Interesting Times

CRE News - 3/24/09

Commercial property sales activity has increased since the start of the year, but the ratio of newly-listed properties to closed sales has increased even more.

The investment sales data from Real Capital Analytics clearly quantifies the general sense that it has become more of a buyer's market and the trend shows no sign of reversing itself.

Roughly $2.7 billion worth of commercial properties traded hands in February, up from about $800 million in January, according to the New York research firm, which monitors transactions of at least $5 million. Meanwhile, the ratio of new offerings to closed sales increased to about 5-to-1 in February from 4-to-1 in January, and slightly more than 2-to-1 in December.

The increased supply of offerings, as evidenced by the greater offerings-to-closed sales ratio, is exerting downward pressure on prices as the Moody's/Real Commercial Property Price Indices, which are based on Real Capital data, registered a 5.5 percent decline in January, their largest monthly decline since 2000.

That downward pressure on prices "is likely to only worsen over the near term," according to Real Capital.

It noted that an increasing number of sellers could be viewed as distressed because of their inability to get financing for properties that have maturing debt.

Real Capital said that $11 billion of the properties being offered are in or near trouble because of an upcoming mortgage maturity, default, foreclosure or bankruptcy by their ownership groups.

Meanwhile, buyers are content to wait on the sidelines as sellers suffer and are forced to drop asking prices. "In this climate, investors would rather be too late than risk pulling the deal trigger too early," Real Capital noted.

A classic example of a property that sold after an exercise of patience may be 1540 Broadway in Manhattan, which CB Richard Ellis Investors acquired for $355 million in early March. The deal for the 966,287-square-foot office building closed about 10 months after a group of lenders led by Deutsche Bank first offered it for sale. The property had been owned by Macklowe Properties, which had purchased it in 2007 from Blackstone Group.

The $391/sf that CB Richard Ellis paid for 1540 Broadway compares to Macklowe's $1,080/sf purchase price.

February sales volumes, as widely expected, were down or flat from January across all property types.

Retail stands out as the weakest in past performance and future outlook. It sustained the largest sales volume decline last month, dropping 53 percent, and it led all sectors in terms of properties under distress.

The sector's distress poster child seems to be General Growth Properties, which last week negotiated a forbearance agreement that lets it extend the payment of $2.58 billion of debt until Dec. 31. The Chicago REIT also has assets for sale across the country that include the 230,000-sf Bayside Marketplace in Miami and the 190,000-sf Riverwalk Marketplace in New Orleans.

The office sector sustained the second largest sales volume decline, dropping 25 percent in closed transactions. Sales are generally closing at 9 percent under asking prices and REITs are among the sellers most willing to negotiate, Real Capital said.

But REITs were sellers in just 13 percent of the office sector's total transactions in January and February, which compares to the 32 percent of office sales volume they accounted for in the market's peak period from April 2006 to March 2007.

Institutional investors have picked up the selling slack to account for 20 percent of the office sales this year, up from 12 percent in 2006-2007. That sector includes pension funds with investment portfolios overweighed in real estate because of the denominator effect, in which stock markets declines dropped their equity portfolio valuations well under their respective allocation targets.

Sales volumes in multifamily and retail were both essentially flat in February at about $600 million and $400 million, respectively. Deal sizes remained low in both sectors as no single-asset sale exceeded $40 million in multifamily or $20 million in industrial.