New cycle of responsible and balanced recovery ahead
BY PETER VANDERPOOL, PRESIDENT,
CIGNATURE REALTY ASSOCIATES
The commercial real estate market in New York is on the road to recovery but it will be a bumpy ride well into the first quarter of 2010.
Although the market is on the cusp of a rebound, it remains unsteady as buyers and sellers adjust to new fundamentals including price corrections, stricter lending standards and a cascade of mortgages coming due – mortgages made when valuations were peaking.
The economy, particularly in New York, flourished for the better part of the first decade of the 21st Century driving property prices to heady heights and attracting a seemingly never ending stream of buyers.
Banks responded by opening their vaults, offering ever more attractive terms to an expanding base of mortgage hungry clients.
The deal flow began to trickle out by the end of 2008 and the banks virtually stopped lending. This was a principal reason for the series of severe corrections that beset the market and that are still impacting the industry.
2009 signaled one of the most abrupt market reversals in the history of commercial
The sellers' market became a buyers' market almost overnight after nearly a
decade of rising prices and expectations, leaving owners with overvalued properties
and investors with second thoughts about their ability to achieve returns.
The shakeout is not over. For one thing, there are lingering doubts about
the economy. And, of course, all those mortgages will becoming due in the next couple of years and it is anticipated that the banks will I make it tougher to refinance them. As a result, there are those that expect to "see blood on the streets." But there are also those who see a light at the end of the tunnel.
Whether it comes sooner or later in 2010, in all likelihood banks will become more aggressive about commercial real estate lending going forward.
Conventional wisdom says they have to because they are in the business of making loans.
Meanwhile, the government has helped them clean up their balance sheets this year, making them more apt to begin opening up their pocketbooks sooner rather than later.
Make no mistake. There are buyers out there and there are sellers, as well.
The buyers are looking for value and short and/or near term returns. Gone are the days when an investor would snap up a property because of its future upside. They want to see returns on their money right away.
For the most part, they are real estate professionals and they include smart long-term owners of buildings with dependable cash flows who sat tight during the past ten years.
Now that cash is king, they are in a position to cherry pick properties and to close deals in a timely fashion.
As for sellers, they are out there, too, including many realistic professionals who know from experience that it won't be long before the market will have made just about all the corrections that it's going to make and that now is the time to begin dealing if they want to be ahead of the rebound.
Thus, it will be the professional commercial real estate community that will lead the road to recovery in the coming months and years and this will minimize the kinds of volatile upticks that we saw in the last decade.
This doesn't mean that deal making will get easier in the short term. It means that deals will be made at rational prices for both buyers and sellers as the New Year unfolds, presaging a full-fledged recovery in the longer term.
There is little doubt that the residential multi-family segment of the market is going to bounce back first. This is New York and there is always a demand for apartments.
If you have a building with a low rent average, and that is priced to sell – it will sell. But you will have to work for it. A year or two ago a few deals like that would stand you in goodstead; in this market you will have to be working on about 15 or 20 such transactions if you want to close one in a timely fashion.
"Now that cash is king, they are in a position to cherry pick properties and to close deals in a
The office market will be slower to blossom and it is the Class B properties that will lead that part of the recovery. First of all, there are not a lot of Class B properties for sale in Manhattan and those that are have generally held their own in terms of vacancy rates versus Class A buildings.
This, despite the fact that where Class B buildings were trading at $350 to $400 a foot at one point during the boom years, today they are trading at between $275 and $300.
As far as years go, 2009 is one that we probably all would rather forget but it is also the "end of the beginning" of a new cycle of responsible and balanced recovery for the commercial real estate market.