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Thursday, Mar 28, 2024

2010: A Year For Buyers and Sellers To Get Off the Fence?

There was no shortage of commercial real estate news to cover in 2009, albeit most of it was about increasing vacancy rates, decreasing property values, and deals – with some exceptions – brokers would have laughed at in boom times. But if I was to hone in on one of the most prominent themes of 2009, I would say it was hesitancy in the marketplace. People were paralyzed from action while they tried to make sense of the economic chaos. Investors and owner/users hoped the commercial real estate market would hit that ever-elusive bottom, which never happened. Sellers and property owners hoped conditions would get better. And both of these factors led to a lot of people sitting on the fence. It’s a new year, however, and commercial real estate pros said it’s high time for buyers, sellers, landlords and tenants to get off the fence. And this may be more than just wishful thinking. The current financial climate actually supports the imperative. Scott Lunine, who recently took over as managing director of Encino-based Investment Real Estate Associates (IREA), said the coming year is all about expanding his firm and seizing an historical opportunity. Sellers didn’t have the motivation to move their properties in 08-09 because vacancy rates hadn’t hit a critical high and they were still making money, he said. But they’re more motivated to sell now because markets have not made the hoped-for turnaround. “Most of my professional life has been spent in brokerage, so I’ve seen both sides of the equation,” said Lunine. “This is one of the most exciting times to be in the business since the late 1990s.” He anticipates seller motivation will peak in the second and third quarters of 2010, and buyers are going to start snatching-up properties before the market hits the “official” bottom. The latter is a likely scenario because interest rates are at historic lows for qualified borrowers. IREA has a track-record of selling deals from as low as $2 million to as high as $60 million. And a lot of the firm’s deals in the past two years were ones that other national companies expired. Lunine recently hired seven new agents and hopes to increase the firm’s total local workforce to 30 or 35 agents. Roger Beck of Colliers International chalks up last year’s fence sitting to owner/users being scared to put money down on a piece of property when that cash could be used to fund operations. However, people are getting used to the current market environment, he said. There’s still a lot of work to be done to spur deal-making. Sellers need to further reduce prices and brokers have to work extra hard to educate landlords and sellers about the market reality. The “market reality” is that we’re likely to see a continued problem of high vacancy rates, lower property values, and more distressed commercial assets coming to market in the new year. Many players who bought late in the game are under water and their loans are coming due. Michael Soto, analyst with Colliers International, believes the Valley is poised to see more distressed “trophy” properties hit the market in 2010. “Every day is a different adventure ,” said Beck. “People held on hoping things would change. But (people’s attitudes) are shifting.” Last year, Beck represented investors who were ready to buy, but only acquisitions that protected them from further market downturns. Now, with the current availability of SBA loans and lower interest rates, he strongly believes there’s a huge window of opportunity. This gets to another factor that may have contributed to hesitancy in the marketplace in 2009: the perception that banks are not lending to businesses. It’s not true. Banks never stopped making business loans, because it’s counter intuitive to their livelihood. They have only tightened lending criteria, and some have shied away from over-weighting their portfolios with risky real estate acquisition and development loans. The short of it is lenders want to know borrowers are financially sound. If the numbers line-up, they’re happy to underwrite the deal. And given how flippantly some doled out money in the past, which contributed to the financial mess we’re in now, I think this is a positive step for everybody. The same holds true for borrowers looking to renegotiate loan terms. Despite media hype about such practices, lenders are not in the charity business. If a business is flailing, heavily leveraged, and the borrower does not have a proven way of paying the debt, lenders will not give them a dime. Foreclosure is often the preferred course of action. But back to the availability of credit. The U.S. Small Business Administration (SBA) backs billions of dollars worth of loans each year. Financially sound businesses can secure 20-year fixed rate 504 loans for below market prices and with less money down than conventional loans. “The biggest challenge is that the typical business owner doesn’t know about the program,” said Sasha Globa, senior executive VP and co-managing director of the California Statewide Certified Development Corporation. It’s true some smaller banks have reduced their business lending, he said. But big banks such as Wells Fargo and Bank of America are very actively lending. And the Obama administration is trying to extend fee reductions that recently expired for SBA loans. “There are plenty of funds available,” said Globa, adding the best way for business owners to know if they can access the program is to get pre-qualified through a Certified Development Corporation rather than assuming they’re not eligible. Tim Foutz, senior executive VP with NAI Capital, has a great take on what may help everybody in 2010. He recently had a conversation with a colleague about how commercial real estate brokers are essentially self-employed and only get paid when they win. The past year was one heck of a roller coaster ride and a lot of people had a hard time making heads or tails of the economy. Foutz said he was a sounding board for clients more often than a closer. And putting together deals is a lot more complex than it used to be. But he has these words of advice for 2010: “I think we’re all hoping for a better year,” said Foutz. “We all have that belief of what made us successful in the past. And right now is a time to remind people of those basics.” Staff Reporter Eric Billingsley can be reached at (818) 316-3124 or at [email protected].

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