Even as the Florida housing market is starting to improve, many are concerned that commercial real estate will drag behind for a while. Jeff Sweeney sees things differently.
The president of Orlando-based Grubb & Ellis|Commercial Florida believes the CRE market will fully improve in the second half of 2010, though there are already positive signs of a recovery. A lot depends on the willingness of banks to get back to lending on commercial projects, he says.
“I’m not sure whether we’ve reached the bottom yet in commercial real estate, but I think we are close,” says Sweeney, whose firm has additional offices in Tampa and Melbourne. “Prices have declined across the board. Office and industrial properties have done slightly better, but retail property rental rates and occupancy levels have declined by as much as 25% in some sectors.”
Grubb & Ellis|Commercial Florida began focusing on distressed commercial properties more than a year ago and currently serves assets valued at more than $125 million statewide. Sweeney says the company’s work with distressed and receivership properties still has plenty of room to grow.
“A lot of loans issued in 2006 and 2007 are coming due over the next three years, and we think the volume of distressed assets will top $1 billion in Florida,” Sweeney says. “A number of those loans will not meet revised underwriting standards, and that’s what creates distressed properties.”
That’s what Sweeney thinks. What do you think?
Absolutely agree with Sweeney. The commercial real estate market is going to come back much quicker than people think. There is a tremendous amount of global equity on the sidelines now that has grown weary of earning 0-1% returns. It is important to note that this real estate cycle-unlike the crash of the late 80s/early 90s-has a much healthier supply and demand situation AND there is much, much more global equity available, mobilized and willing to invest in commercial real estate as it has since become an accepted investment asset class primarily because of the evolution of the REIT industry spawned in the early/mid 90s. Beginning in early 2010, banks, life companies and other lenders are going to clean out their portfolios in bulk selling much of it to the mobilized massive equity players such as REITS, private equity funds (ex. Sam Zell et al), Chinese, Saudis and Germans.
Sellers are beginning to realize that higher cap rates are here for a while due to financing issues and will go ahead and face the music and thus sell at reduced pricing. True, financing is a problem but these bulk buyers will pay all cash and worry about financing out parts of the portfolio as they re-engineer.
Until we clear out, or even better, understand the depth of the CMBS unwinding issues, we don’t know where we are.
With all due respect, I don’t think anyone can yet quantify the problems of loans that will be categorized as underperforming due to new underwriting criteria.
Is there that much private equity out there to handle all these deals?
There is a goodly supply of capital out there but it is largely still waiting. We are in a deflationary phase, a logical reaction to the hyper leverage prior to mid 2007 that drove values way above trend. That leverage allowed an oversupply of almost every type of non-residential development product. Now, as so many businesses are failing, we have 15% vacancies or worse in most cases. Yes, the bottom is about to form. As sales begin to occur, buyers will gain confidence they are not too early. Then there will be a flight to quality utilizing modest leverage as a proper hedge against future inflation. And, since it is so hard to time the bottom, I feel the time is now to make select long term investments.
I disagree; the bottom is not around the corner! Our successful economy although globally influenced, is predicated on growth which I believe will not be seen for some time. Our domestic unemployment is nearly 10% & substantially more in those areas hardest hit. Alan Greenspan also sees unemployment continuing to increase. I agree cap rates are rising & this will dramatically have an adverse effect on the trillions of dollars from the “heyday” of CMBS & Institutional loans, that will be coming due between 2013 & 2016 and find themselves leveraged upside down. There is debt & equity available for those well conceived projects that can stand the scrutiny of conservative underwriting. “Back to basics” is the successful way to nurture growth. Niche products such as: HTC, LITC, NMTC, Brownfileds & others could be our answer. After 40 years in the real estate business one thing is certain, as memorialized by Yogi Berra “It’s like déjà vu all over again.” I welcome comment & can be reached at jm.rome@capital-access.net
Mid to late 2010 is where we will start to see commercial transaction activity start to make its way back to pre-boom numbers. 2004 to 2007 numbers were unsustainable and unrealistic, but we should expect to see moderate stabilization in vacancy and lease rates. This should in turn bring CAP rates down slightly to a realistic value that will apease Seller’s take out price. We are starting to see a major uptick with the small business owner leasing activity, which is a good indicator. Get peole back to work and we can create a foundation to build on. Flush out the toxic bank debt so banks can start lending again along with moderate job growth and we have something.
How can we be close to the bottom when (and in no particular order):
1) Banks are still closing and credit is still frozen.
2) The banks that are open are playing the extremely dangerous “extend and pretend” game with insolvent properties.
3) A “W” shaped recovery and rising unemployment for the foreseeable future.
4) Strong potential for inflation (if not hyper-inflation).
5) Falling prices and no sales velocity means no one really knows what anything is worth – regardless of product type or location.
6) The potential for 2 million additional home foreclosures in the next few years.
7) Israel bombs Iran – Iran blocks the Straits of Hormuz – oil goes to $200/barrel+.
Are there a few deals happening, yes; but even the distressed asset sales of a year ago now look way over priced. But what’s also frustrating from a broker perspective is that Sovereign Funds and other substantial investors are going directly to the banks or owner to negotiate an offer. I think it is going to be a longer slog back than many think.
In DC metro market is just startig to feel the effects of this economy. The acquisition/disposition market is experiencing a sharp down turn in returns, especially the buildings located in the suburbs of DC. With all the money sitting on the sidelines, intervestors are looking for solid purchases, not just a place to park some money like the last 7 years.
I believe the next 6-9 months will be a true tail of the commercial market for the next 2+ years.