The State of the State of the CRE Industry – January 4th, 2011

January 18, 2011

On January 4th, I participated, along with five other panelists in a discussion regarding the state of the commercial real estate industry.

The event was sponsored by the Commercial Real Estate Professionals & Investors Group (CREPIG)

CREPIG was originally started on LinkedIn in 2007.  The group functions of LinkedIn are considered minimal and so a portion of the group was moved to this site which is built on a Ning platform.   Membership hit over 1,000 on March 1st of 2009.

CREPIG’s mission is to serve the investment community and the personal investor to find the funding, resources and projects needed to succeed or complete their current or long term goals. To help, teach and mentor the next generation of CRE professionals and be an overall place of connection and learning.

The discussion was hosted by Bob Schecter and JW Najarian, co-founding members of CREPIG.  The introduction to the presentation was described as: Terrible, dreadful, awful, frightful, gruesome, ghastly, horrid, hideous, grisly, horrific, fearful, appalling, shocking, and abysmal, are a few of the adjectives that I’ve seen used of late, to describe the current state of the CRE industry. As undeniable, inescapable and dire as the situation may have become, dwelling on it won’t make it any better.  So what’s happening in the industry?  Our panelists give us their thoughts.”

Members of the panel included:

  • Alan D. Pollack, President

                Delta Investment Group

  • Eric Salveson, Senior Vice President

              Johnson Capital 

  • Jeff Vinzani, Attorney at Law

              Nexsen Pruet

  • Jim Krieger

             Abide Corp Mortgages Services

  • Leonard M. Manriquez, President & Chief Executive Officer

              Commercial Asset Management

  • Scott R. Lodde, Principal

             Alliance Real Estate Asset Management Group, LLC

The following is a brief summary of the ideas and experiences of the panelists and where they believe the commercial real estate industry is headed in 2011.

Click HERE for a link to the Audio-cast where is can be heard or downloaded.

Alan D. Pollack

Brokers specializing in distressed commercial notes and REO (California, Texas, and Florida).  Local and community banks.

Seeing high activity level. Written more offers in 4th quarter of 2010.  Banks are challenged balancing reserves and trying to keep doors open while their assets are diminishing.  Targeting $5 – $20 m single asset properties including REO, fractured developments, incomplete construction, and empty retail across the commercial sector.

Some of the stronger banks are holding on for a higher price point; however, smaller community banks are actually moving some of their assets.  As they move assets off their balance sheet the banks are attempting to raise more equity to shore up their reserves.

Eric Salveson

Working at Johnson Capital and in the business since 1970.  Did $800 million in transactions in 2009.  $1 billion in 2010 and on-line to do more in 2011.

Finding that there is a division in the marketplace as far as quality goes. High quality assets (AAA rated) whether office, apartments or industrial are being traded at incredible cap rates. Apartments in sub 5% range. Office building in good areas (e.g. downtown LA, Chicago) in sub 6.5% range.

All other properties (lower asset quality) are being sold by banks that do not believe in “extend and pretend”.  Plenty of bridge and mezzanine financing available for these assets at higher rates.

Much more active market than in the first half of 2010, 2009 and the end of 2008. 

On lower quality assets it is interesting on how values are being calculated.   Plenty of capital in the market.

Jeffrey Vinzani

Attorney with the law firm Nexsen Pruet in Charleston, NC.  185 – 200 lawyers.

Being in the South, seeing a positive picture. Immigration patterns indicate people still moving to the South and coastal regions.  Charleston has a triple effect going on with Boeing who is building a manufacturing plant with about 10,000 jobs. Clemson University secured a $100 m grant to build a wind turbine testing facility.  Sheep Island area building huge distribution facilities off interstate.

View nationally.  Positive about new tax extension in place. Should help small businesses make investment decisions and hire more workers.

Key is growth in employment and small and large business investing their capital.

Banks are eager to lend but under watchful eye of the regulators.

Jim Krieger

President of Abide Corp, a small boutique commercial mortgage broker in Seattle, WA.

Majority of clients in Pacific Northwest.

Pockets of areas around the country that have the potential for strong performance.  Seattle in a bubble.  Don’t have extreme lows or extreme highs when it comes to real estate.  Strong manufacturing with Boeing.  Large technology industry with Microsoft.  Huge Asian influence.

Looking at properties in LA and Phoenix.  Many loans matured and are currently in distress.  Retained as work-out specialist.

In last two months business is in an uptick.  Recently been able to work out two deals to extend on notes.  Recently got a transaction closed at the end of 2010 in a twenty-four hour period.

Leonard M. Manriquez

President of Commercial Asset Management (CAM), the Special Assets Services division for ALB Commercial Capital. CAM operates as an asset Management Company involved in the evaluating, management and disposition of distressed commercial real estate assets.

Sees last quarter of 2010 as best quarter but lower than previous years.  Still sees uncertainty in market primarily from the hesitation seen from investor groups.

Don’t yet see capital moving back into the market completely with an array of loan products. Quite a few lenders for different property types have fallen out of the market.

Positive going into New Year.  Lenders showing signs of flexibility with their existing debt.  In good position to help clients with work-outs and modifications.  Big opportunities in note sales.

Scott R. Lodde

State of Florida one of the most distressed parts of the country.  That being said, we have re-invented ourselves over the past few years.  We are primarily a real estate development company and by necessity got into the real estate asset management business specializing in the hospitality industry.

Hospitality is the canary in the mine. The industry went into the recession faster than any segment but will come out of it faster than anyone due to the ability to change rents on a daily basis.  Also, there has been a 21% decline in the number of hotels rooms under construction from the end of 2009 to end of 2010.

On the revenue side, RevPAR is up in 2010 and is expected to be in 2011.  The business traveler is coming back.  We hope that is an indicator the jobs are coming back.

Representing clients who are buying notes and REO.  We see opportunities to buy distressed notes and especially distressed hotels in 2011. 

We don’t need any more inventory (office, hotel, retail).  The action is in the work-out loan business.  Major opportunities in mezz loans subordinating existing equity for well located assets.

JW Najarian

Problems continue in office and retail with continuing unemployment.  2011 is the year things will turn around.

Jim Krieger

Two different perspectives.  On a local level, Washington State experienced highest level of bank transition in 2010.  Majority banks have stopped lending up until last quarter of 2010.  Wanted dust to settle before getting back into lending business.

Most lenders have become distressed asset managers.  Now settling down.

Brought on as a consultant for CMBS portfolio. Needs to be addressed in first two quarters of 2011.

Multifamily will be first sector to come back.

Eric Salveson

Last two loans closed were retail centers in Hawaii.  Seeing more activity for construction loans in multi-family.  High quality assets are different than inferior building. 

Pleased with market studies that came in on new apartment development projects.

Retail appraisals showing distress as well as office unless extremely well located assets.

Suburban market is tough, other than well located neighborhood shopping centers.  Action in downtown areas.

Average workspace in the next five years will be around 125 SF.

Bob Schecter

What is needed in our business is a rejuvenation … a rebirth or we will all be work-out specialists.

New construction will put contractors back in business.  Retailers opening new stores only upon absolute necessity. 

Landlords at the mercy of tenants.  Don’t know where all the optimism comes from.

Eric Salveson

Losing manufacturing base which creates jobs for everyone.  Facebook and Boeing both have $50 billion of market value.  Facebook has only 2,000 employees and Boeing has over 50,000 employees.  Government needs to address manufacturing base in this country.

Japan has been in a recession for over 10 years.

Back in the 1970s we wiped out all the bad real estate.  Today it’s simply “extend and pretend”.

10% – 15% is being foreclosed.  If you buy at “new” level, you will make money. 

Alan D. Pollack

Some banks are recapitalizing existing deals by rewriting a loan with a new (stronger) borrower at lower leverage.  Banks get to convert non-performing loan to performing loan with new (larger) capital.

Scott R. Lodde

Don’t see any new construction.  Country overbuilt in every sector.  Good thing is that we are keeping busy as real estate consultants.  Jobs and population increases (country is still growing) will get us out of this real estate recession but it may take many more years.

Eric Salveson

Investors are going back to basics.  Back to 10% cash on cash returns.

Increases in values over past 15-20 years are a result of cap rate compression not rental income growth.

Bob Schecter

Investors can no longer play the cap rate strategy.  Must buy real estate based upon increases in rental income over time. 

Posted by Scott R. Lodde

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