Commercial Real Estate Prices

Some Say Satabilizing, Banks selling CRE Assets

Posted on Monday, October 4, 2010

Stabilizing operating conditions, firming values and strengthening recovery rates will inspire lenders to increase their disposition of distressed properties, though a flood of liquidations will not occur. Many lenders extended loans or warehoused reclaimed assets through the downturn, waiting for values and operations to improve before taking REO properties to market. As buyer activity has increased this year, lender confidence has improved, and more lenders have begun moving distressed assets to market. Distressed sales activity during the first half of 2010 nearly tripled the activity levels recorded in the same period in 2009, with assets under $5 million comprising over 80 percent of the transactions. This controlled liquidation will continue over the next year as lenders clear their balance sheets of bad commercial real estate debt, whether through note sales, short sales or REO dispositions.
The average recovery rate increased from 63 percent in 2009 to 67 percent in 2010, with approximately 15 percent of all resolutions resulting in full first-mortgage recoveries, bolstering lenders’ confidence in the market and generating a rise in REO sales activity. By delaying their liquidation of distressed assets until after the worst of the downturn, lenders have been able to avoid the fire sale many investors and opportunity funds anticipated. Lender recovery rates will continue to edge up through the remainder of 2010 and early 2011 as vacancy rates stabilize and transaction velocity accelerates, allowing lenders to bring additional properties to market.
Deals involving CMBS loans typically result in some of the lowest recovery rates, as securitized lending increased dramatically between 2005 and 2007, a period characterized by peak property prices, lax underwriting standards and high-leverage loans. Recovery rates also have been influenced by traditional demand drivers, such as location and quality. Properties in coastal markets have achieved higher recovery rates, with lenders faring best in Seattle, San Diego, Los Angeles, Miami and Manhattan. Markets with significant amounts of undeveloped land in the Southeast and Southwest, as well as Midwestern metro areas, fall at the low end of the spectrum.
Impact on Commercial Real Estate

Apartments have already begun to post improvements in occupancy and rents but remain at the low end of the recovery rate spectrum, with lenders recapturing an average of 64 percent on resolutions. This reflects high concentrations of distress involving properties last traded at the height of the housing boom, when condo conversion deals significantly inflated apartment prices in many markets. Warehouse properties, on the other hand, experienced less price appreciation than apartments through the boom period and now boast one of the highest recovery rates among the core property sectors at 70 percent.
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.



The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

By marcusmillichap | Posted in Research | Tagged Commercial Real Estate Distress | Comments (2)
Small Businesses Crucial To Onset Of More Robust Recovery
September 28, 2010 – 10:10 pm
September 28, 2010

Following lengthy debate, the President signed a bill on Monday focused on boosting credit availability for small businesses and encouraging near-term capital expenditures. While credit availability improved markedly for large companies in recent quarters, lending loosened only modestly for small businesses, limiting the economic expansion. The Small Business Jobs and Credit Act of 2010 will establish a $30 billion fund earmarked for small business lending. The bill also provides $12 billion in tax breaks and incentives for small businesses, including accelerated depreciation of new equipment and various tax exclusions and deductions to encourage growth. The new bill should improve liquidity for small businesses and increase capital spending, at least temporarily, potentially boosting hiring across the broader economy.
The index measuring small business optimism ended August at 88.8, up 0.7 points from July but still on par with levels recorded one year earlier. The reading remains down 7.5 points from the onset of the recession three years earlier, indicating small businesses are still concerned about their prospects. Aside from uncertainty regarding tax policies and credit markets, which the legislation may help quell, 42 percent of businesses cite poor sales and weakening profits as their primary challenges. These companies’ limited confidence in the recovery will reinforce cautious hiring plans, but increased capital availability and tax breaks could spark a brief hiring surge and some short-term economic momentum.
Unlike the recession of 2001, job losses in the current downturn have centered largely on companies with fewer than 100 employees, making the recovery of small businesses crucial to the onset of a self-perpetuating expansion. While large companies have substantially repaired balance sheets and built cash reserves, smaller companies have lacked sufficient resources to spur growth and support hiring. By offering tax incentives and increasing lending to smaller organizations, the government hopes to spark capital expenditures by many companies that delayed spending through the recession. Though this infusion risks losing traction once the program ends, much like Cash for Clunkers, it should boost the economy over the short term, offering the opportunity for a more natural and sustainable expansion cycle to take hold by mid-2011.
Impact on Commercial Real Estate

The recession has impacted industrial property operations significantly, generating a 370 basis point increase in vacancies since its onset. While these properties appear close to stabilization already, the new legislation should improve absorption in the coming quarters and hold the rise in vacancy during the second half to just 10 basis points, with the rate stabilizing at 13 percent by year end.
Providing small businesses with increased access to credit and additional tax deductions on startup costs should encourage limited expansion by smaller retailers. This trend would help stabilize operations at neighborhood/community centers, where vacancies increased 360 basis points over the past three years. Vacancy rates at these shopping centers currently average around 11 percent, exceeding the overall retail market vacancy rate by almost 100 basis points. Rents at neighborhood/community centers reflect the dramatic weakening in occupancies recorded in recent years, with the average effective rate down more than 6 percent from the most recent peak reached in early 2008.
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.



The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

By marcusmillichap | Posted in Research | Tagged Small Business Credit | Comments (0)
Tighter Consumer Credit Poses Headwind To Recovery
September 14, 2010 – 11:36 pm
September 10, 2010

Though consumption and retail sales have made significant headway toward recovery this year, the 6.3 percent decline in consumer credit since July 2008 will remain a drag on economic growth and job creation through the rest of 2010. Top-tier borrowers retain access to credit, but these lower-risk consumers continue to impose austerity measures as they de-leverage in the wake of the recession. At the same time, less creditworthy borrowers have been substantially cut off from credit due to high levels of lender risk aversion. As a result, tightened consumer credit will remain a headwind to the recovery as it drags on consumption. Even after credit becomes more readily available, consumption will likely continue to lag until employment and income growth improve sharply, an event not likely to occur until mid-2011.
Total consumer credit outstanding fell 0.1 percent in July, marking the 20th monthly decline in the past 22 months. Further, a 0.5 percent drop in revolving credit, which consists almost entirely of credit card debt, fueled the overall decrease in balances outstanding. With July’s decline, revolving credit has fallen for an unprecedented 22 consecutive months, slipping by 15 percent, or $145.6 billion.
Several factors have contributed to the decline in consumer credit. Creditworthy borrowers continue to de-leverage by paring debt and purchasing fewer goods and services on credit. Even the addition of 723,000 private-sector jobs year to date through July failed to stimulate borrowing, with revolving credit declining 4.4 percent during this period. Less qualified borrowers, including many who remain unemployed or under-employed, have been denied credit, further curtailing consumption. Compounding the issue, lenders continue to write off uncollectible balances, increasing the amount of credit card debt charged off by banks by more than 200 percent over the last two years. In the near term, only reinvigorated job growth will encourage a resurgence of lending and borrowing, but substantive hiring remains elusive.
Impact on Commercial Real Estate

The decline in consumer credit has joined job losses, overdevelopment and worse-than-usual store closures to pressure retail properties. During the 22 months of declining revolving credit, an additional 205 million square feet of vacant space accumulated. The vacancy rate rose 200 basis points since late 2008 to 10 percent in the second quarter of 2010 and will climb another 40 basis points this year to 10.4 percent as retailers continue to adapt to the weakened retail environment.
Tightened retailer inventories in the face of reduced consumption have impacted warehouse and distribution properties that store and transport consumer goods. Since revolving credit started to decrease in October 2008, the national industrial property vacancy rate rose 270 basis points to 12.7 percent in the second quarter of this year. Negative net absorption during that time totaled more than 166 million square feet. In 2010, declining space demand will increase vacancy 40 basis points to 13 percent on a 19.2 million square foot drop in occupied space.
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.



The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

By marcusmillichap | Posted in Research | Tagged Consumer Credit | Comments (2)
Home Sales Fall as Homebuyer Tax Credit Expires; Increases Stress on Already Slowing Economy
September 5, 2010 – 8:51 pm
August 27, 2010

Following the expiration of the homebuyer tax credit, sales of both new and existing homes fell dramatically in July, demonstrating the challenges faced by the housing market as it transitions away from government-stimulated purchases. Buyers who rushed to place homes under contract prior to the April 30 expiration of the tax credit compressed future sales into the early part of 2010. As expected, this caused July home sales to decline, with closings dropping at the steepest one-month rate on record. With the bulk of transactions for the year squeezed into the first half, it will take several quarters to refill the pool of prospective homebuyers and increase sales volume to levels indicative of a recovery. This weakening will place additional stress on the economic recovery as positive momentum from home sales generated in the first half of the year wanes.
Government stimulus supported a rebound in home sales through the initial phase of the recovery, but in the absence of such incentives, existing home sales in July slowed to 3.83 million annualized units, down 27.2 percent from June. While the month-to-month drop in existing home sales was steep, the race to push closings through the system inflated the May and June figures, magnifying the July decline. New home sales in July fell 12.4 percent to 276,000 annualized units, reflecting the loss of the tax credit and rising preference for foreclosures and distressed homes.
Although the end of the homebuyer tax credit will suppress home sales in the second half, favorable housing affordability and strengthened household balance sheets will be a positive component in the future foundation for a recovery. Interest rates on fixed-rate home mortgages dropped to an all-time low this week, reaching 4.36 percent, while the median home price remains more than 20 percent below prices at the height of the market. As a result, well-qualified households able to access financing are positioned to benefit from the cost savings presented by low interest rates and home prices, despite the end of the tax credit. However, exceptionally tight lending criteria remains a barrier for many prospective homebuyers and continuing caution will restrain others from entering the market. Until consistent job formations take hold, likely in mid-2011, and lenders loosen their lending criteria, home sales will continue to languish at existing levels.
Impact on Commercial Real Estate

Expiration of the homebuyer tax credit will boost apartment demand in the second half of the year as the number of individuals leaping into ownership subsides. Slower but continued job creation also will deepen the rental pool, largely driven by the “de-bundling” of households merged during the height of the recession. The national labor market is projected to increase by 1.3 million jobs this year, or 1 percent, and with apartment construction expected to hit a 15-year low, the apartment sector will post notable occupancy gains in the second half. Vacancy will finish the year at 7.4 percent, down 60 basis points from 2009 and the first annual improvement in two years.
Low mortgage rates have encouraged many households to refinance, helping strengthen their financial positions and supporting greater discretionary spending. Refinance applications have increased as mortgage rates have fallen and now account for 82 percent of mortgage applications. For some, these trends have raised household discretionary income and will likely positively impact retail sales. This more positive outlook will lead to greater stability through the remainder of the year, with the vacancy rate anticipated to rise just 40 basis points in the second half to 10.4 percent.
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

-Marcus and Millichap

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.


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It's imperative that more peolpe make this exact point.

Clay 9/23/2012
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