Malkin: investors must be selective.

Mortgage rates are low, the stock market is out of favor, and investors are hungry for current yield. It all adds up to soaring demand today for commercial real estate investments.

But at least one major real estate investor sees danger ahead and warns that there has never been a greater need for selectivity in real estate acquisitions.

"The genuine opportunities are very few, and the pitfalls are many," says Anthony E. Malkin, president of W&M Properties, the acquisition, management and marketing arm of the Malkin family, which owns interests in some 12 million square feet of office and retail space and several thousand apartments.

He cites the prevalence of securitized mortgages as an especially threatening element if real estate operating fundamentals continue to deteriorate.

Addressing a meeting of the Institute of Real Estate Management in Manhattan on the subject of "Opportunities: Past, Present and Future," Malkin noted a major difference in the capital markets today, compared with a decade ago.

"The dominance of life companies, pension funds, and banks in lending is gone and most new commercial mortgages are securitized now," said the W&M executive. "Bondholders have low perception of risk and very high expectations about how their investments should perform. Today's mortgage lending is largely driven by demand from investors to buy securities. The question we have to ask is, 'Who will refinance existing outstanding mortgages if the market for these securities diminishes?'"

Malkin recalled that in the downturn of the early 1990's, a collapse in property values provided ample opportunities for investors to buy properties that could be repositioned for added value in the sharp upturn that followed. But in the current weakened economic environment, high demand for real estate investments is supporting prices, even as rents and occupancy decline.

"Traditional mortgage lenders understand real estate cycles and often prefer workouts to foreclosures, but that is very different from today's originators," Malkin observed. "The new fenders are only empowered to foreclose and sell. We're at a point where property appraisals will soon be headed down and default rates up. And the new capital markets will not be forgiving."

Malkin said his family's investments, most of which are syndicated through Wien & Malkin Securities Corp., the nation's oldest real estate syndication firm, are structured with conservative leverage as a defensive tactic.

He recommends no more than 50 to 55% leverage in the current low interest rate environment in order to assure the ability to refund debt at higher interest rates.

In addition to its traditional long-term direct ownership acquisitions, W&M Properties is also making relatively short-term preferred-equity investments as a means of providing bridge financing for real estate entrepreneurs.

"It's a very under-served sector of the capital markets, because it falls under the radar screens of the institutional lenders," Malkin explained. "Many property owners need modest amounts of additional capital for special situations, including a large number of investors with conduit loans that prohibit refinancing. We're helping to fill this need with structured equity financing."