The Real Estate Investment Security Industry: What To Expect In 2010

Author:Mr Stephen Burr
Profession:Foley & Lardner
 
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With the events of 2008 and 2009, the industry's outlook seemed bleak. Sponsors, broker-dealers, and registered representatives spent most that time wrestling with problems and asset management. The obstacles to doing new transactions evident last year — the lack of investors (particularly like-kind exchange investors), the reluctance of sellers to adjust price expectations, and the very tight debt market — still persist. While there is light at the end of the tunnel for some aspects of the economy, notably the stock market and the stabilization of oil and gas prices, the commercial real estate and debt markets remain depressed and could get even worse before they get better.

So what to expect in 2010? Here are a few thoughts.

Real Estate Opportunity Funds Although sales of direct investment interests in commercial real estate to like-kind exchange investors will remain slow, there are reasons to be optimistic about other segments of the industry. Sponsors and investors are increasingly sensing the bottom of the commercial real estate market — maybe not quite yet, but not far off. This means that would-be opportunistic buyers, whether existing sponsors or newly formed companies, are anxiously seeking capital to take advantage of what they view as a unique buying opportunity.

Generally, these sponsors are not looking at doing one-off direct participation or tenant-in-common (TIC) transactions. They are trying to raise pools of capital, either through fund or REIT structures. To date, their efforts have met with mixed success. Institutional sources of capital, even for opportunistic investing, are still very limited, with capital flowing only to top-tier sponsors. The retail market also is still slow, so sponsors raising capital have to have a simple, compelling message. The ones most likely to succeed have these characteristics:

Modest fees, costs, and mark-ups

A focus on properties that have current income that can be improved, as opposed to no-income properties that may require additional capital contributions

At least some designated assets, not completely blind pools

A reasonable goal for the first offering: $10 – $15 million in equity

A good preferred return (10 percent or more) and fair sharing of residual

An established source of debt on reasonable terms

Oil and Gas After a wild ride in 2008, oil prices have bounced back nicely to $70/barrel — not too high, not too low. This allows royalty sponsors to acquire royalties at an acceptable spread...

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