Boston Capital Institutional Advisors sold Boston’s 99 High St. office tower for $213 million in April.
With good reason, just about everyone involved in commercial real estate is on edge these days, and that situation is translating into a deteriorating investment climate. Many deals in progress have either been quashed completely or are in a holding pattern, while the price chasm between buyers and sellers appears to be widening.
Amidst that backdrop, several investment experts gathered at the recent Urban Land Institute conference in Boston to debate whether opportunity funds and pension fund advisors will be forced to sell despite the declining market. Some claim that pension funds have to trade assets because the stock market correction weighted them too heavily in commercial real estate, especially suburban office buildings. Opportunity funds, meanwhile, often have a five- to seven-year window for buying properties and selling them to distribute their promised returns.
To date, according to the panelists, even the most motivated of sellers has been reluctant to alter pricing on a deal, and moderator Robert E. Griffin Jr. of Trammell Crow advised that “it’s not going to happen soon.”
“Don’t hold your breath on that one,” Griffin said. Because of such hesitancy, he said, “It is tough getting deals done.”
Previously, that really has not been a problem, said Griffin, explaining that more than 98 percent of the time, any seller who has shown an underachieving bidder the door ultimately has attained their asking price. Given the recent upheaval, however, Griffin said it may be difficult to keep up that pace, especially with potential buyers fixated on ensuring they have an exit strategy.
“You have to leave some meat on the bones,” said Griffin, predicting that the days of the “home-run deal” are over for the foreseeable future. “You have to be willing to settle for singles and doubles,” he said. “Home runs are going to be rare right now.”
Panelist Samuel T. Byrne of Boston Capital Institutional Advisors concurred with Griffin. BCIA has acquired several high-profile properties in the past few years, including the $400 million MGI Properties portfolio and Boston’s 99 High St. office tower.
“Our willingness to compromise has been the reason we have been successful in selling assets,” said Byrne. Whereas the firm felt it could have gotten more for 99 High St. when it sold the 32-story tower in April, Byrne said the company ultimately yielded to the top bidder for a slightly lower price. BCIA certainly made a handsome profit, buying it for $168 million in January 2000 and later trading it for $213 million.
On the flip side, BCIA has not been able to reinvest those funds because sellers have tended to remain firm in their pricing demands. “Some people are still living in the past,” said Byrne. In some cases, property owners on the fence have opted to refinance their assets should they not get the asking price, said Byrne, but that may be less of an option as debt dries up in the face of the declining economy.
In addition, Byrne said opportunity funds may be under increased pressure to sell for other reasons. Not only will such vehicles fail to meet their returns if they retain an asset for too long, Byrne said the fund managers need to prove their investment formula works if they are to receive additional funds.
Even with those motivations, however, Byrne stressed that it is difficult to say what the short-term outlook is for investment sales. The terrorist attacks have thrown the country into an unprecedented air of uncertainty, he said, and that generally makes real estate investors nervous.
“I really don’t know where this thing is going yet,” he said. “People are still waiting to see how things are going to break.”
Holding Out
CB Richard Ellis Senior Vice President Jeffrey Dunne said he believes it will be harder going forward for opportunity funds to meet their projections, especially compared to the early players who have already liquidated their holdings and reaped returns of 20 percent and above. By his estimates, such funds have invested $142 billion in real estate since the early 1990s.
Although some funds will refinance their properties, Dunne said he also believes that many will be forced to offer property up for sale. Whereas older funds such as Morgan Stanley have already harvested as much as of 40 percent of their assets, Dunne said many newer versions are still in the 20 percent disposition range, making it likely there will be a substantial number of properties put out on the market in 2002 and 2003.
“We’ll see some of them extend holding [periods] because the timing is not right, but you can’t hold out forever,” Dunne said. He added that many of the funds have stepped up their sales activity, including the Carlyle Group, Lend Lease, Lehman Bros. and the Whitehall Funds.
Apollo Real Estate Advisors principal William A. Scully said his company is always prepared to sell if the right deal comes along, but also stressed that the firm will not liquidate simply for the sake of meeting a prescribed deadline. “We’re prepared to be holders,” he said, adding that the clouded future has his company moving carefully at present.
“We’re all going to play it by ear as best as we can,” he said.
Also appearing at the program was Eastdil Realty Co. President Roy H. March, who acknowledged that it is difficult to advise investors on what is the right approach given the historic and unprecedented incidents of the past month. “There has been some sobriety that has set in,” he said.
March said he also has found the bid/ask situation to be “askew” at present, but also stressed that most of the deals his company has been involved with continue to progress despite the uncertainty. He predicted the overall investment situation will ultimately straighten itself out.
“As life goes on, people will be putting their toe back in the water and testing the market,” he said.
