A Little Too Early For CRE Champagne

Written by Phil Hall
on July 19, 2010 No Comments
Categories : Blog View

[u]BLOG VIEW:[/u][/i] Last week, Time magazine offered a headline that caused me to do a double take: ‘Is Commercial Real Estate Bouncing Back?'[/b] Well, that was certainly a hook that caught my attention, and I wondered if Time knew something that eluded the rest of the world about the commercial real estate (CRE) part of the industry. Actually, the headline was a bit of a cheat. The article in question was not a confirmation of a CRE resurrection. Instead, it was an interview with Mike Kirby, chairman of Green Street Advisors, a real estate investment trust research firm. In his view, Kirby believes that, to paraphrase Mark Twain, reports of CRE's death have been greatly exaggerated. ‘This whole premise that commercial real estate is 'the next shoe to drop' is overstated,’ Kirby said. ‘Clearly, we have problems since there are many mortgages out there that were underwritten using very aggressive assumptions, and those will be difficult to refinance. But the good news is, if you look at our property index, we're back to 2005 pricing. So that means that most properties that were financed in '04 and '05 are not going to be much of a challenge to get refinanced. ‘And, yes, the '06 and '07 deals, which some indices say are still under water, will also need to be recapitalized,’ he added. ‘The good news is there's a very long line of capital sources that have shown up in the last nine months that are ready, willing and able to play that role.’ Oh? I am sure that many people within CRE would question that. For starters, there is Addison Wiggin, the executive publisher of Agora Financial LLC, an economic forecasting and financial research firm. In a column published on Forbes.com one week prior to Kirby's Time interview, Wiggin didn't have that much enthusiasm for the sector. ‘Office vacancy rates hit a near 17-year high in the second quarter, (the) CRE research firm Reis announced today,’ Wiggin wrote, adding that ‘17.4 percent of all American office units for rent are now empty, a 1.4 percentage point rise from this time last year – around the time this supposed 'recovery' began.’ Wiggin's pessimism was echoed in the July 12 announcement of an RBC Capital Markets survey of 102 mutual fund, hedge fund and private equity managers. When asked about their perception of CRE risk over the past year, 46% of those surveyed said the CRE risk was either higher or much higher. Other recent surveys paint an equally gloomy picture. A report by Realpoint that found that the delinquent unpaid principal balance (UPB) for commercial mortgage-backed securities (CMBS) grew by $2.9 billion in June. The total delinquent UPB at the end of May was $57.34 billion – a 205% increase from a year ago, when the reported delinquent UPB was $18.78 billion. Separately, Fitch Ratings found the U.S. CMBS delinquency rate rose to 8.14% in June – its smallest increase in 11 months, but Fitch wasn't ready to declare the sector's stabilization. In fact, Fitch made it very clear that CRE is not out of the proverbial woods. Even more telling was a June 23 announcement by the American Institute of Architects (AIA), which found its Architecture Billings Index down 2.6 points to 45.8 in June. This marked the second consecutive month that the index fell, which the AIA considers to be evidence of declining demand for new commercial projects. ‘The overriding issue affecting the entire real estate sector is unusual caution on the part of lending institutions to provide credit for construction projects,’ AIA Chief Economist Kermit Baker said in a Reuters interview. But even with these recent statistics swirling about, Kirby is still advocating CRE's near-future potential. ‘You get a decent return and you're buying at the bottom of the cycle,’ he said in his Time interview. ‘Real estate being a historically cyclical animal, you know, it's not going to be a good year next year, or even the year after – the cashflows are going to stink – but eventually what has gone down comes back up. So we're sitting at a historically low occupancy and rental rates, but barring a double dip, there's only one way to go.’ In my opinion, that is an amazing statement. The sector's descent is nowhere near the bottom, and the fear of a double-dip recession is extremely strong. I appreciate Kirby's optimism, but the reality facing the sector doesn't appear to overlap his pronouncements. For now, I am not ready to start chilling the celebratory champagne bottle for CRE's return to good health. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b] [i] (Please address all comments regarding this opinion column to hallp@sme-online.co

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