Friday, January 30, 2009

"Its Always Sunny in Philadelphia" - Part III

Earlier this week, we examined the credit market turbulence's affect on the commercial real estate market at a national level, as well as local to Philadelphia. Regardless of location, there will be opportunities. But where and how can they be found? Read on...


Experience is a dear teacher, but fools will learn at no other.

No matter the geographic location, there were many buyers who took short-sighted views of the marketplace, had ridiculous assumptions in their models, had access to cheap debt through the CMBS markets, and overpaid tremendously for assets acquired between 2004-2007. It happened in excess in Southern California and Florida, but it happened locally as well. As short term debt associated with these properties begins to mature and balloon over the next few years, there will certainly be owners who are forced to sell because their properties won’t be worth the debt affixed to them, thus stymieing their ability to refinance.

Furthermore, those owners wishing to workout their sour deals have found that their lenders are simply burying their collective heads in the sand, as if the problems will go away by ignoring them. Banks are only returning phone calls from distressed operators when they default on their mortgages and miss a few payments. Then, and seemingly only then, do lenders realize the severity of this crisis and acknowledge it through workouts.

I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.

There will also be developers whose projects will not be able to find anchor tenants due to the recent economic swoon. Owners of projects with bridge debt or construction loans may soon decide to cut their losses rather than wait out the storm or continue to keep their fingers crossed.

However big a gap that exists between the debt and the current value of said properties will determine whether buyers will see these assets through the brokerage community or directly from lenders.

The intelligent and most successful buyer will be the one who doesn’t wait for either one, but rather proactively identifies underperforming assets and inquires directly with ownership as to their interest in divesture.

Also, more than ever, it may be worth reexamining past deals, and following up with brokers to see if any of their deals are likely to fall out of bed. Investors must dig deep and buck the traditional sources to finding favorable deals.

Finding pain is an art, not a science. And as more pain mounts in the marketplace, perhaps we should recall a famous quote not attributed to Benjamin Franklin:

"The early bird gets the worm, but the second mouse gets the cheese"

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