My friend and veteran land broker, Larry Lynch of Korek Land, emailed me recently to remind me that the scarcity of debt (the Wall Street folks call it deleveraging) and very high investor return expectations are also helping to drive prices of commercial real estate and land lower.
Out of necessity, most distressed assets are now being acquired with little or no debt. In many cases, the entire cost of acquisition and project completion is coming from equity. With investor acquisition underwriting demanding very high annualized returns of +/- 25% per year on invested equity, this all exacerbates the weakness in pricing, as fewer buyers have the funds necessary to acquire and complete a project without debt. Or to put it in other words, it used to be if you had $10 million of equity, with the magic of leverage you had about $40 to $50 million to buy real estate with. Today, with the magic of leverage now gone, if you’ve got $10 million of equity, you’ve still only got $10 million to spend. And, from everything we’re hearing, it will be a while before the magic is back.
