Peter Pays Paul

This month’s meeting for the Bay Area Mortgage Association was titled “What get’s financed in 2009?” The three panelists shared what each of their companies would be looking to finance in 2009.

Two life insurance companies and one national bank were represented on the panel. All three institutions expected higher cap rates, lower loan-to-value ratios, and stronger debt-service coverage ratios as requirements for new originations.

The bank is currently only planning to work with customers that have an existing banking relationship.

The life insurance companies face a difficulty because their global portfolio allocation have been skewed by the massive decline in the stock portion of their portfolios. For some of the life companies their portfolio is out of balance towards commercial real estate, as these assets have not lost value at the same rate the stocks have. This means that they will likely see a decrease in the amount of loans they can originate.

Survey Says

In a survey performed by Marcus & Millichap commercial financing ranked as the biggest concern for real estate investors in 2009 reported by Mortgage Bankers Association.

Financing availability, creditworthiness of tenants and rising vacancy rates top concerns for commercial real estate investors responding to a survey conducted by Marcus & Millichap Real Estate Investments, Encino, Calif.

…

Nearly 60 percent expected all-in mortgage rates to increase in the next year; nearly 75 percent believe financing will be as difficult or more difficult to obtain. While 60 percent of commercial real estate investors expected full recovery of the commercial mortgage-backed securities market, they said its return could take at least two years.

This provides a good opportunity for:

1. Commercial mortgage brokers and bankers that are able to find solutions for their clients,
2. Commercial real estate agents that are able to structure deals that get financed,
3. Real estate investors/lenders that have cash.

Creativity will be one of the keys to success in 2009 for those in commercial real estate. “Business as usual” is on vacation.

Photo Credit: The Pack

Jonathan Miller over at Trend Czar has an interesting post on the near term pain in commercial real estate. He also suggest niche markets that commercial real estate brokers and other commercial real estate professionals should focus on in 2009.

For brokers and other intermediaries, business won’t suddenly ramp up for quite a while unless they specialize in helping broken borrowers find refinancing or fire sale foreclosed properties for lenders.

Near-term lawyers can do well on the workout front and representing various tranches, special servicers, borrowers and lenders who are tangled up in all the CMBS and CDO litigation on the horizon. But before that happens banks and institutions have to begin writing down their portfolios. That will captivate all of us before 2009 is over.

Trend Czar: Debt Burdens–Stream of Consciousness.

The Contra Costa Times is reporting on the New plan for Neiman Marcus in Walnut Creek.

The plans from Macerich detail a store almost 15,000 square feet smaller and only two stories tall.

The earlier proposal for a 107,000 square-foot project met with disapproval of the local community as it planned to exceed the local height limit.

Residential real estate had a tremendous run up in value and is severely overbuilt due to the easy access to consumer credit.

Commercial real estate, unlike previous downturns, did not commit the same error of overbuilding for the most part.

However, the macroeconomic factors of a stock market crash, tightened credit market, and a lack of consumer spending negatively impact commercial real estate.

According to CoStar Group’s article This Year, Pain To Replace Gain , 2009 will see a contraction in the demand for office and retail space.

CoStar’s CEO Andrew Florance presented a 2009 State of the Office Market review and reported that as many as 1,200 properties were either delinquent or past maturity. (Past maturity loans are not necessarily a bad thing. While the loans are in technical default, many lenders are happy to accept monthly payments while the borrower seeks to refinance the loan.)

Florance has one of the most poignant quotes from anyone in the midst of the wave of bailouts.

“The market needs to establish a new bottom before a recovery can take hold,” Florance cautioned. “The sooner we reach it, the better off we’ll be. If property values need to fall to X, it’s better to get there in 18 months not five years.”

This quote is filled with wisdom. Artificially inflating real estate values through bailout money or other funds will only prolong the downward movement. A hands off approach would allow the market to reach bottom sooner. We may feel the pinch now, but a prolonged painful slide would be avoided.

The Wall Street Journal reports in Dirt Lawyer is not impressed by this massive number (sic).

An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows, experts say.

Only time will tell how good/bad 2009 will be. The sooner we reach the bottom the better for all involved in commercial real estate.

Photo credit: AdobeMac

Previously, I wrote about The Money on the Sidelines and the vulture funds waiting to strike.

It appears that a vulture fund in the U.K. has made their first purchase according to the Wall Street Journal article Vulture Fund Circles in U.K.

For nearly a year the veteran British property investment team of Raymond Mould and Patrick Vaughan has sat on their vulture fund, waiting for the right moment to pounce on the growing carnage in commercial real estate.

Now their venture, London & Stamford Property Ltd., is making its first move, buying the prime office building at One Fleet Place in the hard-hit City financial district of London for £74 million ($108.6 million). Given their track record for good market timing, the deal could be a watershed event indicating that the steep decline in British prime property is near its bottom.

Timing the Bottom of the Real Estate Market

Investing in a declining market has been compared to catching a falling knife, you want to catch it as close to the bottom as possible.

Most of the vulture funds have been circling, waiting to make sure that their prey was dead. In this case their prey is the commercial property investors that bought in the last few years with ridiculously low cap rates, high leverage, and inflated rents.

As the WSJ.com article points out this may be a risky move, or it may be a brilliant move depending on where prices go in the next few months. If prices continue to fall, the building may be worth even less in a matter of months.

However, if this is the bottom of the U.K. real estate market, their quickness to act may have allowed them to get a quality building at a great price and before others bid up the price.

Thus the analogy of the falling knife. If you act too soon, you may get cut. If you act to late, you have competition from other buyers and the value begins to go up.

Reaching the Bottom

This pattern is likely to be repeated here in the United States. A few brave vulture funds will decide that we have reached bottom and will make an acquisition or two.

One of two things will happen. If the value of these assets falls, the other vulture funds and investors will stay on the sidelines. If the value holds steady, expect to see a feeding frenzy as competition for assets heats up.

Photo: Circling Vultures by AndyRob

The New York Times is reporting on the spreading vacancy issues in commercial real estate. Office and retail sectors are being hit the worsth.

Much of this affect is due to the prediction that 2009 is going to see a contraction in the U.S. economy. Companies are not looking to expand into new office space. In fact most companies are cutting back on staff and are paring down the amount of office space they are willing to use.

Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.

Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.

This is a very well written article and paints a valid portrait of the situation commercial real estate owners are facing. It is well worth the read.

(HT: Calculated Risk)

What can you do in 2009 to make the best of a bad situation?

By most accounts 2009 is going to be an interesting year for commercial real estate. Only time will tell what actually happens. The economic factors that affect commercial real estate do not bode well.

Three Points of Focus

There are three things that I am going to focus on in 2009: 1) Working Harder and Smarter, 2) Getting an Education, and 3) Focusing on Opportunities.

Working Harder and Smarter

An individual has no ability to control the macroeconomic factors that affect the commercial real estate industry. We cannot single-handedly buy enough stuff to pull the economy out of the funk it is in. (Nor can the U.S. government.)

Working Harder

An individual can focus on their own output. I can determine to spend more time doing activities in my business that generate revenue. Even “hard” tasks like cold-calling or writing for a blog.

Working Smarter

The internet and technology provide a wonderful way to leverage resources. It costs little more than time to maintain this blog. However, I am constantly getting traffic and being exposed to potential clients. Facebook, LinkedIn, Twitter, and other web tools allow professionals to expose their writings to a number of different people from one platform.

Getting an Education

I’m not talking about going back to university. I am talking about taking classes or courses that will increase your knowledge of the industry.

Take a course on marketing, negotiations, or salesmanship. Take a course on finance, investment analysis, or site selection.

Courses that enhance the value you add to your clients will help you generate more income in the long run.

Books

Books are incredibly valuable resources and sources of information. Through a book we can gain the life experience and wisdom of another person’s life.

I have a goal to read 52 books this year. President George W. Bush read 186 books in 3 years while running the United States.

If you project lower income for 2009 and don’t want to spend money on books, invest 15 minutes to join the public library. Many of the best books on economics, sales, business practices, marketing, and finance can be found at your public library for free!

Focus on Opportunities

There is an Allstate Insurance commercial I saw a couple of times during the Rose Bowl, advertising that they started in 1931. This was in the midst of the Great Depression. In 2009, 78 years later the company still exists.

Even in the worst of times there are opportunities to make money. Life goes on. The next generation of property barons will rise up and will need professionals to help them in their quest.

Look for the opportunities and not the obstacles. See the potential instead of the problems.

Thriving in 2009

In many ways the year 2009 will be what we make of it. What will it hold for you? What are you going to do to thrive in 2009?

Photo credit: AustinEvan

Commercial real estate could be worse, you could be investing in Venezuela.

You could build an entire mall the size of a city block only to have the government decide that it wouldn’t be a good use of space.

President Hugo Chavez ordered construction halted on a major shopping mall in Caracas on Sunday, saying the government will expropriate the unfinished building.

The Venezuelan leader said it would be out of line with his government’s socialist vision to allow the new Sambil mall to take up precious urban real estate — and that unbridled consumerism isn’t his idea of progress either.

…

“We’re going to expropriate that and turn it into a hospital — I don’t know — a school, a university,” Chavez said to applause during his Sunday television and radio program, “Hello, President.”

…

“How are we going to create socialism turning over vital public spaces to Sambil?” said Chavez, who has nationalized Venezuela’s largest phone company, electric utilities and oil fields.

The Associated Press: Chavez says mall to be expropriated in Venezuela. (HT: Retail Traffic)

The Contra Costa Times is reporting that Fresh & Easy grocery store is delaying their planned expansion into Northern California and the Bay Area. Fresh & Easy styles itself as a smaller supermarket that insists on fresh food and quality produce.

The article states optimism about the future of the expansion plans for Fresh & Easy. I think that because of public distrust of publicly traded companies, some shoppers may prefer a local, known grocer/shopkeeper to a chain store. This could be a benefit for the smaller Fresh & Easy markets.

However, this may be a sign that people are less willing to spend extra money on “luxury” type food items. Whole Foods has seen a downturn in the present market.

Fresh & Easy delays local expansion – ContraCostaTimes.com.

At many of the networking functions I have attended I have heard about “The money on the sidelines”. The speaker is always referring to the investors that are waiting for the bottom of the market to be declared (I’m not sure who will make this announcement) and will jump in with their barrels of money to make acquisitions at incredible prices. Thus they have “money on the sidelines”.

Dianne Crocker has written a great article about this on her blog about the same topic.

Are There Really $$s on the Sidelines?

Crocker writes:

Whether investors move dollars into play on their own or whether the government will see fit to intervene as it did with the RTC during the savings and loan crisis remains to be seen, but what I do know is this: Prices are still falling, dollars are being mobilized to take advantage of deals, and those who are willing to put their money down will be seeking clarity before closing on deals. Fear has replaced greed and paralyzed our market, but greed will return. Until then, unfortunately, we live in limbo as the uncertainty continues.

My suspicion is that when the market turns, we will see a flurry of activity. Deals will come together at a rapid pace.

Crocker’s article sites Brett White CEO of CB Richard Ellis as saying that CBRE has raised over $5 billion (with a ‘B’) to strike when the time is right. There could be as much as $50 Billion waiting to swoop in and make purchases.

I believe a few things need to take place prior to the sideline money jumping in:

1. Lending needs to stabilize. The pendulum has swung from over exuberant to paralyzed fear. Some of the buyers will pay all cash, but most will want to leverage their investment. Leverage requires lenders.
2. Government handouts/bailouts need to stop. Why? Banks do not like losing money. As long as they think that Uncle Sam will bail them out by buying bad assets at above market rates, they will be unwilling to unload them at market prices. Once the perceived safety net is removed, the banks will unload assets and take the hit.
3. The inauguration needs to take place. Many people want to see how the President-elect Obama handles his duties. How will he govern? What reforms will he make? Will he pass a stimulus? All of these factors have investors and owners nervous.

The year 2009 will definitely be interesting and exciting.