A Fine Line
To the old real estate adage “location, location, location” we would add the prefix “dis”. The past five years have not been kind to the pursuit of dislocation; the word “distress” has practically disappeared from the real estate vocabulary, making way for such terms as “super growth” and “hyperleverage”.
The dominating strategy used by many funds has been to acquire high-quality real estate at market yield and to achieve target returns on equity through structured financing and cap rate compression. This strategy is essentially the basic leveraged buy-out (LBO) model applied to real estate, with often very little being done by way of a physical repositioning of assets.
With cap rates shifting outward, the world entering a global slowdown led by a U.S. recession, an apparent implosion of the pyramid scheme–type structure of modern finance resulting in a worldwide de-leveraging and investment volumes in Europe in the first two months of the year do