With the holiday weekend behind us, it is not too soon to lookat what will be the top investment strategies for next year. Theyinclude:

1. Sell Overpriced Industrial Assets

The industrial market has been booming for the last few yearsand is the favored asset class among institutional investors. Themarket is "hot" because of the strong economy, increased demand forwarehouse and distribution space due to rising Internet sales andlast-mile same- day delivery of online goods. Cap rates forindustrial properties have compressed 1.5% to 2.0% during the last18 months and we would be net sellers of industrial assets in thismarket.

2. Acquire Beaten up Retail Assets

Many shopping center and mall real estate assets are selling at7.0% to 10.0%+ cap rates and some of these assets should be bought.Retail assets have been out of favor for the last few years andalthough there are tenant risks, with bankruptcies and storeclosures, they can still provide a higher risk-adjusted return thanother CRE assets. A number of the public retail malls are alsoselling at deep 50%+ discounts to net asset value and are also ripefor a buyout or being taken private. These distressed retail dealsare opportunistic investments and need significant renovation andreleasing.

3. Invest in Data Analytics Companies

One of the key growth areas of CRE is in data analytics. Dataanalytics encompasses all aspects of big data for CRE including;demographics, ownership data, property data, historical valueinformation, sales/lease data and financial analysis. The dataanalytics space is very fragmented with a few large companies likeCoStar, RealPage, REIS (a unit of Moody's) and many local andstart-up companies. These larger firms have been acquiring smallercompetitors to expand their service offerings and customer base.Recently, CoStar acquired Smith Travel Research, the leadinghotel/lodging consulting firm, for $450 million and RealPageacquired Buildium, a property management software firm, for $580million. As the industry grows, there will be more consolidationand an opportunity to acquire these smaller private firms and evenestablish a platform to consolidate these entities.

4. Sell Overpriced Core Assets and Reinvest in OpportunisticAssets

The risk and return for various CRE investment strategies rangefrom the lowest risk, core investments, which are typically fullyleased, institutional quality, Class A properties with little or noleverage, to value-added strategies which are higher riskstrategies that involve some property redevelopment, tenantadjustment or leasing or with operational problems to opportunisticstrategies, which are the highest risk category that involve a highdegree of redevelopment, leasing, tenant relocation or change ormay be in financial distress. Many core properties are stilltrading at 3.0% to 4.5% cap rates and should be sold. The proceedsshould be reinvested in higher return opportunistic strategies, asdiscussed in #2 above, buying beaten up retail assets.

5. Provide Participating Mezzanine Loans

Even though there is a lot of capital sloshing around chasingdeals, there is a dearth of debt/equity capital for the portion ofthe capital stack above the first mortgage at about 65%-70% andbelow the minimum owners' equity investment of 10.0%. This slice of20% of the capital stack is ideal for a participating mezzanineloan. The participating mezzanine loan may have terms as follow;interest rate at LIBOR plus 4.0%+, loan fees of 1.0%-3.0%+ and20.0% to 30.0%+ ownership of the deal. The mezzanine lender willtypically not be secured by a second lien on the property but by anownership guarantee and assignment of the owner's interest in theproperty. The lender is entitled to the equity kicker because it istaking some of the equity risk of the project. Internal rates ofreturn of 12.0%-15.0%+ can be delivered with this strategy, whichis very attractive for a fixed income investment.

6. Perform a Systematic Review and Analysis of the 15 CRERisks

As we have discussed before, there are 15 risks inherent in CREinvestment as follows:

• Cash Flow Risk-volatility in the property's net operatingincome or cash flow.
• Property Value Risk-a reduction in a property's value.
• Tenant Risk-loss or bankruptcy of a major tenant.
• Market Risk-negative changes in the local real estate market ormetropolitan statistical area.
• Economic Risk-negative changes in the macroeconomy.
• Interest Rate Risk-an increase in interest rates.
• Inflation Risk-an increase in inflation.
• Leasing Risk-inability to lease vacant space or a drop in leaserates.
• Management Risk-poor management policy and operations.
• Ownership Risk-loss of critical personnel of owner orsponsor.
• Legal, Title, Tax and Political Risk-averse legal, tax andpolitical issues and claims on title.
• Construction Risk-development delays, cessation ofconstruction, financial distress of general contractor orsub-contractors and payment defaults.
• Entitlement Risk-inability or delay in obtaining projectentitlements.
• Liquidity Risk-inability to sell the property or convert equityvalue into cash.
• Refinancing Risk-inability to refinance the property.

All investors that own CRE should perform a detailed andsystematic review of the above risks and their potential effect onan asset or portfolio.

7. Acquire Small capitalization Public and Private REITs

There are more than 30 public REITs with market capitalizationsless than $1 billion that are trading at or less than their netasset value. These REITs are ripe to be acquired or taken privateby other REITs, real estate private equity firms or otherinstitutional investors. It also may be possible to get control ofthe board of directors of some of these REITs via a proxycontest.

Any acquisition or merger opportunity will have to comply withthe REIT tax rules including, the 5 or 50 rule which states that 5or fewer individuals cannot own more than 50% of the value of aREIT during the last half of the year. Also, more than two-thirdsof REITs are incorporated in the state of Maryland which hasbroader liability protection, more flexible voting provisions forstockholders, easier Bylaw amendment provisions, better protectionagainst hostile takeovers and easier stock issuance procedures.Notwithstanding a Maryland incorporation, there are stillopportunities via a friendly acquisition or proxy contest.