Scarcity of Supply

ATLANTA (April 8, 2010) Would you believe there’s not enough office product to satisfy demand from investors? In multiple conversations over the past 10 days, our team learned that some of the top real estate funds in the US are struggling to invest the big bags of money that have appeared in commercial real estate. This situation is developing before our very eyes and became even more pronounced over the past 6-8 weeks.

Here’s the sticky wicket; many well capitalized major funds want so called “core” product that is new, and greater than 90% leased in good submarkets. According to investors, the very few buildings on the market in this category are causing bidder to hyperventilate. They are bidding up prices and causing much lower cap rates for perceived safe plays.

As a result, we see prices going higher and higher for core assets thus ultimately increasing risk. We thought we would make it till at least 2011 before talk of “bubbles” came back on the commercial real estate scene.

Well, what about the rest of the real estate universe, you may ask? Investors would love to look at buildings in the middle between distressed and core assets but most of those owners are not selling now. As one major landlord put it “only a fool or a desperate owner would sell in this market.” Prices will need to rise a good bit for these assets to come available.

Much has been written about distressed assets in the past 6 months, but relatively little about the rest of the market. We think it is interesting to pay attention to investor behavior because their actions have a direct impact on the best way to negotiate tenant deals. An owner who is riding high and 90% or greater leased is clearly less likely to be interested in bloody concessions in this market. The buildings in the middle that aren’t struggling are more likely to want to “take their medicine” now through increased free rent and higher tenant improvement allowances. Distressed assets are very risky and require lots of time and attention, but can deliver lots of free rent with relatively smaller amounts of cash for tenants.

Our advice, know the ownership and try to determine not only their position today, but their hope and dreams for the property. Also, like any good deal hunter, keep attuned to the way the wind is blowing in the marketplace. This information will help you as you bag a great lease deal for your next user group need.

Ken Ashley