2008 Outlook for Commercial Real Estate Investors
-- Transcript of Capital Synergies Podcast
DARBY: Hello! This is Darby Worley your host for the Capital Synergies Talk Show for real estate investors. Capital Synergies is sponsored this week by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director of research for Real Capital Analytics. Dan is here to help us take a look back at the past quarter and the year 2007 and to share with us his take on some of the dramatic changes we’ve seen in the commercial real estate sector. Good afternoon and welcome back, Dan.
DAN: Thanks for having me again.
DARBY: So, let’s jump right into it. Recent housing start data showed a major uptake in multi-family start with another of home developers reorienting towards multi-family. What does the supply picture look like for 2008?
DAN: Well, there’s no question that more developers are shifting towards multi-family as the housing slowdown has certainly hit the condo marketplace pretty hard. There’s some competing viewpoints on this; on one side, the housing slowdown is creating more renters out there who are looking for apartments. As far as how that’s going to affect the market, I think it’s going to be really be a city by city type of scenario and some of the more overbuilt markets maybe in the Southwest or in Florida will certainly get more impacted than on more supply constrained markets on the coast.
DARBY: Okay.
DAN: And as far as the impact on values, you have to remember that multi-family property in the US really already went through a pretty significant pricing correction after we lost the condo converters in 2006. So, we haven’t seen the type of softening in the multi-family sector just yet that we may have seen with some of the other property types.
DARBY: Okay. How have the debt markets evolved since the last time we spoke?
DAN: Well, I wish I have some positive news on this front, but you know the CMBS market place as we used to know it is still pretty much shut down. I think, which actually has been a bullish sign, and which has been a little bit of a surprise to me is we kind of didn’t realize how much demand there was from the traditional lenders like portfolio lenders and insurance companies. And both of those groups have really been expanding their loan originations of the last few months to meet the needs of the marketplace. And you got to remember these groups were kind of shut out from the marketplace for several years. You know, being outbid by the CMBS universe which you know, just wasn’t giving them the spreads they were comfortable with. But, you know, they feel the…a market need right now and they’re certainly willing to lend but like always it’s on their terms. You know, buyers need to use more equity.
DARBY: Right. Do you foresee any better…uh, more competitive pricing for 2008?
DAN: I certainly hope so. And you know, I don’t think we’re going to return to the period of extremely oppressive underlying we saw in early 2007; about the only thing I can guarantee, right there.
DARBY: Okay. Are you seeing a rise in commercial real estate foreclosures, and if so, is there a particular product type or region that you know, is affected more than any other?
DAN: Simple answer to that is, no. You know, unfortunately, commercial real estate seems to get mixed up with residential into the same bag. But they’re very two distinct marketplaces and we certainly haven’t seen the type of defaults on a commercial side that have been present lately on the residential side of the equation. So, and you know, real estate fundamentals are strong nationwide right now. And I think that as long the US figures out how to stay out of recession, I really don’t foresee a tremendous waterfall of foreclosures in the near future.
DARBY: But with all the, you know, the uncertainty in the commercial debt market, a number of people were predicting far fewer commercial real estate trades; are you seeing that in the data yet, and is it isolated to secondary markets as many had thought?
DAN: There’s no question, Real Capital Analytic has tracked sales volumes that are off significantly versus the comparable periods last year. For September and October and even into November, for most of the major property types, sales activity is off 50 percent. Looking at individual property types, industrial and hotel have held up the best so far, but both of those are off slightly as well.
DARBY: Okay. Have you seen any real evidence yet for an upward move in cap rate and if so, how big is the shift?
DAN: I think I get this question maybe ten times a day. [Laughing] Um, there’s no question that we’ve seen cap rates move up certainly in notable percentage, however, it’s not a nationwide phenomena, and the best way to describe it is, I think the market has bifurcated into, you know the global US cities were cap rates have not risen as much and in some cases are basically flat versus the more secondary domestic US markets where there’s no question, we’ve seen significant rise in cap rates and for some property types, 50 to 75 basis point is easy.
DARBY: So, how about the shift that’s happening with the dollar, how does our weak dollar play into real estate values?
DAN: Well, there’s no question that makes US real estate more attractive to overseas investors. However, I just, you know, there has been a lot of press recently about this, whether there be a wave of new offshore investors coming in, buying properties here, I just…I don’t…I think if those overseas investors as to where they are in the US are more sophisticated than ever. And I don’t think just because the dollar falls 5 percent, you’re going to see a rush of new allocations. I think where the impact is, is if you’re a European investor and you’re looking to diversify, and you want to be in the US real estate, you just might wind up buying more at this point. You know, your currency is going further and you just might see overseas investors buying more than they would have, given, if the dollar was in a different position right now.
DARBY: And how does that affect the value of treasury?
DAN: Well, you know, I’m certainly not an economist and you know, commercial real estate is, you know, a small piece of the overall economic pie. So, I don’t think it can make a significant impact on the value of treasuries.
DARBY: Okay. So, if you were to offer any advice for investors as we had in 2008, what would it be?
DAN: Well, I’m certainly an Econ 101 guy and I strongly believe that even though you might overpay a little bit to get in, the supply-constrained US markets on the coasts, the ones…the markets that are very linked in to the global economic expansion and those who did might best, that’s for 2008. As far as other types of niche investments right now, I really see some opportunity in the mezzanine space, you know, we’ve certainly seen the situation where there’s less players right now in the mezzanine space than there was earlier in the year and the yields have gotten to very attractive levels.
DARBY: What about any areas to steer clear of?
DAN: Well, you’re going to get somebody upset right now. [Laughter]. But, I think your markets where they’re having significant effects from the slowdown in the housing markets would certainly be on my radar as markets to be very careful in. And I think secondary markets in general, where the market is dominated by private investors who rely and stick debt to purchase their properties will be the most affected. You know, your Manhattan-type markets where there’s such a diversity of capital sources and with more investors could just basically write a check and purchase a property as opposed to using a lot of debt. I think those markets will hold up the best.
DARBY: Well, they certainly seem to be; prices are definitely not dropping here in Manhattan.
DAN: They certainly aren’t. To give an example of that situation, you know, teachers, in a large pension fund just came in and purchased a building from Ethel Green on Park Avenue South and they did it with cash.
DARBY: Wow!
DAN: And you know, this credit crisis or credit crunch, whatever you want to call it, is actually creating opportunity for some buyers. I think it would have been very difficult for teachers to win the bid for that property earlier in the year where they might have been competing against several highly leveraged private investors.
DARBY: Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytic?
DAN: We offer a variety of different subscriptions and we can certainly work with different clients to meet their needs. Our basic subscription is an annual subscription which would give them access to all the transaction activity we have tried in the US through our website and it also comes with our companion, Capital Trans Monthly Reports and their individual market reports. We also have a new global product coming out that we’re really excited about. We’ve been tracking transaction activity overseas for over 12 months now. And we tracked over $400 billion worth of transactions globally, non-US.
DARBY: And so, where do our listeners go to learn more, if they want to subscribe to those reports, do they go to your website?
DAN: Certainly go to www.rcanalytics.com and we have a very simple website to navigate and certainly get all the information they need there.
DARBY: All right, great! Thank you, Dan. This has been a very insightful discussion on commercial real estate and I’m sure our listeners appreciate your spending time with us today. So guys, if you are an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the new advisory services offered by our sponsors, Steelhead Capital, just go to www.steelheadinvestments.com and request your no obligation portfolio review. That’s www.steelheadinvestments.com. This has been Darby Worley, your host for Capital Synergies.
DARBY: Hello! This is Darby Worley your host for the Capital Synergies Talk Show for real estate investors. Capital Synergies is sponsored this week by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director of research for Real Capital Analytics. Dan is here to help us take a look back at the past quarter and the year 2007 and to share with us his take on some of the dramatic changes we’ve seen in the commercial real estate sector. Good afternoon and welcome back, Dan.
DAN: Thanks for having me again.
DARBY: So, let’s jump right into it. Recent housing start data showed a major uptake in multi-family start with another of home developers reorienting towards multi-family. What does the supply picture look like for 2008?
DAN: Well, there’s no question that more developers are shifting towards multi-family as the housing slowdown has certainly hit the condo marketplace pretty hard. There’s some competing viewpoints on this; on one side, the housing slowdown is creating more renters out there who are looking for apartments. As far as how that’s going to affect the market, I think it’s going to be really be a city by city type of scenario and some of the more overbuilt markets maybe in the Southwest or in Florida will certainly get more impacted than on more supply constrained markets on the coast.
DARBY: Okay.
DAN: And as far as the impact on values, you have to remember that multi-family property in the US really already went through a pretty significant pricing correction after we lost the condo converters in 2006. So, we haven’t seen the type of softening in the multi-family sector just yet that we may have seen with some of the other property types.
DARBY: Okay. How have the debt markets evolved since the last time we spoke?
DAN: Well, I wish I have some positive news on this front, but you know the CMBS market place as we used to know it is still pretty much shut down. I think, which actually has been a bullish sign, and which has been a little bit of a surprise to me is we kind of didn’t realize how much demand there was from the traditional lenders like portfolio lenders and insurance companies. And both of those groups have really been expanding their loan originations of the last few months to meet the needs of the marketplace. And you got to remember these groups were kind of shut out from the marketplace for several years. You know, being outbid by the CMBS universe which you know, just wasn’t giving them the spreads they were comfortable with. But, you know, they feel the…a market need right now and they’re certainly willing to lend but like always it’s on their terms. You know, buyers need to use more equity.
DARBY: Right. Do you foresee any better…uh, more competitive pricing for 2008?
DAN: I certainly hope so. And you know, I don’t think we’re going to return to the period of extremely oppressive underlying we saw in early 2007; about the only thing I can guarantee, right there.
DARBY: Okay. Are you seeing a rise in commercial real estate foreclosures, and if so, is there a particular product type or region that you know, is affected more than any other?
DAN: Simple answer to that is, no. You know, unfortunately, commercial real estate seems to get mixed up with residential into the same bag. But they’re very two distinct marketplaces and we certainly haven’t seen the type of defaults on a commercial side that have been present lately on the residential side of the equation. So, and you know, real estate fundamentals are strong nationwide right now. And I think that as long the US figures out how to stay out of recession, I really don’t foresee a tremendous waterfall of foreclosures in the near future.
DARBY: But with all the, you know, the uncertainty in the commercial debt market, a number of people were predicting far fewer commercial real estate trades; are you seeing that in the data yet, and is it isolated to secondary markets as many had thought?
DAN: There’s no question, Real Capital Analytic has tracked sales volumes that are off significantly versus the comparable periods last year. For September and October and even into November, for most of the major property types, sales activity is off 50 percent. Looking at individual property types, industrial and hotel have held up the best so far, but both of those are off slightly as well.
DARBY: Okay. Have you seen any real evidence yet for an upward move in cap rate and if so, how big is the shift?
DAN: I think I get this question maybe ten times a day. [Laughing] Um, there’s no question that we’ve seen cap rates move up certainly in notable percentage, however, it’s not a nationwide phenomena, and the best way to describe it is, I think the market has bifurcated into, you know the global US cities were cap rates have not risen as much and in some cases are basically flat versus the more secondary domestic US markets where there’s no question, we’ve seen significant rise in cap rates and for some property types, 50 to 75 basis point is easy.
DARBY: So, how about the shift that’s happening with the dollar, how does our weak dollar play into real estate values?
DAN: Well, there’s no question that makes US real estate more attractive to overseas investors. However, I just, you know, there has been a lot of press recently about this, whether there be a wave of new offshore investors coming in, buying properties here, I just…I don’t…I think if those overseas investors as to where they are in the US are more sophisticated than ever. And I don’t think just because the dollar falls 5 percent, you’re going to see a rush of new allocations. I think where the impact is, is if you’re a European investor and you’re looking to diversify, and you want to be in the US real estate, you just might wind up buying more at this point. You know, your currency is going further and you just might see overseas investors buying more than they would have, given, if the dollar was in a different position right now.
DARBY: And how does that affect the value of treasury?
DAN: Well, you know, I’m certainly not an economist and you know, commercial real estate is, you know, a small piece of the overall economic pie. So, I don’t think it can make a significant impact on the value of treasuries.
DARBY: Okay. So, if you were to offer any advice for investors as we had in 2008, what would it be?
DAN: Well, I’m certainly an Econ 101 guy and I strongly believe that even though you might overpay a little bit to get in, the supply-constrained US markets on the coasts, the ones…the markets that are very linked in to the global economic expansion and those who did might best, that’s for 2008. As far as other types of niche investments right now, I really see some opportunity in the mezzanine space, you know, we’ve certainly seen the situation where there’s less players right now in the mezzanine space than there was earlier in the year and the yields have gotten to very attractive levels.
DARBY: What about any areas to steer clear of?
DAN: Well, you’re going to get somebody upset right now. [Laughter]. But, I think your markets where they’re having significant effects from the slowdown in the housing markets would certainly be on my radar as markets to be very careful in. And I think secondary markets in general, where the market is dominated by private investors who rely and stick debt to purchase their properties will be the most affected. You know, your Manhattan-type markets where there’s such a diversity of capital sources and with more investors could just basically write a check and purchase a property as opposed to using a lot of debt. I think those markets will hold up the best.
DARBY: Well, they certainly seem to be; prices are definitely not dropping here in Manhattan.
DAN: They certainly aren’t. To give an example of that situation, you know, teachers, in a large pension fund just came in and purchased a building from Ethel Green on Park Avenue South and they did it with cash.
DARBY: Wow!
DAN: And you know, this credit crisis or credit crunch, whatever you want to call it, is actually creating opportunity for some buyers. I think it would have been very difficult for teachers to win the bid for that property earlier in the year where they might have been competing against several highly leveraged private investors.
DARBY: Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytic?
DAN: We offer a variety of different subscriptions and we can certainly work with different clients to meet their needs. Our basic subscription is an annual subscription which would give them access to all the transaction activity we have tried in the US through our website and it also comes with our companion, Capital Trans Monthly Reports and their individual market reports. We also have a new global product coming out that we’re really excited about. We’ve been tracking transaction activity overseas for over 12 months now. And we tracked over $400 billion worth of transactions globally, non-US.
DARBY: And so, where do our listeners go to learn more, if they want to subscribe to those reports, do they go to your website?
DAN: Certainly go to www.rcanalytics.com and we have a very simple website to navigate and certainly get all the information they need there.
DARBY: All right, great! Thank you, Dan. This has been a very insightful discussion on commercial real estate and I’m sure our listeners appreciate your spending time with us today. So guys, if you are an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the new advisory services offered by our sponsors, Steelhead Capital, just go to www.steelheadinvestments.com and request your no obligation portfolio review. That’s www.steelheadinvestments.com. This has been Darby Worley, your host for Capital Synergies.
