As banks and other lenders work through the enormous inventory of overleveraged assets on their books, investors will continue to have a wide range of opportunities to participate in value-creating strategies. The yawning valuation gap between stable, income-producing properties and those properties with perceived risk creates a broad range of attractive situations.
New buyers can acquire at highly favorable prices properties that are fundamentally sound but have been starved for capital and attention while lender and borrower have been dancing. With an advantageous acquisition price and a new, sustainable capital structure, experienced managers can use the lower cost basis to offer rents that undercut the competition. In these situations, profitable levels of occupancy can be achieved even in situations in which there is little net growth in demand in the local market.
As a result, the property's value can increase substantially as it becomes the stable, income-producing asset so prized by the market in these low interest rate conditions. Investors can participate in this process in a number of ways, including through the acquisition of debt or recapitalization of projects.
These opportunities arise from a mispricing of risk that often occurs as the property market bottoms and begins a cyclical recovery. This uncertainty and inefficiency is exaggerated in times when the economic recovery is weak, global markets are volatile, and headlines are persistently negative. At times like this, the normal risk spreads between categories of assets can move out of kilter. Traditional capital sources retreat and are replaced by new market participants. It is precisely in these conditions that experience, research, and local knowledge can identify opportunities to achieve significant risk-adjusted returns.
David Sherman is president and chief investment officer of Metropolitan Real Estate Equity Management LLC, New York.