Four Quick Questions...
...with Evercore’s Martin J. Cicco
by Jason C. Flynn
1Recent data indicate that commercial property values
are rising, yet the level of transactions remains low. Why do
you think this is the case?
Clearly, at this point there has not
been the volume of transactions
that many real estate participants
were anticipating. However, in
addition to transaction volumes
beginning to pick up, there are
several factors that have contributed to the notion that commercial real estate pricing has
stabilized, if not increased, over
the past several months.
First, REIT share prices have
recovered dramatically from
their March 2009 lows. Since
commercial real estate fundamentals have not enjoyed the
same bounce, by definition this
means that the market is placing
a lower implied cap rate (and
therefore higher valuation) on
the assets owned by the REITs.
Additionally, the unsecured debt
markets for REITs have also improved significantly over the past
12 months, as indicated by the
levels of issuance as well as the
dramatic tightening of spreads.
In my view, the most critical
near-term issue affecting transaction volumes, as well as asset
pricing, lies in the continuing
efforts to redefine what is necessary to re-establish a functioning
REITs have clearly demonstrated their advantages over
the past year, most importantly:
liquidity for investors, prudent
capital structures, transparency
and access to capital.
While many private investment vehicles are in distress as
a function of too much leverage and acquisitions made at
the peak of the market, REITs
have spent the better part of the
last year fortifying their balance sheets. As a result, REI Ts
have more than “weathered the
storm” and have regained a substantial portion of their equity
value, while investors in many
private vehicles are left to wonder what their investments are
really worth and when they will
be able to access the capital they
have tied up in these vehicles.
For these reasons, I would not
be surprised over the next several
years to see REITs obtain an increased market share of commercial real estate ownership versus
private investment vehicles.
seems to be on stronger footing
and REIT balance sheets are in
much better shape. The two key
variables I am most concerned
about are when will real estate
fundamentals begin to improve,
and what will happen with the
wave of debt maturities in 2011.
A functioning CMBS market
will be necessary to handle the
upcoming wave of maturities.
2How do you think the re- cent downturn has affected
investors’ view of REITs?
3What do you think is in store for the REIT market
in the second half of 2010?
In a word: uncertainty. Macro
forces once again appear to be
what the markets are focused
on, and, given the unstable
situation in Europe currently, I
would not be surprised to see a
return of volatility to all major
asset classes, including REITs.
The good news as opposed to a
year ago is that the U.S. economy
4REITs exist in major mar- kets across the world,
with new additions on the
horizon. What do you see as
the challenges and potential
benefits in expanding global
The benefits associated with
establishing a REIT market are
clear. And efforts are underway
in Mexico, as well as a great deal
of interest in Brazil.
However, global real estate
ownership has a number of challenges from a structural and taxation perspective. I do envision a
larger market around the world
of publicly held real estate vehicles, the growth of which will
initially be driven by the need to
raise equity to deleverage assets.
But, in my view, the market
needs more time to establish
consistent accounting and
regulatory treatments before a
substantial pick-up in the cross-border M&A market occurs.
Clearly, NAREIT has taken a
leadership role in addressing
such challenges, and such efforts
should be applauded. F