Investors are chewing on a credit crunch

We are surrounded by noise right now, much of it focused on the rising prices of oil and food, the falling prices of stocks and homes, and the crunching of the credit market. Some of the noise has merit with big banks trading below their book value and increased capital requirements for Fannie and Freddie presenting more challenges to an already battered mortgage-backed securities market. In fact, a number of the investment groups we work with frequently are spending a good bit of time today assessing and purchasing performing debt that is trading at a discount. Unlike past periods of uncertainty, capital and debt are still available and, if our recent transactions are any indication, many (but not all) buyers are still hungry for product. The industry is now more global than ever before, deepening the buyer pool in the top markets. While CMBS debt is essentially non-existent, life companies and regional banks are doing what they can to fill the void, though at terms more conservative than those lent on just 12 months ago. A 4% 10-year U.S. Treasury is still well below historical levels and allows for better debt rates and easier to achieve yield requirements. With that in mind, here are some of the ways investors are navigating the real estate world today: "Bite Size" Buying: Much like a consumer on a diet, some buyers are trimming their deal size, focusing on smaller $10 - $25 million transactions. For institutions, these deals may require fewer levels of internal approval, while for the smaller, private buyer they require a lower total equity outlay. From the lender perspective, regional lenders can play on this size without partnering with other lenders. For example, in June my team completed the sale of Century Plaza, a class A office property in Mineola, New York. Sold by an institution to an institution, the $23.4 million transaction is typical of the bite size deals we see today. Assumable Debt: While the exception in 2007, properties with existing debt are today being purchased with the debt assumed. The high leverage, interest-only and low interest rate terms on new debt have for the most part disappeared, so existing debt is becoming another quiver in the bow for sellers today. Our team is currently marketing three trophy office properties with the kind of assumable below market debt increasingly sought by discerning buyers. Wrapped Up with a Bow: When we market a deal today, one of the first questions posed by buyers is "what kind of debt can I get?" That is not surprising, given the collapse of the CMBS market, which has sent buyers searching for a nice, neat package of property and debt. For years, my team has worked to provide solid debt quotes as a standard part of the marketing process. The difference in 2008 is that buyers are using those quotes far more frequently than they have in the past. Big Transactions Are Still Happening: Despite the negative news, commercial real estate remains an important investment vehicle. As such, there exists continued demand for quality real estate that provides critical mass. We've had the opportunity to handle two significant portfolios this year. The Baker Properties Portfolio, a $220 million, 26-asset, 2 million s/f industrial/flex portfolio located throughout the tri-state region, was purchased in March 2008 (25 of the 26 assets) by Lighthouse Real Estate Ventures Inc. as part of the second-leg of a 1031 exchange. The transaction is indicative of the nearly cycle-proof demand for quality real estate. Lighthouse's exchange requirement was driven by their $180 million sale of 100 William St. in Manhattan in late December 2007, which was handled by CBRE's Darcy Stacom and Bill Shanahan. With Stacom and Shanahan's assistance, we were able to find a well qualified buyer for the Baker Companies and simultaneously find the right asset for Lighthouse's 1031 requirement. Looking Ahead: As the White House keys will be changing hands come January, potential changes to the capital gains tax and other business taxes could affect commercial real estate, as well as other asset classes. Debt will continue to significantly impact the real estate sales market, and property owners will be examining their existing debt closely to see if their mortgage is accretive to a property sale. The smaller, bite-size deals will retain their appeal for all measures of buyers, balancing risk for lenders and buyers. Quality trophy properties, regardless of size, will command buyers' attention and focus. And with the uncertainty that continues to surround us, my team will remain focused on providing complete debt and equity solutions for both buyers and sellers. Jeffey Dunne is vice chairman and Christopher Leonard is associate of CB Richard Ellis' New York Tri-State investment team, New York, N.Y.