2008 Commercial Real Estate Forecast Looking a Bit Cloudy
Oct 25, 2007 3:15 PM
As for the DLA Piper survey, about 60 percent of respondents to the survey don't think the industry's prospects will brighten for more than nine months in contrast with just 37 percent that thought things would turn in six months or less.
"I think people see that several factors have to fall back into place," says Jay Epstien, chair of the U.S. real estate practice at DLA Piper. "They've got to get capital flowing again and bond investors have to buy the paper that's now just sitting at banks. Nobody thinks the capital has disappeared entirely."
On the debt side, there are also big concerns about the CMBS market. Most respondents--82.5 percent--anticipate there will be more conventional loans available than CMBS loans in the next 12 months.
The real estate market has entered a transition period, said Mark Larson, senior vice president with Grubb & Ellis, which means institutional investors will stay away from property purchases for as long as six months, until the market sorts itself out. He noted that while that might result in fewer deals overall, there will be an increase in private investment activity next year from buyers who are more comfortable with exposure to higher risk.
However, private investors still face the challenge of securing financing. Last year, they were able to lock-in on 85 percent loan-to-value ratios; but, today that figure has been lowered to approximately 60 percent. Larson contends private investors will conform to the tighter lending requirements by going after less expensive properties, avoiding portfolio deals and courting local bankers for bridge loans. The most popular products, he said, will be 1031 exchanges, single-unit freestanding buildings and grocery-anchored shopping centers.
"There is so much money out there it's unbelievable and there is not enough good product," Larson said. "So I think we'll see private investors proceed with an aggressive caution."
Not everyone is bearish, though.
John Dowd, senior vice president of development at the Goodman Co., a West Palm Beach, Fla.-based developer that has more than 4 million square feet of projects in its pipeline, thinks any issues in the market will be short-lived.
"The projects that were maybe ill-conceived, were speculative in nature that might have gotten financing a year ago are not going to get financed now," Dowd says. "But good quality projects with good quality borrowers are still getting a lot of attention from the lending community. That's always the case."
Dowd says the outlook in the market today is not nearly as bad as in the 1980s or early 1990s when the banking system ground to a halt during the savings and loan crisis. "I think the fact that the rest of the economy is relatively healthy is offsetting some of the concerns about credit and housing," he says. And, in the end, "growth always cures the problems."
--Elaine Misonzhnik & David Bodamer
