More buying opportunities are coming soon. As the economy continues to slow and as unemployment stays high, there will be more and more owners of real estate who find that while things are better, and they got an extension of their mortgage, they are still struggling.
Many of those extend and pretend loans will be maturing in the next year or two. For retail it is going to be a long struggle to raise rents as consumer spending remains restricted. While office space is leasing up in some major cities, a slowdown in hiring is going to cause a slowdown in space expansion and that will lead to an inability to raise rents as much as hoped. Plus corporations are back into a cost containment mode now and for the foreseeable future. Multi is one area that things should remain good. There will continue to be pressure on house prices as the various government and legal actions drag out the foreclosure process far beyond what is good for the economy or for homebuilding. Even with historic low rates, there are not many buyers of houses since getting a mortgage is very difficult and continued employment is now more dubious for many. A lot of former homeowners have learned the house prices decline as well as rise and that owning a big house is not the wonder it was sold by the politicians to be.
Hotels will continue to do better than they had been, but they will not be going off the chart as one appraiser seems to predict. They will rise in value over time but at reasonable rates of increase.
Several other pressures will keep values form rising as fast as many hoped and will continue to exert pressure on weaker owners. Lending remains very restricted and confined to the better assets in larger cities. While there are several major balance sheet lenders who remain active, it is almost impossible right now for the average owner with an average asset in a secondary city to get a new loan. His local or regional bank will probably make a loan, but current underwriting standards are limiting those to around 50%-60% of current value. Debt yields are again higher by about 150-200 basis points. In some cases even more. This means a maturing extended loan is back where it was- unable to be fully refinanced.
It is very unclear what the future of CMBS will be. The current market is essentially closed until a few new pools get sold. If those go well then CMBS will return, but if they fail, or if pricing is higher than hoped, then CMBS volume will be very restricted. Then there are our friends in Washington and their proposed CMBS rules for retention. As proposed it is unlikely much CMBS would occur if those rules are put into effect. In any event it is highly likely that 2011 volume will not exceed $35 billion as opposed to the $50 billion once projected. The whole of CMBS is uncertain. As a result, many owners who have been counting on a CMBS take out for their extended loan will not have that option.
REIT shares are down a lot in many cases. They are no longer the highly active buyers they were recently. It is hard to see how this will change anytime soon given the macro issues in the economy. With few REIT buyers, the cost of capital will again rise, and with more risk in the economy, other buyers will demand a bigger risk premium-i.e. discount. Again, all of those owners with extensions who assumed a sale at a better price in the near term will not have that option.
While we are surely not returning to 2009 or 2010, the expectations of a lot of loan funds and higher and higher prices, will not happen in the near term. Values may not decline from here, but the big upsides are dubious for the next year or so. Beyond that who knows. If Obama and the Pelosi –Reid crowd in Congress get real and agree to realistic changes in entitlements, then a lot can change for the better. But with Patty Murray leading the Democratic contingent to the debt talks, and Obama still not appearing to have a clue about economics, and sound fiscal policy, it seems unlikely that will be a good news commission. They could have just accepted Simpson Bowles or the Gang of Six plans, and be done, but instead Obama decided to throw those good plans in the garbage and start over with another stupid battle.
If you have cash the next year will likely be a good buying opportunity as more and more owners of decent assets in secondary cities come under increasing pressures to sell. Compared to other possible investments for the next two years, real estate is as good a place to be as the yield will exceed almost anything else and over the next 4-5 years, as we get a new administration, things can get a lot better in terms of values.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
