CNN Ranks Naperville in Top 100 Best Places to Live


Top 100 rank: 54
Population: 152,600

In its list of America’s best small cities, CNN Money ranks Naperville at No. 54

Community is king in Naperville, which adds a local 1% tax on food and beverages to fund events and heritage celebrations. Come summer, residents converge on Centennial Beach, a huge quarry purchased by the city during its 1931 centennial celebration, or stroll along the 1.75 miles of brick paths on the DuPage Riverwalk in the heart of town. Top schools and lots of jobs at firms like OfficeMax and Alcatel-Lucent round out this picture of near perfection — marred only by some congestion on nearby highways and a lengthy commute for those who work in downtown Chicago.

Source: CNN Money

1717 Park St

Naperville office building sells for 5.7 million

A 114,016-square-foot office building in Naperville owner Omaha, Neb.-based Quarter Circle Capital LLC sold for more than $5.7 million. DuPage County records show the buyer of the property at 1717 Park St. was a venture of a Farida Tazudeen, a local real estate investor who could not be reached. The venture financed the Jan. 15 purchase with a $4 million loan from New York-based Garrison Realty Finance LLC, according to county records. It was the last remaining building owned by an approximately eight-year-old fund that also had included 1755 Park, which previously sold for $2.5 million to Riverwoods-based Podolsky Circle CORFAC International, Quarter Circle Principal John Martin said.  A Podolsky venture also agreed to buy 1717 Park, but Quarter Circle sued the venture in December, saying it failed to close on the deal. The lawsuit is still pending, Mr. Martin said.

Source: Chicago Real Estate Daily January 28th, 2014


Investors Flirt with Riskier Real Estate Strategies in 2014

Other trends predicted for the new year include that multifamily properties might fall off of investors’ must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.

“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.

Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”

As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor’s view of interest rates.”

One camp’s view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.

“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.

Multifamily is out, malls are in

Meanwhile, multifamily real estate investments may no longer be the darling of real estate investment community in the coming year.

Apartments — and the multifamily sector as a whole — have been extremely strong for several years, but it won’t be as hot going forward, Mr. Morrow said.

The net operating income might start to come down as new multifamily development projects that are in the pipeline are completed, he said. Indeed, there might be oversupply of multifamily properties in certain markets.

“I don’t see the growth opportunity we’ve seen in the past,” Mr. Morrow said. “Apartments might become less desirable.”

It could be a completely different story in the apartment real estate investment trust sector, Mr. Sullivan said.

Apartment REITs were red hot in 2011 and 2012, but underperformed the rest of the public markets in 2013, he said.

“Our view is the market overreacted to the decelerating growth,” Mr. Sullivan said. “Apartment REITs look cheap going into 2014.”

There will be a similar story with mall REITs, he added. In 2013, the mall sector significantly underperformed as investors anticipated a decline in consumer spending and a tax increase.

As a consequence, high-quality malls look cheap in the public real estate market, Mr. Sullivan said.

“Investor angst in relation to investor spending is legitimate but the mall sector was overly discounted,” he said.

One really big-picture item in 2014 is that the pace of new construction is starting to pick up.

“The commercial real estate party … usually ends not because of the lack of demand but because of excess new supply,” Mr. Sullivan said.

New construction, which had been at generational lows, is starting to change “in a pretty meaningful way,” he said.

The pace is picking up the quickest in multifamily, industrial and niche strategies such as student housing and data centers.

“The good news is that there is demand to meet the new supply,” he said.

The increasing supply is not enough to ring any alarm bells, but it is the first time in two or three years that observers will be watching out for oversupply.


One trend that sprouted in 2013 and might take firm root in 2014 is an increase in co-investments in real estate. While co-investments are fairly common in private equity, real estate deals have not been large enough for co-investments.

Real estate managers that can’t raise a large blind pool closed-end fund are looking to new ways to raise capital including seeking co-investments.

Managers may be more open to it in 2014 as fundraising continues to be a challenge, said David M. Sherman, president and co-chief investment officer of Metropolitan Real Estate Equity Management, Carlyle’s newly acquired real estate fund-of-funds business, and head of the real estate fund of funds group in Carlyle Group’s solutions subsidiary.

“Managers that need to stretch the remaining equity in a fund may co-invest, even if their deal sizes are manageable, during the latter half of a fund’s lifecycle,” Mr. Sherman said. “A manager of a new fund may seek co-investment because fundraising is going slowly. Some managers utilize co-invest in between fund raises.”

A big theme in 2014 is expected to be continued investment by foreign investors in U.S. real estate, said P.J. Yeatman, head of private real estate for CenterSquare Investment Management, a Plymouth Meeting, Pa., real estate manager. In a flight to quality, foreign investors have been buying up trophy assets in the U.S., leading to the overpricing for these properties, Mr. Yeatman said.

“We (the U.S.) became the flight-to-quality market,” he said.

These investors consider U.S. core real estate to be akin to fixed income, Mr. Yeatman said. What’s more, many of these buyers purchase properties on the basis of “perception,” he added. “The perception is that New York is a fortress and it is worth paying anything for New York real estate,” Mr. Yeatman said.

He added: “I don’t expect (foreign purchases of U.S. property) to stop” in 2014.

Astute investors will begin investing in value added and opportunistic real estate in order to sell into the overheated core market.

“The smart money will recognize the arbitrage opportunity between creating income streams to sell into the overheated market vs. buying income streams,” Mr. Yeatman said.

Another huge investment opportunity will be European real estate debt, said Joe Valente, managing director and head of real estate research and strategy in the London office of J.P. Morgan Asset Management (JPM).

Some €400 billion ($546.7 billion) of distressed European assets will be coming to the market, Mr. Valente estimated. “Half will be in core European markets where investors don’t have to take macro risk,” he said.

As for the year just ended, one of the big surprises was that the capital markets rebounded stronger than many real estate investors expected.

“I expected it to be strong, but it was stronger than I had expected,” said Gary M. Tenzer, Los Angeles-based principal at real estate investment banking firm George Smith Partners Inc.

Even though prices were at very high levels, in many cases around the pre-financial crisis levels, cap rates were very low, he said, noting that investors were chasing yield.

Source: PIOnline Arleen Jacobius, January 2nd 2014

Geneva Commons

Stiff Competition for Shopping Center Acquisitions

Dennis Gershenson, president and CEO of Ramco- Gershenson Properties Trust (NYSE: RPT), joined for a CEO Spotlight video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Gershenson provided an overview of the acquisition market in the shopping center industry.

“It’s very interesting, because we were in a very frothy market in the first five months of 2013,” he said. “When Mr. Bernanke came out with his prognostication that things might change, the market just crushed. It took most of the summer for both the buyers and sellers to feel that there was some normalcy coming back into the marketplace. Now, here we are in the fall (Editor’s Note: video was recorded in November 2013), and we’re seeing the high quality shopping centers, as well as the B shopping centers, back on the market. What we find is, that as far as the highest quality assets are concerned, the institutional buyers are still paying approximately the same cap rates that they were paying before, and there is a tremendous amount of competition for those.”

Gershenson described his company’s involvement in in development and redevelopment activities.

“Development takes one of two forms,” he said.” Either it’s legacy property that we purchased in the go-go days of 2004 to 2007, and we’re now redeveloping those properties. We will not be greenfield developers going forward, but what we have been doing is acquiring land adjacent to our most recent acquisitions – that gives us the opportunity to expand on a very successful asset.”

Gershenson also talked about his anchor tenants, and what changes he is seeing in terms of occupancy.

“We’re very focused on improving the quality of our anchor tenants, as well as the whole spectrum of retailers in our shopping centers,” he said. “We have filed our shopping centers where we had vacancies, either that existed before the debacle of the recession, or as a result hereof, with high-quality, national retailers. One of the exciting things about bricks and mortar retailing, is it’s always refreshing itself. So, with the problems that Circuit City and Linen’s had, along comes retailers like BuyBuy Baby.”

Source: 1/3/2014 Mitch Irzinski

Bank Owned

Distressed Property Prices Approach Market Values Banks Clear Out Inventories

It’s a sellers’ market for distressed commercial real estate and Taylor Burke, senior executive vice president and chief lending officer for the $2.62 billion Burke & Herbert Bank in Alexandria, VA, wants to move his inventory.

“I think this is a great time to buy distressed property, especially that which we are selling,” joked the Alexandria-based banker.

More seriously, though he says, the market is good for bad property right now.

“Banks should be cleaning out their inventory this spring,” said Burke. “I want to sell all my stuff now and I suspect that my conferees are ready to unload their REO now, too. There is finally some demand in outlying areas where most of our problems are located. Not just income-producing any more – even lots are selling at last. Builders need inventory. There are a lot of troubled suburban strip centers and offices everywhere. There has been a sea change in demand.”

But, therein also lies the weakness to the distressed investment market.

“I don’t see enough of a price spread to justify the risk of buying an empty or troubled building,” Burke said.

Luke Wood, partner in Haverwood Management, an opportunistic investment and management firm in Austin, TX, concurs.

“If you can find a good distressed deal at a ‘distressed’ price, buy it,” Wood said. “Good distressed assets are selling at market value (or above market value, depending on your opinion) at this point in the market recovery. Equity is looking for limited parking spots and we are seeing many distressed assets sell at non-distressed prices to optimistic buyers, eliminating the high returns sought after for distressed deals.”

Distress Sales By the Numbers
Distressed sales as a percentage of total commercial real estate property transactions have been on a declining trend since the start of 2011, according to CoStar Group data. Distressed property sales made up 20% of the dollar volume of deals in 2011 but just 11% of total property sales volume in 2012 as the number of nondistressed sales soared and the volume of distressed sales fell. There was $16 billion fewer distressed sales last year compared with 2011. At the same time total sales increased 26% from $255 billion to $322 billion.

The number of distressed sales decreased significantly in many core markets. Distressed sales in New York state were down $7.6 billion; down $3.1 billion in California and down $1.2 billion in Texas. Notable also was that distressed sales in Nevada were down $1.3 billion; where distressed sales made up almost entire volume of sales in 2011, they represented less than 30% last year.

However, different markets appear to be in different stages of the recovery cycle. For example, while total distressed property sales volume dropped year-to-year in Michigan, Nevada and Georgia, they still accounted for nearly 30% or more of all commercial property sales. But as distressed property sales plummeted in some states, they were increasing in other. Distressed sales were up more than $100 million in 2012 vs. 2011 in Maryland, South Carolina, Illinois, Colorado, Pennsylvania, New Jersey and Missouri.

Lots of Buyers, But Numbers Don’t Always Pencil Out
Ember Grummons, a commercial sales and leasing representative for Investors Realty in Omaha, says there are a lot of buyers looking for distressed product in his markets.

“But the numbers need to make sense,” Grummons added. “Most of my clients require a 20% or greater internal rate of return on a distressed asset, using realistic lease-up assumptions.”

“There is a tremendous opportunity in tertiary markets in the Midwest right now, both for distressed as well as core and core+ opportunities. Markets such as Omaha, Tulsa and Des Moines have strong economies and fundamentals, but are overlooked by most buyers due to the size of the market, Grummons added. “There simply are not a lot of bidders for these properties, and it is possible to purchase them at very attractive pricing.”

Kevin Markwordt, managing director of Transwestern in Atlanta, said, “The likelihood of an investor or owner/user over-paying is unlikely (given rising property values). There are lots of buyers in the Atlanta market and competition is driving up prices.”

But there is a downside too, Markwordt said. “The negatives can be carrying costs and a slow turnaround time. Vacancy rates and rental concessions remain high, which are affecting projected cash flows downward, and ultimately providing a ceiling on the price per square foot (for purchases).”

“The market is appreciating at rapid rate and the longer you hold assets off the market the more value sellers will extract, as long as the carry (expense) does not cause hold costs to outweigh the opportunity an investor will associate with the acquisition,” said Paul Choukourian, managing director of Colliers International in Detroit.

In many markets, brokers say investors have cherry-picked the ‘best’ of the distressed inventory. “The remainder that will come to market has some inherent challenges,” Choukorian added. “The lenders are of aware of the demand and their focus seems to be maximizing the amount they extract. The majority of distressed assets that have the most significant value-add potential do not come to market due to the CRE market turn around.”

Multifamily and retail continue to attract the most interest from buyers. “They have decreased risk and a larger audience that can afford their purchase,” Choukorian said. “These assets are available because they are still seeing mature defaults that will not allow the current owners to procure take-out financing due to changes in lending practices.”

Retail Distress Still a Hot Commodity
Among all property types, only retail property saw an increase in distressed sales volume last year, up 4% in 2012 over 2011, CoStar data shows. Sales of distressed property for all other types declined. Distressed hospitality sales were down 52% year-to-year; office, down 45%; multifamily, down 26%; and industrial, down 22%.

“Retail seems to be a strong interest for distressed investors at present and there seems to be an ample supply of attractive, newer yet distressed retail properties,” said Ryan Phillips, president of Signature Asset Management in Dallas. “Moderately leased suburban office may be an opportunity in distressed real estate. I would stay away from very low occupancy buildings unless they are small and could be filled with a few leases. Any Class “A” product that is moderately leased could be viable — as long as it is priced as distressed and not at very low cap rates.”

Cheryl Pestor, senior vice president of NAI Capital, Pasadena, CA, also noted the strong interest in retail among investors targeting distressed real estate assets.

“I specialize in retail or service-oriented retail investments with about 20% of my sales working with banks on their REOs, and there is continued interest for retail properties if they are well located corner locations with good visibility,” Pestor said.

While there are always value investors in the market, no matter where the market is in a recovery, Pestor faults seller for not pricing distressed property correctly to incentivize an investor for the risk in buying a property “as is, where is, with all faults.”

Capital and Deal Structure Will Define Distress in 2013
“We’re at an interesting point in the cycle of distressed investing with many funds reconsidering the nature of the value investment thesis from a fundamental standpoint,” said Sean Banerjee, managing director of RedBrook Capital, a distressed investment firm in Seattle.

Banerjee sees synthetic credit markets re-emerging after largely being absent throughout the last cycle. He believes funds will be able to leverage newly available credit to acquire higher quality assets, which have been priced out of the range of distressed buyers in this cycle.

“Funds are starting to realize that when you are stepping into great product in great locations and taking advantage of circumstantial distress that isn’t always related to the real estate (such as entity-level or lender-level distress, then you’ve got a better overall picture to sell to investors when attempting to fundraise,” Banerjee said. “Ultimately you’ve got to successfully execute for current investors, but to attract new interest from sellers of distressed assets and investors alike, funds must also be innovative and ahead of the market. Investors don’t want to hear about funds returning capital. They’d rather hear about great deal junkies who have found creative ways to get deals done.”

Market timing is everything, but Banerjee and others understand while current conditions offer a great time for sellers to sell-off distressed assets, changes could be in store for the market down the road.

“Ultimately in the next three to five years, many local and regional banks will have the expiration of FDIC loss-share agreements, which will unlock their ability to sell assets at their sole discretion,” points out Banerjee. “This has the potential to cause flooding in the marketplace, which would saturate a market which has really been driven by competition over assets.”

The Triumph of “Extend and Pretend?”
Up until now, many banks have been reluctant to put to their distressed assets on the market, says Michael J. Tharp, an associate vice president for NAI Norris, Beggs & Simpson in Portland, OR.

Tharp, who works with a special asset team set up to work with REO subdivision, apartment land and raw land for residential, said the strategy pursued by many banks to work with borrowers on troubled loans rather than foreclose and take the loss is paying big dividends as prices recover in many areas.

“It’s become less risky the further we get into the recovery, so the length of time you might get stuck holding an asset with no market lift whatsoever is shorter,” agreed Joshua Anderson, COO of The Roseview Group in Seattle, who invests with and advises institutional clients across the nation.

“In terms of supply and demand of product, it’s more of a seller’s market for bank holders of distress than it is a buyer’s market, especially for notes,” Anderson said. “Geographically the best opportunities are in markets that are showing some initial signs of recovery but that are not as far along the curve as others yet. That applies to most of the Southeast and Midwest. “In terms of strategies, I think many of the best opportunities remain to be had by working through borrowers to approach lenders with white knight restructuring capital; that is generally the best path to getting off-market deals.”

Michael Lapointe, executive managing director and who runs the Capital Market’s in Florida for Newmark Grubb Knight Frank in Miami, said, “Banks, servicers and other asset managers have gotten incredibly savvy in the past few years in marketing assets for sale using a combination of off market, auction and other techniques.”

“Regardless of the medium, the groups that are successful are ones with a clear strategy that is often consistent amongst their dispositions,” Lapointe said. “Lenders that pick off single assets early to close relationships and then mass market remaining notes or poor assets often yield a lower total value then if a more thought out strategy was applied.”

Source: CoStar Mark Heschmeyer March 27, 2013