A New Story Emerges

Instead of quoting a positive economic indicator in this week's note, let me share with you, in a general way, some stories that I've heard recently while meeting with Grubb & Ellis clients. The contrast in their stories was jarring. Some were concerned over the same problems that have plagued the industry for the last 18 months - no debt capital to refinance maturing loans on properties that may have no equity left, disappearing tenants and brutal concessions packages (from the landlord's perspective), all compounded by no job creation and worrisome headlines suggesting that some small, picturesque European countries could resurrect the global financial crisis.

But for every story like that, I heard another story emerging, usually along the following lines:

  • Debt and equity capital for commercial real estate has loosened up in the last 60 to 90 days. Loan terms are becoming more generous, sometimes taking even the borrowers by surprise. Property sales volumes, though still low by historic standards, are up substantially from last year. Pricing seems to have stabilized and, for core assets, has begun to rise. Someone has fired the starting gun, and all those investors with cash on the sidelines are taking steps to deploy their capital.
  • Capital is not just focused on trophy assets in primary markets. It is looking, for example, at riskier assets such as well-located Class B properties that can be turned into Class A- properties with some investment, or Class A- properties that have location issues. Class B and C properties in secondary and tertiary markets continue to struggle, however.
  • The Federal Reserve's strategy encouraging banks to work with borrowers to forestall an ill-timed wave of distressed REO assets seems to have halted the downward pricing spiral. I can only think that glasses must be clinking quietly in the hallowed halls of the Fed.
  • Tenants are back, and more of them are seeking long-term leases. They continue to extract hefty concessions from landlords, but there is some quiet concern among multi-market tenants over how long these favorable (from their perspective) conditions will last. In a few markets, landlords have become bolder already.


I've heard the term "euphoria" used more than once recently, suggesting that the market may be getting ahead of itself. One analyst mentioned to me that stock prices have shot up recently for some mid-tier banks with substantial exposure to troubled commercial real estate. We discussed whether the prospects for the industry could have changed that quickly, or are investors - both in the equity and property markets - getting ahead of themselves.

Landlords and their agents charged with filling half-empty buildings in a sea of other half-empty buildings may not even be aware of the new story that is emerging in the industry. Make no mistake - distress continues to mount, and many more losses will have to be taken by owners and lenders. But I'm struck by how quickly liquidity has come back into a portion of the industry, and it's beginning to spread.

Have a great weekend.

Best regards,
Bob

Robert Bach
SVP, Chief Economist
Grubb & Ellis