Talk about short memories. Some investors appear to be alreadyoverpaying for real estate in markets only recently lurching offbottom. The “richly-priced” deals are few and far between,concentrating in the very best, most resilient markets: WashingtonDC, New York, and San Francisco. But buyers are placing bets againon tomorrow’s hopeful cashflow assumptions, ignoring current anemicrevenues while stepping over the carcasses of yesterday’s overlyoptimistic players.

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Now, if you’re going to overpay, market bottom is the time to doit, and many of these deals are modestly leveraged or even allcash. And since interest rates can’t go any lower and the stockmarket looks rocky, a six cap or under deal can be rationalizedwhen you’re talking buying up prime real estate in the bestmarkets.

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Buyers have been mostly investors with cash burning holes intheir pockets: the odd REIT needing to put IPO proceeds to work,German institutional funds eager to market time, and carefullydisguised Middle East money. The targets are typically well-locatedoffice and recently beaten up prime hotels. The officeinvestors assume core style single digit returns even if stillfalling rents suddenly spike in three or four years. The hotelplayers may hope for bigger pay days in this always volatilesector, but face a steep arc to increased revenues.

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Notably all the opportunity fund stashes can’t compete andremain sidelined. Once expecting plenty of bargains, they areeffectively shut out of the prime markets by the dearth of dealsand the bevy of core investors circling anything of highquality.

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Shunted to secondary and tertiary markets, opportunity playershave essentially been left with an unpalatable choice— go after theflood of busted Florida condos, take a chance on the FDIC’sforeclosed property pools, wait for the inevitable wave of bankforeclosures and owner capitulations, or give money back to theirinvestor clients. None of these alternatives is particularlyappealing. Florida condos, especially the well-built seasidevariety, will likely rebound, but not immediately and may need tobe turned into rental apartments in the meantime to secure anyincome. The early FDIC offerings include some of the worst of theworst, the highest of high stakes bets. Patience doesn’tmatch the immediate-gratification opportunity investor mentality,especially when mistimed legacy investments continue to produceheartache with virtually no chance of recouping lucrative promotes.Without various ongoing acquisition and asset management fees, theymight as well run for the exits and return commitments.

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A depressed sounding acquisition pro laments how he’s beenhitting his head against the wall chasing after deals, while “athousand other really smart former colleagues” are out of work andwithout prospects. He wonders how the buyers landing high priceddeals today can be successful in an environment where either rockbottom interest rates go up in a slow economic recovery pressuringcap rights higher or deflation sets in to challenge overly sanguinerevenue assumptions.

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A leading offshore investor, who had been in the thick of recentbidding, now tells me he is backing off. “I’m really torn,” hesays. “But the prices have gotten too steep.”

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Imagine… and most markets experience a continuing fall inoffice, retail, and industrial rents.

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Jonathan D. Miller

A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.