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Are You Reaching for Investment Deals?

(Last week’s Feedback Poll question was actually inspired by the 2007 edition of “Emerging Trends”–the annual review and forecast put out by PricewaterhouseCoopers and the Urban Land Institute. In a warning note, the piece quotes one advisor who says that “everyone has to reach to get deals done.” Against the second-quarter backdrop of downgraded forecasts and an upgraded sense of caution, our Poll respondents last week split pretty evenly (50/50, in fact) on the difficulty of getting deals done. Commentator Younan, on the other hand, is still bullish on the market’s prospects. Here’s why:–ed.)

This issue actually reflects three basic questions: One concerns lender strategies going forward. The second is if the market is indeed getting slow. The third is one of valuation.

Let’s talk about the market first. In commercial real estate–but especially office, which is my area of expertise–we don’t feel there’s a warning signal regarding the significant cap-rate compression we’ve experienced in the past 16 to 24 months. That compression can be justified easily by an increase in rental rates and occupancy. Some 80% of all the transactions in the past 12 months transacted below replacement cost, so we feel there’s still favorable pricing and valuation in the office sector.Valuations will continue to go up simply because of rental rate increases. Throughout the entire country, we’ve seen some of the best positive absorption we’ve seen in many years–about 120 million sf over the past 12 months. As that continues to grow, we’ll see a significant expansion of rental rates.

In terms of lenders, they understand the situation very well, and that’s the reason they’ve been very aggressive. And they’ll continue to be aggressive because they see the significant fundamental improvement in commercial real estate. They clearly feel comfortable that the economy will continue to strengthen and create positive absorption for years to come. They’re being very aggressive in order to place their money on the right assets at the right time. In addition, the debt-service coverage ratio hasn’t fluctuated very much, even though the cap rates have compressed, and that’s the best indicator of the lenders’ comfort zone.

In all, I think we are just in the beginning of the recovery on a national basis and it will continue to go on for the next three to five years.

Recently voted by the editors of Real Estate Forum as one of the CEOs to Watch, Zaya S. Younan is chairman and CEO of Los Angeles-based Younan Properties.

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