Notes From the Credit Market's Front Lines

Like many observers, Tognarelli finds it difficult to reconcile current real estate fundamentals with the turmoil in the capital markets. Current growth conditions in the economy as a whole, he says, "are supportive of good real estate operating fundamentals."

For Tognarelli and his investors, though, such metrics are just one part of the investment decision. To date, he says with a hint of relief, the widening of spreads has been offset to some degree by the declining yield of 10-year Treasuries, so the "total cost of that component in the capital structure hasn't changed as of yet -- the cost of funds hasn't risen dramatically yet." However, that scenario may be short-lived, he adds: "It appears that spreads will be rising further, so there will be changes in the cost of capital at the debt structure level. That should translate into different pricing at the equity level."

So even as those fine fundamentals hold strong, uncertainty over capital costs are ruling the roost. "When you overlay those background elements in the market, how is all that going to impact my investment decisions?" he asks. That's playing out right now: "So far, it's not translating into pricing yet." (Yet, yet again.)

But he suggests that asset pricing is about to take a hit of an indeterminate scale. "When you look at apples to apples, there are fewer buyers than 12 months ago. I suspect that terms being negotiated today are more oriented to the buy side; buyers can extract more attractive terms." These changes, he believes, "are probably showing up in the pricing of lower-quality assets or in secondary and tertiary markets."

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