The Dirt Lawyer's Blog Archive

I really like this analysis by David Lynn posted at NREI. Why? Because it makes sense to me. At one point, the numbers were insane. People buying deals at a 4 cap with the unfounded expectation that the bubble would go on and on and on smelled of tulips in Rotterdam. And yes, the frost came. But look at the charts now, if you happen to be a chart person. Add in your risk premium and real estate is slowly starting to make sense again. Buy at a 10, sell at a 8 is the maxim I have mentioned here before. And as the caps reach reasonable levels, real estate's making sense again. That is the beauty of cycles. The thing is - it could still get better. But I agree with the analysis that smart money will start jumping in again with relatively "safe" deals - reasonable interest rates, LTVs and expectations.

$8.9 billion in property sales in the first quarter. We knew from local results the number would be down. Its opinion? "While the pace of the economic slowdown appears to be easing, different aspects of commercial real estate and commercial real estate finance are feeling different levels and types of pressure." Originations are down (no shock there), amd the CMBS market is dead (gee, imagine that!) but what I found interesting was that cap rates were, yes, up from 2007, but at 7.4% they are not as high as I might have thought. These are only reported deals, but it is an interesting sign that we may have a way to go or the prices might not drop as low as the vultures expect. Or, we could just be waiting for the shoe to drop on CRE foreclosures. Heck, I will leave it for the experts to figure it out. I'm just interested in the news.

That is what some people seem to be saying to Congress, even as the major banks are repaying TARP money to get the Feds off their backs. I am not making any predictions. But we know this: tons of loans are coming due. Special servicers are just trying to hold on, often by granting short-term extensions. Refi money isn't there for many deals, and when it is the LTVs aren't great, meaning capital calls or mezz debt. (Can you say Barry Sternlicht?) The question is whether the bleeding will remain stanched until things turn around or whether the stiches will burst and we will have Banking Crisis #2 for the Obama administration. Optimists say we're good and that current measures will work; pessimists say the worst is yet to come, especially since printing more money is going to be a problem. Vultures are supposed to be waiting to pounce, but there's a disconnect on some asset pricing that still hasn't settled yet. (I think Mr. Sternlicht even talked about 20 caps ...

It is great to be back. I had a wonderful Christmas with my family (including my three remaining grandparents -- it is such a blessing to still have them all at my age). I am expecting a slowish day or two that will allow me to catch up here, catch up with administrative work for my and prepare for 2008 (and some exciting plans for me personally and professionally). As I have said before, some investors are not buying into the prevailing feeling in the market that 2008 is going to be a bad year in the commercial real estate market. And face it: many of the best in the game buy when everyone else is selling and vice versa. We saw this in the last two years. According to the contrarians, "The common belief is opportunity is knocking for the deep-pocketed crowd because the credit crunch has eliminated high-leveraged buyers from the bidding ranks due to lenders' tightening underwriting practices." Most of these people have access to major league capital that will perm...

Here's a neat chart in today's Wall Street Journal showing the largely consistent decline in cap rates since 2001. And to think I remember the days of "Buy at a 10, sell and at 8..."

Yup. And believe it or not, I'm still quite happy about it. The Urban Land Institute and PricewaterhouseCoopers LLP agree with the herd : prices will decline and lending underwriting standards will tighten. If you are a buyer, 2008 might be a very good year. If you must sell, then... not so much . PWC hit it right on the head: investors who went overboard may have some headaches. I think those who didn't over-lever deals and buy at extreme cap rates won't. And here's an interesting quote from the Business Week story: "The report surveyed more than 600 investors, developers, property company representatives, lenders, brokers and real estate consultants. Most believe real estate investments will outperform U.S. stock and bond returns next year. " (Emphasis added.) Now of course this is coming from within the business so it may be optimistic, but I would not be at all shocked if this were true. It is also a sign that the real pros do not see a crash in...

When I first read this story about large residential projects pulling back, I was not a happy camper. Things looked bad. But then I read it again, between the lines, and came to the following conclusions: 1. Projects are still being done. Of course, if you want the penthouse at the Chicago Spire, it'll cost you $ 40 million . 2. I saw no mention of any mess in non-residential commercial deals. Then I read that cap rates in August are still slightly lower. Take a look . A look at the chart in the WSJ showing where cap rates were, even pre-9/11. (On the other side, however, the Journal also reports that there is a current "paralysis" in the market, notwithstanding rate cuts. But is that for huge portfolio deals or for everything? From what I am hearing, there's money to be had for smart, well-planned single asset deals, especially from traditional lenders. 3. Check out this quote: "The debt market is frozen for the inexperienced developer," said ...

Admittedly I have my buyer's counsel cap on here, as some of those clients have been on the sideline during the latest feeding frenzy. As cap rates start to come back to normalcy, I am gathering that even more deals will be on the horizon, but not until sellers face the reality that, at least for now, most centers are not going to be selling at rates like they were a year or two ago. But as Retail Traffic's article states, is there so much institutional money out there that those investors will drive the market and prevent rates from going too high? I like to think those investors are just as smart as the opportunistic folks; their only constraint is that they have to place the money somewhere.

Bloomberg moved a story today citing experts predicting price drops in the US commercial real estate market of up to 15%. The story also says that because of these drops potential sellers are holding deals; additionally, contracts are terminating because of financing issues and increased borrowing costs and yield spreads have increased to up to 200 bps above 10 year Treasuries. Several experts are predicting big price drops and much less activity. I guess I have to sort of repeat what I have said before. This may be a good thing for many investors, including the types I represent. Yes, some speculators are going to get hosed, and, at the risk of sounding cruel, rightly so in my opinion. As the story says, cap rates in 2002 were at 9.25%. In the 1Q of 2007 that rate was 6.5%, and the EOP deal closed at an amazing 5.3 cap (no wonder Sam got out...what a genius). Also remember that many EOP deals were flipped, perhaps at even lower caps. Let's not forget that rents are still ...