We consider real estate to be in the early phase of a cyclical recovery. After a hiring slump in mid-2011, the job market has begun to show signs of strength, as the unemployment rate continued declining in the first quarter of 2012. Real estate investment performance continues to display favorable conditions, a result of historically low borrowing rates and a modest inflationary outlook. Very limited new supply and rising demand is buoying real estate fundamentals for most property types.
Investor interest to date has been focused on top-tier assets in prime markets and is thus reflected in bifurcated cap rates, with rate compression in those select markets and assets. At this early phase of the real estate recovery, we believe the real estate asset class can provide very attractive return opportunities relative to other alternatives.
Distressed Sales Volume Remains at Elevated Levels Despite Big Boost in Non-Distressed Sales in Recovering Economy
Distressed trading volume has stabilized but continues to remain at elevated levels, increasing by approximately 2% last year over 2010. However, a surge in non-distressed property trading driven by improving economic conditions has begun to mitigate its impact on commercial real estate pricing levels overall.
According to CoStar Group data, the volume of distressed transactions in December 2011 remained well above the average monthly volume for the full year, yet the distress percentage of total observed transaction volume fell 30.1% in January 2011 to 21.1% in January 2012.
By way of comparison, distressed sales made up less than 3% of total sales volume in 2008.
Based on year-end 2011 data for sales of office, industrial, retail and multifamily properties, distressed property sales totaled $21 billion last year. That compares to $20.6 billion in 2010.
CoStar Group’s Property and Portfolio Research (PPR) subsidiary expects distress transaction activity will continue to be elevated in 2012, according to Mark Fitzgerald, debt strategist for PPR, which he said should provide plenty of opportunities for other capital sources to enter the field.
“In particular, private equity has maintained 30% of its total transaction activity in the distress space, despite overall acquisitions increasing nearly threefold from 2009 to 2011,” Fitzgerald said.
REITs, which have been the largest net buyers of assets by a significant amount over the past two years, have also not been significant players in distressed properties.
“REIT transaction activity has been driven by the low cost of capital and strong access to the public markets,” Fitzgerald said. “This has enabled REITs to be highly competitive in core markets with low cap rates. However, one area that public REITs have generally avoided is distressed properties. Of the major equity capital sources, REITs have seen the lowest percentage of their acquisitions consist of distressed assets.”
There are contradictory indications whether other major equity sources might be coming into the picture.
What does this mean for you? This means there is still tremendous opportunity to purchase distressed properties. At least until the retail market sees substantial recovery or until large capital firms start buying up bulk distressed assets.
Call today for a list of distressed assets in your market!
Banks Returning to CRE Lending via Multifamily, Owner-Occupied Properties
Overall loan balances on bank books posted their largest real growth in four years, according to year-end numbers released this past week by the Federal Deposit Insurance Corp. (FDIC).
As far as CRE lending goes, it was a 50/50 split between good and bad news. Total loans outstanding for owner-occupied CRE and multifamily properties saw a modest increase year over year — from $452.6 billion to $457.2 billion for owner-occupied and from $212.7 billion to $218.5 billion for multifamily.
However, those small increases were offset by a minor dip in multi-tenant CRE property loan balances from $550 billion to $543.8 billion, and another huge drop-off in construction and development lending — from $321.5 billion to $240.2 billion.
Take out the 25% year-over-year decrease in construction and development loan balances and CRE loan balances increased $4.2 billion. This isn’t much but it was the first such increase since 2009.
Total assets of insured institutions increased by $76.1 billion (0.6%) at year-end 2011, as loan balances rose by $130.1 billion (1.8%). This was the third consecutive quarter in which total loan balances increased.
Residential mortgage loans also increased by $26 billion (1.4%), following a $23.6 billion increase in the third quarter.
Investment securities portfolios increased by $61.6 billion (2.2%), with mortgage-backed securities rising by $45 billion (2.8%).
One other bright side to the loan numbers for the CRE industry was that overall loan growth was led by commercial & industrial (C&I) business loans, which rose by $62.8 billion (4.9%), accounting for almost half of the total increase in loans and leases during the quarter. C&I loans have increased in each of the last six quarters.
C&I loans to small businesses (C&I loans in original amounts of $1 million or less) increased by $2.8 billion (1%). This is the first time in the seven quarters for which data on quarterly changes in these loans are available that small C&I loan balances have increased.
The latest Federal Reserve survey of senior bank loan officers, known as the Beige Book, sheds a little more color on the sentiment and markets behind the CRE and business loan increases.
The Center for Planning Excellence, known as CPEX, has released its Louisiana Land Use Toolkit, an all-inclusive set of development guidelines for cities and parishes of all sizes that want to do a better job of planning their future growth.
The toolkit helps parishes put in place the public policy — in the form of development codes along with zoning and subdivision regulations — to carry out their comprehensive plan, said Camille Manning-Broome, director of planning at CPEX.
The toolkit and its resources are funded by Louisiana’s economic development department; the National Realtors Association; the Environmental Protection Agency; and the U.S. Department of Housing and Urban Development.
Click below to be linked to the CPEX download link.
CMBS activity has flourished in the past few weeks with more than $6.5 billion in new securitization coming to market. In addition, Freddie Mac brought two multifamily-backed offerings totaling $1.86 billion to market.
The activity in February alone is almost two-thirds of all CMBS deals offered last year – and for some is reminiscent of 2007 when commercial mortgage-backed securities offerings were at their peak, which has the commercial real estate market bullish and fretful at the same time.
All signs indicate that we are in for a good year. While many of us have been skittish over the last quarter we have to start looking at the signs around us. At some point we have got to be open to the idea of capitalizing on our placement in the Real Estate market during these unique but trying times.
The new vision for Greater Baton Rouge was the topic of discussion in the monthly Commercial Investment Division meeting last Thursday. While most of us would love to see the multimodal transportation system as well as the public/private relationships needed to transform blighted districts to resourceful residential, professional and retail districts can it be done? If so, will we live to see it?
Powered by improving conditions in the real estate and capital markets, CRE loan originations rose by 36% in 2010 over the previous year. Loan maturities also continue to roll at a manageable level, with just 11% of the $1.4 trillion in outstanding commercial debt expected to mature this year, shrinking to 9% in 2012.
Brian Andrews speaks out. Brian, a known and respected Commercial Mortgage Banker in Baton Rouge, reported to the Baton Rouge Business Report that he is getting activity from several banks looking for good loans in Louisiana. He says these banks are claiming to have their CRE portfolios well within the regulators suggested limits. What does this mean for us? It means a couple things. 1) We are not going to see prices falling for much longer and 2) If you’re looking to buy CRE at a great price with great rates you have a limited time to get ahead of the crowd. My question to you is.. Will I see you at the starting line or will I see you at the finish line?