Posts Tagged ‘credit market’

Investors Still Wary of Distressed Assets

Wednesday, September 23rd, 2009

Commercial real estate investors are taking a wait-and-see attitude before jumping in and buying distressed assets, according to an Ernst & Young study.  “We haven’t seen many portfolio transactions so far,” says the study’s author, Chris Seyfarth, who is national director of E&Y’s non-performing loans.  “Given the size and the magnitude of the untitledproblem with banks, I think the expectation is that at some point we’ll start seeing sizable portfolio transactions.”

According to the E&Y study, 53 percent of respondents have purchased distressed or non-performing loans in the last 18 months.  Another 45 percent believe it is too early to even think of buying non-performing loans.  Distressed assets are “piling up faster than they’re being resolved,” Seyfarth says.  “The broad view is that commercial real estate assets are getting worse, not better, and that’s going to impact financial institutions.  The issue is that the price expectations are different between the two players, and in some cases significantly different.”

Only 35 percent of those investors claim to have return requirements above 20 percent, and an equal number actually are shooting for returns in the 10 percent to 15 percent range,” Seyfarth concludes.  Once the anticipated tsunami of distressed assets his the market, it could be met with a rush of pent-up capital, all trying to get the best deals at the same time – which may, ironically, further cushion price declines, resulting in a more competitive investment market.

News about the spike in housing starts and the buoyancy of the stock market, which has recaptured $3 billion in value in just a few months, suggests that the recession has at least stabilized and economic recovery is near.  This should encourage increased liquidity in the credit markets, eventually supporting the commercial real estate investment market.

Downtown Chicago Rental Apartments Thriving

Monday, August 31st, 2009

Downtown Chicago apartment buildings – especially Class A properties – are seeing a resurgence in occupancy and rental rates as residents apprehensive about the condominium market choose to rent rather than buy.  The average effective rent of downtown apartment buildings climbed to $2.17 PSF in the second quarter, a 2.4 percent increase over the first quarter, according to a report by Appraisal Research Counselors, a real estate consulting firm.  During the same time frame, average Class A occupancy rose to 93.4 percent, as compared with 90.9 percent in the first quarter and 91.6 percent a year ago.chicagoskyline1

The statistics would be even better if there weren’t so many new downtown apartment buildings.  More than 2,098 new units have been built downtown since 2008.  Add to that the shadow rental market – condominium owners who rent their units when they cannot sell.  Many potential buyers are renting for the time being because they are concerned about falling property values and the possibility that they will be unable to obtain a mortgage in a tight credit market.

These numbers show the inherent strength of Chicago’s CBD rental apartment market — proof that downtowns continue to thrive because of the number of highly educated knowledge workers who want to live in the city.  As a result, places like River North and the Loop remain highly sought after locations for businesses looking to recruit talent.

TIC Owners Caught in the Downturn

Monday, July 13th, 2009

While the commercial real estate market waits to bottom out, dozens of smaller buyers who pooled their dollars to buy office buildings during the boom may be in worse shape than large institutional investors.  These tenants-buy-sell-exchange-photoin-common (TIC) funds, which allow smaller investors to own multiple office buildings together, are facing the same issues as giant retirement funds and institutional owners – higher vacancies, falling rental rates and frozen credit markets.

Lenders are skittish about refinancing loans due on properties with multiple owners who may be unwilling or unable to add equity or pay for buildings costs, such as commissions and management expenses.  This places fund owners in a tricky position.

TIC funds let up to 35 investors acquire properties they couldn’t afford independently.  The mechanism also lets them defer capital gains on properties they’ve sold by rolling the proceeds into another property – known as a 1031 exchange.  Careless underwriting standards and overly rosy projections failed to project that lease rates would fall while vacancy rates rose.  As a result, investors expected returns that were impossible to deliver – especially in an economic downturn that has turned a once over-priced office market into a soft one with increasing vacancies that reduce cash flow.

Chicago Economists Say 2009 Is a Year of Challenge

Tuesday, February 17th, 2009

The economic forecast for 2009 is bleak, although it’s possible that recovery will begin mid-year. This is the opinion of William Strauss and Rick Mattoon, senior economists with the Federal Reserve Bank of Chicago. “We are predicting that 2008 will yield real GDP of 0.2 percent and that 2009 will be 0.7 percent,” Strauss said. “This will be the slowest two-year growth period since 1981 – 1982, an 18-month recession that will be deeper than the 2000 and 1990 – 1991 recessions.”

Although some economists believe that the unemployment rate will hit double digits this year, Strauss and Mattoon optimistically predict that it will level off at approximately nine percent. Real income growth will be flat, and might even decline. The key to recovery is a thaw in the credit markets so that their performance improves.

Trade is holding its own; exports are still in positive territory. Strauss warns, however, that exports can’t be relied upon to drive to the economy, because the global recession means that foreign buyers will purchase less than they previously did.

Given their relative optimism, I wonder if Strauss and Mattoon agree with President Obama, who warned that failure to pass his $800 billion economic recovery package “could turn a crisis into a catastrophe”? Considering the bad review that Wall Street gave to Treasury Secretary Geithner’s preliminary plans for the use of the remaining $350 million of TARP money, it will be interesting to see how the markets react to the House-Senate conference committee’s compromise bill.