Finance CMBS
Jan 1, 2008
By: Paul Rosta, Senior Associate Editor
As 2008 begins, last summer's stunning turnaround in the financial markets continues to dominate talk within the industry. "Uncertainty" is the watchword, as no one can tell for sure what the debt and CMBS markets will look like after the shakeout. Yet even as executives adjust to new realities, they voice cautious optimism, noting that commercial real estate fundamentals remain sound across regions and property types.
Finance
Nervous Stomachs
Few experts seriously doubt that the shellshocked capital markets will stay in the infirmary for a good part of 2008. "Clearly we're in a period where we need a psychological adjustment," said Tom McManus, chairman & CEO of Cushman & Wakefield Sonnenblick-Goldman L.L.C. The only question is how long the now-familiar symptoms, particularly the CMBS market's deep freeze, will linger.
The multibillion-dollar write-offs by giants like Citigroup, Merrill Lynch & Co. and Bank of America Corp. might be just the beginning. The financial debacle dwarfs the Russian debt crisis that roiled the markets in the late 1990s, stated Cliff Mendelson, senior managing director for Transwestern's structured finance group.
Opening the CMBS logjam will require a couple of critical developments, he said. "Lenders holding toxic paper need to sell it off and take their lump." The capital markets also need deep-pocketed players to jump-start the CMBS industry with a bold infusion of capital.
Ironically, fundamentals remain sound and abundant capital is still available, but pricing remains uncertain. CMBS volume is widely expected to decline to about $100 billion this year—about half 2007's total. Even in a time of tightened underwriting standards, though, lenders still look favorably on quality. "Anything with current cash flow, good location and good sponsors will have no trouble getting financed," McManus predicted.
Investment
Buyers, Sellers Face Off
For at least the early part of 2008, lenders are all but certain to remain baffled. "The market is not sick; it's just indecisive," said Peter Ruggiero, national managing director for Colliers International's investment services group. Until the capital markets settle down, lenders and investors are lost in their search for how to price debt. As a result, investment sales will fall far short of the more than $500 billion tallied nationwide last year. Ruggiero expects sales volume for the first half of 2008 to drop 50 percent from the same period last year.
Investors are still struggling to recover from the sticker shock that hit the debt markets last year. To get financing, would-be buyers must typically put in 25 to 30 percent of the purchase price in equity, compared with 10 to 15 percent early last year. Owners, meanwhile, are reluctant to sell at a discount during a time of solid fundamentals.
In a time of uncertainty, investors want quality and security more than ever. "There's a large demand for A-class assets, whatever the product type may be," said Harvey Green, president of Marcus & Millichap Real Estate Investment Services Inc. He expects apartments to top the list of investor favorites, as scarcer credit and tighter underwriting deflate home sales. Next comes industrial, then office and then retail space, he said.
At some point during 2008, buyers or sellers will blink and asset pricing will start to solidify again. According to Real Capital Analytics Inc. managing director of research Dan Fasulo, "In the first quarter, we'll see what's what."
Development
Solidify Structures
After several years of robust revenue growth and expansion, top development executives are realistic but still positive. "There will be less new development but not dramatically, since there's a fairly good economy," predicted Opus Corp. chairman & CEO Mark Rauenhorst.
That said, industry leaders acknowledge that they must recalibrate their plans to account for the credit crunch. Developers have to consider whether they can delay projects, explained Kenneth Himmel, president, founder & CEO of Related Urban Development, the mixed-use development affiliate of The Related Cos.
Related Urban has no plans to tighten its $10 billion national pipeline, but it is making adjustments. Phase I of CityNorth, a $2 billion master-planned project in Phoenix, will incorporate 350,000 square feet of condominium construction, down from the 600,000 initially planned. The company will also increase the size of the units from 1,100 to 1,700 square feet to target more affluent buyers. But the scope of CityNorth's anchor, the 1 million-square-foot retail district, remains unchanged and is still on track for its scheduled fall 2009 opening.
Lauth Property Group president Mike Curless explained his firm's plan for 2008: "You'll see us double back and try to fortify existing regions and existing product types." This represents a change for the Indianapolis-based developer of office, industrial, retail and healthcare projects, which has opened six new offices since 2001.
Developers will also work on a more conservative mix of projects. Opus expects to cut back its speculative building and ramp up third-party and build-to-suit construction, Rauenhorst said.
Brokerage
Case of the Jitters
This economic climate is fraying the nerves of corporate America and influencing its real estate decisions. "Our clients are all exhibiting the jitters," said TCN Worldwide president Ross Ford.
Based on input from the brokerage network's field offices, Ford surmised that leasing activity nationwide fell off about 10 percent from the third to the fourth quarter of 2007. Even if this does represent a new part of the cycle, Ford believes that the brokerage industry should treat leaner times as an opportunity and a mandate to strengthen client ties.
It is unclear whether the economy is in for a soft or hard landing, but Studley Inc. president Michael Colacino expects financial firms to put sublease space on the market as they pare down their forces. And because hedge funds have taken the lead in driving up office rents within financial centers, a softer market may slow the rate of rent increases in such markets as Midtown Manhattan, where Class A rents often break $100 per square foot.
Colacino also expects more consolidation among brokerage firms. "You're going to see the big boys buy up the small boys," he predicted. Big players continue to join together, as well, as exemplified by NNN Realty Advisors Inc.'s recent acquisition of Grubb & Ellis Co.
Property Management
In a Good Spot
Contrasting with the guarded outlook of most real estate practice areas, some leading property managers are decidedly upbeat. "It's a good time for companies like ours that are fully integrated," said Tony Long, president of CB Richard Ellis Inc.'s asset services group. Huge portfolio trades, highlighted by The Blackstone Group L.P.'s 2007 $39 billion acquisition of Equity Office Properties Trust, are creating opportunities. As an integrated REIT, Equity Office used in-house staff to manage its 100 million-square-foot portfolio. But as a hedge fund, Blackstone instead hired third-party managers in many cases.
Buyers' changing priorities are also shaping property management activities. In recent years, investors relied heavily on cap-rate compression to generate value through quick flipping, but many now plan to keep assets for two to five years. "Owners are (looking to) extract value through property management," said Jones Lang LaSalle Inc. product director of property management Bob Best. Upgrades will be more common. Jones Lang, for example, is overseeing the $4 million renovation of Atlanta's 100 Peachtree St., a 33-story tower that Equastone acquired last May.
By: Paul Rosta, Senior Associate Editor
As 2008 begins, last summer's stunning turnaround in the financial markets continues to dominate talk within the industry. "Uncertainty" is the watchword, as no one can tell for sure what the debt and CMBS markets will look like after the shakeout. Yet even as executives adjust to new realities, they voice cautious optimism, noting that commercial real estate fundamentals remain sound across regions and property types.
Finance
Nervous Stomachs
Few experts seriously doubt that the shellshocked capital markets will stay in the infirmary for a good part of 2008. "Clearly we're in a period where we need a psychological adjustment," said Tom McManus, chairman & CEO of Cushman & Wakefield Sonnenblick-Goldman L.L.C. The only question is how long the now-familiar symptoms, particularly the CMBS market's deep freeze, will linger.
The multibillion-dollar write-offs by giants like Citigroup, Merrill Lynch & Co. and Bank of America Corp. might be just the beginning. The financial debacle dwarfs the Russian debt crisis that roiled the markets in the late 1990s, stated Cliff Mendelson, senior managing director for Transwestern's structured finance group.
Opening the CMBS logjam will require a couple of critical developments, he said. "Lenders holding toxic paper need to sell it off and take their lump." The capital markets also need deep-pocketed players to jump-start the CMBS industry with a bold infusion of capital.
Ironically, fundamentals remain sound and abundant capital is still available, but pricing remains uncertain. CMBS volume is widely expected to decline to about $100 billion this year—about half 2007's total. Even in a time of tightened underwriting standards, though, lenders still look favorably on quality. "Anything with current cash flow, good location and good sponsors will have no trouble getting financed," McManus predicted.
Investment
Buyers, Sellers Face Off
For at least the early part of 2008, lenders are all but certain to remain baffled. "The market is not sick; it's just indecisive," said Peter Ruggiero, national managing director for Colliers International's investment services group. Until the capital markets settle down, lenders and investors are lost in their search for how to price debt. As a result, investment sales will fall far short of the more than $500 billion tallied nationwide last year. Ruggiero expects sales volume for the first half of 2008 to drop 50 percent from the same period last year.
Investors are still struggling to recover from the sticker shock that hit the debt markets last year. To get financing, would-be buyers must typically put in 25 to 30 percent of the purchase price in equity, compared with 10 to 15 percent early last year. Owners, meanwhile, are reluctant to sell at a discount during a time of solid fundamentals.
In a time of uncertainty, investors want quality and security more than ever. "There's a large demand for A-class assets, whatever the product type may be," said Harvey Green, president of Marcus & Millichap Real Estate Investment Services Inc. He expects apartments to top the list of investor favorites, as scarcer credit and tighter underwriting deflate home sales. Next comes industrial, then office and then retail space, he said.
At some point during 2008, buyers or sellers will blink and asset pricing will start to solidify again. According to Real Capital Analytics Inc. managing director of research Dan Fasulo, "In the first quarter, we'll see what's what."
Development
Solidify Structures
After several years of robust revenue growth and expansion, top development executives are realistic but still positive. "There will be less new development but not dramatically, since there's a fairly good economy," predicted Opus Corp. chairman & CEO Mark Rauenhorst.
That said, industry leaders acknowledge that they must recalibrate their plans to account for the credit crunch. Developers have to consider whether they can delay projects, explained Kenneth Himmel, president, founder & CEO of Related Urban Development, the mixed-use development affiliate of The Related Cos.
Related Urban has no plans to tighten its $10 billion national pipeline, but it is making adjustments. Phase I of CityNorth, a $2 billion master-planned project in Phoenix, will incorporate 350,000 square feet of condominium construction, down from the 600,000 initially planned. The company will also increase the size of the units from 1,100 to 1,700 square feet to target more affluent buyers. But the scope of CityNorth's anchor, the 1 million-square-foot retail district, remains unchanged and is still on track for its scheduled fall 2009 opening.
Lauth Property Group president Mike Curless explained his firm's plan for 2008: "You'll see us double back and try to fortify existing regions and existing product types." This represents a change for the Indianapolis-based developer of office, industrial, retail and healthcare projects, which has opened six new offices since 2001.
Developers will also work on a more conservative mix of projects. Opus expects to cut back its speculative building and ramp up third-party and build-to-suit construction, Rauenhorst said.
Brokerage
Case of the Jitters
This economic climate is fraying the nerves of corporate America and influencing its real estate decisions. "Our clients are all exhibiting the jitters," said TCN Worldwide president Ross Ford.
Based on input from the brokerage network's field offices, Ford surmised that leasing activity nationwide fell off about 10 percent from the third to the fourth quarter of 2007. Even if this does represent a new part of the cycle, Ford believes that the brokerage industry should treat leaner times as an opportunity and a mandate to strengthen client ties.
It is unclear whether the economy is in for a soft or hard landing, but Studley Inc. president Michael Colacino expects financial firms to put sublease space on the market as they pare down their forces. And because hedge funds have taken the lead in driving up office rents within financial centers, a softer market may slow the rate of rent increases in such markets as Midtown Manhattan, where Class A rents often break $100 per square foot.
Colacino also expects more consolidation among brokerage firms. "You're going to see the big boys buy up the small boys," he predicted. Big players continue to join together, as well, as exemplified by NNN Realty Advisors Inc.'s recent acquisition of Grubb & Ellis Co.
Property Management
In a Good Spot
Contrasting with the guarded outlook of most real estate practice areas, some leading property managers are decidedly upbeat. "It's a good time for companies like ours that are fully integrated," said Tony Long, president of CB Richard Ellis Inc.'s asset services group. Huge portfolio trades, highlighted by The Blackstone Group L.P.'s 2007 $39 billion acquisition of Equity Office Properties Trust, are creating opportunities. As an integrated REIT, Equity Office used in-house staff to manage its 100 million-square-foot portfolio. But as a hedge fund, Blackstone instead hired third-party managers in many cases.
Buyers' changing priorities are also shaping property management activities. In recent years, investors relied heavily on cap-rate compression to generate value through quick flipping, but many now plan to keep assets for two to five years. "Owners are (looking to) extract value through property management," said Jones Lang LaSalle Inc. product director of property management Bob Best. Upgrades will be more common. Jones Lang, for example, is overseeing the $4 million renovation of Atlanta's 100 Peachtree St., a 33-story tower that Equastone acquired last May.
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July 18, 2008
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