitions after spending the past few years in overseas markets because of a lack of attractive opportunities at home.

However, one panelist, Jonathan Gray, senior managing director and co-head of real estate at the Blackstone Group, a New York-based alternative asset manager with a $98.2 billion portfolio, warned the industry's woes could go on longer than some are anticipating. He recalled that just three months ago, experts predicted that the credit crisis would soon be a thing of the past. Yet today it looks worse than ever. And as long as the credit markets are convulsing, that will mean transaction volumes will remain low as well, he said.

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