LWR Commercial
Archive for December, 2008
Saraota Commercial Real Estate Can’t Go Lower?
Dec 22nd
According to the venerable Mr. Braga of the Herald Tribune the Sarasota commercial real estate market has another 50% to drop. So if you consider that lease rates have fallen approximately 33% in the last year and sales prices have dropped almost in half, then landlords are basically going to be giving away the rest of their inventory.
Read on to hear what the doom and gloom crew have in store for us. I, for one, have seen renewed interest and deal making. Landlords that must are cutting their prices and those who don’t have to are content to wait it out. This will be a slower recovery, but not as precipitous as the naysayers.
Unhappy new year for commercial
Published: Monday, December 22, 2008 at 1:00 a.m.
The commercial real estate market has suffered this year as total sales and lease rates of everything from shopping centers to car dealerships have fallen.
But if you think things were bad this year, just wait until 2009.
“The next meltdown we are going to see is in commercial,” said Gordon Hester, a Siesta hard-money lender whose customers include both commercial and residential developers. “The value of commercial real estate will probably drop 50 to 60 percent.”
Investors began pouring money into commercial real estate in 2006, just after the residential real estate market peaked. Like residential investors, these commercial players abandoned the notion that properties need to kick off enough revenue to cover carrying costs, Hester said.
Instead, they banked on the bet that real estate could be purchased for one price and sold for a much higher price in a relatively short period.
“Now investors are only willing to pay based in returns,” Hester said. “For that to shake out, values have to drop.”
Unfortunately, the end of the “appreciation model” in commercial real estate coincides with one of the worst economic downturns since the 1930s.
Unemployment is up, consumer confidence and spending is down, and owners of shopping centers, hotels and office buildings are already feeling the pinch.
“After the Christmas season, we are going to see a ton of retailers and restaurants file for bankruptcy or go out of business,” said Jack McCabe, a Deerfield Beach-based real estate consultant. “Obviously this will affect shopping centers and strip centers and the office market.”
Sales dropping
The deterioration of the commercial real estate sector already is showing up in declining sales.
Only 89 properties in Sarasota County changed hands in 2008 for a total of $131.3 million, a 47.5 percent drop in sales volume from the 109 properties that sold for $250.3 million in 2007.
Office buildings saw the largest drop in dollar terms, followed by hotels and shopping centers.
“The whole thing is being driven by two things: the credit situation, which is nowhere at the moment, and investor confidence,” said Stan Rutstein, a commercial agent with Re/Max in Bradenton.
Rutstein pointed to the fact that Nate Benderson, Nathan Forbes and the Taubman Cos. recently announced they were postponing construction of the new University Town Center Mall.
“If developers like Benderson, Forbes and Taubman, who are national scope, are being cautious — if they don’t want to take a risk — then smaller players are not going to take a risk, either,” Rutstein said. “Two-thousand nine is going to be a very challenging year.”
Rutstein said that the only way commercial properties are going to move is if sellers come down hard on price. For example, a client who was offered $1.6 million from a bank for an acre near Wal-Mart in 2006, might only get $600,000 for that same property today.
“But there aren’t any takers because banks are out of the market,” Rutstein said.
The same downward trend is also affecting lease rates for both office and retail space, said Anthony Migliore, a commercial agent with Coldwell Banker in Sarasota.
“Landlords and owners are getting very reasonable,” Migliore said. “There was one case in which the owners of an office building in Lakewood Ranch gave one year free rent to the Juvenile Diabetes Research Foundation in return for signing a long-term lease.”
Of course, that is an extreme example, Migliore said. But it illustrates the kind of lengths landlords are willing to go to get space rented.
“They may not be able to sell the space, but at least they can get it leased and ride out the storm,” Migliore said.
Vacancies on the rise
“If you are a shopping center owner and you evict someone this year, you’re crazy,” said George Huhn, a Venice-based commercial real estate agent. “Vacancies are going to go through the roof, and everyone will be competing for tenants.”
A lot of landlords are opting to carry mom and pop retailers through the bad times with rent abatements, renegotiations of leases and forbearance agreements, Huhn said.
“They’re just looking to keep the guy in business, because something is always better than nothing,” Huhn said.
Retail sales in Sarasota County were down by nearly $70 million, or 11 percent, in September compared with the same month a year earlier, and that was before the financial crisis really took hold. So it is no wonder that retailers and landlords alike are struggling.
But as in the residential market where foreclosures have led to amazing deals for savvy investors, the collapse of the commercial real estate sector will provide ample opportunities for investors looking for deals.
“Banks already have commercial property available that they have foreclosed on,” Rutstein said.
“A good amount of it is dirt that has plummeted in value.”
For investors like Michael Averbuch, commercial land represents a once-in-a-lifetime opportunity.
“The biggest game in town is commercial land,” Averbuch said. “Banks in Southwest Florida are nothing more than walking corpses. They are sitting on land and developer loans — most of which are in default, and lot of that land will hit the market this year.
“The stuff is so distressed, that it can’t get more distressed.”
Florida Commercial Real Estate Outlook dampened
Dec 18th
WASHINGTON – Dec. 18, 2008 – With the exception of cash transactions, investment activity in commercial real estate sectors is nearly at a standstill because commercial lending has essentially halted, while job losses are curtailing the demand for space, according to the latest Commercial Real Estate Outlook of the National Association of Realtors® (NAR).
Lawrence Yun, NAR chief economist, says there are serious structural problems in commercial lending. “Although access to residential mortgages has improved, the opposite is true for commercial loans,” he said. “We need liquidity for commercial mortgage-backed securities not only to free the market, but also to rollover existing debt. At the same time, the loss of jobs has had a significant impact on the demand for commercial space.”
Yun adds that default rates on commercial real estate loans are very low by historical standards. “However, commercial defaults could deteriorate significantly without a properly structured stimulus that addresses liquidity for commercial mortgages,” he says.
Realtors Commercial Alliance Committee Chair Steven Good says market conditions are very challenging. “Given that supply and demand for commercial space varies greatly depending on location, it’s important for businesses who want to sell or lease space to consult with a Realtor familiar with local conditions,” he says.
The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Torto Wheaton Research provides historic data.
Office Market
Office rent is likely to contract next year as erosion in the job market curtails demand for space. Vacancy rates are projected to increase to 16.4 percent in the third quarter of 2009 from 13.4 percent in the third quarter of this year. Office markets with the lowest vacancies currently include New York, Honolulu and Seattle, all with vacancy rates of 9.6 percent or less. The highest vacancies are in Detroit, Phoenix and Dallas, with vacancies exceeding 20 percent.
Annual rent in the office sector is expected to slip 0.4 percent this year and decline another 3.6 percent in 2009. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen at 12.3 million square feet this year before contracting by 63.0 million in 2009.
Industrial Market
The industrial sector has been holding up fairly well based on the strength of exports, but the global economic slowdown will take a toll.
Vacancy rates in the industrial sector are forecast to rise to 12.1 percent in the third quarter of 2009 from 10.7 percent in the third quarter of this year. Industrial markets with the tightest vacancies include Los Angeles, Salt Lake City and Tucson, Ariz., with vacancy rates of 6.8 percent or less. Areas with the highest vacancies include Detroit; Stamford, Conn.; and Phoenix, with vacancies of at least 15.7 percent.
Annual rent is estimated to ease down 0.8 percent this year and decline another 4.0 percent in 2009. Net absorption of industrial space in 58 markets tracked should total a negative 57.2 million square feet this year and a negative 134.9 million in 2009. Many obsolete structures remain on the market because much of the new construction has been built to suit specific needs.
Retail Market
Declines in consumer spending are impacting the retail sector. The retail vacancy rate will probably be 12.7 percent in the third quarter of 2009, up from 9.8 percent in the third quarter of this year. Retail markets with the tightest vacancies include San Francisco; Orange County, Calif.; and Honolulu, with vacancy rates of 4.5 percent or less. Markets with the highest vacancies include Detroit; Columbus, Ohio; and Fort Worth, Texas, with vacancies of 15.6 percent or higher.
Average retail rent is expected to contract 2.0 percent in 2008 and fall another 7.3 percent in 2009. Net absorption of retail space in 53 tracked markets will likely shrink by 7.3 million square feet this year and contract by another 35.7 million in 2009.
Multifamily Market
The apartment rental market – multifamily housing – continued to benefit from weak home sales.
Multifamily vacancy rates are forecast at 5.8 percent in the third quarter of 2009, unchanged from the third quarter of this year. Markets with the tightest vacancies include San Diego, Northern New Jersey and Boston, with vacancy rates of 4.2 percent or less. Areas with the highest vacancies include Jacksonville, Fla.; Phoenix; and Orlando, Fla., with vacancies of 8.5 percent or higher.
Average rent is projected to grow 2.9 percent in 2008 and 2.8 percent next year. Multifamily net absorption should be 24,400 units in 59 tracked metro areas this year and 142,000 in 2009.
The NAR Research Division for the Realtors Commercial Alliance publishes the Commercial Real Estate Outlook. The RCA, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and NAR affiliate organizations.
Organizations in the RCA include the CCIM Institute, the Institute of Real Estate Management, the Realtors Land Institute, the Society of Industrial and Office Realtors, and the Counselors of Real Estate. The RCA also provides commercial products and services.
More than 82,000 NAR members offer commercial services, and 60,000 of those are currently members of the RCA.
© 2008 FLORIDA ASSOCIATION OF REALTORS®
Sarasota and Tampa Bay Planners offer 4 growth scenarios for region
Dec 4th
THE POSSIBILITIES
SCENARIO A:
“Business as Usual”
This forecast continues current and past growth patterns. Most newcomers would move into more and more subdivisions of single-family homes.
Those suburbs would consume 781 square miles (three times of size of Pinellas County) and impact 312 square miles of wetlands and wildlife habitat. Most likely, the new residents would make long commutes to their jobs.
Of the four scenarios, this one would require the most land, put the most cars on the road, create the highest demands for water and electricity and impact the most wetlands and agricultural lands.
SCENARIO B:
Urban redevelopment
Instead of continuing suburban sprawl, growth would focus on redeveloping areas within existing cities.
Roughly 60 percent of the housing would be town houses, apartment complexes, apartments atop new retail centers and mid-rise and high-rise condominiums.
Vehicle trips could be reduced by 25 percent and transit options, such as light rail or express buses, would be more viable.
Compared with Scenario A, this growth pattern would preserve two-thirds more open space and agricultural land, protect 75 percent more wetlands and 80 percent more wildlife habitat.
SCENARIO C:
Transit-oriented development
This option calls for even more dense development within the cities, putting people closer to their jobs and making mass transit such as commuter rail more feasible.
Of the four scenarios, this requires the least water and electricity, puts the fewest vehicles on the road and preserves the most open space.
SCENARIO D:
Environmental protection
Of the four scenarios, this one has the greatest emphasis on wetland and wildlife habitat protection.
It foresees about 37.5 square miles of new mixed-use communities near existing downtowns. The residential development would be similar to that described in Scenario B.
Across the region, less than 500 acres of wetlands and wildlife habitat would be impacted.
INTERESTED?
One Bay, a partnership of several planning agencies, is asking residents throughout the Tampa Bay region to take a survey about what growth patterns they would prefer to see as more people move here.
To take the survey and read information the questions are based on, go to myonebay.com.
One Bay will start compiling the results after Sept. 30.
Key Documents:
- Possible future growth graphic (PDF – 39950kb)
Commercial Market Will Fare Better Than Residential
Dec 2nd
A bad economy will cause increased defaults in commercial real estate, but nothing even approaching what happened in the residential world. Here is why:
1. Commercial real estate investors do not buy on emotion. It is all numbers. If a deal does not pencil out, it is not purchased. This does not mean that investors never make mistakes. We do (I have made many). But, it is because our assumptions are wrong or events cause changes in the projected numbers. To be contrasted are buyers of homes who fall in love with a home and then buy at whatever price it takes. An emotionally-charged purchase causes people to buy beyond reasonable values and, their means.
2. Commercial real estate lenders have not engaged in the nutty lending behavior that residential lenders did. Although there were some aggressive loans made, the magnitude of the lending mania was nothing like what happened in residential. During the last decade the world clamored for residential mortgage securities because everyone was quite convinced that U.S. housing prices never fall, and that homeowners never walk from their homes. Oops!
3. Unique to most of the world, in the United States homeowners can generally walk from their mortgage debt without consequence. Whether you agree with this or not, it is fact. Such is not the case in the commercial world. Whenever there is personal recourse or some other kind of guarantee, a U.S. commercial mortgage lender is going to come after the commercial real estate owner should he or she up and walk from a losing deal. That tends to keep people focused and much less likely to default.
4. Most commercial real estate investors have reserves for difficult times. Even assuming that an investor could get a loan of 90%+ of value (which is much less likely than in the residential world), it would be the rare investor who had no savings or back-up for the down time. Large numbers of homeowners, on the other hand, operating under the premise that housing prices always go up, were “all in,” that is they put every dime they had into buying a home.
For these and other reasons, I do not believe we will see levels of defaults in commercial real estate approaching U.S. homeowner levels (now exceeding 10%). And I wish the media would stop writing about commercial real estate defaults because it spooks lenders and investors. I will whine about this next time I am on TV.
