Sunday, March 29, 2009

10 Biggest Risks Faced by Real Estate Companies

NEW YORK, NY—Unlike the Obama Administration’s generally positive outlook for the financial markets, global accounting firm Ernst & Young sees no speedy improvement coming that will help the real estate industry this year.

“The real estate sector has felt the tightening conditions in credit markets perhaps more than any other sector due to its heavy reliance on capital,” says Howard Roth, Global and Americas Real Estate Leader at New York-based Ernst & Young.”

“Financial conditions for real estate projects are undoubtedly worsening and the current financial markets landscape is expected to persist for the next couple of years.”

Still, he notes, "In this time of great economic uncertainty and lack of liquidity, many companies are proactively looking for ways to effectively manage risk, streamline operations, and enhance their business relationships so they can hit the ground running when markets begin to stabilize."

The 2009 Ernst & Young Real Estate Business Risk Report, produced with strategy consultancy Oxford Analytica of Oxford, England, itemizes the 10 top business risks faced by the industry as ranked by leading sector analysts.

Those risks, in order, are:

---Continued uncertainty and impact of the credit crunch -- tighter credit is just one threat to real estate from the crunch; the economic downturn is affecting commercial vacancy rates as well as property valuations.

---Global economic and market fluctuations -- due to capital flows and business expansion, the real estate industry has become a truly global industry and, as such, is increasingly susceptible to global market fluctuations.

---Impact of aging or inadequate infrastructure -- particularly in the US, but also in other markets around the world, a lack of key transit and utility infrastructure is a threat to economic
and real estate growth.

---A global war for talent -- globalization of business has also created a worldwide talent pool with countries forced to compete for human capital.

---Changing demographics -- aging and urbanizing populations are changing competitive dynamics and creating new markets in real estate.

---Inability to find and exploit non-traditional global opportunities -- with competition increasing worldwide from sovereign wealth funds and others, many global investors face a tough time sourcing new deals that will meet return expectations.

---Pricing uncertainty -- with few transactions taking place in the real estate market, valuations are a problem for existing owners, as well as buyers and sellers.

---Green revolution, sustainability and climate change -- real estate is at the forefront of the green movement with pressures intensifying to build and operate in sustainable ways and minimize the carbon footprint throughout all types of real estate.

---Economic vulnerability and regulatory risks in developing markets -- developing markets are a key focus for global real estate firms but regulatory risk in these markets is constantly changing as authorities seek to jump start economies.

---Increasing energy costs -- few analysts expect more than a temporary respite from high oil prices as new supply will be unable to meet renewed demand.

“Given the risks outlined by analysts in the report, it is time for owners, investors and users of real estate to use the time afforded by this lull in real estate activity to prepare their businesses for the next period of economic growth,” advises Roth.

He predicts, "There will be a fundamental shift back to traditional real estate underwriting principles, including comprehensive cash flow analysis and prudent levels of debt and equity in consummating real estate transactions.

"This 'back to basics' movement will lead to the greater transparency necessary to restore confidence between buyers and sellers.”

According to Mark Costello, America's Leader of Ernst & Young's construction and real estate advisory services practice, "Real estate is typically the second highest cost item on an income statement after payroll and so provides excellent opportunities for companies to unlock hidden value, particularly through a back to basics approach."

"The real estate industry as a whole is focused on simplicity, transparency and quality deals. However, when things are going really well it tends to mask organizational inefficiencies," says Costello. "Companies which address those issues now and solidify their businesses will be in a much better position to address future risk threats."

On the construction side of the industry, two out of three capital projects are currently over budget or behind schedule, according to Malcolm Bairstow, Ernst & Young's Global Advisory Services Leader for the real estate and construction sectors.

That situation, he adds, is “a statistic exacerbated by the uncertainty surrounding the economy and the availability of financing. Yet, deploying risk mitigation or accelerated delivery methods after careful assessment of a project can also reduce risk and cost and bring in projects on time and on budget.”

"The real estate industry as a whole is focused on simplicity, transparency and quality deals. However, when things are going really well it tends to mask organizational inefficiencies," says Costello.

"Companies which address those issues now and solidify their businesses will be in a much better position to address future risk threats."

Spanish Banks Back $2.5B New Leisure Destination in Mexico Caribbean

(RIVIERA MAYA, MEXICO)—While Mexican drug wars currently make the headlines, a new vacation oasis is being born quietly in the Mexico Caribbean market.

With the backing of Spain-based Bancaja and Banco de Valencia, Mexico developer Grupo Grand Coral has started Grand Coral Riviera Maya, (top right photo) a planned $2.5 billion oceanfront-retail-entertainment development in Rivera Maya, 30 minutes from the Cancun Airport and five minutes from the coastal entertainment community of Playa del Carmen.

Grupo Grand Coral CEO Jordi Mercade says the project will take 10 years to complete and will showcase 6,900 residences. A total $700 million has been invested in the project to date.

The first phase, already under way, is Mareazul, which will offer 300 beachfront condos. Nick Price (bottom left photo) is designing the 18-hole golf course. Adjacent to the clubhouse, with full views of the course, will be the Nick Price Residences comprised of 123 homes.

“The project will have an urban resort feel, something unique to the area,” says Price.

Although the project encompasses 561 oceanfront acres, 75 percent of the land will be preserved, says Mercade. “It is very important for use to work in harmony with the land and we will encourage this lifestyle with all developers and future residents of Grand Coral.”

He says Grand Coral Riviera Maya “will truly be the first of its kind in the region.” As such, Mercade says the master development “presents a great opportunity for developers and investors to be in an impressive gated community with multiple real estate options.”

A mix of land lots is available for development. “There is really an opportunity for developers and investors at every level and we will work with each individually to meet their needs,” Mercade says.

He calls Riviera Mayo “truly paradise…having the world’s second largest barrier reef which lies in the ocean waters bordering Grand Coral.”

Grubb & Ellis|Commercial Florida Wins New Retail Client in Madeira Beach, FL

TAMPA, FL- Grubb & EllisCommercial Florida has been retained by the Hubbard Family to handle leasing and property management of the newly constructed John’s Pass Village and Boardwalk (top right photo) at Hubbard’s Marina located in Madeira Beach in Pinellas County.

John’s Pass Village and Boardwalk comprises over 268,000 square feet of retail and restaurant space located in a series of individually owned buildings.

Grubb & Ellis is leasing the space in the newly constructed buildings and is working to secure a new boat operator to fill the boat slip recently vacated by Sun Cruise Casinos.

The property, located on John’s Pass and the intercostal waterway, is anchored by Bubba Gump and Shrimp Co. It offers boat access and sunset views on the Gulf of Mexico.

The new construction also includes a 350-car parking garage.

“John’s Pass has over two million visitors per year and is a large tourist attraction. It’s a one of a kind, very unique and historical and offers every amenity that a tourist could want,” said Michelle Seifert, (bottom left photo) associate vice president for Grubb & EllisCommercial Florida and leasing agent for the property.

A broker open house is scheduled for April 2. Please call 813-639-1111 for more information or to obtain information on leasing space.
Contact: Michelle Seifert, 813-830-7537 or Jeffrey Sweeney, 407-481-5387