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We have seen numerous vulture/opportunity funds formed over the last year. So far these funds have largely remained on the sidelines waiting for truly distressed opportunities. According to a new report, you can expect these funds to begin buying properties in bulk during the second half of 2009.

Opportunity Funds Won’t Strike Until Second Half of 2009

Last week Fannie Mae announced it would reverse their policy limiting investors to four properties. The change will go in effect on March 1, 2009. Last year Fannie Mae introduced the restriction while under close scrutiny from the government for their lending practices.

Fannie Mae is now changing their policy to allow investor and second home borrowers to own up to ten financed properties provided they meet certain eligibility and underwriting requirements as outlined in the following release:

Fannie Mae is committed to providing financing opportunities for high-credit quality, bona fide investors. Experienced investors play a key role in the housing recovery and Fannie Mae’s continued support for investor borrowers is consistent with its mission to provide stability, liquidity, and affordability to the nation’s housing system. To support prudent lending for housing investment, Fannie Mae is changing our current limit of four financed properties per borrower to allow five to ten financed properties per borrower, with certain eligibility, underwriting, and delivery requirements, including a 720 minimum credit score and 70–75% maximum LTV/CLTV/HCLTV (depending on the transaction and property type). The requirements apply to any loan being delivered to Fannie Mae, regardless of whether Fannie Mae is the investor on the borrower’s other mortgages.

https://www.efanniemae.com/lc/newsletters/sfnews/0209mortgages.jsp

Excerpt from recent S&P press release:

It’s become clear during the past few months–and especially in the past few weeks–that the problems facing the global financial markets and the U.S. economy have left the commercial mortgage-backed securities (CMBS) sector in a fundamentally weaker credit position. As a result, Standard & Poor’s Ratings Services is expecting an increase in the number and severity of CMBS downgrades in 2009 …

"Now that the U.S. is officially in a recession, and since commercial real estate performance typically tends to lag U.S. economic developments, we’re expecting property values to continue to drop and loans with marginal cash flow to default with increasing frequency," said credit analyst James Manzi. "We believe that borrowers with negative equity have little incentive to come ‘out of pocket’ to bring their payments current," he said.

Evidence of this malaise appears to be mounting: The delinquency rate has been increasing significantly, and Standard & Poor’s internal reporting measures show an acceleration in the volume of troubled loans, especially large loans. "Any current change in property prices is hard to measure accurately because of the marked reduction in transaction volume during 2008, but estimates we’ve seen indicate a decline of roughly 10%-15% from the peaks of early 2007. And the gap between offered prices and asking prices, in our view, signals that valuations must decline further to restart any meaningful trading activity," said credit analyst Barbara Duka.

1. Solutions Create Opportunity

   Solving problems for distressed investors will create prime investment opportunities.  Look for ways to provide workouts for distressed investments.  As loan terms mature, many properties will be unable to cover the debt service associated with new loans. Financing criteria has changed dramatically and will surprise many investors as they look to re-finance.  Large “vulture” funds are being formed for the sole purpose of raising capital to profit from distressed institutional grade investments.  On a smaller scale, attentive investors can capitalize on opportunities by providing solutions in their local market.

2. Cash is King

   Investors who have been disciplined and kept a healthy amount of liquid assets are now in a favorable position.Kelly Hugh, a well respected real estate economist says “There is such a volume of capital out there. I have three pictures I use in my talks, one is of Niagara Falls, one is the Sahara Desert and the third is the Hoover Dam. The argument is that for a long time we had a Niagara of capital, now people think we have a Sahara but we don’t. It’s a Hoover Dam. It’s all sitting back there. The question is; when does it get released?”

   Those investors who can move quickly and provide interim resolutions will come out ahead

3. Change Strategy from Growth Investing to Value Investing

   In recent years past, investors had a buffer that alleviated bad investment decisions.  Rent growth and appreciation seemed to remedy any ill-advised acquisitions.Now with rent growth and appreciation absent, property owners are forced to find new ways to produce the yield desired.  Strong asset management combined with tenant retention will help drive yield in existing properties.  New acquisition investments can take advantage of the upward trend in CAP rates.

4. Avoid Lowering Rents

   Commercial real estate values are tied to the income the property produces.  As retailers are struggling we will see more and more vacancies in the market.  Existing property owners should strive to minimize down time and re-tenant quickly.  Up-front incentives such as free rent and tenant allowances will help entice new tenants while maintaining your property value for the long-term.

5. “Buy into Fear, Sell into Greed”

   There is no arguing we are in a slowing market, however investors that seize the opportunity can turn this into a wealth-creation market. While the masses are standing on the sidelines there are unbelievable opportunities for a knowledgeable investor.

Coldwell Banker Commercial has just released a national overview of the commercial real estate market for Fall 2008.  This report gives a good summary of the major indicators and trends that are affecting our local market.  Click here to download the report as a PDF file.

A recent article in National Real Estate Investor gives insight on Standard & Poor’s March GRA Commercial Real Estate Indices.  Overall, national commercial property prices have risen over 5% from March 2007 to March 2008.  The strongest performing region in the month-over-month indice was the Pacific West region.  For more details, click on the link below.

Commercial Property Prices Still Gaining

AOL Money and Finance has created a list of retailers facing problems. So far we have not seen too many closures in the Inland Northwest. The only closure of note in Spokane is the CompUSA. Take a look at the list below:

• Linens ‘N’ Things – closing 120 of 589 stores. Filed for chapter 11 bankruptcy protection in May.
• Disney Stores – closing 98
• Foot Locker – closing 140 of the 3,785 stores in addition to the 274 stores it closed last year.
• Wilson’s Leather – closing 160 stores.
• Home Depot – closing 15 stores.
• Ann Taylor – closing 117 stores.
• PacSun ‘Demo’ Stores – closing 154 stores in addition to the 74 stores it closed last May.
• Lonestar Steakhouse – closing 27 locations.
• Zales – closing 105 stores. Will have 2,145 locations open.
• Pier 1 Imports – closing 25 stores. Closed 79 in 2007.
• Friedman’s Jewelers – closing 120. Closing stores and laying off employees as it goes through bankruptcy proceedings.
• Dell – closing 140 stores.
• 84 Lumber – closing 140 stores. Directly impacting by the nation’s housing market. Closed 12 stores in December.
• Sharper Image – closing 90 stores. Filed for bankruptcy protection.
• Pep Boys – closing 31 stores.
• Ethan Allen – closing 12 of 300+ stores.
• Rite Aid – closing 28 stores.
• Sprint/Nextel Corp – closing 125 stores.
• Movie Gallery – closing 400 of 3,500 stores.
• Saks – closing 1 store.
• CompUSA – 103 stores will be shut down or sold.
• Kirkland’s – closing 30 to 130 stores.
• Fashion Bug, Lane Bryant and Catherine’s – closing 150 stores.

Google has created a powerful tool called Google Trends that enables consumers to chronologically view search & news activity for popular terms. Below is a chart of the term “Commercial Real Estate“.

What does this tell us? If you look closely you will notice a spike in activity at the end of each calendar year and at the end of each fiscal year. These periods are historically busy months for commercial real estate brokerage, especially for 1031 exchanges. To try out different terms visit www.google.com/trends

While the other markets are crying…

The Residential Real Estate collapse… the Credit Crunch … Wall Street swoon…

It’s Still A Buyers Market in Commercial Property

With the relentless drumbeat of negative market news and the current funding credit crunch, you might be thinking now is NOT a good time to be buying commercial properties.

Not so … here is the word on the street…

These market forces have actually made this one of the best times to continue to acquire commercial properties and build your portfolio.

Here are 4 Reasons why . . .We are very active in the market with over 1000 units of multifamily under contract and researching new properties daily. Here’s what we are seeing that is quite new and a pretty large change from conditions 6 – 9 months ago.

1) Uptick in Commercial Foreclosures: For the last couple of years the Commercial Property market has seen nearly as much speculative buying as the Residential side.

In the niche of properties priced at less than $10M – the segment dominated by non-institutional buyers – many people have overpaid for their properties. And the banks went along with them.

Many owners now find them selves over-leveraged and we are seeing an increase in Commercial Property Foreclosures. This is a bargain hunters dream

2) A Return to Rational Prices: The current credit crunch has positive effects. Those same speculative buyers and easy financing are now way gone. With financing MUCH more difficult these days and the speculators out of the picture, asking prices have come down to reasonable levels we have not seen in nearly a year.

3) More Flexible Sellers: Sellers know the lenders are only funding solid deals that are well priced. We are seeing sellers be MUCH more flexible on negotiations both at contract and retrade stages of the purchase.

And with the Speculative Buyers out of the market Sellers are seeing fewer offers as well. They are very hesitant to let your contract go if you are a serious buyer and much more flexible at the bargaining table.

4) Only Solid Profitable Deals Allowed: In fact, lender underwriting right now is so conservative that only solid, four star, profitable deals will get funded. Now is a great time to build your portfolio because, if you can get a property funded in this market, you are going to have a screaming profit machine when the market turns back up again.

Get ‘er done… So as you see the head lines day-after-day touting the bad news in the financial market, remember this…

Right Now is a great time to continue to look for good values in the property markets and if they’re underwritten now in a way that the banks will fund, you’re going to have a great project down the road.

Article Source: Commercial Property 2008 – While Everyone Else is Cryin’ Just Keep Buyin’

Investing in commercial real estate is attractive for a variety of reasons. Commercial real estate investment offers a number of distinct advantages, several of which are discussed briefly below.

1. Positive Cash Flow Investment in income-producing properties often generates an income stream that can be used to fund different needs, such as retirement.

2. Tax Advantages As a result of deferred taxation, the after-tax return on commercial real estate typically is greater than an alternative investment with a comparable before-tax yield. The cost-recovery deduction normally defers (and saves) taxes, an effect that is magnified by debt financing.

3. Appreciation In addition to the periodic cash flows, the sale (or reversion) cash flow of a property can represent an increase in value.

4. Inflation Hedge Real estate investment typically has been an excellent hedge against inflation.

5. Diversification Commercial real estate offers diversification from other investments such as securities (stocks and bonds) and commodities, which have different risks.

6. Psychological Benefits The fact that real estate is a physical asset (i.e., bricks and mortar) provides a certain amount of psychological security over more nonphysical assets such as securities.

7. Positive Leverage/Principal Reduction In many cases, an investor may obtain financing with a lower interest rate than the overall un-leveraged yield of the property. This will increase the yield to equity, including reduction of the mortgage balance.

Credit: CCIM Institute

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