Commercial BUZZ -March 2010
Comments by Jack Cohen of Cohen Financial: “It is clear now that really low interest rates drove really high leverage and really high leverage drove bloated values. Without the leverage in the system, values have collapsed anywhere from 30 to 60 percent on otherwise healthy real estate….given the fact that our economy lost 8 million jobs since 2007 and still has not ended job loss, the issue is when we will reach the point where job growth will drive tenant growth…This past year, considering their real estate investments, the user of capital finally had to recognize that the frequency and amplitude of three distinct cycles-the cycles of brick and mortar, the cycles of the capital markets, the cycles of the economy go hand-in-hand. If we see these cycles overlaid on top of one another, where they converge is opportunity and where they diverge is risk. The risk associated with uncertain real estate values today has never been more paramount….For higher quality properties with relatively stable cash flows, CMBS offered lower borrowing costs and greater all-in leverage. This siphoned off the better lending opportunities, pressuring banks to become more concentrated in riskier types of lending….banks hold the riskiest commercial real estate debt…we cannot legislate against greed or stupidity.
My view of the past generation is those borrowers were “brick and mortar” professionals who knew how to make money from real estate. It was a real estate business that they operated but ran into trouble when the capital markets themselves imploded. By contrast, my judgment of the borrowing community today is, they are by and large, capital markets financiers who lack the comparative “brick and mortar” skill set of professionals 20 years ago, to actually turn the real estate as a business around-that is what the industry needs most right now. Is the borrower “brick and mortar” skilled? Does he know how to get the real estate turned around with stable and increasing dash flow available for debt service? Can he take the economic loss? Answers to these questions, more than any ,will dictate how much longer the real estate industry toils in disaster.
Back in September, Stephen Mihm wrote in the Boston Globe that modern finance is far from the stabilizing force that mainstream economists portrayed. Rather it is a system that creates the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse...[argued that] John Maynard Keynes’ collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse….success invevitably encourages competition and borrowers and lenders take on more risk in the reasonable hope of making more money…[but]…success breeds a disregard of the possibility of failure…as people forget that failure is a possibility, a “euphoric economy” eventually develops fueled by the rise of far riskier borrowers, those whose income could cover interest payments but not the principal…”
Comments by Harold D. Hunt in Tierra Grande on accurate valuation of real estate: “Pick up the newspaper, turn on the television or log on to the Internet, and you can find the price of a publicly traded stock almost immediately. With commercial real estate, it’s not so simple. Commercial properties are not publicly traded on a daily basis. As a result, market values-the prices that would be paid in an open and competitive market-are significantly more difficult to obtain….Since the 1980s, globalization of capital flows and the securitization of real estate debt have worked together to dramatically increase the volatility of real estate capitalization rates…..Capital market forces can now easily overwhelm property market fundamentals…as a result, capital markets have become commercial real estate’s best friend, or its worst enemy….Investors accepted lower yields from commercial real estate despite a sharp deterioration in market conditions and property earnings. As a result, cap rate compression (lower cap rates) completely overwhelmed the negative effects of falling property income (lower NOI) until late 2007….Credit markets seized almost overnight as the true risk was discovered to be much higher than imagined.”
Commercial Real Estate Industry Starting to Recover, Experts Say
By Steve Brown / The Dallas Morning News / February 5, 2010
The CEO of one of the country’s top commercial property firms says the industry is turning the corner, and a Texas real estate economist agrees.
“It’s evident that the market has started some kind of recovery,” John Santora, president of real estate service firm Cushman & Wakefield’s Americas division, said Thursday. “Overall, the fundamentals either improved in the second half of 2009 or the deterioration began to slow.”
“From a leasing perspective, the market came back in the second half of the year,” Santora said at an economic forecast seminar his company sponsored Thursday morning in Dallas. While companies are taking advantage of lower real estate costs to do long-term deals, the outlook for commercial property owners is still troubled,” he said.
“Many landlords are still facing liquidity issues, particularly owners who purchased properties at the peak of the market,” Santora said. “Their equity is gone. That will mean bargains for new buyers,” he said.
“You are going to see some great opportunities to acquire assets in the next year and 24 months,” Santora said. “And from everything I hear, there is enough money on the sidelines.’
“Dallas’ downtown area has double the office vacancy of most other major cities,” he said, “but the rest of the commercial property sector is in much better shape.”
“You are out-performing the broader market,” Santora said. “We have something to feel a little positive about.”
Mark Dotzour, chief economist for the Real Estate Center at Texas A&M University, told real estate executives that the commercial market should be in full recovery by next year.
“In 2012, if you are not in the market, you are going to be too late,” said Dotzour, who predicts investors will snap up buildings.
“There are billions of dollars of dry powder sitting on the sidelines itching to go,” he said. “You have people out there ready to fire all kinds of cannons at real estate.”
“Banks holding back on property foreclosures are delaying the market comeback,” he said.
“If the banks would put that property out on the market, you’d see a massive resurgence of transactions, and you’d see prices firm up,” Dotzour said. “But the financial system is not solvent enough to let that happen.”
He predicts that the commercial property sector will go through a period of little or no construction. “The bottom line is we are not going to build anything in this country for the next three years,” Dotzour said.
But that may not help some owners who paid too much before the downturn. “If you bought anything in 2006 or 2007, you made a mistake.”
Texas Adds 50,000 Jobs in Fourth Quarter
from The Dallas Business Journal / February 8, 2010
Texas added 50,000 new jobs in the fourth quarter and activity in the new housing sector remains strong in both Dallas and Houston, according to a new study by SigmaBleyzer. The Lone Star State has one of the lowest unemployment rates in the nation. The positive quarterly job numbers come despite the state losing 24,000 jobs in the construction, trade, transportation and hospitality sectors in December. According to a recent Texas Workforce Commission report, Texas experienced employment increases in education, health care, mining and logging.
The study also focused on the broader economy of Texas, which remains under a downturn, but holds a positive outlook for the coming year. Among residential housing, some signs of recovery are beginning to emerge, according to the report. Texas has one of the fastest population growth rates in the country, which the report says should sustain long-term demand for housing. According to the U.S. Census Bureau, about 27 percent of all new privately-owned housing units in the nation’s 20 largest cities were located in Dallas or Houston.
The state’s export activity continues to recover as high oil prices and improving foreign demand for high-tech manufacturing increase. Texas remains the largest exporter for the eighth consecutive year. In the first 11 months of 2009, Texas exports only fell by 18 percent, compared to the 21 percent decline nationally.
“This resilience of Texas exporters should help keep the state’s economy on more sustainable footing as the U.S. economic recovery becomes increasingly dependent on the strength of foreign demand,” the report by the Houston-based private equity firm stated.
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