NEW YORK CITY-Lenders, investors and tenants are still largely uncertain about the future of the commercial real estate industry spurred by Standard & Poor’s lowering of America’s long-held sovereign credit rating from AAA to AA+ just over a week ago. But industry leaders tell GlobeSt.com that core assets in gateway cities should maintain high values and continue strong performance despite decreased consumer confidence in the marketplace.
“The downgrade, to me, doesn’t suggest that America is going bankrupt or investments in the US have become far more risky,” says David C. Wilkes, a partner at Tarrytown, NY-based real estate law firm Huff, Wilkes, Cavallaro & Loveless, LLP. “If anything, it probably has more of a psychological reinforcement that we are indeed down, and it’s going to take us time to get up and running.”
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While the downgrade has caused concern among different stakeholders in various property sectors, competition is riding high in several areas, like the class A office market and medical office arena, where demand is constant, the investments are stable and carry less risk. “An argument can be made that we are likely to see even more investor activity in the core markets for core assets with long-term, stable income with credit tenancy due to the volatility in global markets and lack of attractive alternative investment options,” says Helen Hwang, executive vice president of the New York Capital Markets Group at Cushman & Wakefield. “Secondary and tertiary markets were beginning to get more attention, but perhaps that attention will be redrawn into the major gateway cities, such as New York City, Washington, DC, Boston and others.”
But outside of the major CBDs, sources agreed that lenders might be more reluctant to put up money for class B or C properties in secondary or tertiary markets. Jeffrey Rogers, president and COO at New York City-based Integra Realty Resources, a valuation and counseling firm, tells GlobeSt.com that the downgrade could signal a swing-back to stricter underwriting standards. “Whenever you add uncertainty in the marketplace, then people with money tend to get more conservative,” Rogers says. “We’ve gone through a period where it was very easy to get a deal done where you had low-required equity up front and lots of availability of cheap debt. What’s happening now, more equity is needed in deals, and the debt will start to ripple through the valuations. It is the last thing we needed at this point.”
Based upon the difficulty to obtain funding for trickier assets, Wilkes says most successful REITs in the game right now are “not on a buying frenzy,” but the strongest companies are shoring up stable buildings in good, high-traffic locations. In addition, continued interest from foreign buyers are continuing to snatch up New York City real estate, like Bank of China’s execution of a $250 million five-year mortgage loan for the refinancing 3 Columbus Circle and Invesco Real Estate’s $760-million recapitalization of 230 Park Ave. “It is so hard to find anybody that is willing to take the risk on class B and class C properties,” he says. “The effect of that is the competition for the properties that are less risky are that much greater.”
Early Thursday, the New York Times reported that the Justice Department is investigating whether S&P improperly rated dozens of mortgage-backed securities even before the ratings agency downgraded the US to AA+. While CRE investments are remaining relatively stable at this time, Rogers says the downgrade was “reckless” and is pleased that S&P and its parent company, McGraw-Hill, are being investigated. “They gave triple-A credit ratings to some of the worst securities out there, and now on the flipside, you have an entity, being the US government, who has never defaulted on anything and can always raise its revenues,” he says. “We weren’t at that severe point where we weren’t going to service our debt. It was just unwarranted.”
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