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Capital Markets Say to Play the Waiting Game

By Fred Cordova
Published: Wednesday, July 01, 2009, at 11:31AM
Concerto and 717 W. 9th Eric Richardson [Flickr]

Concerto (black; center) and 717 W. 9th (green; left) are two Downtown residential projects still under construction.

Fred Cordova is a Senior Vice President with Colliers International. He writes about capital markets and real estate on his blog, The New Nexus.

My advice to anyone looking to invest in downtown is.....LEASE and WAIT. Your patience will be rewarded. There will be some great buying opportunities in the next 12-24 months.

While it’s true that the capital markets seem to be indicating they are starting to thaw — stocks have risen some 30+% since the March 9th low of 6500 for the Dow (see the Federal Reserve report linked below for more) — the unfortunate truth is that job losses are continuing, foreclosures are rising, consumer spending continues to be restricted, and banks are still not lending.

Strangely, this is an advantage for all want to be loft owners out there. Since the debt markets are frozen there is no liquid capital in the market to save projects that have construction loans or need to refinance permanent loans coming due before the market has a chance to recover. Unfortunately projects like Concerto, Muerelo's 717 W 9th Street, The Brockman, The Roosevelt Lofts, etc are simply victims of lousy timing. People who believe the cliché that real estate value is all about “location, location, location” are out of date. Today, timing is everything.

Once these projects run out of reserves and are taken back by the lenders — or in some cases the lender is in trouble (like Corus Bank with the Concerto) — fresh capital will come in to recapitalize the projects at 50% to 60% of their construction cost. The new buyer, armed with a low capital structure, will be able to drive rents or condo pricing to levels that the existing owners will have to follow if they want to move product. A real-time example is the Kennedy Wilson/LeFrak/Guardian Life Insurance Company acquisition of The Mercury from Forest City. They are now selling units for 40% of the previous asking prices.

Signs of an “eminent turnaround” such as an increase in existing home sales, an increase in consumer confidence, or an increase in commodity prices cloud the simple fact that job growth drives the economy. With unemployment reaching into the double digits, (or creeping to 18% including the under-employed,) the dearth of jobs leaves no fuel to fire the economy.

This is good news for anyone considering investing in real-estate or looking for housing in downtown as it will further drive down real estate prices. Rentals and condos saw prices drop by 20% to 30% across the board in 2008, and they will continue to fall as HOA fees are stubbornly resistant to pricing adjustments. Expect residential values to fall to between 40% and 50% off peak numbers before this "correction" runs its course.

Just remember, Timing is Everything!

A native Angeleno, Fred Cordova is a real estate entrepreneur with broad transactional and development experience. During his 25 year career he has purchased, sold, leased and developed more than $5.5 billion of real estate. He currently specializes in investment sales for both private and institutional capital. In June 2008 Cordova was named one of "LA's Best Brokers Specializing in Capital Markets" by the Los Angeles Business Journal.


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