News & Research Archive

Lots of Money on the Sidelines

Feb 22, 2010

 

For investors looking for deals through distressed properties you may be surprised at the competition. During the last collapse of the commercial real estate market in 1991 there were virtually no buyers. Vacancies were high, financing did not exist, and prospects for tenants were low. Today everything holds true except, there are many buyers with plenty of money all waiting to jump into the market.

Distressed property lectures, wieners, luncheons, dinners, retreats, classes, workshops abound—everyone is promoting distressed properties. New firms specializing in raising equity or raising capital to make loans are forming in large numbers. Yet, could this be all for nothing?

In order to have a distressed market, banks must take back commercial properties and be willing to discount notes to a value that meets the market wishes for a deal; or you must have owners that are willing to sell at a price that meets the economic realities of today's rental market and still allow a new investor to make money. Both of which have so far, been hard to find.

Banks today are paralyzed regarding the amount of commercial loans that are coming due or are in default. Unlike the residential market where loans are amortized and paid back over 30 years, commercial loans are typically due in 3, 5, and 7 years. The high water market deals done in 2006 and 2007 are now coming due.  Banks at this point are sending mixed messages, some are foreclosing others are trying to work with the borrowers. The government is also sending mixed messages; first telling banks to reduce loan portfolio values to meet current market conditions, then telling banks they can leave their loan portfolios on the books at their original values.

Uncertainty typically creates opportunity. In this case uncertainty has created a gridlock where no one really knows what to do. The big difference is that there is a lot of cash waiting to jump into this market.  In San Francisco, prices for office buildings have dropped and sold for under $200 a foot for a Class A product. This would appear to be a "steal" in terms of value, but rental rate prices are still soft and could go down further. At the prices of these current sales, $200 may be considered an expensive buy-both in the short term and in the long term.

Job growth will be the key; without it demand for commercial space will remain soft, potentially for years to come. When the market crashed in 1985, it was not until 1997 that values started to improve.

Some buyers believe that there will be another cycle of buyers that will overpay before property value will drop to its true worth. Then they will come into the market. Either way all of this distressed property discussion may turn out to be nothing more than a big hype.

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 25 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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