Look for smaller, lower quality assets that need value add. This is where the bargains will be because for the last two and a half years or so the majority of the assets that have traded hands other than distressed loan portfolios were core stabilized assets with relatively no risk. Other than the obvious lack of available financing, investors are still uncomfortable with value-added assets because they feel that some of those properties haven’t adjusted to the current pricing and they are not sure when things will stabilize. Value-add deals can still be characterized as potential “career killers”. Nobody has yet been willing to go in front of their board and pitch a deal that isn’t air tight for fear of being laughed out of the board room or worse have the board believe their pitch then lose your job for recommending a failed business plan.

Lower quality and smaller assets have become more prevalent in recent investment-sales activity. The MIT Center for Real Estate, index that tracks prices paid for properties sold by institutional investors fell 7.3 percent in the third quarter. Deals of less than $10 million accounted for 40 percent of the third quarter volume and the $31.4 million average price paid in all the quarter’s deals compares to an average appraised value of more than $39 million for all NCREIF index properties during that time. Both findings show that lower-priced assets and probably lower-quality assets are more actively being sold.

Landlords are willing to market weaker properties because they had realized surprisingly  “sufficient profit” from sales of higher-quality assets in the preceding quarters which has given them a sense that selling conditions have improved. This has created the opportunity to find bargains and beat up sellers because for the reasons mentioned above I’m not so sure that selling conditions have improved much for riskier assets. Happy Hunting!

By Bruce Krall, Managing Director
December 27, 2010