View from the Mezzanine: It Isn’t New, but Mezzanine Debt is Back in Vogue
Outsized amounts of available capital, exceptionally low interest rates and the resulting low capitalization rates have put downward pressure on real estate returns in the United States — albeit to more rational and normalized levels, especially in the prime 24-hour gateway cities. As the Urban Land Institute’s 2013 Emerging Trends in Real Estate forecast points out: “Real estate looks more like ‘the income vehicle’ it was meant to be,” and total returns in the 6 percent to 10 percent range compare extremely favorably to stock and bond alternatives.
Capital chasing higher yields, meanwhile, also edges noticeably into higher-risk secondary and tertiary markets as well as investing in greater numbers of B- and C-quality properties. In examining the capital stack for the best risk-adjusted returns, core real estate appears priced to disappoint at current lofty levels given sluggish improvement in tenant demand for space. The more “commodity” property cat