By: Reed Weinberg
Principal and Broker Associate
Many of us are aware of the popular local catch phrase “Keep Louisville Weird”. It was adopted by the Louisville Independent Business Alliance to help promote the uniqueness and independence of our local business community. Well, I would say that the phrase also applies to our investment real estate market. In many respects, this assessment of the Louisville market is a microcosm of the overall market in many cities across the country.
What do I mean by a weird market? Well, as we all know, we are climbing out of the worst recession since the great depression and one of the most severe real estate crashes in modern history. Where do we stand almost 2 years later? Banks are either coughing up or sitting on troubled loans, borrowers are defaulting, triple net investment deals are trading at pre-recession pricing, retail vacancies remain high, Class A apartment deals are selling for premium pricing and there are not enough quality deals to support the amount of money chasing them. Confused? How is that for a weird mixture?!
The current real estate investment climate is a difficult one to navigate, but the key to it depends on your goals and asset class of choice. To best understand what is happening, it is helpful to pinpoint the reasons for the current state of the market for each asset class. For example, there is currently more demand than available product for high quality NNN retail deals. Why? It could be pent up demand. It could also be the fact that investors need to place dollars, but the flood of available distress deals just hasn’t been able to keep up with the demand. Another example of an interesting dynamic is the multi-family residential market. What are we seeing? Class A apartment deals are trading at premium price points. It’s almost as if the recession never existed for some of these properties.
At the same time, many banks are having a difficult time selling even the highest quality apartment properties that they have taken back in foreclosure. This, clearly, is due to the fact that the drop in values affected loan to value ratios. Like the single tenant, triple net market, there are not enough fairly priced, value-add apartment deals to support the investor demand. Finally, an asset class that is facing dismal prospects is residential land. The buyers just do not exist for those properties. In all, the phrase that “all real estate is local” shouldn’t just apply to the actual physical location. The state of your asset and its value and worth also depend upon which asset class it’s “located” within!
So, how does one navigate these markets to accomplish their goals? If you are an owner who is considering selling, do some research to figure out the current state of your property’s asset class. It is also important to remember that the Louisville market is behaving differently than many other metropolitan areas (i.e. top quality downtown office properties are trading at pre-recession pricing in downtown Boston, but not in downtown Louisville.) Then, you must remember that it is important to actually meet the market. Don’t just say “I have an appraisal that states ‘x’”. The pricing gap between buyers and sellers is the biggest hurdle in today’s market. If you are not prepared to make meaningful steps to fill the gap, then it’s not the right time to sell.
If you’re looking to buy, then times are very opportunistic. Interest rates remain at historic lows and many investment properties are being valued at 40-50% less than where they were in 2007. Some of those properties are stabilized. So, it may not be necessary to take on the risk associated with a highly distressed asset. You can still buy a great stabilized property and see the value rise as the market turns. However, be forewarned. The good deals are hard to come by. Buyers need to work harder than ever to get in front of the right deals.
Using a professional can help navigate this confusing market. We at PRG Investments are specializing in representing buyers and sellers of every sort of asset class. Please let us know if we can help. Here’s to a happy, healthy and weird 2011!
Sincerely,
Reed Weinberg
Principal