Triangle may disappoint hungry vulture investors

If you had to use one word to sum up the recently released Urban Land Institute 2010 forecast for real estate, it would be "bleak."

Like nuclear winter bleak.

Property values will be off 40 percent to 50 percent from their peak, vacancies will rise, rents will decrease, and credit will remain scarce, predicts The Emerging Trends in Real Estate report, based on interviews with 900 real estate professionals nationwide.

The lone bright spot amid the doom and distress, the report notes, is that 2010 and 2011 could be "an opportunity of a lifetime" if you're a real estate investor with cash.

Given the adage that all real estate is local, how much of that much-hyped opportunity will be in the Triangle?

That some investors with cash will target the Triangle is a given, because the region is widely viewed as having a bright economic future once the recession fades. Development has slowed, but ambitious projects such as North Hills East continue to forge ahead.

With fewer ill-conceived projects dotting the landscape, there's a chance the swelling crowd of vulture investors circling overhead may not have much to prey on.

"The reality is that there's a lot more money that wants to be in the Raleigh-Durham market than there is going to be opportunities," said Jim Anthony, president of Anthony & Co., a Raleigh real estate services company.

Anthony said the blood bath and resulting discounts, which investors are predicting in California, Arizona, Florida and other places, is unlikely to take place in the Triangle.

"We don't have the supply, and we do have the demand," he said. "They don't have the demand, and they have all the supply."

The Triangle is among the 10 U.S. markets with the lowest percentage of distressed apartment, office and industrial assets, according to Real Capital Analytics, a New York research firm. Real Capital calculated its ratings by taking the amount of distressed assets in a market and dividing it by the number of real estate transactions conducted between 2005 and 2008.

Using that formula, only 5 percent of the Triangle's assets, or $480 million, are considered distressed. Compare that with Miami, where $4.3 billion in assets are deemed distressed, or 22 percent of the market.

What is 'distressed'?

Ed Fritsch, CEO of Raleigh-based Highwoods Properties, the biggest suburban landlord in the Southeast, said it's important to make the distinction between a distressed asset and a distressed seller.

Some good Triangle projects may come on the market because the owner owes more than the property is worth, or because owners have poor-performing assets in other markets that they are unable to unload.

"Selling the good to save the bad is not an unusual story in tough times," Fritsch said.

Given its healthy balance sheet, Highwoods is expected to be an active player in the market for distressed assets. This week, the real estate investment trust announced that it had paid $24.7 million for a 220,000-square-foot office building in Tampa.

Fritsch said his sense is that a lot of the cash sitting on the sidelines now is foreign money that may target properties in major U.S. cities such as New York, Washington, Boston, Chicago and Los Angeles.

"They're heavily invested in what I'd call the gateway cities," he said. "I don't think that if a building came on the market in Raleigh that the competitive bid set would mirror that of a building that came online in midtown New York."

That may create more opportunities for local institutional investors such as Highwoods and private investors who already have a presence in the Triangle.

Craig Briner, president of GreenHawk Corp., a Raleigh company that specializes in taking over troubled properties, said that if somebody is just looking for the best deal on paper, the Triangle is not likely to provide it.

"It's really an interesting dichotomy that exists in that people really want deals," Briner said. "And here, you'll get a deal, but it won't be a deal in terms of a discount that you could get elsewhere, because other markets are worse off."

In late September, GreenHawk made a winning bid of $5 million for a 23-acre residential development in Apex, L'Hermitage at Beaver Creek. The company has since made several other purchases of distressed residential properties in the Triangle.

Because it's difficult to get loans, Briner said, having the cash to purchase property may not be enough. An investor also needs enough cash to make improvements to the property that are necessary to boost cash flow.

GreenHawk learned long ago not to pay much attention to what the previous owner paid, Briner said.

"To some people, the percent of a discount is what it is all about," he said. "That honestly has no relevance to us. It's what it's worth today. What are you going to do with it? What's it going to cost? ... I think we'll be less wrong if we do it that way."