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.

Commercial real estate downturn to get worse

Just as the country's housing market is starting to show some (potential) signs of life, the commercial real estate sector is about to go through its own turmoil, impacting the owners & tenants of offices, retail stores, industrial parks and apartments. From the New York Times:

These days, the people who buy and sell office buildings, shopping centers, warehouses, apartment buildings and hotels are hardly in a festive mood, despite some recent encouraging signs relating to the job and housing markets and a recent increase in sales of small office buildings...

The distress is still in its early stages, analysts said. “We are between the first and second inning,” said Richard Parkus, who directs research on commercial mortgage-backed securities for Deutsche Bank. “We’re going to have to get through a very difficult period.”

Mr. Parkus said that vacancy increases and rent declines already mirrored what happened in the 1990s, and until new jobs were created, generating an increase in demand for commercial space and more retail spending, this was not likely to be reversed.

Building values have declined by as much as 50 percent around the country, and even more in Manhattan, where prices soared the highest. As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards, he said...

But the damage is expected to be even greater for banks, which are holding $1.3 trillion in commercial mortgages (including apartment buildings) and $535.8 billion in construction and development loans...About $393 billion worth of mortgages are scheduled to mature by the end of next year alone, and an estimated $39 billion more were due to expire this year but have been extended...

The mechanism set up to manage problems with the underlying mortgages is being put to the test for the first time. Some longtime real estate investors who profited from the ready access to mortgages made possible by securitization now complain that the system is impersonal and rigid. Instead of negotiating directly with a lender sitting across a table, Norman Sturner, a partner at Murray Hill Properties, a New York real estate company, said he had been forced to deal by telephone with “a third party sitting out in the Midwest” who seemed indifferent to his problems.

Since the master servicer, which handles the routine servicing of the loan, has no authority to restructure it, the landlord has no way to tackle anticipated problems before it comes into the hands of a special servicer and is already in trouble. “What’s going to happen when billions of dollars can’t be repaid?” said Mr. Sturner, who owns and operates five million square feet of office and apartment buildings.

Book review of "After The Fall" published at Inman News

My review of the book "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade" by Steve Bergsman is now online at Inman News. As an adjunct to this review, I also interviewed Bergsman for my new Housing Chronicles show on BlogTalkRadio, which you can listen to by clicking here or listening to it on the widget below:



From the review:

With the housing market still in tatters but showing some signs of life and the commercial markets starting their own freefall, many investors continue to consider real estate one of the last places to put their dollars to work.

In his new book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," veteran real estate and travel writer Steve Bergsman argues that now is precisely the time to start considering what types of real estate sectors -- whether residential, commercial or leisure -- should be on your shopping list, both today and in the future...

For each chapter, the author takes us through a brief business journey beginning with an overview, followed by "Where We Are Today," "Where We Were," "Where We Are Headed" and "Fundamentals."

Readers can easily thumb through to whichever chapters they deem most relevant for analysis on the past, present and future for their sectors of interest. In addition, a "Bonus Box" at the end of each chapter focuses on a recent trend for a particular land use sector, such as "The Office Condominium," "Flex Space" (for industrial uses) or "Locations for Knowledge Workers" (for retail uses).

In the case of the commercial real estate markets, Bergsman paints a future portrait of haves and have-nots, in which the largest investors will favor larger urban, international centers such as New York, Washington, D.C., or Los Angeles, while largely ignoring tertiary, largely domestic markets such as St. Louis or Minneapolis.

By 2012, however, the author thinks it will actually be the sleepy, stable apartment market that will be one of the best places for institutional dollars, having likely rebounded from several years of weakness in that sector's underlying fundamentals and a dearth of new construction...

One sub-sector expected to resist the outgoing tide is senior housing, which already went through its own boom-and-bust cycle earlier in the decade and, by 2010, will enjoy a strong surge of favorable demographics as boomers begin to retire in larger numbers.

Looking ahead, two residential sectors Bergsman expects to underperform the market include: condominiums (especially those in popular vacation areas such as Las Vegas or South Florida) and, at least until the next decade, second homes.

However, due to future demographic trends pointing to an aging population, smaller families and a growing preference for returning to the city centers, condos located in urban areas that haven't been overbuilt could return to health as early as 2010, he said...

Finally, although most real estate sectors are expected to return to basic fundamentals for most of the 2010-20 years, one heralded star of the housing boom -- the exurban McMansion built on the far fringes of metropolitan centers -- could likely become its most visible victims of the bust.

Featuring large lots at the expense of a long commute and few public transit options, some industry observers think such single-family homes will eventually be subdivided and become housing for the poor -- which, ironically, is exactly what happened to buildings in various downtown areas as a car-crazy populace moved out to new suburbs during the mid-20th century (see Inman News report on urban, suburban and rural growth and planning trends in the aftermath of the housing boom).

Of the 57 million existing single-family homes on large lots, nearly 40 percent, or 22 million, could have considerable trouble finding buyers in the years ahead as larger economic, political and cultural forces change the way Americans live and view residential real estate as an investment class...

Click here for entire review.