A Message from Reza on the Market

Last year, prior to the ICSC convention in Las Vegas, I sent you a note elaborating on our company's strategy just as we began to see some clouds forming on the market's horizon. Although none of us foresaw the magnitude of the credit market challenges that have come to fruition, we felt it necessary to proactively take steps to leverage these anticipated changes in the market. Two years ago, we embarked on ground-breaking work at REZA Investment Group to become an even more team-oriented, streamlined, and nimble team. We employed world class business coaches and advisors to analyze how we operate, evaluate team members' alignment with the company's core values and assist us in implementing a highly effective model of teamwork employed by some of the world's greatest organizations. The result for 2007 has emerged and, with special thanks to our clients, we achieved an overall ranking of 6th in the nation for shopping center sales volume, and were the only retail-specific investment company within the top six, according to Real Estate Alert.

The following are some highlights of what we currently see in the market:

Demand still remains strong for core assets with excellent locations (i.e., those with high barriers to entry, dense demographics, and affluent population)
Capitalization rates for "B" and "C" assets have already moved, with the primary driver being the lack of favorable financing in the marketplace for these properties. Specifically, with the demise of the CMBS market, the remaining life insurance companies and balance sheet lenders are increasingly selective in their loan originations and would preferably finance "A" deals. Available financing for these "B" and "C" deals are selectively available and are increasingly available on a recourse-only basis.
The buyer pool is evolving, and is now dominated by seasoned and sophisticated retail operators. These operators tend to underwrite more conservatively and apply appropriate risk premiums into their valuations. The 1031 exchange driven buyers that have dominated the buyer pool over the last 2-3 years has been reduced.
Institutional buyers (i.e. REITS and Pension Funds) are scaling back on retail acquisitions for several reasons. On the REIT side, the cost of capital has become prohibitive for aggressive acquisition strategies. On the Pension Fund side, retail assets have lost ground in their overall ranking amongst all asset classes. Specifically, other product types, namely Multi-Family and Industrial, have become more desirable in terms of asset allocation due partly to the negative sentiment associated with consumer spending patterns beginning to decrease nationwide. We believe this will create an opportunity to purchase strategic retail assets due to decreased competition.
Tenant demand is softening across many sectors, with several big box users pulling back their expansion efforts. National and regional inline tenants are still expanding, but are much more conservative in their site selection strategies.
Local tenants are experiencing weakness, with landlords reporting increases in delinquencies within their existing tenant base. Asset management is becoming a more significant component of NOI preservation, as landlords are increasingly working with tenants in the efforts of minimizing rollover and maintaining cash flow.

The credit crunch has been the cause for many to be concerned about the future and I would like to share some of my personal thoughts as well as the thoughts of those industry professionals that I have grown to respect:

We are in the middle of financial market tightening and credit crisis. Make sure you are working with the best lenders in the market and the rug will not be pulled out from underneath you in the 11th hour. Do your homework. Always have a back-up plan when you are working on financing or refinancing. If you have an issue on your existing CMBS loan, do not wait until the last minute to talk to the lender.
Relationships matter. In times of uncertainty, who you deal with at all levels matters significantly. A friend and a good client recently said to me: "Now, I know that to surround myself with people that I trust and can count on is the only way to do business."
See the market no better or worse than it is. I observe some individuals who constantly want to tell others and hear back from others how bad things are and, at the same time, I observe others that feel that they have to be overly optimistic. Let's accept it for what it truly is. Then, let's take steps to handle issues that arise and turn the adversity into opportunities.
Managing emotions. We are in an environment of uncertainty and it is important to manage our emotions and attitudes, especially as we manage or lead our teams and organizations. I highly recommend reading articles and books by Daniel Goleman, the author of Emotional Intelligence. His Harvard Business School whitepaper on the topic is an excellent read.
Don't worry too much. Get excited for the opportunities to come. The time to worry was two years ago while the party was going on.
Streamline and continue to build your team so everyone is rowing in the same direction. Look for white elephant-like issues in your organization and address them proactively.
As an industry, we experienced a tremendous level of activity during the past several years and many of us have become addicted to this high level of action. It is important to keep in mind that sometimes great wisdom and opportunities come from less action and patience.

Final Thoughts:
Over the past year, I have spent time with many foreign investors. I have traveled to Europe, South America and the Middle East, including Dubai and Abu Dhabi where I met with large private and institutional (international) funds. Visiting with investors and examining the international real estate market leads me to several conclusions - There are many bubbles that are forming in other parts of the world and the U.S. is not alone in this part of the cycle and we still have it very good here.

As an immigrant, who in my teen years, had to leave a world that changed overnight, and who subsequently had to jump through many hoops to get to the U.S., I feel strongly that from a global perspective the U.S. has the most diverse culture and grants everyone the environment and opportunities to grow. This unique landscape of freedom, stability, and capitalism will continue to attract foreign investments for years to come. Inasmuch as we all find many things that are wrong with our system, the U.S. has historically enjoyed one of the most stable systems of trade and government in the world.

Having walked many larger real estate assets all around the globe this past year, one thing that becomes abundantly clear is that real estate values in the U.S.are starting to look like bargains. Even though the capital crunch is making short term prospects difficult, the long term prospects point in a different direction. When you factor in that the U.S. is one of the only significantly growing populations in the developed world along with the fact that inflation is a factor, still being able to acquire assets at or below replacement value is something that may soon become just a dream...

See you at ICSC Vegas.

All the best!

Reza