Global property slide may be long
NEW YORK (Reuters) - Commercial real estate markets in many parts of the world are falling and in the United States, the largest market, things are poised for a deep, lingering dive, experts said.
"I've never seen the sector get so tied up in knots as it is right now," Jacques Gordon, global strategist and head of Research for LaSalle Investment Management, told the Reuters Real Estate Summit this week.
Commercial real estate markets around the globe are facing debt repayment issues, declining values, and deteriorating rents and occupancies in different combinations.
Prices are resetting lower at different speeds and magnitudes country by country.
"The UK is way out ahead," Gordon said. "We do not see the U.S. teed up to be the number two in the re-pricing process. We are seeing Australia, even signs of Japan and Germany out ahead in terms of re-pricing."
But in the United States, commercial real estate players -- buyers, sellers, and lenders -- have been taking other avenues to avoid selling at prices most experts believe are half of what they were at their peaks in 2007.
Commercial real estate sales worldwide in the second quarter are expected to be off 67 percent from a year earlier, according to research firm Real Capital Analytics, with U.S. volume down 83 percent.
Lenders have been reluctant to foreclose because financing for sales is scarce and instead are extending loans.
"If you can't sell a property why not extend?" said Richard Parkus, head of Deutsche Bank Commercial Mortgage-backed Securities and Asset-Backed Securities Synthetics Research.
Some borrowers whose generous loans included interest reserves are hanging on to their property for now.
"A lot of these deals will have interest reserves that will take them through 2010," said Darcy Stacom, vice chairman of CB Richard Ellis Group Inc (CBG.N).
Still, others who have seen their rental revenues fall are safe for now because their loans were based on LIBOR, which has plummeted.
"You've got deals that were supposed to be paying $15 million of interest paying $4 million. Stacom said. "They're alive."
The holdout by borrowers has vexed potential buyers looking for distressed deals, said Stacom, one of the top commercial real estate brokers in New York.
"Investors are incredibly frustrated," she said. "We have virtually nothing in the supply pipeline of just direct distressed deals."
Yet, many potential buyers are in no rush as deteriorating rents and occupancies has made property values moving targets.
"We are prepared to do nothing if we don't hit our price," said Tom Shapiro, president of real estate investment firm GoldenTree InSite Partners. "It's not just our pricing, but our terms, where we are in the capital stack, how the deal is structured that are very important for us."
HEAVEN AFTER '11
Parkus estimated that from now though 2013, about $1.415 trillion of commercial real estate mortgages will mature, and more than $1 trillion may have problems refinancing.
With rental revenues drying up quickly, however, borrowers could default before that.
"It's getting bad, much worse, every month," Parkus said. "We are currently in something which is comparable to what we saw in the 1990s and potentially worse," he said referring to the last U.S. commercial real estate crash.
Large-scale term defaults further weaken the market and lead to new defaults as buyers of the distressed properties base their rental rates on a much smaller mortgage, attracting more tenants.
This will pressure rents on other buildings whose owners will have to lower rents or else risk losing tenants.
"So it creates clearly a downward -- kind of a vicious circle in terms of fundamentals," Parkus said.
Experts said they expect sales to pick up by next year as lenders and borrowers capitulate to the lower values.
But a recovery could take years.
"Our long-term projection is maybe it's in 2017, rents will be back to where they were in 2007," Parkus said. "Valuations will take many years as well. We're looking at, at least five years of, I would say closer to seven -- so 2015, '16, '17 time frame."
Stacom's team has decided "It will be heaven after '11," she said.
Like the last downturn, which fueled the wealth of such moguls as Sam Zell and Steve Roth, fortunes will be made.
"Anybody who really knows anything about commercial real estate realizes that the next five to 10 years will be present a world of opportunity," Parkus said.
(Editing by Steve Orlofsky)
