Commercial Real Estate Watch: Thoughts on Recent Institutional Transactions

Includes: CBF, JLL
by: Chris Rodriguez

Yesterday, CoStar published an article entitled Institutional Investors Throwing Big Money Around Class A Quality Retail Property. The article highlights several recent large transactions that have taken place and interviews guys from CBRE (CBF), Marcus & Millichap and Jones Lange LaSalle (NYSE:JLL) for opinions. A few of the points/quotes caught my attention and I thought I’d share my comments on the matter.

First off, M&M’s Bernie Haddigan comments on the fact that these recent transactions are all of class “A” assets and states the reason he believes high quality assets continue to trade (emphasis mine):

"What is coveted in today’s market is prime locations and prime credit. With the St. Regis deal, for example, even in the worst of times, someone recognizes that there’s significant intrinsic value there. The best locations are the last to go down and the first to recover," said Haddigan, adding, "Irreplaceable premium deals are going to trade."

Haddigan said Marcus & Millichap is "finally starting to see increasing amounts of better quality deals come on the market. The profile of the buyer in all those cases is someone who wants stable, high quality, infill deals and they’re buying at 200bps above where they would have been 2-3 years ago at low leverage. There still is a lot of capital that will buy quality to park in their portfolio."

I have always preached quality first to my clients. I have never been an advocate of chasing cash flow across the country. I believe this is a recipe for disaster. At the end of the day, no matter what the property, the asset you are buying is LAND. Tenants come and go and buildings depreciate. What I want to know is when my tenant leaves or goes bankrupt, whether in 1 year or 20, how long will it take me to find a new tenant and can I be sure that the rent I will get is the same or greater than my current rent? Essentially, did I buy good dirt? If I did, my dirt will have appreciated at a greater rate than the rental increases of the lease which encumbers my property, ensuring the realization of passive upside – or appreciation.

This mantra would, of course, rule out ever purchasing a single tenant Starbucks (NASDAQ:SBUX) building – in any market – as there is not a single other tenant that is able to pay $6.00 PSF / month for a 1,700 square foot building on a 15,000 square foot parcel with 6 parking spaces.


This next quote kills me. It is from Kris Cooper of Jones Lange LaSalle (emphasis mine):

"The problem is you have to have a seller that’s willing to sell at a cap rate that’s ridiculous compared to where it was just two years ago. Why would you sell a good grocery anchored center at an 8%+ cap rate today when that same center two years ago sold for a 6% cap? There’s got to be a reason they need to sell, whether they need cash, they have a debt maturity coming up, etc. Otherwise, why not hold it for two years and wait out the cycle and sell it at a presumably lower cap rate," said Cooper. Buyers are wise to this issue, too, which puts the seller at a further disadvantage, said Cooper.

Let me think about that for a moment. Well I would think it wise to sell a property at an 8.00% CAP Rate, even if it traded at a 6.00% CAP Rate two years ago if I thought it was going to be worth a 9.00% CAP Rate next year. That is the first reason that comes to mind.

Saying “why not hold it for two years and wait out the cycle and sell it at a presumably lower cap rate” is one of the most ridiculous statements I’ve read this year. Has this guy been in this business for more than 5 years? If so, he would realize that CAP Rates were never before at the levels we just saw in this last boom. Saying CAP Rates (prices, values, rents, etc.) are just going to jump back to previous levels in “two years” is just stupid and irresponsible.

CBRE’s George Good seems to agree with me here (emphasis mine):

On the cap rates these deals are closing at, Good said, "Certainly these cap rates are dramatically different than two years ago, but looking at it on a 10-year or 20-year history, they could even be considered aggressive."

Yes, even today’s CAP Rates could be considered aggressive from a long-term historical perspective. Remember that when you are deciding to hold your property because you think the value is coming back in the next “two years.”

M&M’s Bernie Haddigan adds a dose of reality, also contradicting Cooper’s statement, with the following quote (emphasis mine):

"No one really knows how deep and how long this is going to be. Most people seem to think that 2010 is not going to be any better than 2009. I think by the second half of 2010 we’re going to see a lot more transactional velocity because people are just going to surrender to the fact that the market is not coming back to 2007 values until maybe the beginning of 2019. I think we’re going to see yield requirements jump and prices go down," said Haddigan.