Financing issues will dog the commercial RE industry - Philadelphia Business Journal:

This is a great insight to what the local experts are predicting for the commercial real estate market for 2010 and 2011. Commercial backed mortgage securities (CBMS) coming due between now and 2012 are estimated at $153 Billion.

"As residential real estate flirts with a tempered rebound this year, commercial real estate will be tested.

One looming issue is the maturities of commercial-backed mortgage securities used to finance property acquisitions during the run up to the credit crunch. Current estimates have $153 billion of CBMS loans set to mature between now and 2012 in markets across the United States, according to CB Richard Ellis data.

How much of that will involve properties throughout the region is difficult to peg down; however, the effects have already started to be felt.

Loans have matured on properties, such as 1601 Market St. in Center City, and the owner has been renegotiating a new deal in a tight lending environment. Delinquent loans on local apartments, retail centers and suburban office buildings have been sent to special servicer companies to try to salvage what they can. In other cases, banks have secured judgments against developers who borrowed money for projects.

“I think we’re in a period of torpor where we’re just lingering along on the bottom of the market,” said Ward Fitzgerald, CEO of Exeter Property Group. “I don’t expect the market to get any worse, but there will be signs of worseness because of foreclosures and bankruptcies. They are manifestations of things that have already taken place. We have already had a decrease in occupancies and rental rates have fallen so now you will see a lot of the effects of the disease. Up to now, we have just seen the disease.”

The challenge will be for property owners to avoid defaults, foreclosures and bankruptcies by refinancing. That won’t be easy. Financial institutions aren’t as cavalier with money as they were during the boom years, and lending standards have tightened. The CMBS market isn’t what it used to be.

Other issues are also at play. With vacancy up and weak leasing, some landlords don’t have cash flow to cover debt. In some cases, properties are underwater and reassessed at less than the loan.

That’s not all.

“One of the biggest risks out there is interest rates and floating rate debt,” Fitzgerald said. “If there is an increase in interest rates, you will see an even more tremendous amount of distressed real estate.”

The impact will be most felt by private property owners who were unable to tap public markets last year to raise equity to shore up balance sheets and stabilize properties. Two of the region’s office real estate investment trusts — Brandywine Realty Trust and Liberty Property Trust — are on firm ground.

For example, in the last year, Liberty has raised $1 billion and has cash on hand and a stronger balance sheet than when the recession began. It’s in the position where if it needed to borrow more money, it could, said CEO Bill Hankowsky.

That’s not an option readily available to private developers who relied heavily on borrowing and CBMS markets for financing.

“Capital is available for the haves and capital isn’t available for the have nots,” said Hankowsky, who described the recession, the evaporation of the capital markets and their effect as something akin to a tsunami. “Some people got knocked over by the tsunami and believe whomever is standing is surviving. That’s not accurate. There will be a long high tide that will create pressure on people.”

The major theme for this year will be fundamentals — keeping space filled and properties well run, Hankowsky said.

Another issue is whether the recession will turn into a jobless recovery. That will directly affect the office market and vacancy rates. Philadelphia County has the highest unemployment rate in the 11-county region at 11 percent, according to the Bureau of Labor Statistics. Chester County’s unemployment rate stands at 6.6 percent and Montgomery County at 7 percent. There is still a worry.

“There are fewer people employed in this country today than there were 10 years ago and 2.3 million lost office jobs between 2008 and 2009,” managing principal at Cresa Partners. “My read on that and translating that into real estate is we have bottomed out, but I think we’re at the bottom of a very big U and I don’t forecast us recovering in 2010 and 2011.”

That has meant increased office vacancy rates. The suburban vacancy rate now stands at 21.5 percent, according to data. In South Jersey, the rate is 17.4 percent. It’s not expected to get much better this year.

“Locally, regionally, nationally, there is a soft leasing market,” said managing director of CB Richard Ellis’ Philadelphia office. “I think what you’re going to see is vacancy rates ... bump up, negative absorption and downward pressure on rents.”

The sluggishness will continue for the first half of the year and then finally a slightly more optimistic view of the economy will finally take hold.

“I think people, particularly the second half of 2010, will feel as if we’re almost there. Is it going to be a rocket to the moon? No.”



Financing issues will dog the commercial RE industry - Philadelphia Business Journal: