Monday, November 2, 2009

Q. Commercial property sales dropped dramatically nationally, and in North Texas, in the first half of this year. When do you expect investment proper

Alvarado: It is likely that national transaction activity reached its absolute bottom in early 2009 and is now very gradually gaining momentum, with small quarter-on-quarter gains. Volume for office properties in third-quarter 2009 may surpass $10 billion, which would be the highest U.S. total since fourth-quarter 2008 when sales volume totaled $15 billion. Still, if current trends hold, overall transaction volume for office properties in 2009 may only reach approximately $40 billion, which would be the lowest total on record. The Dallas area has experienced a substantial decrease in sales, similar to the national trend. Through second-quarter 2009 sales volume for office properties in Dallas reached approximately $211 million compared with $855 million and $2.4 billion during the same periods in 2008 and 2007, respectively.

Our expectation is that sales volume will begin to increase at a faster pace in the second half of 2010 as larger pools of commercial mortgage-backed securities (CMBS) and commercial bank loans begin to mature. There has already been a significant number of assets entering the workout or special servicing stage, which should result in increased sales in 2010. We also expect the credit markets to ease in 2010 with new commercial and CMBS loan investment allocations.

Gillespie: Commercial property sales, both nationally and locally, can be expected to rebound in accordance with macroeconomic recovery. Comparing conditions in North Texas to many other commercial real estate markets in the United States, we are fortunate to have escaped the worst impact of the recession. However, like the national market, our local market continues to experience a general stalemate between bid and ask prices. Increased visibility of an economic recovery will be needed to significantly jump-start trading in commercial properties. When capital (investors) believe we are on the cusp of a recovery, transactions will resume.

Greene: Sales will rebound when buyers and sellers can agree on value and debt capital is more readily available to finance the transactions. Over time, sellers will feel more pressure to transact than buyers, so combined with deteriorating fundamentals, expect continued price reductions in the near and intermediate term. There is a human element to the sales equation as well. When there is an abrupt shift in value to the downside, it takes time for existing owners to get comfortable with the new environment. Over time, the peak valuation recedes into memory and people begin to focus again on what it takes to transact in the current environment. I believe that 2010 will be that transition year, so expect a very modest, restrained rebound relative to the 2009 bottom.

Also, the sales transaction rebound is being delayed by the lenders. Many lenders are opting to not foreclose on loans that come due but can not be paid off due to the borrower’s inability to sell or refinance. The loan may be at 100% loan-to-value or more, but the borrower can still meet debt service. So, the lenders are choosing the least painful path — extend the loan and hope for the best in the interim. This may simply prolong the problem, but short of federal intervention, this practice will likely remain for loans that can continue to meet debt service. This practice is curtailing the sales rebound, but the lenders’ actions are understandable.

Regarding debt availability, we already see some life insurance companies increasing their allocations for the remainder of 2009. The commercial banks remain under pressure from the Fed, but many continue to conservatively lend on commercial real estate.

Hardage: When we speak of sales activity, I think it goes without saying, we’re talking about “distressed” or “significantly discounted” sales activity. A majority of our industry seems to think it will be the middle of 2010 before significant transaction activity begins. I originally believed it would be the fourth quarter of 2009, but the banks and special servicers appear to be doing everything in their power to push the problems out into the future, most likely to 2011 or 2012. We know that approximately $236 billion of CMBS loans mature by 2013 and many of these will be maturity defaults or operating defaults that will not qualify for refinancing or extension. There is currently $49 billion of CMBS that has been handed to the special servicers, the policing entity that takes over when a loan gets into trouble or appears imminently headed that way. Of this $49 billion, more than $26 billion or 53% of these loans are currently delinquent — so you can see the problems are mounting. Banks hold more than twice the amount of mortgages as the CMBS market at a reported $1.7 billion. While bank loans are much harder to track than CMBS loans, most experts believe that bank loans are every bit as stressed as CMBS loans and their numbers are growing. Suffice it to say there are a lot of troubled loans that are going to have to be dealt with.

Kartalis: Actually, I’ve already seen a “glimmer” of a rebound beginning, and I think it will accelerate beginning in the fourth quarter. The Miller family sold Highland Park Village, a major investment property; our company recently syndicated and purchased an anchored retail center in Houston for its portfolio; and quite a few sales of smaller properties have been completed by our associates of freestanding pads and industrial buildings. Sellers are getting more realistic of their pricing.

Q. What needs to happen, in terms of lending practices and the supply-demand picture, for investment property sales to rebound?

Alvarado: The unprecedented level of public policy support, with $4 trillion already provided of $12 trillion pledged to restore the financial markets and create economic stimulus, has effectively halted an economic free fall, but it has also stalled a recovery in the commercial real estate capital markets as banks continue to extend maturities for their borrowers, avoiding foreclosure in a practice jokingly known as “delay and pray.” Banks need to write off or dispose of these loans to clear their balance sheets and create the capacity to write new loans. We also need to restart the CMBS market, which will require new standards for underwriting and for the rating of underlying securities.

A recovery in values could be delayed until 2012 and beyond, based upon the lag effect typically seen in the investment property market. The market will first need to see positive results in corporate earnings growth, followed by rehiring, which will lead to absorption of surplus lease space and, ultimately, leasing and absorption of new commercial space.


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