Groundhog Day - NYC Small/Mid Cap Commercial RE

Posted by jeff

Tue Apr 28th, 2009 04:16 PM

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The state of shocked disbelief seems to be lifting from the small/mid cap commercial real estate market in New York, at least anecdotally. A month or two ago business was dead. Bob Knakal of Massey Knakal (the highest volume seller of buildings in New York City) wrote in his quarterly commentary for q2 2009 that sales volume in the under $100 million market in 2008 was down 40%. Volume actually started 2008 at a decent clip and then...fell off a cliff. Massey Knakal had been projecting that turnover of building stock would hit a 1990s bear-market low level of 1.6% of total buildings or lower. They believe that Q1 2009 numbers were running at about 1.2%.

I can only report what I see and hear, but I have been sensing a much greater interest on the part of property owners to try to find some opportunities in the market....and at least pick up the phone or return phone calls.

One multi-family property owner told me "Yeah rents are down some, occupancy is down, vacancy rates are as high as we've ever seen them but we're okay, we're still alive. We're interested in distressed assets".

Another said "We're keeping busy. Just getting set to close on a property, small, only 20 units but we're paying less than $100,000 a unit."

Another building owner I recently met with told me that he had in fact pulled the trigger a few months back on investing in a new bank that was being put together last summer. He was smiling so wide I thought his face was gonna crack.

When we talk to investors today, there is no longer any resistance to the idea that there were a bunch of bad loans made even in the commercial market and that "there will be blood." Most investors, now accepting that the downcycle is here, seem to have spent recent months assessing their own condition, and if they are relatively healthy, they just want to know when over-levered properties are going to be taken back by the banks and sold, and where to get in line to bid. They wonder if there will be another RTC-type organization to deal with or whether banks will be selling properties directly.

In some cases, even these smaller investors, have long-time sources of capital and are not worried about where to get equity....but most are willing to talk about partnering with preferred equity or mezz lenders to buy distressed assets, whereas they previously wanted to keep things from getting too complicated. Some are exploring raising funds from high net worth individuals to invest.

There doesn't seem to be much of a hurry, or any reason at all to be precipitous, but people are raising their heads out of their foxholes and awaiting signs that it's safe to pursue emerging opportunities. Obviously the bid/ask spread is wide between sellers, who in many cases would lose all or nearly all their equity if they sold in today's depressed market and buyers who are looking for deals. So it will take the damn bursting on bank forcelosures or discounted note sales to get volumes moving. I just heard about one institution that is planning to start off-loading a bunch of loans......now I just need to find out who is left there to talk to about bidding.

Being a contrarian, I am always a little wary, when people who could not believe a downturn was coming, suddenly see opportunity in it. However, most of the people I spoke with had been sellers rather than buyers in recent years, attesting to their market savvy. Additionally, at least with commercial properties (when purchased with cap rates above mortgage constants....an old but good strategy) you get paid to wait for a turnaround.