Commercial Real Estate Finance

Posts Tagged ‘cap rates’

We have talked ad nauseum about how the CMBS market appears to be back.  Well, right alongside private investors,  their institutional counterparts are lining up behind them….hungry for commercial real estate. In a recent report by Real Estate Research Corp. institutional investors seem to favor real estate as an asset class over their competition, mainly stocks and bonds.

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Much has been said regarding the economic downturn and its hard-hitting subsequent effects on the commercial real estate industry.  When economic forces such as unemployment, consumer spending, and housing all converge negatively on us, most sectors of income producing real estate were hit hard.  But why did we not see this coming?  Or maybe the better question is: Why were we not better prepared for this? After all, real estate is cyclical and the good times could not have lasted forever. While real estate metrics like cap rates, cash on cash return and price per pound are all very simple, yet static tools, why did the more diverse and complex metrics like internal rate of return, specifically designed to take time and market fluctuations into account, seem to fail us? Read the rest of this entry »

Desperate times call for desperate hoteliers?

There is no doubt that the hotel sector has been the hardest hit amongst the various real estate property types over the last 2 years.  While cap rates have risen steadily across the board in every asset class to the tune of 50-250 basis points, hotels have seen a meteoric rise between 400-800 basis points, mostly depending on the flag and location. I was perusing the daily periodicals the other day when I came upon one of the most ridiculous, fascinating and shocking real estate related stories I have ever read. Read the rest of this entry »

When I first started my career as an investment sales broker, a mentor taught me an effective method to have property investors reconsider their position in their properties.  While my goal was essentially to coax them into a selling frame of mind, there were myriad instances where selling simply did not make sense.  Yet, that didn’t mean there was no opportunity to do business with such a client. Instead of focusing on cap rates and price per square foot numbers, I could instead shift their focus from the stability of cash flow to the meager return they were receiving on the equity they had invested in the property.

“Mr. Property owner, I understand your building is full, you are free and clear of debt, the property is cash flowing well, and you want to pass the property down to your grandchildren.  But what is your return on equity?” Read the rest of this entry »

From a recent article on Bloomberg:

“Among 35 of the biggest regional lenders that retain TARP funds, commercial real estate and construction loans average 37 percent of total loans, compared with 9.5 percent at Citigroup Inc. and Wells Fargo & Co., the two biggest U.S. banks that haven’t announced plans to repay the government, according to data compiled by Bloomberg.”

In a word, “Oy!!”

Folks, if 37% of the loans currently on the books of regional banks are commercial real estate and construction loans… well, it’s not a good thing for the banks.

What do I mean by ‘not good’? How does wiping out 1/3 of bank capital without breaking a sweat sound?

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In the commercial real estate space, you likely by this time have heard the phrase “extend and pretend,” usually in reference to what a bank will do when faced with a non-performing loan coming due on their books.  Rather than foreclose and ending up owning an asset, which banks are not in the business of (nor do they have the proper asset and property management staff  requisite to keep the asset from devaluing further over time), they would rather extend the term of the loan and allow the borrower to continue to try and turn the asset around. In the mean time, they will sit on there collective hands and pretend there is no impending doom in relation to the asset, or their portfolio full of similar problem properties.  After all, it is likely the borrower is more of an expert in how to fix the asset’s issues than the bank.

But after attending a brokerage conference last week that was full of investors of the four major food groups (multi-family, retail, office and industrial product), I think perhaps that there is a new phenomenon.  Banks may be extending and pretending, but investors are doing the opposite: Pretending and extending….as in their hopes and expectations for their assets, and the markets for them. Read the rest of this entry »

In the last 18 months, banks’ balance sheets were decimated by having to “write down” the values of perceived “toxic assets” that were on their books.  This led to the devaluation in bank stocks, which tightened the grip on credit harder than Shawne Merriman’s hands on Tila Tequila. The (literal) collateral damage?  In the hundreds of billions.  We now collectively refer to this debacle as the credit crisis.  But could the resurgence of the market for distressed assets lead to a quick reversal of fortune for both banks and the real estate industry as a whole? Read the rest of this entry »

When I worked as a commercial real estate investment sales broker, I was introduced to various resources for digging up basic property level information. Whether it was CoStar or LoopNet or something else, I quickly realized they all sucked at what they were trying to do….provide information. Yet despite the overwhelming gaps in reporting and the underwhelming confidence I had in the numbers they did show, I kept on using them. Why? Because there just isn’t anything else out there. And this is the sole reason companies like CoStar and LoopNet do not cease to exist. They provide a crappy product, but a necessary service to the real estate community. Read the rest of this entry »

Barry Gosin, CEO of Newmark Knight Frank, one of the world’s largest independent commercial real estate firms, discusses the state of commercial real estate.

Real Questions…

…. and Unintended Consequences

Question 1:

If you are a buyer of real estate (and actually have capital), what sort of IRR are you looking for? 20%? 30%?

Question 2:

If you are an owner of real estate, why on earth would you sell into this market unless you absolutely had to?

These questions succinctly sum up the entire commercial real estate market. Other statements examine facets of the problem, but they all revolve around this problem we’ll call, “The Bid/Offer Spread”.

Every day, the fund managers who still have jobs wake up, read the Wall Street Journal and say to themselves, “If I’m going to buy a property, I deserve a discount.” Any possible ‘green shoots’ notwithstanding, unemployment is high, the economy is in recession, global icons are getting destroyed (or taken over by the government), and the banking system as a whole is only viable because the Feds have stepped in with HUGE assistance programs. You can also throw in the fact that recent liquid market action (rally in gold, commodities and TIPS while the 10yr notes sells off ) is telling us we might even have an inflation problem in the not-so-distant future. Read the rest of this entry »