Friday, February 5, 2010

Commercial Real Estate Review for 2010 and Beyond

Below you will find reprinted an excellent article on the U.S. commercial real estate market and its prognosis from the website Inside Tucson Business. The article is just so good I am reprinting it without any further comment.

Robert J. Abalos, Esq.


Commercial Real Estate: Stable 2010, bargain hunters point to start of years-long recovery (with slideshow)

By Roger Yohem, Inside Tucson Business
Published on Friday, February 05, 2010

For the next five years, the commercial real estate industry faces a chilling forecast. Nationally, 2010 “looks like an unavoidable bloodbath” for a multitude of borrowers, investors, and lenders.

Each year through 2015, there will be $250 billion to $300 billion in loans that will come due on office buildings, malls, shopping centers, manufacturing facilities, warehouses and other commercial properties, according to PriceWaterhouseCoopers, a New York-based professional services company.

“Yes, those are big, real numbers,” said Howard Schwiebert, investment specialist for Tucson Realty & Trust Company. His research shows $270 billion in loans maturing in 2010 nationally. For the Tucson region, the $1 billion-plus level is certainly reasonable.

Scarce capital, high vacancies, declining rents and sluggish job growth will pound the market, including Southern Arizona. Although there will be spurts of positive activity, it may take until 2012 for a sustainable recovery to gain traction.

Ironically, these vile economic conditions could create the opportunity of a lifetime for investors this year and next. The values of commercial real estate are at cyclical lows, presenting some of the best acquisition environments ever.

“There will be some offsets that will mitigate this to some degree. Not all notes coming due will default, some will be successful in refinancing. Some owners will find buyers and avoid default. Some will work with lenders on short sales. And certainly, there will be investors who will buy foreclosed, bank-owned properties that lenders put back on the market at a realistic price,” Schwiebert added.

He agreed with the forecast, that commercial real estate values will hit bottom this year and investors with cash will take advantage of bargain-priced opportunities.

PriceWaterhouseCoopers also projects commercial property foreclosures to accelerate across the nation. To build up their loss reserves, financial institutions delayed “dropping the hammer” on distressed borrowers. Now, due to government bailouts, they are ready to take action.

For Southern Arizona in 2010, significant commercial property foreclosures are expected. Although it sounds harsh and he doesn’t want to come across as being negative, Schwiebert says the data backs it up.

Due to higher vacancies and falling rents, the region’s commercial property values are starting to reflect deteriorating financial performance. Problems with maturing debt, specifically again, the inability to secure financing, will cause a surge in defaults.

“Because loan defaults continue to increase, we can expect the resale of bank-owned properties to continue,” Schwiebert said. “Although this obviously brings misfortune to distressed owners, it brings opportunities for investors and is a necessary part of the correction.”

Well-financed investors are going to focus on bargain-priced, bank-owned properties. Property prices will likely continue to slip through 2010 even as sales of buildings increase.

Schwiebert holds hope that liquidity will improve in 2010. He has seen signals of the commercial mortgage-backed securities market reopening and several independent investors have successfully raised capital.

“On the positive side, this could shorten the correction cycle that some experts expected to extend through 2012,” he said. “This doesn’t necessarily mean 2011 and 2012 will be great markets, but it may mean that 2010 is a year to make good deals if you’re an investor.”

Schwieber went on to say, “This might unfold in any number of ways. Locally, 2010 could be the year that much of the distressed property problem is dealt with.”

The road to recovery begins now.

Statistics cited in this special report were provided by CB Richard Ellis, Tucson Realty & Trust, Picor Commercial Real Estate Services, Land Advisors Organization, and Bright Future Business Consultants. In sectors where data from these sources were not an exact match, an average or median number was used that best represented those market conditions.