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Among Buyers, Who Will Step Up?

No single buyer group is leading the charge for commercial property in 2010, but REITs look the best poised to make a significant impact, according to a new report from New York-based researcher Real Capital Analytics (RCA).
The dearth of transaction activity that began in 2008 and carried through much of 2009 finally began to ease in the third quarter and looks to continue into 2010. However, buyers are minus a lead dog to guide the way. The biggest bellwether appears to be the public REITs, which have already committed to acquire as much property so far in 2010 as they did for all of 2009. They’ve also raised an enormous amount of dry powder for the job, an estimated $30 billion.

Across the buying landscape, there does seem to be at least one consistent theme – a frustration at the lack of product. This is most evident when quality assets hit the market. They are quickly bid up by the pool of salivating buyers.
Among buying groups, foreign investors have yet to create a surge in buying activity. Equity funds targeting distressed assets also have raised enough capital to have a serious impact on the market, but their high return expectations are dampening real activity.

According to RCA, prospective investors are increasingly divided between two camps: core and opportunistic, and although they all are looking for bargains, few are finding them.

Core buyers complain that there are few suitable, quality assets on the market and competition for those that are available is steep, pushing pricing to surprisingly strong levels. Opportunistic buyers have been denied the expected tsunami of distressed sales and are now realizing RTC-like returns will be unlikely. Some may have to alter their initial investment strategies or lower their return expectations.

Just 10.8% of all sales in 2009 were associated with distress, but the composition of those buyers differs from non-distressed sales in some meaningful ways, especially within each property type. Overall, players from all sectors, except the public and private REITs, are active in the distressed space. Surprisingly, institutional investors are buying a significantly greater share of distressed sales than of non-distressed, and foreign buyers have been equally active in both arenas. Equity funds have been buying a slightly greater share of distressed than non-distressed properties.

Without decisive moves from REITs, foreign buyers or equity funds, the buyers in the market have largely been private and mostly local. Users, including corporations and governmental and educational entities, have also stepped up to become the second most active buyers of commercial property. As the market recovers, a shift away from private local buyers and users to national and international investors is expected.

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