RCA in the commercial property press:

Commercial Real Estate Faces Tough Recovery Slog

Wall Street Journal reports: Home prices finally saw an uptick in 2009 as the government sought to resuscitate the housing markets. But commercial real estate is likely in for more pain as rental rates fall and buyers stay on the sidelines. The market is faced with huge amounts of unoccupied space and a deluge of defaults and foreclosures that are putting new stresses on banks and other financial institutions that already are on life support.

In Midtown Manhattan, the most expensive office market in the U.S., the amount of available space has increased by 16 million square feet since the beginning of 2008, according to brokerage CB Richard Ellis Group Inc. That is roughly equivalent to 16 empty 40-story office towers. Midtown building owners have dropped their asking rents by more than 30% since November 2008.

As rents and property values fell and the extent to which banks are exposed to commercial-real-estate losses became increasingly clear, the government scrambled to contain the damage. The Federal Deposit Insurance Corp., which has been seizing banks hurt by bad property loans, is offering private investors lucrative financing to buy and work out those loans.

In the biggest such deal, Barry Sternlicht's Starwood Capital Group last fall led a group of investors who paid $2.8 billion for a portfolio of 112 construction loans made by Chicago's Corus Bank with a face value of $5 billion. Small and midsize banks are particularly vulnerable to being dragged down by their real-estate portfolios.

"There are going to be huge losses and a huge number of banks failing," says Deutsche Bank commercial-real-estate analyst Richard Parkus. "This is just the tip of the iceberg."

More than $1.4 billion in commercial mortgages will come due by 2013, and as much as 65% of those will have trouble getting refinanced, Mr. Parkus says.

One major wild card in 2010: When will big investors get back into the market?

For now, institutions that control more than $100 billion in unspent capital earmarked for real-estate deals have been gun-shy, waiting for prices to drop and more distress to come.

Research firm Real Capital Analytics recorded only $42 billion in U.S. commercial-real-estate transactions through November 2009, compared with $136 billion in the same period in 2008 and $489 billion in 2007. But optimists believe that all that money on the sidelines will make for a quick rebound when investor sentiment improves.

"When confidence returns to the markets," says Dan Fasulo, Real Capital's head of research, "I think things are going to spiral upwards again very quickly."

Articles related to this topic:

 Starwood Completes $144 Million in Investments in First 60 Days
 US commercial property values at lowest levels in 7 years
 Growth Of Distressed Commercial Properties Slows, Hits $17.6 Billion
 Silicon Valley 'Bloodbath' Leaves Office Buildings Empty
 Commercial Property Market to Favor Tenants in 2010

Posted by: Matthew Stone

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