Commercial real estate is an asset class that includes a wide range of strategies and approaches, all of which can be segmented into a few simple categories. The most important segmentation is core versus non- core, or properties with stable income versus unstabilized ones. Some investors consider four loosely defined classifications: core, core plus, value-added, and opportunistic.

Our “core” category includes both core and core plus strategies, and our “non-core” category includes both value- added and those opportunistic strategies that are real estate based rather than corporate. The distinction between value- added and opportunistic essentially refers to how unstable the income is, but there is not a consensus on where on the continuum the definition changes. Most things considered to be value-added have some income component, whereas opportunistic assets can have none (i.e., empty buildings or new developments).

An update by David Sherman, CIO, about the current state of the real estate markets, particularly in relation to real estate debt opportunities
Opportunities In A Workout Environment – Fall 2010 (PDF)

A thoughtful commentary by David Sherman, CIO, about the current state of the real estate markets and particularly about the attractive debt opportunities.
Opportunities in a Workout Environment – 12-2009 (PDF)

Example: Discounted Mortgage Loan Purchase

In this example a loan was bought from a nationalized European bank at a discount. The loan is secured by a suburban office building; the owner has been repositioning the building.

MREEM Overview – Discounted Mortgage Loan Purchase – June, 2009

Note: A full Case Studyon this whole loan purchase and its performance is available for MREEM clients. Please contact us for a username and password.

US Real Estate Fundamentals: The Silver Lining?
By Margaret McKnight

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Overview:

While there has rightfully been much discussion lately about the scarcity of debt capital and its impact, we would like to set that aside for a moment and focus here on another critical, but presently overlooked and possibly misunderstood aspect of real estate: fundamentals. Fundamentals, or the supply and demand for physical space, drive rental rates, occupancy, and income, and are at least as important in determining real estate prices as cap rates, though they may get less air time.

Watching financial markets cascade down globally, it is hard to focus on much other than the pending recession. Slowing economies will mean slowing commercial real estate fundamentals. But how far fundamentals fall will, to a great extent, depend on where they start. In that respect, there is cause for cautious optimism. Commercial real estate fundamentals in the US are generally quite healthy. In most markets, for most property types, supply and demand are in equilibrium. While there are exceptions, they go both ways. Real estate markets are in the strongest position we could hope for given that we are likely to experience a drop in demand due to a weakening economy. Good fundamentals at the outset put us in a good position to weather the storm. They dont guarantee that we wont suffer damage; we expect an economic downturn to reduce tenant demand, perhaps significantly. Whatever comes, the solid starting position means that income will be more resilient and will recover faster than if we were not in equilibrium now.

This is particularly good news to investors who may wind up holding assets longer than they expected given the slowdown in the exit markets. As weve discussed elsewhere, as long as you have husbanded your capital well, an important advantage of real estate is that if you dont like todays price, you can wait to sell until you do like the price. This is true because you can earn an attractive income stream (NCREIF income average over 30 years is 7.5%, unleveraged) while you are waiting, so its helpful to know income is as healthy as it can be, all things considered.

We are in the midst of the most challenging financial market environment in years – for many professionals the most challenging environment since they entered the workforce. The attached piece summarizes our current thoughts and (we hope) will provide some useful perspective.
Metropolitan Real Estate US Market Outlook: August 2008 (PDF)

International Real Estate Market Update with David Sherman, CIO
August 2008

 

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Metropolitan Real Estate Markets Outlook: 2008 (PDF)