RICHMOND, VA, Feb., 9, 2009 - (by Jim Tucker, CCIM) Much of the attention surrounding non-performing commercial real estate assets tends to focus on the complexities associated with sell-side discussions. That being said, my advice is not to overlook the buy-side opportunities currently presenting themselves. While all investors yearn for a buyer’s market, not all sponsors have the risk profile to dive into this market. Even for those that do, they may not be well positioned to take advantage of deeply discounted troubled assets.
While money can be made many ways in commercial real estate, most people tend to focus on the profit that is booked from successful dispositions. The simple fact of the matter is that you really make money on the buy-side. Those commercial real estate investors that bought into the top of the market are now watching the market value of their assets erode rapidly in the face of this market decline. Patient investors who stood on the sidelines during the frothy market run-up refusing to acquire assets at cap rates that could not be economically justified were able to preserve their capital for just a time such as this.
Investors who either possess organic domain expertise in deal restructuring, work-outs, or the value added repositioning of troubled assets, or who can avail themselves to the necessary third party professionals with the required skills should feel like the proverbial “kid in a candy store.”
It’s said that one man’s trash is another man’s treasure, and nowhere does this axiom hold more truth than in today’s commercial real estate market. The potential gap between acquisition and disposition cap rates that this type of market can generate for investors who have the ability to buy into a declining market and who have a long-term focus can be truly significant.
Distressed assets offer the savvy investor the opportunity to capitalize on the mismanagement of the asset and/or hardships created by the severity of current market dynamics. Distressed assets are often disposed of for a deep discount from their original market value in an attempt by the owner to recoup as much of their original investment as possible while at the same time removing the responsibility for the debt service obligation associated with the asset.
The disposition of these distressed assets offers commercial real estate investors the opportunity to purchase what were once considered prime commercial properties in all areas of the country at a cost much lower than they would have paid even a year ago. The stress placed on owners courtesy of the economic recession, and the resultant tightening of the commercial capital and credit markets has forced many owners to dispose of what would otherwise be prime property because their portfolios can no longer afford to wait for an economic upswing.
Distressed assets in fast growing cities with a strong industrial base, diverse employment pool, and access to necessary resources are almost certain to become profitable properties when the economy picks back up, and astute commercial real estate investors are lining up to take advantage of that. With focused attention and diligence in your acquisition efforts, distressed properties can be purchased for prices that can be anywhere from 20- 80% off the market highs. Investors who have the capital to buy into this market and reposition or add value to a distressed property will reap significant rewards in the future. This is not a market conducive to short-term speculation. Investors diving into this economy need to realize that it is likely to get worse before it gets better. They need to buy with a long-term vision and focus with regard to their acquisitions.