Expanding role for commercial specialists.

Eastern Consolidated Properties, Inc.

As institutions and investors face a commercial real estate marketplace that exceeds expectations and sets value benchmarks unprecedented in New York City, commercial real estate professionals are called upon to provide increased advisory services, complementing their existing role as investment specialists in a sale transaction or in the disposition of assets.

Many of New York's leading institutions and investors now seek advisory services from sales brokers, particularly in situations where property valuation, assemblages, acquisition or disposition strategy, operating net leases, 1031 exchanges, user purchases or careful due diligence are required.

Uncovering hidden value

Knowing the value of an asset is of primary importance, and accurate value assessment in complex, multi-level transactions is one of the most valuable services a commercial broker can offer. Working with an analytical brokerage team can often find hidden value in an asset, or determine creative positioning strategies to create maximum investment value. Commercial real estate professionals must interact on a regular basis with policymakers at all levels of the New York City government, and supply clients with up-to-the minute information on tax, legal and zoning regulation.

Eastern's director of Corporate Advisory Services, Jon Epstein, comments, "In some cases, an owner may come to us to sell his or her property, and through our close assessment, we have often determined that based on the building's long-term value, a net lease disposition or long-term financing may prove to be a more profitable strategy."

Equity placement to meet market demand

Based on close relationships with both institutional and private equity sources around the globe, brokerage firms must be able to arrange third party equity to facilitate the purchase of highly valued properties. According to Ron Solarz, a senior director at Eastern and part of Eastern's team who recently brokered and secured the equity for the 300,000 square feet development site at 750 Sixth Avenue, where a 32-story rental apartment building will be completed this summer, "There is a significant amount of equity available in 2000 for real estate developers or investors with a solid track record. Pension funds, high net-worth individuals as well as private investors are anxious to invest in value-added real estate investments."

Real estate financing faces lower long-term rates

According to Philip D. Restifo, who leads Eastern's financing division as its executive director and who recently concluded a $430 million first mortgage for 4 Times Square, "In the first quarter of 1999, real estate owners and investors made a conscious shift toward refinancing existing debt with lower cost floating rate debt.

"During this time, treasury bill rates have swung from one direction to the other: rising throughout 1999, but since February 2000, falling once again. While The Federal Reserve raised its discount rate five times since December 1998, the treasury market in February 2000 developed an inverted yield curve: in which treasury bill rates with longer maturities were priced lower than short-term treasury bills, thus signaling to investors that interest rates in the future would be lower than n current rates."

Maximizing profitability: understanding financing trends

This trend in treasury bill rates has had its affect on the real estate market, with investors shifting from long-term fixed rate debt to short-term floating rate debt. Real estate investors must ask themselves, "Why lock into a high rate now, when rates will likely decrease in the future?" The first quarter has shown a significant reduction in the demand for fixed rate, long-term debt, as capital markets have been impacted by farther volatility in the swap market, as well as a significant shortage of buyers for the unrated securities that represent the first loss position in CMBS. "This combination has c4used the spread between treasury rates and the e ultimate rate charged for mortgages to widen appreciably. We look forward to the reversal of that trend by the third quarter," comments Restifo.

Further highlighting these financial trends, the March 29th article in the Wall Street Journal, entitled, "Business of Selling Loans Loses Some Luster," says, "the [commercial real estate] business is getting wracked by unusual volatility in the bond market, which has increased the risk of warehousing hundreds of millions of dollars in real estate loans awaiting securitization. Those property owners who are borrowing have increasingly preferred floating-rate rather than fixed-rate debt, which is securitizable, but less profitable for originators."

Custom financing for a dynamic marketplace

To keep abreast of a dynamic marketplace, commercial brokerage teams must maintain close contact with reliable and aggressive sources of creative financing. This includes international capital sources who often provide short-term financing with options to roll into long-term financing at a fixed rate, giving borrowers the advantage of maximum loan value, without "missing" the current market.

Overall, brokers must remain ahead of the curve in a turbulent marketplace by consistently considering market changes and understanding how to price and position an asset accordingly. Brokerage teams who are able to provide formal advisory services, maintain constant contact with worldwide equity sources and develop creative financing vehicles will allow real estate owners and investors to succeed in a market which exceeds expectations.