commercial real estate

While I often claim I threw out my crystal ball a long time ago, I will now go out on a limb and make a prediction: retailers are going to feel a lot more pain through the holiday shopping season. I predict more bankruptcies, more store closings, and more alternatives for your existing tenants that might have expiring leases.

If you’ve been thinking about selling that strip center, now’s a fine time to take some money off the table. Cap rate won’t be as attractive as in 2007 but who can time the market? And remember you’ll be buying into the same market you’re selling into.

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Ameribank of Northfork WV bit the dust on September 19. This is the 12th community bank that went down for the count this year.  Five have tanked since August 1 alone.

This is unfortunately the fault of a regulatory environment that did little to stop predatory lending practices targeting subprime borrowers.

My world, the commercial world, has been dragged down simply by association.  There is little-to-no non-recourse debt financing available to fund commercial real estate acquisitions, despite sound market fundamentals in my area. The volume of CMBS loan originations — the primary source of non-recourse debt up until 2008 — is down 90% over last year.

My answer to a linkedin question:

The American Seniors Housing Association generates a range of reports that you might find useful, albeit at a cost.

Links:

• http://www.seniorshousing.org/Bookstore/

As a result of extensively marketing a car wash in Maryland, two other car wash owners have tracked me down and asked me to market their own car wash…leaving me the possibility of handling six car washes for three different owners…an unusual prospect for me, primarily a warehouse broker. Running these takes some effort, so it is often a change in life circumstances, eg a move, health issues, etc that leads to a sale.

but the 10 year treasury off which commercial mortgages are set was up 7 bips today. Spreads are still rather wide in the commercial world too.

Headlines today: foreclosures up 79% over last year! Time to panic! Oh my!

The facts? More than 1 percent of U.S. households were in some stage of foreclosure in 2007, up from about half a percent in 2006.” ONE PERCENT. Comparisons drawn with the great depression abound.

Hogwash. Take a deep breath. The national foreclosure rate during the depression was 3.9%. On top of that the depression saw a bunch of distressed sales.

I was walking through a mortgage broker’s space yesterday and heard a training seminar in progress.

The teacher was saying, “start your calculation with how big a commission you want to make, and price the loan accordingly.”

There are honest mortgage brokers, and then there are crooks. Ask your friends for referrals, and check your terms against bankrate’s averages for your state. Don’t be afraid to ask if you’ve been offered the best deal.

I often say I threw out my crystal ball a long time ago, but I’d say now’s the time to put a commission in your favoriate mortgage broker’s pocket and look at refinancing your house. I managed to catch a 5.375 rate several years ago, and that was close to rock bottom. We haven’t seen it in some time, but we’re just about there, with Bankrate showing the average 30 year fixed conforming mortgage at 5.44 percent. Don’t quibble over a few basis points.

See my story in the Baltimore Business Journal today. Or at least part of it.

Joe Burke, a great mortgage broker in Maryland wrote the following about the commercial mortgage market. A great read. Let me know if I can put you in touch with Joe.

“What a market we have had over the past six months! It seems things change every day. Yesterday we saw the 10 year Treasury rate plunge about 15 basis points to 3.29% in the morning only to lose steam quickly ending the day at 3.60%, a 31 basis point increase in 4 hours time. I have been in this business for a long time weathering a lot of ups and downs in the market but I cannot recall experiencing the volatility we are currently seeing. It makes it tough on both lenders and borrowers trying to figure out where we will be tomorrow and when should you think about locking rates. The volatility creates many issues for lenders who don’t want to lock rate when the Treasury is approaching historic lows unless they are sure that it is a long term trend. The lenders try and hedge their bets and typically either widen their spreads as the Treasury rates go down this quickly or institute a floor rate that they will not go below regardless of where the Treasury goes. The philosophy behind this strategy is easier to understand when viewed in the context of what happened in the Treasury market yesterday. In the space of 4 hours they could have lost 31 basis points on their ultimate rate.

Pricing pressure for insurance companies come primarily from what alternative investments are available at spreads that are equal to or better than what is available in the commercial real estate mortgage market. Currently in the CMBS market in the Super Senior traunch [which has a 30%+/- subordination level] spreads of 200-235 basis points are available. Typically rated as high as AAA by the rating agencies one can see the relative value investing in these AAA CMBS bonds. The question all real estate developers would ask is “are they really AAA?” Time will tell but it does explain why CMBS all in spreads for new business can range from 275-350.”

I spoke with a REIT executive who confirmed my impression that the days of bidding wars for commercial real estate, even in the hot Washington DC market, are over for now. Where once brokers set bid deadlines and were assured of a dozen offers, brokers are now “quietly marketing” properties to a handful of buyers. The fear? No one wants to strike out, end up with no offers for their building, and be embarrassed.

The parallel is the residential side where once brokers could have an open house on Sunday, set a bid deadline of 7 pm on Monday, and count on a bidding war.

Costar runs highlights today of retail market reports from Grubb and Ellis, Torto Wheaton, ICSC, Marcus and Millichap, plus their own data.

As usual, looking for a story, the report paints a bleak headline ( “…bleak picture for 2008″).

The facts paint a different picture:

-”The U.S. retail vacancy rate stood at 6.6% at the close of fourth quarter 2007, varying only slightly throughout the year.”

-”During 2007, 111.8 million square feet of retail space net absorption was recorded, a significant improvement over 2006 net absorption of 58.6 million square feet.”

-”The average quoted asking rental rate in the U.S. has increased at a fairly steady pace over the last two years, creeping up 13.8% from $15.47-per-square-foot in first quarter 2006 to the current rate of $17.61-per-square-foot.”

-Grubb & Ellis predicts buyers will “return to the investment market in greater numbers” in 2008.

I’ll believe the gloom and doom when I see it.

Roost is “is betting that there’s room for one more real estate search service in an already-crowded market.”

Just read my post on Trulia. Same holds true. Bunch of tech guys with an old idea, no innovation, and an incomplete set of listing data. Oy! Maybe it’s too small of a market, but someone needs to do this on the commercial side.

As yields on U.S. Treasury securities wilt—the 10-year bond is at 3.38%!—in response to a continuing flight to quality and liquidity, spreads on commercial mortgage-backed continue to widen and widen and widen .

What does this mean? If you need to finance a commercial property, your cheapest loans may now be from a bank!

on the commercial side. Don’t expect the terms we saw from conduit lender to creep back in the face of recent falling interest rates. One of my clients tells me that he’s buying pools of commercial loans at 75 cents on the dollar. There are floors on conduit lender rates to ensure a profit. Interest only of more than a year or two is a thing of the past. 80% loan to value is hard to find. Things are different in the world of residential mortgages, where we are back down to four year lows (excepting subprime which is on life support!)

From The New York Times. The author was unwilling to proclaim it a recession, but it’s frankly been obvious on the streets for some time.

I sell a lot of warehouses to users. Things were frenzied here in the Washington DC area for some time: selling empty buildings to users of space was a cake walk for the better part of 2007. Now things are dead and I am hearing the phrase “cold feet” a lot more than I’d like.

Thanks to high gas prices, gas stations and their owners are struggling.

While this may seem counterintuitive, gas station customers are putting less gas into their vehicles in each visit, are using their credit cards more often (and the gas station owner pays the credit card’s fee), and they have less cash left after pumping their gas to spend in the convenience store.

An investor underwriting a gas station should be wary: future cash flow could head down if gas prices remain high.

Here’s what I wrote for KLNB’s market report covering the state of the Office/Industrial market in the Baltimore Washington Corridor (but much of it holds true for the national commercial real estate market as a whole):

The last quarter has brought with it a dichotomy of sorts in the demand for commercial investment real estate in the Baltimore Washington Corridor. The appetite from institutions for well-located, quality real estate – particularly class A buildings in the most desirable business parks – remains strong and prices for this product have held steady or increased. Relatively older or less-well-located assets have seen demand from investors diminish, and yield expectations from prospective buyers of that real estate have risen commensurately.

Driving this dichotomy is the widely publicized cred
it crunch on Wall Street. Fears of widespread default on residential mortgages have irrationally spilled over into the commercial side, despite leasing fundamentals – particularly in our region – that remain strong. As a result, Wall Street-based originators of debt slated for securitization– the lenders that have offered the most attractive terms available and have financed the majority of investment real estate that has changed hands in the past several years – have much less money available to lend.

These lenders – popularly referred to as “conduit lenders” – have become much more selective about which properties they will finance, and their money is much more expensive to borrow. Spreads — the margin over treasuries at which these lenders set their interest rates– have increased today from a range of 95 to 110 basis points over the corresponding treasury before the crisis up to a 200 to 250 basis point spread today. Complicating matters further is the fact that the market is extremely volatile and pricing changes almost daily. The other major sources of financing for larger commercial real estate acquisitions – life insurance companies and banks – have always been relatively conservative; as such it is not surprising that these lenders have not moved to meet the unmet demand for inexpensive financing.

Institutional buyers (real estate investment trusts, pension fund advisors, and the like) are not as reliant on this sort of financing and as such have continued to bid aggressively on a very selective basis, focusing on the most desirable assets in the market with almost as much relish as before the credit crisis. Capitalization rates well below 7 percent still are the norm for the most sought-after “core” office and industrial assets in the Baltimore Washington corridor, despite a lending environment where borrowing is occurring at loan constants between 7.75 percent and 8 percent. In this range of pricing, where debt provides negative leverage (meaning financing lowers the cash-on-cash-return), financing-dependent private investors cannot compete with the institutional buyers.

Class B and C assets that cannot attract interest from institutional buyers are not changing hands as readily. There is market disequilibrium; many sellers have not adjusted their pricing expectations downward to meet the yield expectations of the private buyer that demands at the very least modest positive leverage from his debt. Practically speaking, at today’s interest rates, an investor needs to buy at a capitalization rate that is higher than 7.5% to 8.0% to garner positive leverage, and needs to do meaningfully better than that if the asset requires significant ongoing capital expenditures.

Owners that refinanced before the credit crunch with assumable financing – and secured record low rates and often an upfront interest-only lasting for several years– will benefit doubly when it comes time to sell: buyers will be thrilled to assume that financing and will be able to rationalize higher prices than they could if that below-market-rate financing was not in place.

User-buyers are paying the highest prices in the marketplace today, as (a) interest rates still remain near historic lows and (b) these users are more focused on the overall cost of ownership versus that of leasing and ownership frequently wins out in that analysis today. Many an owner of late expends significant time, energy and expense filling a building with tenants to ready it for sale, only to later learn the unhappy irony that the building would be worth more empty (to an owner-occupant) than full (to an investor).

More than a few would-be buyers and sellers are taking a “wait and see” attitude, with sellers expecting that the market “froth” will subside, and buyers boldly predicting greater crisis and opportunistic buying opportunities to come. Prudent sellers will price their assets appropriately and move to sell while rates remain low, rather than trying to “time the market.” Appropriately-priced and widely marketed assets still generate multiple offers from the investment community. Buyers looking for opportunistic buying opportunities are not yet finding them: there is little-to-no distress among owners of commercial real estate in the Corridor. Distress, where it exists, is nascent and primarily in the residential sector.