The BBJ reports that a PricewaterhouseCoopers national survey confirms what we, here in Boston, have been seeing for this past year, that real estate values are living a double life.  There is a very healthy market here for core assets with low vacancies and long term leases – long enough to get through this downturn and, hopefully hit inflation in rents.

With low interest rates, credit becoming more available for credit worthy borrowers, and a ton of investor money looking for low risk real estate investments, cap rates are falling (and prices are climbing for sellers.)  More owners are considering the sale of their properties, not only due to financial pressures, but because this is a good market to sell class A properties into.  There are already a number of apartment projects that have hit the street with asking prices in the 4-6% cap range – and they will most likely sell at those prices.

Except for the other real estate. You know, the kind of property that the opportunity funds were looking to buy at a deep discount.       

Oh that there were more of that product out there.  But that is the problem.  Generally, banks and/or regulators have not pushed borrowers over the cliff (ala 1990s.) So, with limited core and distressed product and a crush of investor dollars, there is no sign that prices will moderate anytime soon for the quality stuff, or that the problem property will be priced to sell.

At the NAIOP Main Event breakfast: “Investors Unplugged,” this seemed to be the theme.  But there were some concerns voiced even about the core quality product.  The big question seemed to be can you buy at the current low returns and have an exit strategy that justifies the acquisition price.  What if interest rates rise?  Generally, cap rates rise too.  And if you can’t count on cap rates dropping to appreciate your investment, then you must be convinced that vacancies are going to drop sufficiently for rents to go up.  Will that happen in all markets?  Only those with the ability to grow the job market.  (Note, Massachusetts employment has been relatively flat from 1990 to 2010!)

And for those distressed properties counting on leasing up the vacancies, how long an absorption period are you plugging into your underwriting assumptions and how much will those rents need to rise?

Lastly, the answer to the question for each of the NAIOP participants of what can you pay for an asset today, was what is the appropriate rate of return on your capital?  That is going to be very different for the pension fund, opportunity fund, sovereign fund or REIT.

So, get ready for a bumpy ride through 2011.  Some players are rooting for the FDIC to pull the plug on life support, while others are just looking for a little more forebearance.  How that works out will be the key to the pricing of real estate product.