Major Fall in CRE Deals Since End of Summer: There has been a surge in deals falling out of contract because of difficulty obtaining financing.
National Mortgage News November 5, 2007 | Sichelman, Lew LAS VEGAS — The mortgage mess spilled over into the income property sector in a big way after the summer came to an official ending, according to analysts at the Urban Land Institute’s annual fall conference here. go to site citibanks ignon
“The capital markets have changed tremendously in the past 60 days,” Robert White, president of Real Capital Analytics, New York, told an outlook session.
Mr. White reported that there has been a 30% decline in sales activity since September, noting that it was the first falloff in volumes since late 2001. And he expects to see further declines in the future, he told the ULI, a nonprofit group of 37,000 real estate and allied professionals dedicated to responsible land use.
There has been “a surge in deals falling out of contract,” not just because of higher loan rates but also because of the difficulty obtaining financing, the analyst said.
“There has been a total repricing of risk. It started in subprime and has now moved into commercial mortgage backed securities. It’s even impacted AAA-rated securities.” At the same time, Mr. White reported that 2007 will still go down as a record year, largely because transaction volumes through the end of the third quarter exceeded those for all of 2006.
Another good sign is that there is “still plenty of equity capital available,” he also said. Which may be why the meeting attracted a record attendance of 6,700.
Capital may not be coming into the market as fast as it once was, and lenders are no longer willing to underwrite speculative income, the analyst reported. But the amount of money available for developers and purchasers of income-producing property is still growing. “There’s more capital available today than there was in 2002 or 2003,” he said.
Still, Mr. White said he is seeing a rise in cap rates. But even if there is a 10% correction, “it would just take us back to where we were a year ago.” “I personally don’t think [the adjustment] will be that great,” he offered. “The market is fundamentally solid. There’s nowhere near any overbuilding.” In another conference session, meanwhile, the conclusion was that price declines as measured by projected growth rates, lower amounts of available debt and higher residual value assumptions would be in the 8%-14% range.
The panel tended to concur with Mr. White, noting about half of all deals currently in the pipeline are being repriced or renegotiated, and some are even being terminated. web site citibanks ignon
While the market is awash with debt, not much of it is trading, said Robert Foley, chief financial officer with Gramercy Capital Corp., New York, who estimated that there might be as much as $60 billion-$80 billion in commercial paper sitting on the balance sheets of banks.
Sheridan Schechner, managing director of JPMorgan Chase, New York, said he hoped the markets will open back up again by February. But Ed Adler, managing director of Citibanks’s commercial real estate finance group, said it can’t come soon enough for holders the $185 billion in commercial paper that is due to reset in March.
But Christopher Cole, chief executive officer of the Cole Cos., a publicly traded, Phoenix-based real estate investment trust that specializes in retail properties, said that he’s not particularly worried about the future of commercial real estate.
“The long-term demographic trends are so profound that they will have a stabilizing effect” on the sector, Mr. Cole said.
“The fundamentals are terrific,” he said.
Sichelman, Lew
