While getting ready for the long Independence Day weekend, I got caught up on a little industry-related reading and saw this article from Gulf Coast Business Review that says commercial real estate sales volume between Tampa and Naples has fallen 82% from last year. Now, before you say “no kidding, Chester” or any variation thereof (which I admit was my initial reaction), it’s important to note why deal velocity has fallen off so much.
Turns out it has little to do with the continued frozen capital (really, in this heat?) and more to do with the continuing bid-ask gap between eager buyers and reluctant sellers. Kyle Burd with Orlando-based Eola Capital even remarked that a deal got spiked over as little as a 2% difference. Somebody at the table would have covered that out of pocket back in the crazy money days.
The problem continues to be that buyers are waiting for prices to fall farther, while sellers remain hopeful that they can still get back most of what they paid for their properties a few years ago. One broker is advising owners to cut their losses now, use the money to buy something else cheap and wait for prices to go back up somewhere down the road.
Sure, everybody’s looking at distress opportunities lately, but that doesn’t necessarily mean the bidding wars of recent memory are going to drive prices higher again. In fact, smart investors are betting prices will go lower before they start to move back up sometime in the second half of 2009 (which, incidentally, begins Wednesday).
We’ve heard for several months now that capitulation will be the key that unlocks investment deals this year. It seems that time has come, but the question remains how much longer will buyers and sellers stand off before they agree on pricing and get this market moving again.
The sellers cannot sell because the decision is not entirely theirs. Most deals I have seen in the last six months have loans with 80% LTV. Factor in a 20% value cut..and the decision lies with the bank. Very few owners have equity…and those who do can still finance themselves out of distress.
I agree with this first responder. I am actually a Realtor here in Miami-Dade County. We have seen drastic price reductions here in offering prices, but they are still too high for them to be realistic to prospective buyers.
Capitulation has not yet arrived here.We are hoping for some movement here in the 3rd & 4th quarters of 2009.
Dig a shade deeper, Carl… Yes, it’s true that the disconnect between the prices that buyers are willing to pay and the price at which sellers are able to sell has not diminished in recent times. But the reason is absolutely the frozen credit markets. You state that a small gap would heve been closed “out of pocket back in the in the crazy money days.” But the source of the money in that pocket was, in fact, the credit markets. Whether from a home equity line or a conduit loan, this was still perceived as OPM.
Spending other people’s money is always a lot easier and more painless than spendiong one’s own – and can be done with a lot less thought and hand-wringing. And in the days of non-recourse financing the sponsor/owners were spending other peoples’ money. Today, when cash is king, we are seeing just how readily investors are willing to open their own wallets, and now they even seem to have grown cautious with the OPM that they control.
That points to a slower, more cautious recovery over several years of price readjustment…