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With values dropping, sales declining and credit scarce, it was not a good year to sell commercial real estate in South Florida.
Deals were getting done, but nowhere near the level of five or six years ago when buyers were plentiful and prices steadily climbed.
And things are likely to get worse as the economic crisis deepens.
Unemployment is growing, retailers are facing the worst holiday season in years, and the credit market remains a mess. With billions in short-term loans coming due, numerous commercial property owners across South Florida could be facing foreclosure.
Yet a wave of foreclosure could ultimately be the salvation of the industry as cut-rate properties valued on their income - rather than on investors' optimistic expectations - hit the market.
"You are starting to see [commercial loans go in default] because owners cannot pay their loans," said Steven Beauchamp, president of Mangrove Advisory Group.
"The first half of 2009 will be similar to the last half of 2008, with very little activity in commercial real estate," said Gabriel Navarro, a principal with MMG Equity Partners in Miami. Navarro, along with partners Marcel Navarro and Martin Pico, buys, manages and develops commercial properties throughout South Florida.
"There is still a gap between sellers' expectations of value and what buyers are willing to pay. The gap may be increasing, as many buyers are of the opinion that what you buy today will be less tomorrow."
Sales of South Florida commercial properties plummeted in the first nine months of the year.
In Miami-Dade County, sales declined 62 percent to $1.68 billion during the period from January to September, compared with the same period a year ago, according to Real Capital Analytics.
Commercial sales in Broward County fell 80 percent to $747 million, and in Palm Beach County, they declined 53 percent to $932 million.
Cash deals
Unlike in the past, most recent large acquisitions didn't include financing but were cash deals. Most of the buying was done by institutional investors with deep pockets such as pension funds and life insurers.
During the hot real estate market of the early- and mid-decade, many buyers were non-institutional investor groups that often borrowed as much as 95 percent of the property's value.
Real estate experts said there are plenty of private equity funds with money to invest, but the potential buyers don't like the prices.
Those short-term buyers want to earn at least a 20 percent profit when they sell in a few years, and to achieve that target, they need to buy low, said Stephen Nostrand, executive vice president in the investment sales division of Colliers Abood Wood-Fay in Coral Gables.
Beauchamp said investors are waiting on the sidelines for lenders to take title to distressed commercial properties.
They speculate that lenders - and possibly government agencies - will offer greater discounts because they will be more eager to unload the troubled assets.
That theory could prove true.
In 1989, Congress created the Resolution Trust Corp. to auction shopping centers, offices and condos taken back by savings and loans that later became insolvent.
Many of those assets were bundled and sold to investors at large discounts. The total bill to taxpayers was $87 billion, according to former Federal Reserve Chairman Alan Greenspan. Many deals in 2009 will involve private owners of struggling shopping centers, office buildings and warehouses with rising vacancy rates and shrinking income, predicted real estate broker Neil Merin, with NAI/Merin Hunter Codman in West Palm Beach.
"In the next three to six months, we will see a lot of foreclosure sales," he said. "But it won't be like during the savings and loans crisis in the 1980s and 1990s, when 100 percent of the sales were foreclosures."
Michael Stein, managing director of the Aztec Group in Coconut Grove, said lenders are increasingly seeking advice from his firm on how best to dispose of poorly performing properties with delinquent mortgages or loans that are worth a lot more than the depreciating collateral.
"We went to them looking for business a year ago, but they told us they didn't have any nonperforming loans," he said. "Now, we are getting calls from them requesting our services."
J. Kingsley Greenland, president and chief executive officer of The Debt Exchange based in Boston, said lenders in South Florida are quietly selling loans - some that are current, others that are nonperforming - to investors.
Greenland, whose firm specializes in finding buyers for bad loans, said most of the troubled loans in South Florida are backed by properties whose owners loaded them up with debt during the run-up in prices over the last five years. He said some non-performing loans that have land as collateral are selling for 40 cents on the dollar.
"Banks are trying to get the problem behind them to go back to lending," said Greenland, who declined to name lenders using his services to sell non-performing notes.
Some of the most prominent sales in 2009 are expected to involve properties whose owners have loans about to come due. Their options will be limited. In many cases the value of their properties have declined, and lenders willing to make loans are demanding that owners increase their equity in the building and boost their cash reserves.
Some real estate experts say it's too early to forecast the direction the commercial real estate market will take next year. When President-elect Barack Obama takes office in January, he could launch policy changes that might significantly impact the market, said real estate broker Richard Matricaria, vice president of investments at Marcus & Millichap in Fort Lauderdale.
For example, Obama is proposing to boost taxes on capital gains - the profit earned when an asset is sold - from 15 percent to at least 20 percent. Hoping to cash in before the tax rate increases, long-term owners might be motivated to sell properties that have appreciated significantly.
"If the capital gains tax is to go into effect in 2010, sellers may be looking to cash out next year," Matricaria said.
Obama is also proposing an additional stimulus package that could inject billions of additional dollars into the economy.
If the strategy is successful, retailers, restaurants and distribution companies might need more space. That would boost demand for shopping centers, warehouses and other commercial properties and help increase sales of those properties.
Falling values
For now, however, rising vacancies and falling rent rates are depressing the value of income-producing properties in South Florida.
Values could fall between 5 percent and 20 percent in the next 18 months, according to William Hemingway, co-managing director of real estate consultancy Integra Realty Resources in Miami.
Nationally, the Moody's/REAL Commercial Property Price Indices reported that commercial properties lost 11.2 percent in value in August compared with the same month in 2007.
Capitalization rates - a key valuation measure based on the ratio between cash flow and a rental property's market value - are on the rise. The higher the cap rate, the lower the price of the property.
But because properties are generating less revenue, cap rates are increasing from 0.5 percent to 2 percent, reaching at least 7 percent in some Class A properties and more than 8 percent in less stellar properties, Hemingway said.
Values are likely to continue to drop as the region's economy shrinks and unemployment rises. In Miami-Dade County, unemployment increased to 6.1 percent in September, up from 3.9 percent in September 2007. The jobless rate in Broward County hit 6 percent, up from 4.1 percent the year before. And in Palm Beach County, it rose to 7.3 percent, up from 5 percent, according to the Florida Agency for Workforce Innovation.
As consumers cut back on spending, retailers and service providers are downsizing or closing shop.
As a result, office space vacancies in South Florida reached 11.4 percent in the third quarter of 2008, up from 10.4 percent in the first quarter of 2008, according to CoStar Group, a real estate research firm.
Retail vacancies jumped to 4.7 percent, up from 4.2 percent. Industrial vacancies jumped to 7.4 percent, up from 6.1 percent.
With rental rates flat, landlords are increasingly having to dangle upgrades or offer one or two months of free rent to attract or retain tenants.
Those expenses eat into operating income, said Doron Valero, managing partner of Global Fund Investments in Miami Beach.
"Why would you want to buy a property when it requires a lot of cash at a time when rents are not growing but going the other way?" he asked.
Lenders know rents are soft and take that into account when underwriting commercial loans, he said.
Until recently, lenders would look at the rent rates charged by a landlord and lend money based on the net operating income. Now, lenders compared a building's rental rates with the prevailing rates.
"If the rent at your shopping center is $30 per square foot but the retail center across the street charges $25 per square foot, banks will go with the lower rent because they know you will have to lower your rent to attract new tenants when your current tenants move out," he said.
As a result, lenders are willing to finance between 50 percent to 65 percent of the market value of a commercial property, down from 85 percent more than a year ago.
Dealmaking will remain slow until financing loosens up.
"There is not much trading of Class B and C properties because it is very hard to get financing," said real estate broker Jay Caplin, who leads Cushman & Wakefield's Capital Markets Group in Miami. "Lenders are being selective and lending to better quality properties."
Navarro, whose family owns Navarro Pharmacies, said he had a hard time securing financing to buy a Class B shopping center for $22.5 million last month. Navarro obtained a short-term, $10 million loan to acquire a 94,816-square-foot shopping center in western Miami-Dade County, he said.
"Securing financing was difficult, to say the least, and securing attractive financing was nearly impossible," he said. "We [ended up] securing a short-term bridge loan with Wachovia for a portion of the purchase price to close and will work on placing longer-term debt on the property in the next 30 to 60 days."
Navarro is confident he will be able to refinance the shopping center with a long-term loan, because he already has 50 percent equity on the property.
Source: http://www.dailybusinessreview.com/news.html?news_id=51726
Paola Iuspa-Abbott can be reached at (305) 347-6657
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