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New York City-based Falcon Real Estate Investment Co. set a company record in 2007 with $888 million in deals, including $591 million in property dispositions and $297 million in acquisitions, the largest total of sales and acquisitions since the company’s founding in 1991. The first question that GlobeSt.com wanted to ask Scott Sweeney, San Diego-based executive vice president for Falcon, was whether the company thinks that it can repeat that kind of a year in 2008.

GlobeSt.com: In light of Falcon’s $888 million year in 2007, do you think you can approach that same number in 2008?

Sweeney: I think 2008 is going to be very different from the way most of 2007 was. The credit squeeze, the housing market and the slowing of the economy all put questions on the market so we will be very happy if we can reach a transaction level in 2008 that is similar to what we accomplished in 2007. We’re on the sidelines a little bit right now, waiting to see where the economy goes, and also to see how this credit squeeze resolves itself, but even so we are still looking for opportunities because there are always opportunities in real estate. And in fact right now, we are in the process of acquiring two properties, a multi-tenant office building and a single-tenant office building.

GlobeSt.com: Considering the niche that you have developed in attracting foreign investors, what percentage of your funds come from offshore and what percentage come from the US?

Sweeney: The non-US investor base is our niche because we have a lot of experience with it and we are able to set up specialized investment strategies for certain types of clients. For example, we have a lot of experience in setting up investments that are Islam compliant and Sharia [Muslim] compliant. About 10% of our client base today is domestic investors and we are going to be pushing to increase that this year because, at the end of the day, we are still doing real estate transactions in the US.

GlobeSt.com: Has the weakening dollar prompted more foreign sources to invest with Falcon or caused some of your existing foreign investors to increase their investment levels with you?

Sweeney: A lot of countries see US real estate as a value now, especially when they include their currency into the mix. We are talking to a lot of people from Germany and Ireland who are looking for opportunities now. Part of their reasoning is that not only has pricing come down a bit, but the currency play even brings more of a benefit to them. In addition to the historically strong interest we have had from the Middle East because of the price of oil and other factors, we even have interest right now from the Japanese, who have not been active here for a while.

GlobeSt.com: You mentioned a single-tenant and a multi-tenant office deal that you have in the works. Do you have any preferences there?

Sweeney: Our portfolio is about 20% single-tenant office and about 20% multi-tenant office. We focus on very strong CBD gateway locations, infill locations or real estate that may be mixed use and have an office component along with good public transportation. We are also looking at the very top tier secondary markets for office investment.

GlobeSt.com: Do you expect to see prices adjusting downward for office properties?

Sweeney: It depends on the asset quality. I really haven’t seen any pricing on core-plus assets adjusting. One deal we marketed and closed the fourth quarter of last year was our Gem Gateway Property [a 162,326-sf suburban office complex near Los Angeles that sold for $48.5 million], which is the leading multi-tenant office project for that market. The cap rate was as aggressive as it has ever been and the competition was very intense, but what did change in that transaction was that the all-cash institutional buyers stepped up to the pricing while the highly leveraged buyers did not. There was a very big gap between the all-cash buyers and those who were highly leveraged.

GlobeSt.com: Will the distress of some over-leveraged owners result in opportunities for companies like Falcon to step in and buy at good prices this year?

Sweeney: I think there will some parties that have to sell because it’s their exit strategy, because they bought at the right price at the right time, because they have made their profit and they need to get on to the next deal. There will also be opportunities with owners who used too much leverage, bought their properties at too high a price with aggressive underwriting and will be squeezed when they try to refinance. For the right property, we might be able to provide mezzanine debt to bridge the gap or go in as a JV, but only on the right property.

GlobeSt.com: What do you recommend to your international investors in terms of geographic asset allocation?

Sweeney: We typically advise a client that invests globally to place about a third of their equity in the US. We then take that equity and we put it into different properties in different regions for diversification. We look at all property types and it really depends on their objectives and risk tolerance as well as the exit strategy for the property.

GlobeSt.com: How long do you hold your investments before exiting?

Sweeney: Our clients typically hold their investments for three to 10 years. A few years ago it was three to five years, but when pricing got higher, we went to longer-term horizons.

GlobeSt.com: Does Falcon invest in core assets, core-plus, value-added or all of these types? Do you invest across all property types such as office, industrial, retail, multifamily and hotel?

Sweeney: We look at all of the property types you mentioned and we also place equity in development JVs. The one product type that we don’t work on is hotels.

GlobeSt.com: Why should an investor choose Falcon?

Sweeney: We’ve always focused on real estate 101 so we’re really just buying quality properties in stable locations with growing rents. We practice realistic underwriting and conservative leverage and we always try to have a clear exit strategy, so our IRR has been tested both in good markets and in bad. The best barometer of our success is that we’ve done well over $4 billion in transactions and our IRR is more than 18% from the inception of our firm.

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