Who will budge first? Buyers and sellers of commercial real estate are locked in a game of chicken. But someone is going to have to budge, or deal volume will remain dreadfully low. And with commercial loans coming due and other commercial real estate investment groups needing to raise cash, some experts hint that it might be the sellers who are forced to make the first move.
Commercial real estate activity in Richmond slowed almost 60 percent in the first quarter of this year compared with last year, according to LoopNet.com, which tracks activity.
The total value of sales has dropped even more, down 78 percent.
So far this year, LoopNet reported 24 completed sales in the Richmond area, worth at least $30.9 million. The recent sale of Capital Garage and RAMZ Hall account for $19 million of that total.
In the first three months of 2008, there were 59 completed sales reported, worth at least $142.6 million.
There is at least $519 million worth of real estate currently advertised on LoopNet for sale in the Richmond area. A handful of listings did not disclose a price. On the site there are:
• 119 office properties, for a total of $104.5 million.
• 100 industrial properties, $106 million.
• 66 retail/shopping center properties, $65 million.
• 41 multifamily/hotel/motel/senior housing properties, $54.4 million.
• 88 tracts of developable land, $189.7 million.
But there is more than $530 billion worth of commercial loans nationwide coming due in the next two years, and, with office and retail vacancies increasing, it is unlikely Richmond will escape untouched by defaulting commercial mortgages.
Eric Robison, an investment broker at Thalhimer, said he has yet to see distressed sales hit the Richmond area. He said is seeing more sellers than in the past, but the scarcity of CMBS (commercial mortgage backed securities) loans has kept potential buyers at bay. Meanwhile, investors with lots of capital are waiting for prices to drop lower, Robison said.
“A lot of buyers are assuming properties on the market now, even if they aren’t distressed, are being sold at distressed pricing,” he said.
Default rates for CMBS loans are creeping up nationwide. At the end of 2007, the default rate was about .44 percent; now it is just over 1 percent. Robison said he has heard that it will reach 2 percent by the end of the year. Fitch Ratings is predicting that it could go as high as 3 percent.
In other parts of the country, banks are starting to seize shopping centers. According to Real Capital Analytics, 464 retail properties with a total value of $7 billion dollars have been seized or are in some state of default. That is three times the number reported for the first half of December.
Brian Glass, a broker for Grubb & Ellis | Harrison & Bates, said that he hasn’t seen distressed sellers yet but that it could be coming.
“You have REITS [real estate investment trusts] that have properties out there that they will have to sell,” Glass said.
Glass mentioned a REIT out of Australia, Centro Properties Trust, that is so highly leveraged they will soon have to sell some assets to repay loans.
“They have some properties in Richmond. I’m not sure if they will sell those, but they may be candidates,” Glass said. (Read more about Centro Properties Trust here and here.)
Despite the slowdown, some smaller deals are getting done. Glass said he recently facilitated the sale of a strip shopping center. To close the deal, the buyer had to put up 40 percent equity. Glass said the seller was unloading their shopping center investments because he wanted to concentrate on multifamily properties.
“He had to discount the price a little bit and make some concessions, but it worked out well for him,” Glass said.
But many buyers are still looking for the bottom.
Brad Rodgers, president of Moreland Property Group, said his company is for the most part taking a “wait and see” approach to adding investment properties to their portfolio.
“You don’t want to be the first guy out there, but you want to be out there,” he said.
Moreland’s portfolio is mostly concentrated throughout Virginia, and Rodgers said they invest in properties that are $5 million and up.
So far, Rodgers said he hasn’t seen distressed sellers in this market, either.
“I have not seen a flood of distressed deals, but people keep talking like it’s coming,” Rodgers said. He said he has received some calls about troubled loans on the way.
More often, he said, he is hearing about banks looking to sell good loans for as little as 70 cents on the dollar to refresh their balance sheets.
“There is so much uncertainty in the banking industry, they are saying that they are better off wiping the slate clean,” Rodgers said.
Overall, Rodgers said he is seeing less quality property for sale, and in many cases sellers are listing property just to test the market.
“There is a big question in the market whether or not the sellers are real,” Rodgers said. “If I come in with a market price, are the sellers going to look at it and say ‘that it is too low’ and decide not to sell?”
And that is the crux of the dilemma. Buyers are looking for bargains, but sellers that are in good standing aren’t looking to sell themselves short. At least not yet.
One thing holding back buyers, especially for newer properties, is a lack of historical data that can be used to calculate risk, according to Rodgers. But once a few deals start to get made and there are more data points to help sellers and buyers determine fair prices, Rodgers said that will clear the way for activity to pick up. And some landlords can only hold out so long with shopping centers or offices that are producing less revenue than is needed to cover financing payments.
“The real estate community is a bunch of deal junkies without any deals to do,” Rodgers said, “Once the levee breaks, it will bounce back pretty quick.”
Doug Atkins, a lawyer who processes commercial title insurance for Fidelity National, said one reason there hasn’t been a flood of distressed sales in Richmond is that borrowers have had some success renegotiating terms with lenders. He said some have been willing to accept a 10 percent to 15 percent reduction in payments if a borrower has experienced a similar reduction in their revenue stream: for example, if shops in their strip center have gone out of business.
Atkins also said he is seeing the early signs that some local investors might be starting to wake up from the slumber.
“A few of them seem lately to think we have hit the bottom,” Atkins said. “They are coming off the sidelines and hiring law firms to do due diligence on owners in distressed situations.”
More reading:
Bloomberg News – Defaulting Commercial Properties Hit Banks on Vacancy-Rate Rise
Who will budge first? Buyers and sellers of commercial real estate are locked in a game of chicken. But someone is going to have to budge, or deal volume will remain dreadfully low. And with commercial loans coming due and other commercial real estate investment groups needing to raise cash, some experts hint that it might be the sellers who are forced to make the first move.
Commercial real estate activity in Richmond slowed almost 60 percent in the first quarter of this year compared with last year, according to LoopNet.com, which tracks activity.
The total value of sales has dropped even more, down 78 percent.
So far this year, LoopNet reported 24 completed sales in the Richmond area, worth at least $30.9 million. The recent sale of Capital Garage and RAMZ Hall account for $19 million of that total.
In the first three months of 2008, there were 59 completed sales reported, worth at least $142.6 million.
There is at least $519 million worth of real estate currently advertised on LoopNet for sale in the Richmond area. A handful of listings did not disclose a price. On the site there are:
• 119 office properties, for a total of $104.5 million.
• 100 industrial properties, $106 million.
• 66 retail/shopping center properties, $65 million.
• 41 multifamily/hotel/motel/senior housing properties, $54.4 million.
• 88 tracts of developable land, $189.7 million.
But there is more than $530 billion worth of commercial loans nationwide coming due in the next two years, and, with office and retail vacancies increasing, it is unlikely Richmond will escape untouched by defaulting commercial mortgages.
Eric Robison, an investment broker at Thalhimer, said he has yet to see distressed sales hit the Richmond area. He said is seeing more sellers than in the past, but the scarcity of CMBS (commercial mortgage backed securities) loans has kept potential buyers at bay. Meanwhile, investors with lots of capital are waiting for prices to drop lower, Robison said.
“A lot of buyers are assuming properties on the market now, even if they aren’t distressed, are being sold at distressed pricing,” he said.
Default rates for CMBS loans are creeping up nationwide. At the end of 2007, the default rate was about .44 percent; now it is just over 1 percent. Robison said he has heard that it will reach 2 percent by the end of the year. Fitch Ratings is predicting that it could go as high as 3 percent.
In other parts of the country, banks are starting to seize shopping centers. According to Real Capital Analytics, 464 retail properties with a total value of $7 billion dollars have been seized or are in some state of default. That is three times the number reported for the first half of December.
Brian Glass, a broker for Grubb & Ellis | Harrison & Bates, said that he hasn’t seen distressed sellers yet but that it could be coming.
“You have REITS [real estate investment trusts] that have properties out there that they will have to sell,” Glass said.
Glass mentioned a REIT out of Australia, Centro Properties Trust, that is so highly leveraged they will soon have to sell some assets to repay loans.
“They have some properties in Richmond. I’m not sure if they will sell those, but they may be candidates,” Glass said. (Read more about Centro Properties Trust here and here.)
Despite the slowdown, some smaller deals are getting done. Glass said he recently facilitated the sale of a strip shopping center. To close the deal, the buyer had to put up 40 percent equity. Glass said the seller was unloading their shopping center investments because he wanted to concentrate on multifamily properties.
“He had to discount the price a little bit and make some concessions, but it worked out well for him,” Glass said.
But many buyers are still looking for the bottom.
Brad Rodgers, president of Moreland Property Group, said his company is for the most part taking a “wait and see” approach to adding investment properties to their portfolio.
“You don’t want to be the first guy out there, but you want to be out there,” he said.
Moreland’s portfolio is mostly concentrated throughout Virginia, and Rodgers said they invest in properties that are $5 million and up.
So far, Rodgers said he hasn’t seen distressed sellers in this market, either.
“I have not seen a flood of distressed deals, but people keep talking like it’s coming,” Rodgers said. He said he has received some calls about troubled loans on the way.
More often, he said, he is hearing about banks looking to sell good loans for as little as 70 cents on the dollar to refresh their balance sheets.
“There is so much uncertainty in the banking industry, they are saying that they are better off wiping the slate clean,” Rodgers said.
Overall, Rodgers said he is seeing less quality property for sale, and in many cases sellers are listing property just to test the market.
“There is a big question in the market whether or not the sellers are real,” Rodgers said. “If I come in with a market price, are the sellers going to look at it and say ‘that it is too low’ and decide not to sell?”
And that is the crux of the dilemma. Buyers are looking for bargains, but sellers that are in good standing aren’t looking to sell themselves short. At least not yet.
One thing holding back buyers, especially for newer properties, is a lack of historical data that can be used to calculate risk, according to Rodgers. But once a few deals start to get made and there are more data points to help sellers and buyers determine fair prices, Rodgers said that will clear the way for activity to pick up. And some landlords can only hold out so long with shopping centers or offices that are producing less revenue than is needed to cover financing payments.
“The real estate community is a bunch of deal junkies without any deals to do,” Rodgers said, “Once the levee breaks, it will bounce back pretty quick.”
Doug Atkins, a lawyer who processes commercial title insurance for Fidelity National, said one reason there hasn’t been a flood of distressed sales in Richmond is that borrowers have had some success renegotiating terms with lenders. He said some have been willing to accept a 10 percent to 15 percent reduction in payments if a borrower has experienced a similar reduction in their revenue stream: for example, if shops in their strip center have gone out of business.
Atkins also said he is seeing the early signs that some local investors might be starting to wake up from the slumber.
“A few of them seem lately to think we have hit the bottom,” Atkins said. “They are coming off the sidelines and hiring law firms to do due diligence on owners in distressed situations.”
More reading:
Bloomberg News – Defaulting Commercial Properties Hit Banks on Vacancy-Rate Rise
Great article Al, but you should consider Loopnet’s data. They (and CoStar) are a great source for listings, but sales gathering and analysis is not their specialty. Surprisingly, the % declines they report seem to be reasonable. However, the $30.9 million in sales thus far?–not quite. Also, with regard to distressed sales, I haven’t seen many in Richmond either. One that I am familiar with put me on guard because the seller sold the entire LLC rather than the real estate itself. Without actually speaking with the seller, I never would have known about it. I imagine developers and investors… Read more »
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