JMBM 2011 California Real Estate Survey: Real estate executives seek opportunistic investments
More bulls and fewer bears
To review the statistical results of the survey, click here.
JMBM’s Real Estate Group gathered the opinions of 71 California real estate executives in January 2011. More than half (52 percent) identified themselves as developers, 15 percent as capital providers, with the remainder involved in asset management, construction, and consulting.
Only four percent of executives indicated they were “bearish” about the market, down from 11 percent in 2010 and 22 percent in 2009. Those that are bullish grew from six percent two years ago to 18 percent today. The majority of respondents, 73 percent, remain “cautious.”
Finding the right opportunities for investment remains the biggest challenge. As in 2010, finding the right opportunities for investment remains the biggest challenge to our executives. The “bid/ask gap” and “acquiring debt” were their next most challenging issues.
Distressed assets continue to be of interest. Fifty-six percent of respondents are seeking opportunistic acquisition of distressed assets and 34 percent think that distressed assets have not yet reached bottom. Only 12 percent of our respondents indicated they were “staying away” from distressed assets. JMBM real estate partner Guy Maisnik, said, “The acquisition and disposition of distressed assets can be a win for all parties –– buyer, seller and lender –– but it requires a sophisticated and simplified game plan.” Maisnik recently structured the sale of the Sheraton Universal Hotel through a receivership, enabling all parties to address real estate and legal issues without the lender having to foreclose on the property.
The availability of capital in 2011. Sixty-four percent of respondents believe it will be easier to acquire debt in 2011 than it was in 2010. “There are more sources,” said one executive, but the underwriting is much tougher.” Sixty-four percent also believe that acquiring equity will be easier this year. But, as one respondent cautioned, “It still depends on relationship, relationship, relationship.” The majority, 51 percent, believe there will be no meaningful change in cap rates in 2011; 31 percent think they will go up and 18 percent think they will go down.
“Multifamily” is the most attractive real estate sector to investors. Asked to rate seven real estate sectors, 69 percent of respondents chose “multifamily” as the most attractive to investors in 2011. (Note: a large number of our respondents are developers of multifamily product.) “In the past two to three years, the only real estate financing available has been for multifamily or mixed use development with a substantial multifamily component,” said Ben Reznik, Chairman of JMBM’s Government, Land Use, Environment and Energy Department.
Hotels targeted for investment. Of those respondents involved in hotels, 52 percent are currently involved in distressed hotels and 33 percent plan to invest in hotels in 2011. “Hotel industry fundamentals are improving and this year will see strong increases in hotel values,” said Jim Butler, Chairman of the JMBM Global Hospitality Group®. “Those involved in this sector are very active.”
Financial institutions are more willing to sell notes. Forty-four percent of our executives have seen an increased willingness by financial institutions to sell notes. One said, however, that, “Most lenders’ staff are totally unprepared for real estate issues and don’t share our industry’s negotiation ethics/mores.” Of those that have purchased notes, 28 percent acquired them as part of prepackaged resolution with the borrower and they promptly acquired the property; 24 percent said the loan is performing; 20 percent said they are actively pursuing recourse against the borrower and guarantors; and 16 percent restructured the debt with the borrower. “Deal flow is way up, as more note sales and receivership sales are coming to market,” said JMBM real estate partner Seth Weissman. “Opportunistic all-cash purchases are still the norm. But in some cases, servicers are allowing buyers to acquire the real estate and assume and amend in-place financing. Buying at a good basis, the next challenge is for the acquirers to stabilize the assets and obtain commercially-reasonable debt financing.”
It’s a good time to entitle and re-entitle properties. Eighty percent of respondents believe that 2011 will be a good time to entitle and re-entitle properties. “With the 2-4 year lag between starting the entitlement process and putting the finished product on the market, timing seems to be appropriate,” said one developer. “But it’s still difficult, as cities are broke and lack staff to productively engage –– even when developers are willing to foot the city’s bill,” said another.
Developers still grappling with CEQA issues. Developers continue to deal with compliance under the California Environmental Quality Act (CEQA). Their main challenges in 2011 are storm water (ranked the #1 CEQA concern), greenhouse gas emissions, and the Endangered Species Act.
“Our survey indicates that California real estate executives are cautiously optimistic about 2011,” said Reznik. “There seems to be general agreement that opportunities for development and investment are available and that capital is continuing to come online.”
“Real estate activity has been an important contributor to California’s economy throughout the years,” said Butler. “And it’s clear that the industry is eager to play its role in the economic recovery that is underway.”
We would like to thank our clients and friends who participated in the survey.
For the JMBM Real Estate Group:
Benjamin M. Reznik
For a list of all our Real Estate professionals, click here.