Where Is The Commercial Recognition?

Just a short gripe after reviewing Inman's 100 Most Influential People in Real Estate report from September 17, 2007. Where is the commercial real estate recognition? The CCIM network is the pinnacle designation (a little self promotion, I know) of the commercial practitioner and I know that the national committees (along with the regional boards) spend a tremendous amount of time "getting the word out" about our differentiation in marketplace.

The problem is that the residential side is the 800 lb. gorilla in the room and it's "political action committee" (NAR) spend considerably more time (and money) hitting the Inman's of the world to promote the residential side (and its ancillary components) of the business.

Our network (CCIM) must meld into the discussion with these ancillary components, because if a company/community/blog/network that is less than 18 months old (page 28, Most notables, Active Rain with 49,000+ active members and 1,400+ online at any given time) can receive Inman's attention over the CCIM network, then something's missing in the discussion.

Speaking of Active Rain (which I'm a member), I received a call from an appraiser (prompting this brief quip) this morning wanting to get a hold of me for information on a truck terminal I sold two years ago. He sounded like he was less than 30 years old and new to the business, so where did he find me because I asked him - IN the Active Rain directory - his first stop to locate an agent (not NAR, or CCIM or even Coldwell Banker - where I was at the time) - he looked to Active Rain, this is a wake-up call to CCIM and the 800 lbs gorilla.

Autumn Winds of a Changing Market

As I mentioned on Aug 22, one of the greatest benefits of the CCIM network is the network of professionals we have in this industry, and their tireless assistance in providing expert market research for many of our posts. Last evening I received a detailed report on the effects of the "credit crunch" on the commercial markets and the implications of these changes as we move forward. Thanks again to Jim Nowak, CCIM from San Clemente, CA with Site Systems, Inc. for the information. I've asked Jim (as well as any other CCIM) to be a guest contributor to our forum.

Due to liquidity and valuation issues surrounding securitized debt backed by sub prime mortgages in the US home market, an increased perception of risk on the part of lenders has spread throughout the global financial system creating the current “Credit Crunch.”

Below are ten of the possible implications for the commercial real estate sector.

1. Sales volume will drop until a new price level is achieved and friction between sellers and buyers eases. Implication: Falling volume will result in less 1031 demand. Demand for 1031 properties will also soften as the gains on sales drop and more capital is reinvested into alternate asset classes.
2. A flight to quality is typically experienced during any period of market uncertainty. Implication: Top assets in top markets will see less of a price correction than class B & C assets in secondary and tertiary markets.
3. Properties and markets that command the attention of institutional and foreign buyers will continue to have the most competitive bidding. Markets with buyers that have relied most on CMBS conduit financing will see investor demand fall. Implication: Top assets in top markets will see less of a price correction than class B & C assets in secondary and tertiary markets.
4. Mega-deals and portfolio transactions have been primarily financed by Wall Street will be curtailed due to the credit crunch. Implication: Pricing premium enjoyed for portfolios and other major asset sales will diminish.
5. Portfolio Lenders are regaining market share from conduits. For these lenders, sponsorship matters and a track record and proven operating abilities are highly preferred. Implications: Sellers won’t see as many new, out-of-state bidders. It discourages new investors plus some portfolio lenders do not like TICs or other complicated ownership structures.
6. With the amount of busted deals and re-trading that has occurred lately, sellers are favoring buyers with a high confidence of closing. Implication: The highest bid may no longer win the deal. Sellers are favoring buyers with no financing contingencies and ones that can quickly make firm and non-refundable deposits. Institutions and other established, reputable buyers will be favored.
7. In the past, a 90- 95% leased building achieved prices close to that of fully leased buildings. Now buyers will have to put more equity at risk since their lender won’t give them credit for vacant space anymore. Implication: Prices for well leased properties will hold up well compared to those with current vacancy or heavy rollover exposure.
8. Just as construction costs were starting to stabilize and commercial development was gearing up, the credit markets have changed the economics again. Developers are facing higher financing costs and greater equity contributions even if they can get a loan. Implication: New development will remain constrained which is a positive for the space markets. Of all the uncertainties in the market, the fear of overbuilding is not one.
9. Demand for mezzanine debt has grown as LTVs of first mortgages have fallen. With a number of mezz lenders clipped by the credit crunch, mezzanine debt has been significantly re-priced with returns back in the mid to high teens. Implication: Yields on mezz debt are looking attractive compared to equity, and more private equity funds are contemplating filling this capital void.
10. As new mortgages are tough to get and terms are not as favorable, assumable debt will be sought by buyers. Implication: Properties with mortgages originated over the past few years that are also assumable will trade at a premium. Institutions may find opportunities in assuming moderate leverage with mortgage rates that are now relatively low.

- from Real Capital Analytics September Report (Phone: 866-REAL DATA)

So Where Are We In The Housing Bubble?

So I'm reading Diana Olick's blog on CNBC about the housing bubble and she's voicing her frustration with the repeated "on camera" question: Have we hit bottom yet?

To which she replies, it depends on the market (and since I'm in the thick of it here just north of Stockton, CA, I have to agree) with most notibly California and a majority of the West Coast having seen the largest percentage drop around the country over the last month. Great, nothing I haven't heard.. honest reporting.. time to move on.. BUT wait, she puts a link to the Zillow blog at the bottom of the page for some regional stats.

Now if you click on the image, it will take you to the Zillow "Zindex" site that has the interactive data for 66 MSA's from around the country. Each vertical bar represents a city's year over year housing appreciation (red) or depreciation (blue) - the green bar represents the "Zindex" for the full MSA in that market. Interesting visual format.

You can slide the mouse over each bar in the MSA to get a closer look at each community's housing price change year over year. What is startling confirms what my neighbors and friends are saying is happening in our market (Stockton/Sacramento/Central Valley) and the "grand exitos" from Northern California into Oregon and Washington over the past year. Each one of these markets is red on the site and most are up substantially. They did not include the Boise, ID market, but my hunch is that it would trend higher as well. From the visual data, it is easy to see where we are at regionally and nationally.

Two other interesting credit market notes in the news today:

1. Noting that the UK is not faring much better with the credit crunch, it was reported that BarclayCard has reduced its spending limits on 500k credit card holders today. Effectively they have closed off any credit that marginal cardholders might need if they show difficulty handling existing levels of personal debt. I'm sure that this is one trend that might make it's way to the States, just in time for Holiday shopping.
2. Eric Englund (credit professional for the past 23 years) provides an editorial in Financial Sense on the credit "crisis" and how we got to this point (very interesting read). But, I was most interested in the statistics of just how high domestic household debt has risen in twenty years:

Regrettably, when the Federal Reserve targeted housing to reflate the U.S. economy with enormous doses of money and credit, America’s creeping credit socialism was given fertile ground to grow into a monstrous housing bubble. Mortgage lenders irresponsibly said "yes" to just about any borrower while Alan Greenspan cheered them on. It is no wonder why I have seen the most debt-laden, maladjusted personal financial statements in my entire career. In fact, the Federal Reserve’s data support my observations as domestic household debt has increased from approximately $2.5 trillion in 1986, to $7.7 trillion in 2001, to $12.9 trillion in 2006 (with 76% of the 2006 figure being mortgage debt). The toxic combination of mind-numbing inflation and credit socialism has crippled household finances from coast to coast. Therefore, do not believe the talking heads who claim that the mortgage mess is limited to the subprime stratum. As the housing bubble continues to implode, the financial fallout will result in nothing short of an international economic disaster. The Federal Reserve’s September 18, 2007 one-half percent cut in the fed funds rate will not do anything to head off America’s looming household-insolvency crisis.