Ridin' the storm out

Ridin' the storm out

commercial real estate by Dave Szymanski | Tampa Bay Editor

The recent stock market dive has slowed investment in commercial real estate, but no one is calling it a crisis. Interest rates and supply are still key.

What happens when the stock market falls and one out of three sources of funding for commercial real estate projects (mortgage-backed securities) becomes more scarce?

The other two sources, banks and insurance companies, lick their chops and move in for more business. And it costs more to do that business.

That is an oversimplification, but that is part of the impact of the stock market plunge on commercial real estate, one of Florida's key industries.

"Commercial securities are in disarray," said Patrick Duffy, president of Colliers Arnold, a Clearwater-based commercial real estate brokerage. That's because the asking rates on longer-term debt are up as much as a full 1%. Cap rates, another component of commercial financing, are expected to be effected, too.

"People may have to drop deals or negotiate a higher price," Duffy says. "We don't know where it's going to go until the market settles down."

Although many people in the industry watch the markets, no one is panicking.

"It's not a crisis," says Larry Richey, senior managing director of he Tampa office of Cushman & Wakefield, a real estate brokerage.

"This definitely impacts the cost of funding and acquisitions and value a seller can get," Richey adds.

No panic

A series of Gulf Coast industry experts predict that deals will still get done, but they will cost more and take longer. Patience is needed.

And in comparison to stocks, many still see bonds and real estate as safer places to put their money.

"The ability to acquire real estate and borrow money has become more difficult," says Mike Davis, senior director in the capital markets department with Cushman & Wakefield's Tampa brokerage. "But we think it's temporary and should clear up by the end of the year.

"There will be higher spreads (for funding), but real estate remains fairly attractive," Davis adds. "Occupancy rates are still fairly high."

Duffy agrees: "Commercial is still a good place. There are very few pockets where there is overbuilding."

David Conn, retail broker with CB Richard Ellis in Tampa, worries more about the impact of the housing slowdown on retail construction and growth than about the market's impact on other commercial activity.

Retail follows rooftops. The saving grace for the Gulf Coast, like other forms of commercial, is that the market is not overbuilt, so current projects should continue.

However, financing was a key topic at the International Council of Shopping Centers convention in Orlando this year. The message was that financing would tighten.

The stock market moves and news connected to it gathers a downhill momentum, fed more by perception than reality sometimes, Conn says.

"In my experience, if the stock market goes in the crapper, there's a lot of negative news and it becomes a self-fulfilling prophecy," Conn says. "There's talk of recession, the Gulf War. There are reasons and rationales.

"In Florida we still have strong job growth and strong tourism," he adds. "I really haven't seen too many fundamental weaknesses in the economy. The housing stock got ahead of itself. In the future, Tampa Bay is ready for a (residential) comeback in 2008."

No comparison

In comparison to the doldrums the residential real estate market is in, commercial is still functioning.

The default rate on commercial-backed securities is less than 0.5%. The default rate on sub-prime paper (higher-risk residential loans) is more than 16%.

Florida homes are taking six to nine months or more to sell because of the giant supply and smaller number of buyers.

There is only one solution: The residential and commercial property for sale must be sold and move through the system so the supply is brought down.

"Stuff really needs to get pushed through," said Don Jennewein, broker with CB Richard Ellis in Tampa.

"We've been through this in 1987," Jennewein adds. "Wall Street is pretty efficient in dealing with this stuff. It will take a while to get about $50 billion in business through the system."

More difficult deals

One of Colliers' hotel sales is taking longer to complete because of the stock market.

Another Gulf Coast real estate professional, who spoke on background, said that after the market fell recently, New York equity investors for a project in Florida pulled out. They decided to look for a stronger "primary market" for the project instead, such as Atlanta.

It wasn't a "disaster" to lose the deal, but the professional said he regretted spending so much time on the telephone and sending emails and faxes for something that didn't happen.

Of more concern are interest rates for commercial loans. If those inch up and keep rising, it could have a global impact on development, Duffy said.

"That would have a ripple effect that would be unfortunate," he says.

REVIEW SUMMARY

Companies: Commercial real estate brokerages, banks, insurance companies, investors and developers

Industry: Commercial real estate

Key: Riding out the plunge in the stock market and keeping commercial projects alive through alternate financing and patience.