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  • | 9:10 p.m. December 17, 2009
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Hold your breath.
Commercial property owners who financed acquisitions of buildings with easy Wall Street money through this decade are going to find out if lenders will let them live through the next decade.
Nationally, $250 billion to $300 billion of commercial real estate loans will come due in the commercial mortgage-backed securities market each year until 2015, according to PricewaterhouseCoopers. While exact numbers aren't available, it's fair to say billions of dollars of commercial loans are at stake in Florida.
Buyers know this and they're waiting for opportunities that could arise as owners are forced to sell in a down market.
“There's no one trading because of that issue,” says Thomas Hoban, managing partner with Kitson & Partners. Kitson teamed up with Chicago-based private equity firm Evergreen Real Estate Partners over a year ago to invest $750 million in residential and retail properties in Florida.
This isn't the time to be selling real estate. Demand for office, warehouse and shopping space has dropped significantly in the past year since companies have cut nearly 100,000 jobs from Tampa to Naples.
For example, in the Tampa area, overall vacancy rates in office buildings topped 19% in the third quarter, up from 15% in the third quarter of 2008. In hard-hit areas like Fort Myers, vacancies in top-quality buildings reached 30%, according to Cushman & Wakefield.
“It pushes values down if they start liquidating assets in declining markets and net operating income goes down and they can't find the capital to do tenant improvements,” says Lee Arnold, chairman and chief executive officer of Colliers Arnold in Clearwater.
“When all these buildings go back to the banks, then the leasing war will start,” says Jeffrey Feeley, a Clearwater commercial broker Rubin Real Estate who represents tenants. Feeley says he's advising tenant clients who can to wait for better deals.
“It's the ugly part of the cycle,” says Gary Tasman, executive director of Commercial Property Southwest Florida in Fort Myers. Rents have already fallen by 50% since the peak and sublease space on the market is now renting for half again.
Rent declines and rising vacancies are reflected in falling property values. David Farmer, managing principal of Keystone Development Advisors in Naples, says he paid $100 a square foot for his office in May 2008. Recently, a client bought an office in the same complex for $50 a square foot.
Deals have slowed considerably as owners and sellers remain far apart. In the Tampa Bay area, for example, the number of commercial real estate transactions has dropped 59% to 16 deals in the first three quarters of 2009 compared with the same period in 2008. In that same period, dollar volume of commercial real estate transactions fell 69% to $277 million, according to Real Capital Analytics.

Buyers and sellers apart
What buyers of commercial properties are willing to pay and sellers are willing to accept continues to hamper deal making. “That bid-ask spread is still out there,” says Dan Woodward, vice president of the Tampa division of Highwoods Properties.
Highwoods, one of the largest owners of office buildings in the Tampa Bay area, recently acquired 4200 West Cypress Street, a 10-story building in the Westshore office market of Tampa. Highwoods, a real estate investment trust, paid $24.7 million for the 220,000-square-foot building in one of the few office deals this year.
“There's a lack of debt, so it takes a great amount of equity to fund a transaction,” says Kyle Burd, regional vice president with Eola Capital in Tampa. “It's very difficult to hit investor yields with those hurdles.”
Because there's little debt available, investors with expectations of 20% or better annual returns have to buy properties at steep discounts. So far, most sellers of well-located properties aren't willing to meet them. “Not a lot of Class-A buildings are being brought to market,” says Woodward.
“All the bad properties are on the market right now and nobody wants them,” says Tim Becker, director of the Bergstrom Center for Real Estate Studies at the University of Florida. The center publishes a quarterly survey of market conditions and it's no surprise that those surveyed recently expect capitalization rates to continue rising, signaling continued price drops.
“When you don't have capital availability in the marketplace, it applies a larger discount to every property type,” says Shelton Weeks, director of the Lucas Institute for Real Estate and Finance at Florida Gulf Coast University in Fort Myers. “I don't think there's any confidence that financing is going to be any easier to come by in the near future.”

Bad, but no disaster
Although the situation looks bleak now, the market may sort itself out. “It's not going to be the ultimate disaster,” says Patrick Leardo, former global head of real estate consulting for PricewaterhouseCoopers. Leardo reassured real estate executives at a meeting of the Urban Land Institute in Bonita Springs recently.
“There's all kinds of cash out there, waiting,” Leardo says. Institutional investors are poised to be big buyers of commercial real estate. “Insurance companies are going to be huge sources of capital. They have a ton of money right now because they haven't done anything,” Leardo says. “I don't understand why cap rates are as high as they are right now.”
“Do I think there will be a meltdown? No,” says Arnold. “There's no appetite for going through foreclosure if there's an alternative.” These include commercial short sales and note sales.
Companies that manage the commercial mortgage-backed securities may extend the terms of loans coming due, too. “These servicers are open minded to restructured deals,” says Hoban. “They're much more likely to sit down and work with the borrower if he's credible.”
But uncertainty remains because the commercial mortgage-backed securities market is a relatively new financing scheme with no track record in a downturn and the size of the problem is so enormous. In addition, Hoban says he's concerned any government subsidies will simply prolong the problems.

Jobs needed
Any recovery in the commercial real estate market will depend on job creation. “Office buildings are a lagging indicator to job growth,” says Woodward. “The job decreases are slowing, but we haven't seen the uptick.”
From Tampa to Naples, employers have cut nearly 100,000 jobs. Although some industries such as education and health care continue to grow, other areas of the economy have yet to post meaningful growth.
Unlike the previous real estate downturn in the late 1980s and early 1990s, the Gulf Coast didn't have an excess of commercial space going into the recession. Instead, the current situation is due to companies rapidly cutting staff. “Every industry group pulled back at once,” says Burd. “I've never seen it tighten up so fast in 25 years of doing this.”
Companies aren't expanding their payrolls now because they're not confident about the recovery, says Mike Timmerman, an economist with Fishkind & Associates. “Florida has lost population for the first time in 40 years,” he says.
Tasman says “cheap homes” will bring the Fort Myers-area economy back. Median prices for single-family homes in the Cape Coral-Fort Myers area have fallen 72% to $91,600 in October from their peak of $322,300 in December 2005. As a result, the area recently posted the strongest rebound in sales in the state on an annual percentage basis.
“We need to continue to burn off this residential inventory,” Tasman says. “Once bodies are in those homes, demand for commercial space will return.”

Industry. Commercial real estate
Trend. Billions of dollars of commercial debt is coming due.
Key. Investors are playing a waiting game.

Best Bets
Consulting firm Pricewaterhouse-Coopers and the Urban Land Institute publish a report every year called Emerging Trends in Real Estate, a compilation of surveys of hundreds of real estate executives across the country. Here are some of the report's “best bets” for 2010:

Deal with cash. Cash is the only way to take advantage of opportunities.
Don't rush. Early is the new wrong. Act only when you see job growth, stabilizing asset prices and increasing tenant deals.
Focus on quality. Be selective. Prepare to hold at least five to seven years.
Buy public real estate investment trusts. Dividends and liquidity make these stocks attractive to take advantage of the correction.
Provide financing. Lenders can make the best loans of their careers at relatively wide spreads using conservative assumptions.
Consider buying distressed debt. The government will dispose of large loan pools from failed banks with guarantees to lure investors.
Stop feeding losers. Focus capital to protect your best properties and retaining and attracting tenants.

Write off the year. Scratch 2011 and 2012, too.
Dream about the future.

Buy or hold multifamily. Demographic demand and scarce construction makes this the best bet in commercial real estate.
Buy hotels. If business travel picks up, hotels have the most potential to recover.
Buy distressed condos, second homes. Concentrate on prime resort areas where developers overbuilt.
Buy land. Focus on infill sites.
Buy or hold industrial. Warehouses can recover if inventories grow.
Hold office. Hope long-term leases can bridge the downturn.
Triage retail. Infill grocery anchored strips and fortress regional malls will survive.

Jean Gruss covers the Lee-Collier region. He can be reached at [email protected], or at 239-415-4422


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