The recent “feeding frenzy” for US real estate assets is not an indication that equity has returned in force to the markets, but merely a reflection of the lack of deals, according to CBRE Investors Capital Partners president Ethan Penner. As a result, the fierce competition for opportunities has induced a false sense of “euphoria”, misleading some investors into being overly optimistic, said Penner.
“We were all so beaten down a year ago, so we all reset our mental framework to a very low level,” he said during a real estate summit today. “Any move off that low level feels like a cause for euphoria. But I think that if you dissect the numbers and realities of things you would come up with a very different conclusion than an optimistic conclusion.”
Penner’s comments came at the 2010 DLA Piper Global Real Estate Summit in Chicago, where Dune Real Estate Partners chief executive officer Dan Neidich suggested that some investors have even felt trigger happy about making deals due to the sheer dearth of available transactions.
Neidich stated that unless there was significant change in the supply-demand balance, his New York-based firm would only purchase debt over the next six to 12 months. While he added that it wouldn’t take a lot to change that balance, he admitted the imbalance was a reflection on the lack of supply, as opposed to how big the pools of capital are.
Penner said that although REITs have raised at least $29 billion of fresh equity since early 2009, there has been roughly $700 billion of write downs in the US real estate industry. “It’s not a meaningful raise compared to the dollars lost and the value eroded,” he said.
He also pointed out that close to 90 percent of all loans in the legacy CMBS market were originated between 2005 and 2007, most of which are deeply underwater. “I think that’s probably true in the bank loan portfolios as well,” he added.
As those loans mature between now and 2014, the number of opportunities for investment will increase. Penner said though the amount of capital available for investment would look like a “drop in the bucket” compared to the sheer level of equity needed to refinance loans taken out at the peak of the market.