Part 2 of 2

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LOS ANGELES-Industrial investors are shying away from risk andfocusing more on core investments as they shift their strategies,according to speakers at the sixth annual CB Richard Ellis SouthernCalifornia Real Estate Conference this week. “Pension funds havereally changed their strategies,” explained Darla Longo, CBRE vicechairman and an industrial market specialist.

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Longo joined other panelists to provide a quick capital marketsoverview, mostly surrounding the industrial sector, pointing outthe shift in the capital flows that has accompanied the change instrategies by institutional investors. Part of that shift is theincreasing focus on core properties, which in turn has intensifiedthe competition for those properties and driven up prices, a pointthat CBRE CEO Brett White underscored in hisremarks to the conference on Thursday.

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Speaking to the audience of nearly 400 at the event in DowntownL.A., White said that, thanks to the bidding competition for coreassets, the greatest opportunities are not in core but in otherassets with more upside potential.

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The capital markets overview by Longo and other panelists showedthat core property funds have attracted $7.2 billion in capitalthis year; riskier funds targeting at $120 billion only closed at$6 billion. Specifically, Longo pointed out, CalSTRS has a$132.2-billion fund that is increasing core allocations to 50% from35% and is decreasing riskier allocations to 50% from 65%.

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Longo also pointed out that third-party-managed funds, whichmake up majority of capital, have decreased to 49% from 77%;publicly listed companies now account for 17% from 4% in 2009; andto date, over $9 billion in industrial real estate has traded--$1.6billion in September alone.

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Concerning trends, Longo said, “What we have is globalinvestment capital targeting US real estate, which is forecasted todouble in 2011.” Regarding distress, she said that “Basically, 77%of the distressed industrial assets are still unresolved.” Of the$11 billion of industrial real estate that has fallen into distressthis cycle, she said, only 3% has been restructured. However, asLongo pointed out in a recentinterview with GlobeSt.com, industrial assets accountfor only a small portion of the commercial real estate market’soverall distress, about 10%.

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Another trend outlined at the conference was the improving debtmarket. “We are seeing very strong increasing appetites fromlenders,” said Val Actemeier, executive vice president of debt andequity finance at CBRE. “Recent debt market activity can becharacterized by strong lender demand for mortgages and incrediblylow interest rates,” she said.

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Liquidity, Actemeier said, has continued to improve through2010. Some common themes in the debt market that she pointed to inaddition to expanded lender appetite and low interest ratesincluded increasing risk tolerance, a decline in issuer defaults,volatile macro capital markets (weak job growth, sovereign debt,global issues) and compressed spreads.

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Actemeier described the debt market as improving but stillinefficient. CMBS issues are returning to fill a void and areexpected to total $8 billion to $10 billion this year—perhaps$40-billion in 2011. Life companies have about $20 billion to $25billion to invest in core, stabilized assets with excellentpricing, she said, while the banks that are lending again arefocused intently on sponsorship driven. Among the challenges in thedebt market, she said, are vacancy, rollover, single-tenantexposure, mark-to-market impact and approaching maturities.

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The CBRE event included top producers and executives from aroundthe country. Among some of their observations:

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Chris Riley, vice chairman of the southeast, pointed out thatnational class A industrial cap rates have compressed from thistime last year and “are still 100 to 150 basis points off fromwhere they were at the peak.” Riley predicted further compressionof cap rates next year but said, “We will find improvedfundamentals in 2011.”

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Mike Hines, northeast executive vice president, compared A and Bclass properties. “If you look at B space, it has improved over thepast six months. It is not as significant as class A, but I thinkgoing forward, you are going to have to see some improvement onclass B space,” Hines said. “I believe that the best opportunitiesin 2011 will be in the class B markets.”

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Mike Caprile, vice chairman of the North Central region, pointedout that more foreign capital is targeting the industrial sectorbecause investors feel comfortable with industrial properties. “Ithas a more predictable cash flow and that is what everyone wants.It is what it has always been,” Caprile said.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.