Live Blogging a Commercial Real Estate Group Therapy Session

by francine Hardaway on October 30, 2008

I have a real estate license, which requires continuing education, so this morning I'm attending a seminar on the state of the commercial real estate markets. Not surprisingly, the brokers and developers are finding the capital markets not very friendly. Banks are not using their government money to lend; they are using it to acquire other banks. Most banks are really not in business today. This is true in every industry, but it's astonishing the young commercial real estate Type A people who have never seen a down market.

 Getting financing and trying to make any type of project stand by itself is difficult
, which is why developers are going to mixed use projects, where one fundable component can start at a time. At the same time, cities are pushing for density, and  high end mixed use doesn't work everywhere. (You need 6 million tourists going to high end resorts who want to go shopping to make them work. Thus many mixed use projects are sucking wind right now).

 Retail is a disaster. In Phoenix, there are 13 vacant Mervyn's, and 18 vacant Linens and Things because of retail bankruptcies. There are midnight moves, falling rents, one year free rent and free-flowing TI money for tenants. The only retailers who are expanding are Marketside (WalMart) and Fresh and Easy, and the dollar stores. We have a thousand shopping centers that need to be redeveloped, and everyone in retail is waiting to see who else will go BK after Christmas. There isn't even any SBA money to finance franchisees in these centers.

National capital markets are grim
. There's no liquidity, and major life insurance companies are sitting on the sidelines, too. The illiquidity of real estate loans scares them. They can buy Caterpillar bonds at 390 over the Treasury, so why buy into a real estate deal?

It's probably easier to do a loan under $25 million than over. And the spreads are 300-400 points over the Treasury bond. 7.90 rate.

You will be putting 40% down if you are buying in Phoenix. And looking at a 7.9% finance rate. Buying anything makes no sense. Tenant quality has to be good. Seasoning has to be 3.5 years.

There is no happy news today. There are few transactions because of the gap between the bid and the ask, which is what happened first in the housing market. Sellers can't reduce their prices to transact.

Private lenders are lending on properties that are being bought at a discount
: "broken deals" and 50 cents on the dollar repos. You can get a 1-3 year bridge loan on a good property for a high price if you are an A paper client and you can't work in the regular credit market, which is shut down. Bank borrowers with great assets are getting loans. People are paying 13% for loans if they need to move forward on a deal.

This is happening to people who want to move forward on deals to realize the potential income rather than sit on unfinished projects. Rates are dependent on the type of transaction; a drop in prime doesn't affect the private lenders, because there's so little money available. Going forward, land at 12.5%-13% on land, 11.5 for income producing property.

All the markets face liquidity problems, which means commercial real estate is losing 30% of its value–not because of the value of the real estate, but because of worldwide credit problems.It will take ten years to come back. In the mean time, property is being exchanged and the vultures are out there doing creative deals.

These commercial real estate guys and gals are hoping that after the election, a new administration will force the banks to lend, rather than sit on their money. Good luck.

What will probably happen is that people will come in with private money, buy all these assets at 25-50 cents on the dollar, and move the market along.

Don't sell if you don't have to. Don't try anything fancy. Keep your tenants happy. And buy land; they're not making it anymore:-)

{ 1 comment… read it below or add one }

Daltonsbriefs October 31, 2008 at 4:30 am

Thanks for the on the spot report, I’ve been making the point for a couple months now that the housing problems would affect commercial real estate, all types of construction, and consumer spending.

I’ve also been saying to anyone who will listen that all these markets will come back … six months after the housing market recovers with a roar.

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