COVER STORY, SEPTEMBER 2009

ON TOPIC Q&A: CREDIT MARKETS
Richard Myers, CEO of Realty Capital Partners, gives insight into the best bets for commercial real estate investing, selling and financing.
Interview by Lindsey W. Marcec

Myers

Since founding Realty Capital Partners in Dallas/Fort Worth in 1992, Richard Myers has provided many individuals with sound advice on investing in commercial real estate. In light of the current state of the credit markets, we asked Myers what words of wisdom he would give those looking for project financing, or looking to buy or sell, in this climate. 

TREB: Are you seeing any loosening of the credit markets? Are developers/sponsors seeking
financing having any better luck finding it now rather than 6 months ago?

Myers: We have seen some anecdotal evidence of the credit markets shifting, such as our developers/sponsors receiving refinancing terms for existing buildings and loan commitments for a few ground-up construction projects. However, overall, it is still a difficult market for developers/sponsors to find financing. Even projects with extremely sound competitive advantages and solid, experienced project teams are finding today’s lending environment difficult. Furthermore, even if a developer/sponsor is astute enough to find financing, the amount of leverage that banks are offering today has declined so much that the terms are often not attractive enough to induce investors off the sidelines. While it may help the real estate industry in the long run to have more disciplined lending practices, the effect today is that the flurry of activity we saw through 2008 is now highly constricted.

TREB: What advice do you have for investors trying to sell commercial properties in this
market?
Myers: Sellers have to be patient because many potential real estate buyers are choosing to wait on the sidelines due to the tough lending environment and uncertain economy. However, there are buyers out there and, as a general rule, they are seeking off-market opportunities that offer at least one distressed component that is compelling enough to increase the perceived value of a property. And even then, highly interested buyers may have difficulty securing financing. However, the key thing to note is that there are still buyers out there. In fact, five of our properties have sold since September 2008 and we are aggressively working to sell additional properties. The second suggestion is to try something new. Sellers today are likely to face intense competition to distinguish their property from other available properties and to pique the interest of potential buyers. As such, sellers have to pursue more creative methods for marketing properties to interested capital rather than more traditional sales methods. Examples of strategies we have recently undertaken include evaluating properties for inclusion in nationwide property auctions and directly marketing properties to end users rather than just to other real estate investors/sponsors.

TREB: What about investors looking to buy? What can they expect?

Myers: First, investors generally expect every real estate investment opportunity today to be “distressed.” With all the news coverage about distressed assets flooding the real estate market, potential buyers want fire-sale prices even if a property’s price is substantiated by significant competitive advantages. Investors are also looking for more current income investments, particularly since many of them have seen the yields on their other fixed assets decline along with today’s interest rates. In terms of what investors can expect, today’s investment opportunities are likely to require a higher percentage of equity (often 40 percent) compared to historical debt to equity percentages due to the tightened credit markets. As a result, those with available capital can demand very favorable terms and safety measures to protect their investment. As for distressed opportunities, we have seen that these deals often have too many problems and are distressed for good reason. It is important to carefully look at distressed assets and focus on those that are distressed due to mismanagement or because of an owner’s liquidity issues.

TREB: Are there certain property or class types that are selling better than others?

Myers: As mentioned above, income-producing investments are in high demand right now. Mezzanine opportunities with significant collateral and high projected returns are particularly popular with investors. In addition, we are seeing a lot of interest in medical office and other real estate classes targeting the Baby Boom Generation, such as assisted living.

TREB: What do you look for when providing equity? Has your criteria changed?

Myers: Development projects should offer highly compelling competitive advantages, such as being 100 percent preleased with attractive lease terms or an extremely low land cost basis. The criteria we use for considering development deals has not changed except we now demand higher returns for low-risk opportunities. Because of the scarcity of investor capital for development deals and the fact that this capital can now receive the same level of returns on existing properties, returns on development deals have to exceed what they’ve typically been in the past. The deal basically has to be a no-brainer for investors.

TREB: As we wrap up the third quarter, have you seen a positive change in the overall attitude of investors from the first half of the year?

Myers: There is definitely less panic among investors compared to late 2008 and early 2009; however, many are still very skeptical about investing in any asset class. A number of investors put quite a bit of capital in real estate over the past 3 to 5 years and have seen the anticipated hold periods for that capital extended. As such, it is unlikely that this skepticism will soften until the credit markets loosen and/or properties begin to sell. This is unfortunate because now is the time to invest as we are seeing opportunities that provide a premium for our equity and mezzanine investments.

TREB: What is RCP doing to prepare for the return of a healthy market?

Myers: We are spending a significant amount of time on investor communication and hand holding. We are trying to help investors understand how this downturn is affecting their existing investments and what they can expect moving forward. We are also trying to communicate that while real estate is not immune from economic turmoil, it has historically proven to be a viable means for attaining wealth. While these are tough conversations, investors appreciate knowing that we are working hard to protect their capital. We feel that if we do a good job providing service to our investors during market downturns, they will be even more loyal to us during healthy markets. Also, keep in mind that despite the bad national economic news, we are still receiving excellent real estate investment opportunities. So, in that regards, we continue to strive to make the best investment decisions for our investors with a heavy focus on our acquisitions, underwriting and asset management functions.

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