Commercial and industrial real estate sales plummeted in the fourth quarter of 2008, with buyers and sellers finding themselves at loggerheads over pricing. Sellers pointed to relatively solid market statistics, buyers countered with dreadful macroeconomic forecasts, and sales ground to a standstill.
That phase is passing, and sellers are beginning to yield on price. But the first half of 2009 shouldn’t be much busier than the end of 2008 was. Buyers are rapidly exiting the market, just as sellers are starting to rouse themselves.
“Sellers are ready to concede,” said Lisa Campoli, head of Colliers Meredith & Grew’s investment sales group. “The market has shifted, and they’re ready to engage. For sellers, now is the time to reckon with issues they thought would go away.”
Investors are looking to shed properties because they’re rebalancing portfolios, facing a capital call, or are experiencing problems with their existing debt loads. Many are confronting with maturing debt that will require a substantial increase in equity to roll over. Others may not need the cash now, but foresee needing a capital infusion over the next 12 to 18 months; they want to sell now because they fear that prices will continue to soften.
Where Did All The Buyers Go?
But when sellers finally come to the table, they’re finding themselves in a lonely place. “As sellers wake up and decide to take offers, the offers won’t be there anymore,” said Janet Krolman, a director in the Boston offices of Holliday Fenoglio Fowler. “All of a sudden, the buyer isn’t there, or isn’t there at that price. The sellers end up chasing a downward market. It’s really frustrating for them.”
“In each sector of buyers, there are dramatically less truly active buyers,” said Michael Smith, managing director for capital markets at Jones Lang LaSalle. “Most are just out there trying to gather data.”
That’s because the turbulence of the past few quarters has relegated most types of buyers to the sidelines.
“Every buyer class is constrained in one way or another” Campoli said.
“Pension funds will be net sellers in 2009,” Campoli insisted. They’ll sell because of what Campoli labeled the ‘denominator effect’ – heavy losses on Wall Street have left many funds unbalanced and over-allocated in real estate.
“Now, they own too much real estate,” she said.
Shifting currency exchange rates and unrest in European banking markets have conspired to push foreign buyers out of the American market. Insurance companies aren’t doing much investing, preferring instead to hoard capital to boost their balance sheets and ratings. Many observers believe large stockpiles of private equity are searching for buying opportunities. Those funds are searching for distressed investments, though, or high-yield tranches of securitized loans. Healthy properties don’t interest them yet. They’re waiting for the bottom, and haven’t seen it yet.
“They think, ‘If we wait, there will be more opportunities at more attractive prices,’” Campoli said.
What’s left are what Campoli characterized as “traditional investors” – non-institutional buyers who depend on leverage. Many are running into new trouble pricing assets because of softening rents and rising vacancies. Others “see a huge buy opportunity, but they need lenders.”
Buyers Marooned
Community banks continue to fund small deals, but the evaporation of conduit lenders and Wall Street investment banking dollars has left these buyers – the only significant class of buyers still looking to buy – stranded.
“I feel like I’m back in 1993,” Smith said. “You were second-guessing every assumption you had, when in reality, you should’ve been buying everything that came across your desk. There are great opportunities now. It’s a matter of truly having cash you can invest. It’s a matter of being able to get financing.”
“There’s a lot of wait and see,” Krolman added. “There’s a lot of psychology to this. Until people start to feel confident, sales will probably limp along. Nobody wants to be the first one to jump. But somebody is going to have to be the first to take the plunge. The big difference now is, in the early ‘90’s, people didn’t like real estate. Investors had a real issue with our product type. Now, they like real estate, and it’s just a matter of restarting the capital markets. It’s painful, and it’ll take a while, but we’ll get there.”
