It seems perhaps the toughest questions to answer in Tampa Bay’s commercial real estate market are: Where can I invest, and at what price?
“Over the last several years with abundant and variable financing alternatives available, demand was so strong that many opportunistic sellers went to market with no set price,” says Dale Peterson, Senior Vice President, Investment Properties Group, at CB Richard Ellis. “Comparable sales data was changing so fast it was often difficult to assess day to day exactly where market value was. Competitive bidding many times forced investors to stretch pricing beyond historical comparable sales and accept lower yields to win deals. Today, the metrics are much different so answering the questions of who will sell, who will buy and at what price provides a new set of challenges.”
Peterson notes that the dynamics of today’s capital markets have far-reaching effects. Investors at every level, whether they are sellers or buyers, foreign or local, are searching to establish a benchmark for value as they continue to seek investment in the Tampa Bay market.
Smart Business spoke with Peterson about the issues affecting investor decisions today and what the market can expect looking forward.
What factors led us to today’s commercial credit market?
The initial recognition that the credit markets had been too aggressive in risk assessment led to the onset of the credit lockdown, or ‘crunch’ as it’s better known, in the fall of 2007. This had a dramatic impact on existing transactions in process at year end and has carried over into the first half of 2008. Loan spreads widened very quickly and rating agencies subsequently downgraded existing debt obligations creating an immediate shift in bond values. CMBS lenders were left with billions of dollars in unsold mortgages on their books as bond investors demanded more yield. In response, aggressive assumptions were challenged and underwriting standards became highly scrutinized. One key result was that the highly popular and widely available interest-only, fixed-rate conduit loan vanished.
How have these changes affected overall investment activity?
While interest in investing in the Tampa Bay market remains strong, there is no question that the change in today’s capital markets has provided noted challenges. For the first time in a number of years, buyers began to reassess their intended acquisitions and started to renegotiate or ‘retrade’ on pricing. Cost and availability of capital had changed significantly, affecting projected yields. As such, many offerings failed to achieve acceptable bids and disappointed sellers chose to pull the properties from the market as opposed to a deeply discounted sale.
The number of properties on the market for sale are significantly down as there continues to be a disconnect between buyer and seller pricing expectations. For sellers who had no immediate need to sell, the choice has been to hold with the anticipation of a more stable atmosphere in the future. Overall, the number of qualified bids received during a typical process is down significantly today as smaller pools of qualified investors consider fewer quality offerings.
Is there a specific area of investments more challenged than others?
The most extreme change has occurred in what we term ‘value-add’ transactions where certain assumptions are made to forecast potential future income and subsequent future value. Such assumptions in this sector became increasing more aggressive and with that came increased risk. As an example, lenders are now repricing that risk in a number of ways, such as no longer giving credit for vacant space and discounting the assumptions that a property can be leased up quickly and at market or better rates. The result is that we have seen lenders either significantly alter the terms of their debt offering or in some cases pull their bid completely.
How have private and institutional investors fared in this current investment climate?
Without question, the result is that leveraged buyers are struggling most. This group is primarily comprised of domestic high-net-worth individuals, syndications and entrepreneurial firms that utilize various sources of opportunity funds for acquisitions. More disciplined underwriting requirements that require higher equity participation, lower loan-to-value ratios, higher interest rates, and less favorable amortization periods have resulted in less proceeds and, bottom line, lower leveraged returns.
So who has the capacity to buy today? While the private leveraged buyers are still active, it is the institutional buyers that can leverage their ability to get the deal done without debt and have again come forward. These buyers have substantial resources, a desire for quality, a longer-term view of investing and an underwriting process that is geared for today’s investment climate. We are back to the basics!
DALE PETERSON is a Senior Vice President, Investment Properties Group, with CB Richard Ellis. Reach him at (813) 383-3711 or firstname.lastname@example.org.