Recent Posts

Tech Centers Driving Growth and Greater Commercial Real Estate Occupancy in Multiple Cities

January 31, 2012

A mid-January commentary in The Kiplinger Letter stated that the technology industry is driving growth, jobs and economic vigor with California leading the way (the state accounted for one in seven jobs created in the U.S. during 2011). In addition to the San Jose (Silicon Valley) to San Francisco submarkets, metro areas reaping the tech benefit are Seattle, Boise, Phoenix, Austin, San Diego and in the east, Raleigh N.C.

During the recent two years, the San Francisco Bay Area’s tech-strong economy, along with market drivers in social media, gaming and life sciences, have generated a larger volume of big transactions in Silicon Valley than just about any other period in history.

From early 2010 through the close of 2011, a combined 98 lease and sale transactions of 100,000 square feet or greater closed from San Jose to San Carlos, with an astounding total of 22,104,951 square feet of office and R&D space, according to Cornish & Carey Commercial Newmark Knight Frank.

The Bay Area’s commercial real estate market gained traction in 2010 and genuinely caught fire in 2011.

During 2011, 68 transactions of 100,000 square feet or greater closed in office and R&D sectors, totaling 15,862,169 square feet. In fact, total net absorption for Silicon Valley office and R&D product for 2011 was 5,483,943 square feet – an amount that is even greater than 1999 and 2000, which were record years before the dot.com bubble burst.

While the Bay Area witnessed several mega deals (Facebook and VMware each did nearly 1 million-square-foot deals and Google did one in excess of 700,000 square feet), commercial real estate conditions improved in the other tech cities as well.

In Austin, the overall office vacancy rate has declined to 16%, the lowest level in three years, according to Grubb & Ellis. Meanwhile, the Seattle Times ran an article late last year with a headline: ‘Commercial Landlords Rejoice! The Office Vacancy Rate is Dropping.’ The Times article cited a 55,000-square-foot leased inked by Expedia in Bellevue’s news Skyline Tower. And in Boise, one of the city’s headquarters companies – Clearwater Analytics, expanded its downtown presence last year by leasing an additional 11,561 square feet in the 9th & Idaho building, reports Colliers International. In addition, with office vacancy hovering at 16% during the 4th quarter of 2011 and Micron Technology continuing to expand its physical presence in Boise, additional start-up tech companies are likely to find opportunity in this market.  One example is the company Balihoo, which just secured an additional $5,000,000 of venture capital funding to expand its national presence.  Balihoo is headquartered in Boise.

Tech is not only driving jobs, but wages, too.

Tech-jobs website operator Dice Holdings Inc. reported that average annual salaries for Silicon Valley technology workers surpassed the $100,000 mark last year, pushed higher by the competition among tech companies to recruit and retain software and other engineers and programmers. The Valley’s tech salaries increase 5.2% in 2011, to $104,195, compared with a 2% increase for tech workers in the rest of the United States, to $81,237.

On the flip side, Kiplinger forecasted for this year that ports, manufacturing and warehousing will slow down around NYC, Northern New Jersey and Connecticut because of volatility in the stock markets with layoffs in NYC, and recession in Europe.

Posted by Gary Marsh

 

January 30th, 2012 by of Zoliath

Small Businesses Spur Job Growth

December 5, 2011

Like holiday cheer, good news emerged last week when the Bureau of Labor Statistics reported that U.S. employers had added 140,000 new jobs in November, causing the unemployment rate to plummet to 8.6% — from 9%, in a single month. This, despite 20,000 government jobs lost during the month at the federal, state and local levels.

Moody’s Analytics Chief Economist Mark Zandi attributed much of the job growth to small businesses, and broadly across many industries, from retail and hospitality to manufacturing.

The ADP National Employment Report backed Zandi’s statement up, claiming that 206,000 private-sector jobs were created in November with only 6% by companies that have more than 500 workers, while 53% of the new jobs were created by businesses with fewer than 49 employees.

Typically, commercial real estate absorption and vacancy rate trends lag employment gains or losses by 6-12 months. We took a look at a few U.S. communities with the intent of monitoring Houston commercial real estate, San Diego commercial real estate and Portland commercial real estate.

The unemployment rate in Houston County Texas was 11.7% as of September (most current data) and trending upward, yet the citywide average office vacancy rate at the end of the third quarter was 16.0%, down from 16.6% a year earlier, according to Colliers International.

The unemployment rate in San Diego County California was 9.7% as of September and trending downward, while San Diego’s office vacancy dropped to 13.9% at the close of the third quarter, according to CoStar, which also reported net positive absorption of 532,516 square feet during the period.

In Portland, Oregon, the unemployment rate was 9.1% at the end of September and trending downward (1.3% year-to-date). Coincidentally, Portland’s Central Business District office vacancy rate was 9.1% at the close of the third quarter, down considerably from 11.9% at the end of the second quarter this year, reports Cushman & Wakefield. Meanwhile, the suburban office vacancy rate also declined steeply in the third quarter to 15.6%, from 22.6% in the second quarter this year (which C&W says was the peak of Portland’s office vacancy rate).

We’ll check these same date points after the first quarter next year to follow the relationship between employment and office vacancy trends.

Posted by Gary Marsh

 

December 8th, 2011 by of Zoliath

What Recession?

November 11, 2011

Commentary by Gary Marsh

 

While the media blazes away with heaps of negative news, from my view I see an economy that keeps working. If you read the daily stream of real estate news from reputable mainstream business media and trade publications, you are reading dozens of completed lease or sale transactions daily. Businesses need physical space from which to operate, whether they are running an office with 20 employees, a manufacturing plant in the Midwest or are shopkeepers at a retail location in Anywhere USA.

A lease or sale of real property represents serious commitments by the people signing on the dotted line that they have a viable business to run. Perhaps, they even have growing and highly profitable businesses. The media rarely reports these stories.

I am not Pollyannaish. The Greek debt threat is very real and could put the global economy on its rear end. And we all know that banks own more property than they certainly wish to.

But here is what I am seeing, and just this week from one commercial real estate organization – CORFAC International.

The Andover Company/CORFAC International (Seattle, WA) issued a press release announcing 15 completed lease transactions in a recent 30-day period. There were 12 industrial leases and three office leases totaling 123,000 square feet of space. Other than a deal with the United States Postal Service (an entity represented by Andover), unless you are from the region you would not recognize the names of the lessors and landlords in Andover’s list of transactions.

In Ft. Lauderdale, Florida, Ken Morris of Morris Southeast Group/CORFAC International reported three lease renewals with professional service firms in a Plantation building his firm manages. The largest lease was just over 2,000 square feet – not huge in the scheme of things, but three different businesses essentially said they are staying in business for another 60 months, or 48 months. Two of them are accounting firms and one is a professional staffing firm. They have clients to serve. They need a place to house their workforce. America keeps on working.

Dave Hazenfield with The Dickman Company/CORFAC International in Milwaukee, Wisconsin, called me after I asked about a sale transaction that his firm had reported in a press release. A local property of 23,100 square feet had traded, with the seller – a family partnership, selling after the patriarch of the family had passed away. This is a somewhat common occurrence in the industry. The inheritors of the property – the previous owner’s brother and daughter, didn’t want to manage commercial property. The buyer is a local, long-term investor who likes to hold property, lease it and earn income from his properties. This is called a marketplace – a motivated seller and interested buyer hooking up. This is business in America and it keeps repeating itself in every state in the union, every week.

Hazenfield also told me that the Milwaukee industrial commercial real estate market caught fire in the third quarter this year, with 1.2 million square feet of positive absorption in the three month period. Total positive absorption in the Milwaukee market for the first three quarters this is nearly 2.9 million square feet, and the vacancy rate is down to 7.5%, one of the lowest in the country. Rust belt my ear! But the press isn’t reporting this except maybe locally.

Dickman also reported an industrial building sale to a local charter school operator. With the challenges in the public school system, opportunity beckons for some. Charter schools are popping up all over the country and they need real estate, too.

What is going on in Wisconsin, like neighboring Detroit, is that small and enterprising business is carrying the day.

L. Mason Capitani/CORFAC International sent in a press release announcing a 46,000-square-foot industrial lease in Roseville, Michigan, on behalf of Aristo-Cote, a specialty manufacturer of polyurea coatings for customized packaging clients. Jason Capitani and Joe DePonio represented the firm in its lease while Capitani and Michael Grammatico represented the landlord. Aristo-Cote is taking on larger space than their previous location in Romeo, MI. Either the packaging industry for specialized products is in high demand or the lessee has established a successful niche – or both. Business is working for them and they need a physical plant.

The final deal example I will cite from this week is not only an indication that business is still working in America, but also a statement on the diversity of our economy.

King Industrial Realty Inc./CORFAC International brokers David Richardson of Bill Johnston represented TAPCO in a 60,420-square-foot lease that was both a consolidation and expansion in the Kennesaw/Acworth Industrial submarket of Atlanta, Georgia, for the company. Apparently business is good for the Georgia-based manufacturer and supplier of firearms and accessories, or the company would not have needed more real estate.

November 11th, 2011 by of Zoliath

Commercial Real Estate Media Changes

November 9, 2011
By Gary Marsh

These days, there are fewer changes in the commercial real estate media business than during the tumultuous ‘print converts to digital’ period from 2003 to 2007, which was followed by the relative ‘bloodletting of the scribes’ time zone in the 2008 to 2010 recession. Even so, there are newsroom changes of late that are noteworthy.

Jonathan Schein, son of Real Estate Forum founder and later, the original publisher of www.GlobeSt.com, recently came out of semi-retirement to lead Penton Media’s real estate media group. Penton’s primary CRE asset is National Real Estate Investor. Schein is listed as the “Practice Leader” while Marianne Rivera remains the Publisher.

Schein’s arrival caused a slight shift at the top of NREI’s newsroom. Out: Longtime editor-in-chief Matt Valley. In: David Bodamer as new editor-in-chief. In recent years he has run Retail Traffic (another Penton product) and earlier was on the Commercial Property News staff. Bodamer has a strong grasp of managing online content and social media, perhaps a hint of things to come for NREI. The other factor in the change is that Schein is a New Yorker through and through. NREI was based in Atlanta, GA. Bodamer and Schein live in New York. Separating the two roles is like having Butch hanging out at the Hole-in-the-Wall while Sundance trots off to Nevada to rob a bank. Update: David.Bodamer@penton.com.

Meanwhile, Valley didn’t stay unemployed for long. France Media Inc. (formerly known as France Publications) is based in Atlanta. Valley used to work with Gerald France “back in the day” at a previous CRE publication. Presto! Matt Valley returns to France Media. His original post at France is as the editor of Heartland Real Estate Business – one of the five regional publications by the media firm. But stay tuned.

Whether related to ‘Valley Redux’ or not, France editor Dan Marcec, who was also the primary contact for France’s online news outlet, REBusiness Online, resigned within a week of Valley’s arrival. Marcec moved to New York to work in a hospitality trade publication. For a few weeks there was a leadership void at REBusiness Online, although fresh news items appeared daily. Now we learn that Nellie Day, who was brought in a couple months ago as editor of Western Real Estate Business (WREB), is the new editor of REBusiness Online. Day is keeping her ‘day’ job at WREB, too.

Updates: nday@francemedia.com and mvalley@francemedia.com

Gary Marsh is a principal of Marsh Marketing, a virtual marketing, communications and public relations agency serving commercial real estate firms and property developers nationwide.

November 9th, 2011 by of Zoliath

The Emergence of Online Search in Commercial Real Estate Marketing

Learn how to effectively market yourself online.
Tim Thornton

Having begun my career in commercial real estate in 1988, I have seen what I consider to be the beginning of the application of consumer technology within the commercial real estate industry.  I remember going to the One-Hour Photo and picking up hundreds of copies of building photos, and systematically gluing them to property marketing flyers that were created on IBM Selectric typewriters.  The strange thing is this doesn’t feel like it was that long ago.  It must be though, because as I was drafting this, Microsoft Word’s online dictionary flagged “Selectric” as a non-word and subsequently tried to correct it.

 

Fast-forward several years to 1995.  This is the year that LoopNet was founded.  Many people reading this article will remember the office file drawer that was reserved for each office’s proprietary commercial listing database.  This database was usually nothing more than one office’s attempt to gather all of the broker mailers available and catalog each available property marketing flyer by submarket and property type.  At that time, it was common to hear brokers state, “there will never be a commercial multiple listing service like there is in residential brokerage.  We protect our information and our proprietary database is part of what sets us apart from our competition.”

LoopNet, CoStar, Propertyfirst.com, Property Line, Xceligent and others paved the way for the proprietary office database to become a relic, and standardized the way in which commercial real estate agents share and present information.  Not only did we not know what the worldwide web was in the late 80’s, who would have ever conceived that a commercial multiple-listing service such as LoopNet would have over 37,000 visits every day? (Source: Quantcast.com)  To say that this type of technology has revolutionized the commercial brokerage business is an understatement.

Of course, there are many ways in which technology has impacted our industry. One area that is rapidly emerging is in the area known as Search or Online Search.  Simply put, Search means using an online search engine such as Google to help an individual find a product or resource on the Internet. Here are some facts gleaned from Google that will shed light on the role that the Internet plays in Search as it relates to the commercial real estate industry:

 

PHRASE                                                         AVERAGE MONTHLY SEARCHES IN U.S.

Commercial Real Estate Agent:                                33,100

Commercial Real Estate Management:                   8,100

Commercial Properties For Sale:                             74,00

 

By contrast, the number of searches on Google for these items in 1995 (the same year that LoopNet began) was zero.  This is because Google didn’t file for incorporation until 1998. As an interesting side-note, Google was previously named BackRub.

We can now expect that the next generation of commercial real estate specialists is very Internet savvy, and uses the Internet for virtually all facets of their lives.  This plays into the ideology that we need to make sure that more than just our listings can be found easily on the Internet, and not simply found but analyzed, compared, and displayed in a format that both novices and computer pros can understand.

We have moved past the era of websites functioning like simple, online brochures and into a period featuring high-level websites that allow people to search for commercial real estate service providers and properties that keep up with the pace of technological innovation.  Business owners and operatives in the commercial real estate industry have a lot of work to do just to stay current, much less apply some of the basic techniques to their businesses, but having a well designed, easy to navigate and properly search-engine-optimized website is a fundamental requirement these days.

THE FUNDAMENTALS OF SEARCH ENGINE OPTIMIZATION AND SEARCH MARKETING

With phone books on the way to becoming obsolete, the Internet has become the place of choice to search for commercial real estate information and service providers.  While it’s doubtful that we will ever completely stop phoning a peer to seek a recommendation, many people prefer to search anonymously and create short lists based on their needs, such as identifying potential specialists before entering a new market.  Another example of current search use occurs when making a broker or management change on a property or tenant-rep assignment.

There are numerous key factors that determine whether or not your information is found during a search online, without having to pay for display advertising within search results.  Three of the more obvious ways help boost your rankings are:

  • The amount of time your website has been indexed by a search engine
  • The number of links back to your website from other “relevant” websites
  • Optimization of certain industry specific keywords

Search Engine Optimization (SEO) is really a specialty unto itself.  When your website is properly optimized and thus returned within the first few pages of an engine’s search results, the site is considered to have a high “organic” ranking.  In this context, the word “organic” means that no money or other artificial ingredient would be added to obtain high search rankings.  By contrast, Google and other top search engines typically reserve the top few search results for companies who pay to be placed at the top of search results and is known as Search Engine Marketing (SEM).  Sometimes, these are called sponsor ads or display ads but in any event, a company pays a certain amount every time a searcher clicks on their entry.  This is known as Pay-Per-Click (PPC) advertising and is a very common practice today.  Websites bid on certain keywords or search-phrases and how much they bid determines where in the search results they show up.  Ranking high on a search engine’s results can be very competitive, ranging from a few pennies per click to $50 or more per click.  It is both industry and phrase dependent, for example, the keywords “real estate broker” may be more costly to bid on than “commercial real estate broker” due to the larger number of websites that may be bidding on these keywords.  It is also imperative that you really understand your target audience, and only bid on keywords and phrases that are likely to bring the right customer or client to your website, because you will pay for every click, regardless of whether or not the user is looking for your type of business.

In closing, let’s not lose sight of the goal of technology, including Internet marketing and networking — which is to drive business. Too often, people can get caught in a vicious circle and chase their tails to keep up with the latest technology. Being actively engaged online is becoming critical as more people use the Internet to search for commercial real estate professionals. However, the key is to determine what works best for your desired goals, which innovation is most cost effective and which of these require minimal upkeep on your end.  With myriad ways to spend your marketing dollars, Search, and PPC are going to become more important than paying for “impressions,” as has been a traditional way of measuring online exposure in recent years. As in life, throwing all of your eggs into one basket may not be the best use of your resources.  Rather, cast a wider, smarter online net to ultimately create more leads for your business.

 

About the author: Tim Thornton has been a commercial real estate broker since 1988, and is the founder of Zoliath.com, a web based application for the commercial real estate industry.  Tim can be reached at www.zoliath.com.

 

September 23rd, 2011 by of Zoliath

CORFAC International and Zoliath.com Enter Into Joint Marketing Agreement

Entrepreneurial commercial real estate brokerage and property management organization forms collaborative arrangement with the nation’s premier website directory featuring commercial real estate services and professionals in dozens of specializations

CORFAC International, a commercial real estate services organization with market reach in 65 global locations, and Zoliath.com, the nation’s premier web-based directory of pre-screened commercial real estate service providers, today announced that the two organizations have entered into a joint marketing agreement to cooperate in certain co-marketing activities in the United States.

August 28th, 2011 by of Zoliath

Zoliath.com Press Release

Boise, ID (August 17, 2011) – Zoliath.com Founder & CEO Tim Thornton announced today that after an 18-month beta test period with more than 800 original members, the search-based and members-only website – Zoliath.com, is now officially open to commercial real estate practitioners nationwide.

Zoliath.com is the nation’s premier directory of commercial real estate providers and its website is dedicated to connecting property owners, investors and tenants with businesses and professionals that work within the commercial real estate industry. Zoliath Founder Thornton has worked in commercial real estate for more than two decades beginning in San Diego as a rookie broker with CBRE specializing in retail and office commercial brokerage. Thornton is currently a partner in the Boise, ID brokerage firm, Intermountain Commercial Real Estate, LLC.

The core categories and industries Zoliath enables businesses to promote their firms within are: Aerial Photography Companies, Appraisal Companies, Architectural Firms, Banks, Building Inspection Companies, Commercial Real Estate Brokerages and Property Management Firms, General Contractors, Insurance Companies, Law Firms, Mortgage and Lending Companies and Signage Companies. Zoliath.com “mines” the major search engines with well placed, industry specific advertisements in order to deliver your potential client to its website. Zoliath.com is set to allow visitors to search for service providers at a city or regional level, and to filter these searches according to exacting specifications.

A typical Zoliath member has a detailed online profile which will enable commercial property owners, investors and tenants to find and review the specialists they need by state, city and category, using search technology that is similar, but more targeted, than major search engines (including Google, Yahoo and Bing). Zoliath membership and a basic site profile are free, though members go through a vetting process prior to membership acceptance to ensure specialization. Members can opt to enhance their profiles using pay-per-click campaigns with set monthly budgets, with each click only $1.99.

“We’ve created a format that connects industry specific people and the way they find companies by geographic locations these days,” said Zoliath CEO Tim Thornton, adding that in June of this year there were more than 40,000 searches in Google for the phrase “commercial real estate broker” followed by a city or state.

For more information, contact Tim Thornton, Founder & CEO of Zoliath.com at
(208) 345.6550 or email info@zoliath.com and visit www.zoliath.com

August 22nd, 2011 by of Zoliath

Increase Your Firm’s Publicity Coverage

Zoliath PR tip of the week: Everyone fyi there is a new commercial website news aggregator called CommercialPost.com. I checked them out and can tell you that they don’t actually accept press releases, rather, they pick up news covered by other online and print media and post it to their website. It effectively nearly doubled PR coverage for one of our clients in the second quarter this year. So make sure you are getting some of your press releases to appear in any of our relevant trade periodicals and watch your coverage increase because of CommercialPost.com. Contributor: Gary Marsh of Marsh Marketing

June 30th, 2011 by of Zoliath

Here’s a Pearl – Financing Update 5-18-2011

Bloomberg reported yesterday on a previously reported CMBS offering. That is not news, but the news within the news is that CMBS spreads* are declining along with corporate bond spreads. CMBS is seen as a good alternative offering acceptable yields. Thus CMBS is another alternative to investing in corporate bonds, especially junk bonds.

What Bloomberg does not report is the average leverage and DSC in the CMBS pool. It goes without saying, the leverage is what we euphemistically refer to as “moderate”, which is a polite way of saying its a lot lower than the halcyon pre-crash days.

The really curious number is the ratio of loans in the pool to the total number of properties secured by those loans – it’s about 1:2. No shortage of security there!

Bottom line: the amount of primo deals available to CMBS lenders is declining. That’s good news because that means the pressure on CMBS lenders to widen their deal search to sub-A properties in non-primary markets is inexorable. That reality has been evident in Boise, Idaho since Q4 2010.

Folks it’s getting better out there. Or at least it’s getting better for borrowers with properties which have no hair on them. Problem properties are still orphans in the world of long term fixed rate CRE finance. Those properties need infusions of equity or a lender JV or some other technique to share upside with capital sources.

 

*spreads are not directly determined by Treasury Bond yields, but spreads are influenced by T yields. Low T yields allow lower coupon interest rates and lower rates support comfortable DSC. As DSC narrows, the capacity of property to support debt decreases as does perceived risk. If you agree with PIMCO’s Bill Gross that the expiration of QE2 may presage increase in T Yields, then you agree that the CRE interest rate market is currently probably as good-as-it-gets.

 

J.P. Morgan leads $2.9 billion CMBS offerings

Wells Fargo and Royal Bank of Scotland are also selling bonds linked to office, mall and hotel loans as issuance accelerates.

By Bloomberg News

Published: May 17, 2011 – 1:00 pm

 

(Bloomberg) – J.P. Morgan Chase & Co. is leading banks marketing $2.9 billion of bonds backed by commercial mortgages as relative yields narrow amid investor demand for debt tied to skyscrapers, offices and shopping centers.

The J.P. Morgan deal consists of 42 loans on 84 properties, said a person with knowledge of the transaction who declined to be identified because terms aren’t public. Wells Fargo & Co. and Royal Bank of Scotland Group Plc are also selling $1.45 billion of bonds linked to office, mall and hotel loans.

The securities, which may be sold as soon as next week, are being offered as issuance in the $700 billion market accelerates. Banks have arranged $8.6 billion of commercial- mortgage bonds this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales may reach $45 billion in 2011, according to J.P. Morgan, as investors seek out higher-yielding assets with the Federal Reserve holding its benchmark interest rate at record lows.

“We expect demand to remain strong, and upcoming deals to be generally well-received,” New York-based J.P. Morgan analysts led by Ed Reardon wrote in a May 13 report. About $4.5 billion of new offerings are in the pipeline for the next two weeks, the analysts said.

The extra yield investors demand to hold top-rated securities linked to commercial real estate has declined to 187 basis points, or 1.87%, more than Treasuries, from 228 basis points at year’s end, according to a Barclays Plc index.

Money managers are turning to commercial mortgage debt as relative yields on investment-grade corporate debt declined between 17 basis points and 149 basis points since Dec. 31, according to Bank of America Merrill Lynch index data. Spreads last month declined to 145 basis points, the smallest gap since October 2007.

“[New-issue CMBS] offer attractive all-in-returns when compared to similarly-rated, duration-matched alternatives,” the J.P. Morgan analysts said.

The largest loan in the J.P. Morgan deal is a $199.8 million mortgage on the Newport Centre, a 1.5 million-square-foot mall in Jersey City, N.J. Macy’s is the largest tenant, occupying 229,889 square feet. Retail properties account for 41.1% of the pool, while office buildings make up 35.6%, the person said.

The offering by San Francisco-based Wells Fargo and Edinburgh-based RBS consists of 73 loans on 144 properties, said a separate person, who also declined to be identified because the sale isn’t public.

Torchlight Investors purchased the riskiest slice of the J.P. Morgan pool, according to deal documents. Selling the so-called B-pieces is a prerequisite for marketing the rest of the deal. The pool of B-piece buyers is growing amid surging sales.

BlackRock Inc., Rialto Capital Management and H/2 Capital Partners dominated the market for so-called B-pieces in 2010. Investors in this portion of commercial-mortgage backed securities can kick out certain loans from the pool if they deem them too risky, thereby policing underwriting standards.

Sales of commercial-mortgage-backed securities are a boon for property owners who have struggled to refinance maturing loans amid a dearth of new lending. Sales plummeted to $3.4 billion in 2009, choking off funding to borrowers with maturing loans, according to data compiled by Bloomberg. A record $234 billion of the debt was issued in 2007, the data show.

 

May 18th, 2011 by of Harty Capital

Commercial Real Estate Financing Update-May 2011

BANK LOANS

Banks are not in the loan term fixed rate business, but their rates are attractive.  Banks are offering short term loans (3yr-5yr) at attractive rates keyed to short term swaps or Treasuries yields.  However, the favorable rate is offset by the high risk that at loan maturity in 2014 – 2016  the property will require refinancing in a future higher interest rate market and a higher cap rate market, or both.  If rents do not escalate during the term of the short term loan, then the result will be that refi loan proceeds may not equal the amount of maturing debt which must be paid off.

LARGE LONG TERM FIXED RATE LOANS

Many lenders (except Fannie and Freddie) are hedging risk by keeping LTV moderate.  There are exceptions, but the 75% LTV for commercial real estate is still considered an “exception”.  In contrast, Fannie Mae will lend on apartments up to 80% LTV under some circumstances.

Generally on larger life company deals and CMBS deals ($10M minimum), a best-in-class rate today on what would be considered a maximum leveraged loan would be 5.50% -5.75%.  On 5/5/11 the 10 Yr T Yield was 3.16%, the lowest point since the first week of December 2010.  Spreads are also contracting currently so rates for larger deals may reach new 2011 lows in the short term.  Smaller deals will not enjoy the same low rate level as larger deals.

SMALL LIFE COMPANY LONG TERM FIXED RATE LOANS

As a market indicator for small (~5%M) long term, fixed rate loans, below are lending criteria adopted by a life company which specializes in small commercial property loans, i.e., loans in the $2M – $6M range.  This lender has remained active throughout the capital markets collapse.  However, like most life companies, large or small, their underwriting criteria remain very cautious.

Small Life Company Criteria:

  • low leverage, typically 60% – 65% LTV
  • high DSCR, average deal is 2.08 DSCR
  • limited cash out, generally no cash out on refi
  • low cash flow risk, diversified rent rolls with no lease hangout for major tenants
  • average loan size $4M, loan range $2M – $6M and up to $10M for conservative transactions*
  • recourse required on some deals
  • loan term: 8yr – 25 yr, fixed rate
  • self-amortizing loans (15yr – 20yr – 25yr) are available in conservative situations.  Typically self-amortizing loans will tend towards shorter amortization, versus longer amortization, so cash flow to borrower is more constrained.

*presumably the life company does not consider its standard underwriting requirements above to be “conservative” so the have yet another class called “conservative” into which they put bullet-proof deals.  After the S&P notice of “negative” outlook for US Treasury bonds, the life company may consider Treasuries to be high risk.

PROSPECTS

It is likely that during Q3 & 4 2011 more lenders will become active in the loan range <$10M, which is currently a very underserved market.  We have already seen some aggressiveness with lenders concerning choice properties in the larger loan category.  Part of that aggressiveness is evidenced in the willingness of CMBS lenders to consider Secondary or Tertiary Markets* such as Boise, Idaho.

Owners with properties which have no hair on them will consider to be well received by lenders; however properties with hair on them…not so much.

All lenders are concerned with borrower financial strength, even nonrecourse lenders.  Their object is to place the loan in the hands of someone who has sufficient liquidity and financial wherewithal to withstand bad news, should bad news be found in borrowers path.  More so, recourse lenders (banks and small life companies) are even more concerned about the quality of borrower assets and borrower liquidity.  Bank lenders may have short memories, but they are not so short that the banks have forgotten the bind created when borrowers with illiquid assets confronted the reality that Cash Is King.

The good news is that effectively all lenders have short memories and as soon as they can rationalize looser standards, especially in the face of keen competition, they will abandon their virtuous behavior.

Recall how Charles Prince, deposed CEO of basket-case Citibank observed before the crash:  ”As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing.”  Capitalism’s “creative destruction” **is always preceded by the marvelous effect of competition causing creative irrational exuberance.

*If “Secondary” or “Tertiary” were defined according to risk, rather than size and perceived importance, then Boise would have to be considered a Prime Market.  Remember, however, no one ever accused lenders of being smart.  You probably would not even deal with them were it not for the fact that they have all the money.

** A term coined by Joseph Schumpeter in his work entitled “Capitalism, Socialism and Democracy” (1942) to denote a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

May 6th, 2011 by of Harty Capital