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Equity Supply to Hold Steady into 2013, According to Jones Lang LaSalle

Retail garnering highest level of interest, multifamily, industrial and office close behind

DENVER, Oct. 18, 2012 — The supply of institutional equity for core, well located assets is expected to remain robust for the rest of the year and into 2013, despite the continued uncertainty surrounding the European debt crisis and the upcoming election in the United States. According to Jones Lang LaSalle’s Capital Markets experts, all segments of the equity capital markets are active as pension funds, endowments, insurance companies, co-mingled funds and open-ended funds are all actively seeking opportunities for capital placement.  The result is a unique time whereby product demand is outpacing transaction supply, however, this cycle is notably different.  Investors are taking a more cautious approach to their real estate allocations as compared to pre-recession times, and the strategy for deploying capital has altered as well.  This dislocation in the market, as well as the shifting of relationships between institutional owners and investors, highlights the conversation at the Urban Land Institute’s (ULI) Fall Conference, currently happening in Denver.

“There’s a definite feast or famine environment with core, Class A deals backed by strong sponsorship producing an all-out bidding war among equity investors.  We’re seeing the highest level of interest right now in retail product as investors find themselves grossly under allocated in that sector, however, we are still seeing healthy demand for multifamily (including student housing), industrial and office sectors,” said Tom Fish, Executive Managing Director and leader of Jones Lang LaSalle’s Real Estate Investment Banking team.  “However, because demand continues to far exceed supply with yields compressing significantly for such deals, we’re seeing a slow, but noticeable, migration of equity towards riskier transactions in secondary markets and secondary product types.”

To sidestep the high-tide of competition, many equity investors are seeking off-market deals, either acquisitions or recapitalizations of a capital stack, with investments offering current yields and a familiarity with an asset, not just future projections.  As another approach, some institutional investors are aligning themselves with operators that fit a niche or have some unique value-add approach to an asset class.  For example, Jones Lang LaSalle recently arranged a programmatic joint venture equity vehicle aimed at acquiring small opportunistic industrial deals in Chicago and New Jersey.  The venture was arranged on behalf of Sitex Realty partners and State Teachers Retirement System of Ohio (OSTRS), and has a total buying power of up to $150 million.

“In an effort to match post-recession risk tolerances with the current desire to deploy capital, we are seeing a great deal of creativity in the venture structures being offered by institutional equity investors.  The idea is to mitigate risk while still achieving the base-case yields they solved to before, while at the same time adequately compensating the operating partner for their value-add component to the deal,” said James Tramuto, Managing Director with Jones Lang LaSalle Capital Markets.  “In the end, though, transactions must make sense fundamentally—and not just because of financial engineering due to creative structures or exceptionally low interest rates.”

Also worthy of note is that while the construction pipeline here in the U.S. continues to strengthen for virtually all product types, it is doing so slowly and cautiously as the capital markets have proven to be the biggest “governor” for new development.  Lenders are requiring higher levels of equity co-investment, have higher standards for sponsorship, typically require pre-leasing, and most notably – they want recourse.  This knocks many developers out of commission, resulting in what appears to be a sustainable development pipeline.

“Equity investors are more disciplined than they have been in the past and comprehensive underwriting and due diligence are the name of the game as we ride the slow wave of recovery.  There’s a healthy fear of potential oversupply in multifamily, and in the retail, office and industrial sectors—any new development typically requires some level of preleasing--albeit with some exceptions.  But despite those constraints, we expect to see plenty of capital ready and willing to partner to put shovels in the ground for the right opportunities,” concluded Fish.

Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2011 alone, Jones Lang LaSalle Capital Markets completed $60 billion in investment sale and debt and equity transactions globally. The firm’s dealmakers completed $52 billion in global investment sales and buy-side transactions, equating to nearly $216 million of investment trades completed every working day around the globe. In the United States, Jones Lang LaSalle grew its total Capital Markets volumes by 122 percent in 2011 and is quickly gaining market share across all property types. The firm’s Capital Markets team comprises more than 1,200 specialists, operating all over the globe.

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About Jones Lang LaSalle
Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit