The economy is dead, long live the economy!  Subprime schmubprime.  There is a problem in the commercial real estate financing world, liquidity, but it's not at all comparable to the residential world's woes.  In fact, Torto Wheaton (the research group now owned by CBRE) in tracking markets across the country came out with a report on Friday a week ago that noted that warehouse space demand in the US is actually stronger now than a year ago!

That's not to say it's all great, they did say that only 12 of the markets they track (of over 50, maybe even more) were down in 2007 from 2006, but that is mostly likely I think to the fact that the warehousing and bulk distribution models most large companies are following are in a state of rapid change.  Intermodal transportation was not a word on everyone's lips 20, even 10 years ago, but it's the word-of-the-day among industrial real estate brokers, developers and investors. 

In short what's going in warehousing and distribution is that the Wal-Marts of the world are going to even fewer, larger distribution hubs, and they are becoming more aligned with mass freight transportation hubs.  That primarily means port cities like Long Beach and Miami, but also railroad hubs like Chicago and Kansas City (Chicago, incidentally, is the world's 5^th largest port, we just don't use Lake Michigan to take delivery of anything but iron ore - it all comes in by rail). 

The office market, too, has remained relatively strong, with rent fundamentals remaining very encouraging in most major and even minor markets, but transaction volume for investment sales (unlike leasing) has slowed to a near halt, particularly in secondary and tertiary markets while investors figure out what's going on.  As one client of mine put it the other day, they don't care as much about missing out on the market going up 5% from here before they get back in, as long as they don't make the mistake of being in now and seeing it go down 20% before we know it's safe again.  As a higher leverage buyer, a 20% value drop for them would wipe out 80% or more of the value of the equity they had in a deal, pretty detrimental to investor returns! 

Not everyone is on the sidelines, though.  CoStar reported last week that something like $39 billion in "vulture fund" money raising has already taken place for those sharks circling for opportunities to bite those in trouble.  This is in addition to the $71 billion (yes, folks, these are numbers with a B) that private equity groups raised in 2007 as reported by the Private Equity Real Estate (PERE) weekly newsletter on the following day.  There is a lot of money out there to buy commercial investment real estate and most market watchers are seeing that as buoying the market, even in the current liquidity crisis (who is lending money these days?!).  The pundits are split, though, as to whether that just prolongs the correction or whether it actually helps prevent it (remember the old "soft landing" thing Alan Greenspan always looked to achieve?).  I am with the later group at present, as there is so much money out there it would take a true, sustained recession to really take down the commercial real estate investment market at this time. 

One of the big question areas is hotels, one of the hottest asset classes in the past 18 months.  If the economy were to tank the travel and lodging industry is always hurt, but returns and growth of RevPAR and other metrics have been so strong it's hard to keep people out of the market for these assets right now. 

Foreign interest is especially high now, since the dollar's decline makes everything here seem cheap vs. historical averages, as long as you're holding Pounds, Euros or pretty much anything other than US Dollars.  Even the Canadian Dollar is pretty much on par with the greenback.  My entire life memory it seems we could just use 70 cents on the dollar for Canada.  No longer.  The tough part is that US investors really can't afford international real estate investments, just when those markets are really taking off.  The flip side is one might argue that it's never too late - who knows how far the dollar could decline and for how long.  If you like the dollar's chances, hedge against the currency risk, but look at foreign markets, because they have been very strong for the past two years, and show no sign of abating.

Here's a bright spot - I just got quoted 175 to 200 bps over 10 year treasuries for an 80% LTV loan on a $70MM office building.  The 175 deal is for 5 year fixed money and the 200 deal is for a 10 year term.  With where interest rates are now, that's pretty much back to where the CMBS market was giving away money a year ago before things went haywire.  Those quotes included 2 years of interest only, something everyone said was never coming back - and here we are 4 months later and it's back aready!  The reason is that spreads like that over US government bonds are great yields for insurance companies and others that have to invest their money somewhere and in this interest rate environment aren't getting any yield out of bonds.  Are the lenders really back yet?  No, I don't think so, because this was a loan for a building that was mostly leased for 8 years or more, with below market rents (and a way below replacement cost price per square foot) and for a strong borrower, but still, I think things are indeed proving we're not in horrific shape. 

The other tactic smart borrowers are employing right now is short-term debt placement - 3 year deals at even better interest rates because of the short term.  They are less risky for the lenders and let the borrower assume that in 3 years things will be much better for long term financing again.