There are two ways to judge the state of commercial real estate. Look at the statistics and look at the vultures starting to circle.
For statistics, let’s consider those cited for Phoenix in the Arizona Republic today (sorry no link available).
- The commercial vacancy rate increased from 19.9% in the first quarter to 21.4% in the second quarter.
- Net negative absorption was in excess of 1 million square feet in the second quarter up from a negative 600,000 in the first quarter.
- In the second quarter 723,896 square feet of new office and industrial property came on board.
- Commercial real estate sales activity was a negligible $45.9 million versus $87.2 million in the first quarter.
- Values continue to decline as developers run out of time to renegotiate construction and bridge loans.
And on the vulture side, this from Reuters:
Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon.
The planned IPOs, which include units of firms like Apollo Management APOLO.UL and Alliance Bernstein Holding LP, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.
The U.S. commercial real estate market has been reeling ever since a prime source of financing, the commercial mortgage-backed securities (CMBS) market, virtually closed and banks shut off their lending spigots in the past year.
“In the real estate world, the next few years will be defined by a lack of capital,” said Michael Knott, a senior analyst with Green Street Advisors.
According to a recent Deutsche Bank report, as much as $40 billion will be needed to salvage about $420 billion of CMBS mortgages maturing over the next 10 years.
The Reuters article notes well that filing for an IPO is a bit differene from actually raising the money. They point to the experience of Invesco which had to slice the size of a REIT IPO in half to $170 million in order to close the deal.
I suspect that if and when the economy starts looking a little brighter that investors’ appetite for REIT’s and distressed real estate will improve. There are going to be incredible deals to be made but the cost is likely to be the elimination of a goodly sized piece of the medium and community banking network. The haircut that’s going to be required to get these loans off their books will be bigger than a lot can stand.
In the meantime, if you want to send me a hundred million or so, I’ll be more than happy to start prowling around the wreckage for you.