Where Have All the Sales Gone?
28 Jun 2010 |
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We agree with this article written by CBRE. This is a great article on current market conditions.
Most pundits in the real estate industry will admit that in early 2009, they expected 2010 to be a banner transaction year fueled primarily by a large pipeline of distressed assets. Those same participants today will also tell you that 2010 and the near future doesn’t look or feel like what they predicted. So where have all the sales gone?
New York has had an extraordinarily rapid turnaround in investment sales pricing and volume primarily driven by a lack of product on the market and the perception of rapidly improving leasing fundamentals. There have been 8 office building transactions totaling $2.3B – a significant improvement over 2009 but still a long way off from historical averages.1 This lack of transaction activity is further echoed by the question every investor asks– “so what do you think is coming on the market in the next few months?”
The mortgage industry constantly tracks the number of loans in special servicing and those that have defaulted. In the New York area, that current total is approximately $17.63B, which has risen almost 8% since April.2 Despite the seemingly large amount of “defaulted” loans, it is impossible to restructure, repurchase, or work out a loan unless it is in servicing; i.e. defaulting. The general consensus is that many of these properties will have to be sold in order to repay their lenders and there should be a steady parade of distressed asset sales. That has not happened and in fact, many of these assets may never come to market.
First, the tenor and evidence in the leasing market has shown significant improvement since the beginning of the year. Tenant concessions have been shrinking, leasing velocity now exceeds the moving five year average of 1.9 million SF per month3, and many of the submarkets are showing real rental growth. Second, there has been a significant improvement in the real estate capital markets in pricing, liquidity and the number of lenders willing to make loans. Overall, it feels like things are getting better and it looks like the trend will continue.
New York has seen a few UCC sales but no high profile distressed asset sales. Why? Many of the loans are LIBOR based and despite a high level of leverage – they are cash flowing. In those cases, borrowers are extending while they seek new loans and/or partners. With improving leasing and capital market fundamentals, the lenders are cooperating and “playing ball” in the hopes of full recovery. Others are being restructured with buy-downs or extended with fresh leasing and TI capital. Again – with improving fundamentals, the prospects for full recovery appear better and there is an argument for granting more time. This explains the trickle of activity from the distressed side.
So what about the current sales in 2010? Only one was considered “distressed” since it was a short sale (sold below the current mortgage balance). The balance of the assets were sold for profit or corporate motives and were not distressed. These assets were hotly contested and many pundits predicted that these sales would herald a wave of new listings as owners tried to take advantage of the market liquidity in debt and equity and capitalize on the lack of quality product in the marketplace. Again, the market seems to have confounded the experts as the market is still largely devoid of Class A product. Is this just a pause or the new face of the market?
The answer is it may look more like the latter for two reasons. The first is the trend in trying to work out distressed assets as previously discussed. The second is the number of large office assets that are now owned by traditionally long term holders – REITs, families, and offshore investors. The office inventory in Manhattan is estimated at approximately 370 million SF.4 The top 10 owners in Manhattan control about 32% of that inventory (120 million SF)5 and these top 10 owners are primarily REITs/Institutions, families and offshore investors – typically long term players who tend not to sell their assets. They also tend to be the group with the least amount of leverage and the highest liquidity. Looking at the eight sales this year, five of those went to these long term holders.
Where have all the sales gone? Primarily to the long term owners in the market. From the current vantage point in the market, the lack of Class A assets for sale looks likely to continue at least into the near future.
CB Richard Ellis – Capital Markets
