The Lost Year
Dec 1, 2008 12:00 PM, By Elaine Misonzhnik
You've had a very wide shift in terms that are [there] to protect the lender while not factoring in the property and the sponsor, Taub notes.
Plus, even with loans that feature punishing terms, the lenders want to make sure the property is more than 80 percent leased to strong credit tenants, and they are likely to do business only with long-term clients who are bringing them repeat business.
They are lending as though they are protecting against Armageddon, says Gorczycki. That is not surprising given that vacancy rates in the retail sector are projected to rise until at least 2010, according to Bach.
Meanwhile, there are whispers that the market has started to hit bottom not the absolute bottom, as retail real estate values will likely continue to fall through the next six months but within range of the bottom, according to Weissburg. If that's true, it will give lenders a better sense of how to price commercial mortgages, he notes, and make them feel more comfortable about lending again.
One regional bank in Miami, for example, has already looked at about nine retail real estate deals in the past few weeks, says Lawrence Suchman, president and CEO of Suchman Retail Group, a Coral Gables, Fla.-based commercial real estate brokerage, acquisition and development firm.
Ryan Krauch, principal with Mesa West Capital, a Los Angeles-based privately held, institutional commercial real estate lender, notes that once banks clean up their balance sheets, they might feel more comfortable underwriting commercial real estate transactions. Plus, there will likely be some private fund lenders in the market, like Mesa West Capital. The firm has more than $1 billion allocated to loan originations over the next year, but has been having trouble finding enough deals to finance. Mesa West's loans tend to feature two- or three-year, floating rate over 30-day LIBOR terms and are 100 percent non-recourse.
As a result, most of the real estate lending taking place in 2009 will be done through commercial banks, whose allocations to commercial real estate will continue to be limited, according to both Mulvee and Lynn. The volume of commercial mortgages originated through portfolio lenders will make up only half the gap left by the CMBS markets, says Lynn. I think the [lending environment] will stay the same for most of 2009 and that will have an impact on a lot of things in the industry, he notes.
If you are a blue chip company, a lot of the lending is relationship driven, so you might have some negotiating power, according to Lynn. But if you are a smaller player applying for a new mortgage, the banks want to see plenty of equity and might insist on an interest rate of up to 11 percent.
Diminished expectations
The problems in the finance arena are leading to deals getting scuttled. On Nov. 3, Homburg Invest Inc., a Halifax, Nova Scotia-based real estate investment and development firm, announced it was cancelling a proposed joint venture with Cedar Shopping Centers, Inc., a Port Washington, N.Y.-based REIT, for the purchase of a 32-property, one-million-square-foot portfolio located throughout Ohio, Pennsylvania and New York for approximately $129 million. Homburg Invest cited troubles in the capital markets as the reason for the cancellation. The deal was scheduled to close on Dec. 15, subject to due diligence and board of directors' approval. It would have brought in approximately $49 million in cash proceeds for Cedar.
Lack of available financing has certainly played a role in the downturn, says Mower. Only those deals that feature in-place financing or all-cash buyers are getting closed right now, she notes. That has kept average deal size low, at $11.9 million, according to Real Capital Analytics. The average deal price for strip centers went down 14 percent in the third quarter compared to the same period in 2007, to $14.5 million.
The negative outlook for the retail real estate sector, however, has also been a driving force behind lackluster sales activity. In the second quarter of 2008, investors gave retail the lowest rating of all the commercial property types on a 1 to 10 return vs. risk scale, at 3.9, reports Real Estate Research Corp., a Chicago-based real estate research firm. Retail also got a value vs. price rating of 4.2, below the rating for every sector except hospitality.
Yet many sellers still have unrealistic expectations for the cap rates they can achieve in this market, with the gap between buyers and sellers running from 50 basis points to a 150 basis points, Mower says. In the past few months, that gap started to close somewhat Suchman, for example, has seen listing cap rates of up to 8.5 percent, up from 6.5 percent to 7.5 percent at the beginning of the year, but it still hasn't reached a point where buyers feel they are getting enough of a discount. To spur sales activity, cap rates need to return to the historical 9.0 percent to 10.0 percent range, according to research from Goldman Sachs and JPMorgan.
BACK OF THE LINE: Investors ranked retail the worst among all property types in assessing return vs. risk and second worst in value vs. price in a recent Real Estate Research Corp. survey.
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