Brace yourself, commercial real estate pros. It’s bad, and it will probably get worse before it gets better.
That was the overall consensus among speakers at the annual Virginia Commonwealth University Real Estate Trends Conference held yesterday at the Greater Richmond Convention Center.
Nearly 800 real estate professionals attended the event, a record according to a VCU spokesperson. And despite the rough times, the conference was not short on sponsors —nearly 40 local real-estate-related businesses contributed to the event.
Sally Gordon, managing director for the advisory firm BlackRock, said it will be several years before prices return to what they were at their height in 2007; in fact, they might not return to those levels at all.
“I suggest most assets were never worth in the first place what we thought they were,” Gordon said. “There is no law of nature that stipulates to what level prices will return to.”
She compared the overvaluation of some commercial real estate to that of dot-com companies that imploded in the 1990s.
According to her analysis, property values have fallen about 40 percent from the peak, which puts us about where they were in 2003. She said she wouldn’t be surprised so see prices continue to fall before bottoming out around 50 percent.
Falling prices are bad news for commercial real estate investors with loans coming due over the next three years, many of which will find themselves underwater, she said.
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Stephen Blank, a senior resident fellow at the Urban Land Institute, delivered a presentation about capital markets that was peppered with humorous cartoons from the New Yorker.
But the prognosis Blank delivered was grim.
“This crisis is going to be going on for a while,” Blank said.
He said that without securitized bonds for commercial mortgages, such as CMBS loans, lending for commercial real estate has dried up, and it’s not clear what will replace it.
“CMBS is past life support,” said Blank. “The amount of loans issued peaked at $250 billion in 2007; today it is so small there isn’t even a shadow.”
He said servicers of CMBS loans and banks with commercial real estate loans are extending the terms on many of the loans that are coming due rather than foreclosing if the borrower is unable to pay off the balance — for now.
Refinancing in this environment, or getting loans for new projects or acquisitions, is incredibly difficult because of the lack of comparable sales. And lenders are only likely to extend terms to those borrowers that are current.
Without a long-term replacement for CMBS, which may require some form of government assistance, eventually lenders will have to start step up foreclosures.
“The market is clearly sitting there with a wave of extensions that is leading to a wave of defaults,” said Blank.
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David Lereah, president of Reecon Advisors, delivered mixed news for the residential real estate market.
“It’s been a frenzied environment for residential real estate,” Lereah said.
He said the good news was that supply is starting to fall and sales are starting to increase. But there are still more than 2 million vacant homes across the country, he said, and foreclosures are continuing to rise, jobs are still being lost, and homes are losing value in double digit percentages.
The number of home sales is rising in places like Nevada and Arizona that were hit hardest by foreclosures, he said. Meanwhile, in Virginia the number of home sales is still declining, he said.
In Richmond he said the medium sale price for homes has fallen more than 11 percent year-over-year, but that it doesn’t seem as bad if you compare it to places like Los Angeles, Las Vegas or Orlando, where prices have fallen between 25 percent and almost 40 percent.
And overall, home values are up since 2000.
“It’s the only way to look at it if you want to sleep at night,” said Lereah.
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The last speaker was Jeffrey DeBoer, president and CEO of the Real Estate Roundtable.
For the past 25 years, DeBoer has lobbied Washington on behalf of the real estate industry, and he said this is the most challenging environment in decades.
He said over the past several years the amount of debt supporting commercial real estate has grown considerably. He valued the total of U.S. commercial real estate to be about $6.7 trillion, of which $3.5 trillion is debt, with an average of $400 billion maturing each year.
“Its like taking a 13 size and dropping it in a size 10 box,” De Boer said. “The financial architecture of America is not big enough to accept the shoe, which is maturing debt.”
DeBoer praised a new Treasury policy that allows borrowers to enter negotiations with CMBS loan servicers before a default or foreclosure took place. Under previous rules the borrower could not, and many were walking away from properties or purposefully going into default in order to begin to work out new terms with the servicer.
He said there is a great debate going on in the Capitol over whether coming commercial real estate failures will cause minimal damage to the overall economy, or whether they pose systemic risk.
So far the damage has been held off because bank has been allowed to hold onto repossessed commercial real estate assets instead of selling them and writing down the losses. But DeBoer said some argue that holding the assets is holding back the recovery of real estate and preventing repricing from taking place.
DeBoer said he is still unsure what the best resolution will be.
“Certainly some of the larger institutions are going to start to see regulators push more aggressive on them to take the losses,” DeBoer said. “But flush this out now, and you will see a lot more than just the 400 banks that have already failed.”
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For more information, view the VCU Real Estate Trends webpage, where the speakers’ presentations will be posted.
Al Harris covers commercial real estate for BizSense. Please send news tips to Al@richmondbizsense.com.
