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Thursday, July 22, 2010

2Q Survey Finds Private Real Estate Investors Still Optimistic

Lee & Associates’ Investment Services Group conducts its second quarter national poll
LOS ANGELES—July 15, 2010—In a second quarter survey by Lee & Associates’ Investment Services Group, the Los Angeles-based brokerage firm invited thousands of its clients nationwide to complete a short online survey consisting of eight key questions facing private real estate investors. The respondents included high-net-worth individuals, partnerships and other groups specializing in commercial real estate deals valued in the range of $2 million to $20 million.
Mark Larson, vice chairman of the ISG and who specializes in land, investment and consulting brokerage, spearheaded the survey.
“While there does seem to be some thawing on the investor front, which seems to be evident with Lee offices reporting an increase in deal activity, there still remains a mood of caution among investors,” Larson said.
Based on responses to the survey, Larson said some key points have emerged:
  • Most think we are starting to see commercial real estate strengthen.
  • Sellers still need to be more realistic, however, the great news is that there are buyers who are ready, willing, anxious and have capital.
  • Lenders have to start making loans.
  • Government involvement has been too slow to assist in lending and job creation.
  • As institutions are on the sidelines for the most part, now is the best time for private investors to buy.

Below are the results:
1. How long has it been since you last purchased a commercial property?
As the economic environment continues to plod along, the number of investors that have not purchased a commercial property in over one year increased to 76 percent, which is a 4 percent increase over the number last quarter. However, investors that closed on transactions within the last four months increased by more than 14 percent -- truly a good sign.
2. What was the value of the transaction?
Almost one-half of all transactions that closed were $5 million and below with 72 percent of the deals under $10 million. This represents the demand by private investors to take advantage of the marketplace and lack of activity by institutional investors in their “lower range” in acquisitions of well located assets. There was a huge decrease, 57 percent, in properties valued above $10 million that sold this last quarter.
3. The property was purchased on which basis?
There was a 20 percent drop in lender financed property from the last quarter, although a little over one-half of all transactions -- 52 percent -- were lender financed. All cash sales increased by 45 percent, with 37.9 percent of the reported transactions being all cash. There were some assumable loans that accounted for closing 5.7 percent of all the sales last quarter.
4. What type of investments would you most favor today?
The confidence in the stock market has rebounded somewhat but the overwhelming place for private investors to place funds is still in commercial real estate (38.9 percent) and short term cash (28.9 percent). This is a drop of approximately 7 percent from last quarter, but still shows the confidence that investors have in commercial real estate, which stayed at the same 39 percent rate. This finding is still significant because private investors typically rely on leverage to a greater degree than institutional investors and are not as adverse to risk.
5. How long until the commercial real estate market begins to strengthen?
At last there is some optimism in the commercial real estate market. Last quarter, 82 percent of the respondents did not think the market had started to strengthen yet. This past quarter, that number went down to 63 percent, a reduction of 30 percent. For the first time in two years, over one-half of the respondents believe the market will be strengthening in less than 18 months. About one-fourth were still pessimistic that we still have over 24 months before the market shows signs of getting stronger.
 6. Have Sellers become more or less realistic in the past 3 months?
Private investors still believe that sellers are not realistic enough. In our first quarter report, 72 percent thought sellers were “slightly” more realistic in their pricing. That number decreased by over 60 percent this quarter. Buyers still think sellers are trying to sell on “yester-year” prices in today’s environment. While it is still unclear if the bottom has occurred, many believe it is close and the time for the private investor to get active is now. Most of the lender non-performing assets (REOs) are not premium properties and are trading at bargain prices. However, that also is having a negative effect on those properties that are B+ and above. There seems to be little effect on A trophy assets. In addition, lenders are extending loans on the nicer assets in hopes of the borrower being able to eventually turn the tide and get the asset performing again.
7. What do you think will stimulate sale activity?
We asked our investors what they thought would reverse the trend and get all of us making deals again. For the first time, job creation was the No. 1 response, up 22 percent from the last quarter. We need to get people back to work and have companies getting healthy again which results in a stronger commercial real estate market. That response was followed closely by more available financing. Banks and other lenders are just not making loans; either not available or underwriting is so restrictive that it doesn’t make economic sense. The “fuel” for an uptick in activity is the large amount of private capital that has been on the sidelines and is now coming into play. As Sellers become more realistic, activity will increase dramatically. Same goes for the lenders, as soon as they start making loans, this market will be off and running again.
8. Which product type do you favor?
Assuming all the factors discussed come to fruition and activity increases, we wanted to know what commercial real estate properties would be in the highest demand. Again, the backbone of our business, industrial uses, was No. 1 at 38 percent, up 11 percent over last quarter. Office and Retail continue to be sluggish and need the economy to rebound to once again increase its demand. Multi-family remained second at 25 percent with retail at 15.6 percent. Office was at 13.6 percent and single tenant assets were last at 7.5 percent.


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