Capital Moving Ahead of Fundamentals in Top Markets

Speaking prior to the Georgetown University McDonough School of Business and NAREIT Spring 2011 Real Estate Luminaries Series, Brian Gill, adjunct professor of finance and real estate at Georgetown University and managing director of Allegro Advisors, discussed the tremendous liquidity improvements made in the real estate capital markets in the past year.

"It has continued to be effusive, especially in terms of real estate assets that have been trading, particularly in the gateway markets on the coastal areas of the U.S.," Gill said.

Gill said that while overall acquisition activity has not been as abundant as some had predicted last year, capital has flowed to places it needs to be to in order to take advantage of the available acquisition opportunities.

"What you haven't seen is the volume of transactions that is anticipated with the amount of capital that is available," Gill said. "Because of that, pricing in top markets has been bid up to what some feel are 2007 levels. There is at least some cause for concern that the capital market aspects of things that are pushing capital to these bidding situations are moving a bit more aggressively compared to where the fundamentals are."

Gill said the fundamental growth in rents, occupancies and other areas that capital flows seem to be anticipating have not materialized on a widespread scale yet, which is needed to make the pricing levels sustainable.

Allegro Advisors was formed in 2011 by the merger of Gill's former company Kalorama Realty Capital with Farragut Capital. The firm serves both domestic and international investors. Gill said international capital continues to target coastal gateway markets.

"In up and down cycles, particularly in down cycles, investors often flee to safety. Safety in this particular instance means they want to be in markets that they believe they understand and where they believe that the long-term fundamentals are going to be sound," Gill said.

Within that geographic focus, Gill said capital is targeting stabilized core assets.

"On account of that, you have a flood of public money and a flood of private money, both domestic and international, all chasing the same assets driving prices to what I think are somewhat frothy levels," Gill said.

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Capital Moving Ahead of Fundamentals in Top Markets

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