Tough Times For Commercial Real Estate

Our local newspaper is figuring out what many of us have known for a while: the local commercial real estate market is pretty bleak. But that all depends on which side of the fence you're on. Interestingly, 2009 for me was a fairly busy one, with nearly all of my deals occurring on the leasing side. Last year I saw a lot of relocation...basically people moving from one leased space to another because of more favorable rents and aggressive tenant incentives. I did not see all that many startups, though. I do agree (as I had stated in this 12/19/09 post), GDP and employment will lead the way out of the recession. For the most part, however, asking rents are still way too high in some parts of town to attract new startups in such a tough economy. One thing's for sure, landlords who don't have particularly attractive or strategic locations, and who refuse to get aggressive are going to end up getting steamrolled. Story link below (Sarasota Herald).

Tough times for commercial real estate

By KEVIN L. McQUAID

Published: Monday, January 4, 2010 at 1:00 a.m.

To borrow a biblical expression, it may be easier these days to pass a camel through the eye of a needle than it is to get a commercial real estate loan.

Despite federal bail-out money intended to stimulate lending, loans for investment in office buildings, shopping centers, industrial sites and raw land are increasingly rare, the result of falling values and other factors.

Commercial property owners and mortgage brokers say the lack of capital also stems, in part, from new federal regulations intended to staunch foreclosures and halt the aggressive lending practices of the early 2000s.

"It's ironic that the federal government put all the stimulus money into banks, while another branch of the government is over-regulating capital reserve requirements on banks," said Brett Hutchens, chief executive officer of Casto Lifestyle Properties, a Sarasota development firm that owns shopping and lifestyle centers nationwide.

"The same government is providing both the carrot and the stick to lenders," Hutchens said. "It's created gridlock and made lending and borrowing very, very difficult."

"It's a Catch-22 the government has imposed," said N.J. Olivieri, president and owner of Sarasota-based Horizon Mortgage Corp. "They tell the banks to make loans but then tell the FDIC to tighten the restrictions on new lending."

New regulations notwithstanding, lenders say the pullback in available credit is appropriate, given the shaky economy.

"Banks are simply not looking to take extended risk today," said Charlie Murphy, chief executive of the Bank of Commerce, a Sarasota lender, and a board member of the Florida Bankers Association, a trade group.

"It's not unusual for banks, in bad economic times, to tighten their lending standards," Murphy said. "And regulators are not too happy these days about allocating new money to commercial real estate."

Other forces

Banks have been hurt, as well, by other forces beyond their control.

Most notable has been the exit from the lending market by risk-averse insurers and pension funds, typically a key source for permanent mortgages.

That has crippled commercial real estate owners seeking to refinance or simply shift loans from banks, as is usually done.

That, in turn, has forced banks to keep mortgages on their books, which further limits their ability to cut new loans -- especially in the construction and real estate sectors.

The precipitous drop in commercial real estate values -- combined with falling rental rates on nearly every property segment -- represents the largest factor in the dearth of lending, however.

Retail rental rates have fallen by as much as half, and many tenants remain unable to pay rent at all, part of the fallout from the longest economic recession since the Great Depression.

Vacancies, too, from super-regional malls to neighborhood-anchored strip centers, have risen dramatically.

"In many cases, shopping centers are full, but not all of the tenants are paying rent," Olivieri said. "Landlords don't want their space to go dark, so they're letting them stay put."

Office rents have also fallen, in Southwest Florida and nationwide -- by 20 percent to 30 percent in some cases.

"In some submarkets, there is an even greater devaluation of rents," said John Harshman, president of Harshman & Co., a Sarasota commercial real estate brokerage firm.

The lack of income, and decrease in values, has forced many property owners to come up with new equity on loans to satisfy lenders' re-appraisals, investors say, even on performing mortgages.

Regulators, too, are calling on banks to beef up reserves and loan coverages by thinning loan-to-value ratios.

Restrictions

Meanwhile, the few commercial real estate loans that are available come with excessive restrictions, including onerous equity requirements and repayment schedules, which are also the result of new federal regulations.

In many cases, lenders that once required investors to put down 20 percent or 30 percent equity are demanding twice those percentages -- and borrowers' personal guarantees -- before they will consider loaning money.

"We've gone from having an unsecured line of credit, on a performing loan, to getting a commitment for just one-year from the bank, and the terms are complex," said Andy Dorr, a senior vice president with Githler Development Co., a Sarasota real estate investment and development firm.

As a result, Horizon and others have begun lining up equity partners for developers or investors, Olivieri said.

At the same time, Dorr said, the costs associated with commercial real estate borrowing -- appraisals, origination fees, legal expenses and environmental analysis -- have increased in many cases.

The hiked fees and the lack of new capital are both tied, investors and lenders say, to the fear that a commercial real estate meltdown is in the offing. Already, development giants such as mall owner General Growth Properties have defaulted on commercial real estate loans -- a signal to some analysts that another wave of foreclosures is ahead. Next year alone, hundreds of billions of commercial real estate loans, many of which were cut during the real estate boom and required interest-only payments, will mature or come due nationwide. When that occurs, many predict, defaults will spike.

"Everyone keeps saying that commercial real estate is the next shoe to drop," Hutchens said. "Well, I have to agree: It's about to drop."

The answer, industry experts say, can be summed up in a single word: Jobs.

"We have to stimulate the economy with more jobs and small business," Murphy said. "When we have jobs, then businesses expand and the economy cycles upward. The opposite is also true, and it creates a vicious, self-fulfilling prophecy."

"People have to go back to work," Olivieri said. "Specifically, in construction.

"Construction has always led the way out of recession; it's key. It starts the employment cycle, and then retailers hire and the cycle returns to supply and demand. But if you don't have a job, if you don't know where your next dollar is coming from, then you don't spend," Olivieri said.

Unfortunately, for Florida, that job growth may be a long time in coming.

Unemployment in Southwest Florida stands at 12.7 percent, slightly above the 11.5 percent statewide average, which is at the highest level since October 1975. Nationally, unemployment is just under 10 percent.

Even more dire are some economists' predictions that Florida's unemployment rate will not fall to 6 percent -- within the range of a moderately healthy economy -- until 2018.

If that proves true, experts believe commercial real estate will remain depressed well into the future.

"The 12 percent unemployment rate in Sarasota and Manatee counties, and the 10 percent rate nationally, will create more commercial real estate vacancies," Harshman said. "And more vacancies will, in turn, further drive down commercial real estate values."

LINK

5203 Cortez Road - Finally 100% Leased!

Another one in the books! Leased the very last unit in Scott Paint plaza at 5203 Cortez Rd yesterday. 1,150 SF goes to Budget Signs for 6 years. Congrats, guys. Glad I was able to help. Enjoy your new home!

FYI, this center had 4,600SF+ vacant when I took over leasing duties in November. Good to end the year on such a positive note.

Great marketing = great results. :)

My Moto Droid & XMas Shopping

I love gadgets and I enjoy playing around with new technology. I'm sort of in the anti-iPhone camp, too, mainly because of the network it runs on. Never really liked AT&T too much and would have at least tried the iPhone if Apple had the foresight to sever its ties with that weak network. I've been with Verizon for five years now and have no intentions of leaving. They're pretty solid as far as coverage. So when Verizon got the Google/Motorola Droid back in early November, I decided to wait a few weeks for the reviews to come in and make a decision. Everyone was pretty much fawning over the device, so I decided it was time to retire my Blackberry Curve and give it a shot.

One of the things I am most intrigued with is the phone's ability to use its built-in camera as a UPC barcode scanner. A simple app like ShopSavvy can be installed while you wait in line at the store and be up and running within 60 seconds - and it's free. What ShopSavvy and other similar apps do is scan the UPC code and then broadcast that code to the ShopSavvy servers. The servers identify the product based on the UPC code and then search both web and local sources for retailers with the same product. The end result is being able to see prices other retailers are offering.

For instance, I was in Best Buy (BB) looking for a micro USB cable. The only cable BB had was priced at $14.99. I thought that was high so I used ShopSavvy to scan the barcode and let it do its thing. Three sources came back, all but one of them were sourced from Internet sites. The best price? $4.99 with $2 express shipping. I ordered the product from my phone and walked out of BB empty-handed. In fact, I walked out of a lot of stores for exactly the same reason while Christmas shopping this season.

The operating system on this phone is developed by Google, so there's pretty tight integration between the device and things like GMail, Google Maps, Google Voice, Google Calendar, Street View, YouTube and so on. The Bluetooth in this device is a little buggy at times, but I cannot find too many faults with the phone. You might want to play around with a Droid the next time you're in a Verizon wireless store.

So Long, 2009.

What a year you were.

Business was very much like a roller coaster this past year, with most my deals occurring during the summer and within the past two months (Nov-Dec). Overall I would rate 2009 as not too bad. 95% of my sales came from leasing. Nearly 100% of my leasing deals were taking people out of high rent situations and repositioning them into lower rent opportunities.

I have more bank-owned inventory than I did last year and I am only expecting that to increase. I am also expecting those waiting in the wings for distressed assets to finally start showing up, probably in the mid to latter part of 2010.

Where's the bottom? Who knows. And no one is likely to know until things start turning around. I believe (and have always believed) Florida's geography will help it emerge a little sooner than other distressed areas. If you're looking for a sign, keep an eye on GDP and employment figures.

So here's a toast to the year that was: 2009. Don't let the door hit you in the ass on the way out.

Leased! Leased! Leased! Leased!

Two units leased since December 1 in this strip mall next door to Wal-Mart on Cortez Rd. I have one 1,150sf unit left and that one looks like it might be spoken for. Welcome to Allison's Dance Centre and Purple Coconut Hair Salon. Allison's took 2,250sf for 3 years and Purple Coconut took 1,200sf for 2 years. Out of my approx. 40 listings, this property has been the most active.

Latest Office Vacancy Report (November)

The numbers are in for 11/09. They are as follows**:

Downtown Sarasota: 13.74% (+)
University Parkway: 18.22% (-)
I-75 Fruitville S to Clark: 21.27% (n/c)
Venice: 22.03% (n/c)
North Port: 37.28% (n/c)
Suburban & South Trail: 27.84%

** = does not include sublet space.

Leased Another One! John Deere.

Moline, Ill-based JOHN DEERE, INC. (NYSE: DE) has leased 10,000SF of office and warehouse space for its landscape division at 1360 12th Street in Palmetto from HDVN, LLC. Deere, a $28-billion (worldwide sales) company, is ranked 102 in the Fortune 500, and leased the space for 3 years with options. Anthony V. Migliore of Coldwell Banker Commercial represented the tenant. The landlord was self-represented.

Orion & Century Bank Shut Down

Two more local banks go down.

Regulators shut 2 Fla. banks; 122 failures in '09
Regulators close Orion Bank and Century Bank in Florida; 122 US bank failures this year

* By Marcy Gordon, AP Business Writer
* On 7:49 pm EST, Friday November 13, 2009

WASHINGTON (AP) -- Regulators on Friday shut down two Florida banks, boosting to 122 the number of U.S. bank failures this year as loan defaults rise in the worst financial climate in decades.


The Federal Deposit Insurance Corp. took over Orion Bank, based in Naples, Fla., with about $2.7 billion in assets and $2.1 billion in deposits, and Sarasota-based Century Bank, with $728 million in assets and $631 million in deposits.

IberiaBank, based in Lafayette, La., agreed to assume all of Orion Bank's deposits and $2.4 billion of its assets, as well as Century Bank's deposits and $706 million of its assets.

The FDIC will retain the rest for eventual sale.

In addition, the FDIC and IberiaBank agreed to share losses on roughly $1.9 billion of Orion Bank's loans and other assets, and on about $656 million of Century Bank's.

Orion Bank's 23 branches will reopen Saturday as offices of IberiaBank. Century Bank's 11 branches will reopen during normal business hours, starting on Saturday.

The failure of Orion Bank will cost the federal deposit insurance fund an estimated $615 million; that of Century Bank, $344 million.

With the two closings, 11 Florida banks have failed this year. Failures also have been concentrated in California, Georgia and Illinois.

As the economy has soured, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have cascaded and sapped billions out of the federal deposit insurance fund. It has fallen into the red.

To replenish the fund, the FDIC on Thursday mandated the roughly 8,100 insured banks and savings institutions pay about $45 billion in premiums in advance that would have been due over the next three years. It is the first time the agency has required prepaid insurance fees. The idea is for banks to spread the costs over three years rather than paying a one-time fee that would deplete their capital reserves.

The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years.

Depositors' money -- insured up to $250,000 per account -- is not at risk, with the FDIC backed by the government. The FDIC still has about $21 billion cash in loss reserves apart from the insurance fund. It can also tap a Treasury Department credit line of up to $500 billion.

Last week brought the closure of the fourth-biggest bank to fail this year: San Francisco's United Commercial Bank, with $11.2 billion in assets. East West Bancorp Inc., parent of East West Bank of Pasadena, Calif., agreed to buy all of United Commercial's deposits and most of its assets.

Banks have been especially hurt by failed real estate loans. Banks that had lent to seemingly solid businesses are suffering losses as buildings sit vacant. As development projects collapse, builders are defaulting on their loans.

If the economic recovery falters, defaults on the high-risk loans could spike. Many regional banks hold large concentrations of these loans. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.

The 122 bank failures are the most in a year since 1992 at the height of the savings-and-loan crisis. They have cost the federal deposit insurance fund more than $28 billion so far this year. They compare with 25 last year and three in 2007.

The number of banks on the FDIC's confidential "problem list" jumped to 416 at the end of June from 305 in the first quarter. That's the most since June 1994. About 13 percent of banks on the list generally end up failing, according to the FDIC.

Is The Bottom Near? Forecast Says So.

Tough to say.

I'm of the belief that rents in certain areas of town cannot go much lower at this point. I have a few properties where, after the pass-through expenses are stripped out of the gross rental figure, the owner is maybe taking in $0.50 a foot or even less at the end of the day. Doesn't leave much room for error. And even with these record low rents, tenants are tough to come by. In some of these cases, theoretically, the property is probably worth more vacant than with a credit tenant in place. Sad but true.

Pricing anything is very difficult due to a lack of reliable comps. I get some ridiculous "drive-by" sign calls from people offering $20/ft for halfway decent downtown property. Can't blame 'em for trying, I guess!

Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters
Most Market Forecasters See a Pricing Bottom Next Year, and at Least One Prognosticator Suggests that Transaction Pricing for Institutional Investment-Quality Real Estate May Have Already Bottomed in the Third Quarter

By Randyl Drummer

November 4, 2009

Having reviewed the next round of commercial real estate surveys, forecasts and emerging trends issued this past week for 2010, about the only good news appears to be that the market has hit bottom -- or will soon. Rents and values have continued to fall across virtually every commercial real estate sector and across almost every market.

However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.

Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.

At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.

The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.

Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.

Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.

A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.

Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."

"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases” from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.

Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.

The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are “largely dead” and drop to new depths and practically to “abysmal” levels for office, retail and hotels. Warehouse and apartments scored only marginally better at “modestly poor.”

READ THE REST OF THE ARTICLE HERE

Leased Another One!

This baby is 90% leased!

Many thanks (and congratulations) to Mr. Horras Sheffield and his wife for renting our nice little 1,000SF retail unit for his upcoming package liquor store. I still have one 1k SF unit left in this strip center at 4034 N Washington Blvd in Sarasota and then it will be 100% leased. Mission not quite accomplished...yet! Landlord is motivated, so bring me something.