Starboard Commercial Real Estate

Hans Hansson | February 23, 2010

For investors looking for deals through distressed properties you may be surprised at the competition. During the last collapse of the commercial real estate market in 1991 there were virtually no buyers. Vacancies were high, financing did not exist, and prospects for tenants were low. Today everything holds true except, there are many buyers with plenty of money all waiting to jump into the market.

Distressed property lectures, wieners, luncheons, dinners, retreats, classes, workshops abound-everyone is promoting distressed properties. New firms specializing in raising equity or raising capital to make loans are forming in large numbers. Yet, could this be all for nothing?

In order to have a distressed market, banks must take back commercial properties and be willing to discount notes to a value that meets the market wishes for a deal; or you must have owners that are willing to sell at a price that meets the economic realities of today's rental market and still allow a new investor to make money. Both of which have so far, been hard to find.

Banks today are paralyzed regarding the amount of commercial loans that are coming due or are in default. Unlike the residential market where loans are amortized and paid back over 30 years, commercial loans are typically due in 3, 5, and 7 years. The high water market deals done in 2006 and 2007 are now coming due. Banks at this point are sending mixed messages, some are foreclosing others are trying to work with the borrowers. The government is also sending mixed messages; first telling banks to reduce loan portfolio values to meet current market conditions, then telling banks they can leave their loan portfolios on the books at their original values.

Uncertainty typically creates opportunity. In this case uncertainty has created a gridlock where no one really knows what to do. The big difference is that there is a lot of cash waiting to jump into this market. In San Francisco, prices for office buildings have dropped and sold for under $200 a foot for a Class A product. This would appear to be a "steal" in terms of value, but rental rate prices are still soft and could go down further. At the prices of these current sales, $200 may be considered an expensive buy-both in the short term and in the long term.

Job growth will be the key; without it demand for commercial space will remain soft, potentially for years to come. When the market crashed in 1985, it was not until 1997 that values started to improve.

Some buyers believe that there will be another cycle of buyers that will overpay before property value will drop to its true worth. Then they will come into the market. Either way all of this distressed property discussion may turn out to be nothing more than a big hype.
Posted 9 years, 5 months ago on February 23, 2010
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Comments on this post:

Re: Lots of Money on the Sidelines
In order to have a distressed market, banks must take back commercial properties and be willing to discount notes to a value that meets the market wishes for a deal; or you must have owners that are willing to sell at a price that meets the economic realities of today's rental market and still allow a new investor to make money. Both of which have so far, been hard to find.

2010/02/24 by Worldwide properties wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/145/42929/
Re: Lots of Money on the Sidelines
I think your right, there are many investors for distressed properties. Banks are not parting with the commercial deals, even when they are with out a doubt over priced. Maybe the banks don't want to write them down. Many people are looking for deals that make a killing, they just are not there in Bergen County New Jersey area. If there is a good deal, you must write the check fast!

2010/03/01 by Richard Stabile Bergen County New Homes wwwReply
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Re: Lots of Money on the Sidelines
A large portion of the true Commercial Real Estate loans/deals that were originated over the past 10 years are actually held in CMBS Trusts and not by individual banks (i.e.: Citi, BofA, JPM, etc...). When we hear rating agencies talk about delinquencies in the market, they are referring to loans in CMBS trusts not actually loans held on banks balance sheets. Once a deal is transferred into Special Servicing (delinquent or near delinquent) from the Master Servicer it is than the special services obligation to the Trust to first work out the asset and work with the borrower to make the loan current again. The last resort by a trust would than be to sell the loan on the open market.

Most Local and Regional banks do have loans on their books that they are looking to sell but at specific pricing which sometimes doesn’t make sense based on where values are today. In most cases, the banks cannot take the write-down’s as it will affect their capital ratio's. At some point, they will need to take loses and move on so they can start lending again. These distressed and overvalued assets cannot stay on their books at par forever. When will they recognize loses? A month from now, a year from now? Or when the FDIC lifts the accounting rules they changed in early 2009 and forces these financial institutions to deal with these problems...

2010/03/26 by Mario C wwwReply
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Re: Lots of Money on the Sidelines
It is true that there are many people for investment in distressed properties. Commercial real estate market facing shortage of capital but the banks are providing the commercial loans at restricted terms and conditions than residential loans. To promote this market the banks must take back commercial properties. It is too difficult to generate profit from this property sector in short term.

2010/05/21 by Commercial Properties wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/145/43987/
Re: Lots of Money on the Sidelines
The feds do not want to see a flood of properties hit the market at one time. First they want bank balance sheets to get stronger. This is why there really has been little encouragement by the feds to promote more lending by the banks. Today banks are borrowing money from the feds at zero percent and investing in Treasuries at 3.5%. That is why the banks are showing a profit but the real reason for this strategy is to shore up banks bottomline enough so that when they are strong enough they can begin to foreclose on properties hopefully in a better economic environment

2010/05/21 by Anonymous • • Reply
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