Worst over for commercial real estate?

For many months we've continued to hear about the sturm und drang in the commercial real estate market. Where's that crash we keep hearing about? It is just over the horizon, or has that sector of the real estate industry learned the lessons of the housing crash and decided to manage revaluations in a different way? According to a story in the L.A. Times, not only may the worst be over for office buildings, retail stores and industrial properties, but funding is now starting to emerge from the sidelines. From the story:

After nearly three years of declines there are signs that Southern California's beaten-down commercial real estate market has struck bottom — setting up the possibility of a rebound later this year.

In a sign of the easing, heavyweight investors armed with buckets of cash are on the prowl, looking to snap up office buildings, warehouses, shopping centers and apartments at the market's low, industry observers say. The buyers are choosy, but the most desirable buildings elicit bidding wars when they come up for sale...

Although commercial building landlords in many markets are still struggling with high vacancy rates and weak rents, the erosion in some sectors has slowed, piquing the interest of buyers. In addition, reinvigorated banks have been able to postpone or avoid liquidating billions of dollars' worth of distressed real estate loans sitting on their books, helping to solidify prices.

In a similar fashion, Southern California's housing market hit bottom more than a year ago and prices have been trudging higher ever since, partly because a feared wave of fresh foreclosures hasn't materialized.

If the commercial real estate market continues to gain strength it would represent a significant shift in economic risk because many experts had feared that mass defaults by landlords on their loans could cripple banks and drive the country deeper into recession.

"It's true that thousands of commercial loans must be worked out and some of these properties will enter the market in 2010," investment banker David Rifkind said. But "federal policy has been accommodating to banks and they are not being forced to realize losses."

With rents falling and the economy trembling, commercial real estate transactions had been rare during the downturn. Owners were holding on in hopes that prices would stop falling and buyers were holding back, waiting for the low point.

But a philosophical change has become apparent among investors, Rifkind said.

"There is so much money sitting on the sidelines that when distressed assets or even small pools of loans come to market, there is a flood" of interest, said Rifkind, managing partner of George Smith Partners.

"That became palpable to us in the first quarter," he said. "Money can't stay on the sidelines for long periods of time. It has to retool and be put to use."...

Click here for the entire story.

June column for Builder & Developer now online

My column for the June 2010 issue of Builder & Developer magazine is now online. In this issue, entitled "A Spring Thaw for Project Finance,"I interview Jonathan Lee, a Vice President with George Smith Partners (GSP), a real estate investment bank and a MetroIntelligence client on the various financing programs available today buying land, developing projects or refinancing existing ones.

In addition, MetroIntelligence is now able to work with builders and developers in need of project finance/re-finance, conduct preliminary due diligence and then bring appropriate deals to GSP. An excerpt from that column:

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly...

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values. In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started.

And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so. As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios...

Click here for entire column.

A Spring Thaw for Development Finance?

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly.

In order to prepare for this new environment, MetroIntelligence is now partnering with George Smith Partners (GSP), a leading real estate investment bank which regularly taps its vast network of sources for customized equity and debt on residential and commercial properties throughout the U.S.

Whether the assignment is finding an equity partner to buy land or refinancing a stabilized apartment property, MetroIntelligence is now able to provide objective reviews of a sponsor’s assumptions in order to bring appropriate opportunities to GSP -- as well as to ensure that builders and developers are fully aware of their options.

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values.

In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started. And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so.

As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios.

Not surprisingly, GSP’s Lee says that most of the projects getting financing today are infill projects closer to employment centers, stressing that broken developments in tertiary markets with high rates of foreclosures will take much longer to rebound.

For builders looking to dip their toes into construction financing for new projects, Lee says that as opposed to the one or two banks actively lending six months ago, today there are closer to four or five banks plus half a dozen hard-money lenders. Nonetheless, both of these types of lenders would want to chop up larger projects into phases to minimize their exposure.

But for builders looking to revive dormant projects, the view is cloudier, with a delicate dance involving a builder with deep enough pockets to buy back his note at a discount with new recourse money that ultimately protects the lender. Of course that assumes we’re talking about a single-family project, as financing for new condominiums is virtually nonexistent.

However, Lee does offer up an intriguing idea in which a multi-family project could conceivably be financed based on apartment underwriting standards but with the appropriate release clauses and a caveat that -- under the right conditions and assuming available mortgage financing – the units could eventually be sold as condos.

As for traditional apartments, with the worst of the downturn likely behind us, lenders are starting to wade back in with the right operators in the best markets but still with extremely conservative LTV ratios.

Certainly, any return to the days of easier credit will be long and arduous, especially given that total outstanding AD&C loans were reportedly down by 23% year-over-year in the fourth quarter of 2009.

Yet for those builders and developers who can adapt to the new environment and partner with the right sources for capital, a greater share of both the market and its future spoils await.

Want to see if the financing quotes you're getting for your projects are competitive? Interested in rolling over maturing debt for land, apartments or other commercial uses?

Contact MetroIntelligence at 818-584-1848 for more information!