There's no call to toll the bell for CRE, as we discussed extensively at the Fall 2008 SIOR world conference in Minneapolis, there are dollars and financing available for smaller development projects (though not retail projects) and there is a market for green buildings. New buildings that meet LEED standards are in demand especially by universities and municipalities.

Real Share Westchester & Fairfield Counties echoed our conclusions. The retail sector is facing the biggest challenges in Commercial Real Estate. Large deals are also having trouble. Financing for smaller projects will remain the most available in the market. So the news is not all bleak, Peoples United Bank is reporting a stronger flow of deals in its pipeline and there are others in the market like Peoples that did not loosen underwriting standards. Those institutions still have money to lend and did not put themselves on the edge of ruin over the past ten years. So, the good news to take away is that while Retail suffers, smaller projects that make good business sense can be built.

Commercial Real Estate values in New Haven County have held up in this economic market that brings a new question every day. However, cracks are beginning to appear. Commercial Real Estate headlines that have been appearing around the country for the past three to six months are cropping up in Connecticut.

DDR, Developers Diversified Realty has put construction on their Guilford Retail project on hold. The retail development previously pitched as the ultimate destination for shoreline shopping, will halt construction as soon as site work is completed. The 155,000 square foot center was slated to open in 2009 with a mix of high end national tenants like J. Jill, Chico's, Panera Bread, Black House White Market and Barnes & Noble, as well as local and regional retail tenants.

According to DDR, the project has been put on hold because the local infill tenants have not signed leases.

In Bloomfield Michigan, DDR has put a $350 Million lifestyle retail project on hold. That project was more than five times the size of the Guilford project. It included 600,000 of retail space as well as 150,000sf of office space and about 100,000sf of residential condo units.

DDR was partnered with Coventry Real Estate Fund II in the project. DDR released a statement saying that the project was halted due to the partnership. According to DDR Coventry did not deliver on equity funding which had been projected to be 80% of the project cost.

While these may be the ultimate causes for the construction halts on both these projects, the overall economy and retail climate is a more likely culprit. As we all know, people are spending less. Consumerism is "out". Nationally retail sales have been dropping like a stone. In October, sales reached their lowest point since 1973.

-kristin


November 9, 2008

No one can agree on how long the recession will last or how deep it will go. But the one thing that real estate professionals DO agree on is that it's time to invest in real estate. According to Herb Krumsick, SIOR of Wichita, KS., the most money was made in real estate between 1989 and 1993. 1991-1992 are largely referred to as the last big real estate recession years.

Buying investments may look different now than it did two years ago or even last year. Equity, cash for purchases will be more important than ever. Banks aren't lending. They are still holding tight to government bail out money so buyers with cash and an interest in distressed properties, or properties owned by a distressed seller will find a wealth of opportunity in the market.

Whether money is raised through venture capitalists or syndicates alternatives to conventional lending will play a big roll in the financial success of investors. In addition to banks hesitancy to lend, non-recourse loans are, at the moment, a thing of the past. Interest rates are likely to rise as will cap rates. While rising interest rates may not be great news, the cost of money rising with more hoops for borrowers to jump through, rising cap rates may not be terrible news. They indicate falling values for properties, which is another sign of opportunity.

But, these are times for entrepreneurial investors, single investors, tight knit partnerships and smaller purchasing syndicates, Tenant-In-Common and Real Estate Investment Trust investing are no longer favored forms of getting into the market. TIC's are more or less dead and REIT's have suffered in the wake of the credit crisis and the collapse of Lehman Brothers.

At a recent Jones Lang LaSalle meeting in Miami. JLL released their thoughts on 2009 and the commercial real estate market. They echoed the same news released by the Urban Land Institute two weeks ago and the opinions of brokers, developers and other real estate professionals at the World Conference of the Society of Industrial Office Realtors in Minneapolis.

In Florida, JLL's Cross Sector Survey revealed that respondents, predicted a drop in Commercial Real Estate values in 2009. It's another voice in the choir. Similarly, they also predicted a rise in cap rates and therefore a drop in real estate values. Rising cap rates mean that investors are going to demand better returns on their investments for a number of reasons, including rising interest rates and uncertainty in the tenant markets and business.

Interestingly, according to Moody's commercial real estate prices peaked in January 2007 and have dropped 12% off their high. That's not exactly the sky is falling scenario that one might expect after hearing all the bad news about the residential market and the repercussions of the sub prime mortgage crisis. But, 2009 may well see a rise in distressed properties as tenants fall behind in payments, so those investors with cash should start looking around for a place to put it.

Connecticut investors would be well advised to look outside our state to the areas of the country where the residential markets took deeper cuts in home values. Connecticut has gone through one major recession and realignment of expectations. National Developer Landlords have largely taken a "by" on our state for the past twenty years, but working with a broker who is well connected across the country through their affiliation with professionals through the SIOR network, can find opportunities in markets that they may not have previously considered. Commercial real estate investment will likely be frowned upon by Wall Street for some time, but those who are fearless and stand tall in the face of panic will benefit in the long run.

Real Estate cycles traditionally run in seven year cycles. We've just moved out of thirteen years of rising values, that doesn't mean that we are going to have seven or thirteen years down, but it does mean that smart investors are going to look at good quality bricks in mortar to hold. The opportunity and the profits will be in the rent rolls, the tenancy and the sites. Remember, cash is king but there are ways to work with venture capitalists, syndicates and other tools to create cash if your pockets aren't as deep as you'd like. - kristin


November 3, 2008

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