The commercial real estate market still has a way to slide before it hits bottom, a group of industry professionals said during a recent roundtable at The Daily Transcript offices.
“Clearly, the real estate economy is sick. It’s a question of how much sicker can it get or will it get,” said real estate lawyer Gordon Gerson, who is also president of the San Diego Receivers Forum. “We don’t know the extent to which this can get worse.”
Of course, not all regions or assets are created equal, roundtable participants agreed. For example, San Diego may have a slight edge, as expected population growth and coastal relocation patterns translates into real estate demand.
In contrast, people are leaving economically strained locales like Detroit, said Lorne Polger, managing director of Pathfinder Partners. Even Arizona’s new immigration law, SB 1070, has had an effect, Gerson said: Occupancy in some Phoenix multifamily properties have fallen from 90 percent to 60 percent within 30 to 45 days as Hispanic families leave.
Outside of demographics, however, the commercial real estate market in areas like Florida, the Midwest and Nevada continues to soften as values fall and defaults rise. The San Diego market also has its weak points, particularly in retail, but those at the roundtable said core products in core markets are showing strength, particularly because San Diego is less overbuilt in office properties.
“Valuations in the last four months has gone up not down in office,” said Stath Karras, Cushman Wakefield executive managing director. “They’re actually bidding prices up in core markets, which to me is kind of bizarre.”
Even within retail, big-box stores — large, free-standing retail buildings — are getting bought up, said Trigild president and CEO Bill Hoffman and Jerry Jacquet, a partner at real estate management company Meissner Jacquet.
Values on multifamily properties have risen slightly because of available financing from Fannie Mae and Freddie Mac, said Lee & Associates managing partner Wes Nichols.
The brunt of commercial real estate troubles has fallen on so-called B-quality and C-quality properties — although Hoffman noted that the situation is reversed in the hotel industry: High-end hotels are the hardest hit as businesses and consumers cut back on spending.
“That’s because you mark to market every day,” Karras said, noting that office and retail owners at least have the advantage of having their tenants on a longer-term lease.
Industry players expect commercial real estate market conditions to worsen. High unemployment trails the economic recovery, meaning that consumer confidence and consumer spending will remain low and depress the retail and office market.
Many banks are still holding souring loans on their balance sheets, which leaves a lot of room for uncertainty until they take action on those loans, Gerson said. Also, trillions in mortgage-backed securities debt is expected to mature over the next few years, with no refinancing options in sight. Hoffman said he does not expect MBS debt to be extended because the loans are “too far upside down,” meaning the properties are worth much less than the loans.