It seems perhaps the toughest questions
to answer in Tampa Bay’s commercial
real estate market are: Where can I invest, and at what price?
“Over the last several years with abundant and variable financing alternatives
available, demand was so strong that many
opportunistic sellers went to market with
no set price,” says Dale Peterson, Senior
Vice President, Investment Properties
Group, at CB Richard Ellis. “Comparable
sales data was changing so fast it was often
difficult to assess day to day exactly where
market value was. Competitive bidding
many times forced investors to stretch
pricing beyond historical comparable sales
and accept lower yields to win deals.
Today, the metrics are much different so
answering the questions of who will sell,
who will buy and at what price provides a
new set of challenges.”
Peterson notes that the dynamics of
today’s capital markets have far-reaching
effects. Investors at every level, whether
they are sellers or buyers, foreign or local,
are searching to establish a benchmark for
value as they continue to seek investment
in the Tampa Bay market.
Smart Business spoke with Peterson
about the issues affecting investor decisions today and what the market can
expect looking forward.
What factors led us to today’s commercial
credit market?
The initial recognition that the credit
markets had been too aggressive in risk
assessment led to the onset of the credit
lockdown, or ‘crunch’ as it’s better known,
in the fall of 2007. This had a dramatic
impact on existing transactions in process
at year end and has carried over into the
first half of 2008. Loan spreads widened
very quickly and rating agencies subsequently downgraded existing debt obligations creating an immediate shift in bond
values. CMBS lenders were left with billions of dollars in unsold mortgages on
their books as bond investors demanded
more yield. In response, aggressive
assumptions were challenged and underwriting standards became highly scrutinized. One key result was that the highly
popular and widely available interest-only,
fixed-rate conduit loan vanished.
How have these changes affected overall
investment activity?
While interest in investing in the Tampa
Bay market remains strong, there is no
question that the change in today’s capital
markets has provided noted challenges.
For the first time in a number of years, buyers began to reassess their intended acquisitions and started to renegotiate or
‘retrade’ on pricing. Cost and availability of
capital had changed significantly, affecting
projected yields. As such, many offerings
failed to achieve acceptable bids and disappointed sellers chose to pull the properties from the market as opposed to a
deeply discounted sale.
The number of properties on the market
for sale are significantly down as there continues to be a disconnect between buyer
and seller pricing expectations. For sellers
who had no immediate need to sell, the
choice has been to hold with the anticipation of a more stable atmosphere in the
future. Overall, the number of qualified
bids received during a typical process is
down significantly today as smaller pools
of qualified investors consider fewer quality offerings.
Is there a specific area of investments more
challenged than others?
The most extreme change has occurred
in what we term ‘value-add’ transactions
where certain assumptions are made to
forecast potential future income and subsequent future value. Such assumptions in
this sector became increasing more aggressive and with that came increased risk. As
an example, lenders are now repricing that
risk in a number of ways, such as no longer
giving credit for vacant space and discounting the assumptions that a property
can be leased up quickly and at market or
better rates. The result is that we have seen
lenders either significantly alter the terms
of their debt offering or in some cases pull
their bid completely.
How have private and institutional investors
fared in this current investment climate?
Without question, the result is that leveraged buyers are struggling most. This group
is primarily comprised of domestic high-net-worth individuals, syndications and
entrepreneurial firms that utilize various
sources of opportunity funds for acquisitions. More disciplined underwriting requirements that require higher equity participation, lower loan-to-value ratios, higher
interest rates, and less favorable amortization periods have resulted in less proceeds
and, bottom line, lower leveraged returns.
So who has the capacity to buy today?
While the private leveraged buyers are still
active, it is the institutional buyers that can
leverage their ability to get the deal done
without debt and have again come forward. These buyers have substantial
resources, a desire for quality, a longer-term view of investing and an underwriting
process that is geared for today’s investment climate. We are back to the basics!
DALE PETERSON is a Senior Vice President, Investment Properties Group, with CB Richard Ellis. Reach him at (813) 383-3711 or
[email protected].
