One Eye on Markets

One Eye on Markets

commercial real estate by Dave Szymanski | Tampa Bay Editor

The near collapse of Bear Stearns has made some commercial real estate sales more difficult and has the industry on guard for similar news.

Local and out-of-town investors walk into Bill Eshenbaugh's office on Rocky Point in Tampa with access to $100 million, $500 million, $1 billion and more, looking for land to buy in Florida.

But clients in need of financing have been affected by the near collapse of investment banking firm Bear Stearns and are taking more time these days to assemble funding for commercial real estate deals.

"We wait while they regroup," says Eshenbaugh, president of Eshenbaugh Land Co., a real estate brokerage specializing in land transactions. "These are trying times."

Across the Tampa Bay area, the crisis at Bear Stearns is creating a ripple effect, making some deals tougher to assemble or putting brokers on alert.

The real impact appears not to be Bear Stearns itself, but the nerves it has triggered in capital markets overall. It has left brokers and clients wondering if there will be more Bear Stearns incidents.

Another Gulf Coast land broker, Bruce Erhardt, executive director with Cushman & Wakefield of Florida in Tampa, said Bear Stearns hasn't stopped sales activity for him, but it has put him and his colleagues on notice.

"If another one tanks, things could get dicey," Erhardt says.

Speculation has raised concerns at other investment banking firms. Eshenbaugh, also known by his industry nickname "The Dirt Dog," recently was in negotiations on a land sale on the Gulf Coast and the buyer was a fund that puts demands on other investors to share risk. It recently had to shift away from Lehman Brothers to another fund.

"Lehman said it wouldn't do a land deal in Florida," Eshenbaugh says.

Still, Eshenbaugh admits there are "huge amounts of money swirling around the country" from clients who are seeking land for commercial projects in Florida.

"They like Florida," he says. "There will be great buying opportunities in '08 as the market adjusts. They are in here every day."

Attractive market

Investors in general like Florida's market characteristics, Eshenbaugh says.

"We have basic employment and it's a market not dependant on second and third buyers," he says. "They like Phoenix, but don't like San Diego because they think it's overpriced. Sacramento is good. New Jersey is nice. They don't like Atlanta because of water shortage issues."

So, although there is concern about the capital markets in the Gulf Coast real estate community, buying and selling continues, even as the economy delivers troubling signals.

"It's an unsettling headline: $112 a barrel for oil and Bear Stearns," Eshenbaugh says. "We're at $112, but life goes on. And we seem to have a hard time pronouncing the 'R' word."

Tampa real estate attorney Ron Weaver says he keeps hearing about recession signals but activity continues as investors take advantage of lower prices for land and buildings.

"History has shown that because of our economy, Tampa actually comes back faster than many markets, so the people investing now will really see some great values when the markets strengthen, proving the value of Florida," Weaver says. "This market has some natural advantages that our competitors don't have."

Those who have money in hand continue to do deals, but clients who need to arrange financing are finding it more difficult, says Russ Sampson, executive vice president and principal with Colliers Arnold Commercial Real Estate Services in Tampa.

"The subprime mess definitely is having a negative effect on lending," Sampson says. "However, money is still available to the borrower, just not as much of it."

Pat Duffy, president of Colliers Arnold in Clearwater, says CMBS (commercial mortgage-backed securities) debt is no longer available so there is an impact from Bear Stearns based on a dominant source of inexpensive debt going away.

Commercial cash

The CMBS market grew tenfold during the past decade, according to the Commercial Real Estate Securities Association. Investors' love affair with real estate produced record years for commercial mortgage-backed securities, signaling a further shift in real-estate financing from banks to Wall Street.

Cash flooded the market, where mortgages for skyscrapers, strip malls and other commercial properties were bundled together and sold off as bonds to investors varying from pension funds and insurance companies to hedge funds and wealthy investors. But that activity has slowed down.

"Insurance companies and banks are still lending, but they want more equity and cleaner deals," Duffy says. This will cause a slow down in investment sales and development deals in the near term, he says.

The impact of Bear Stearns is consistent with the tumult in the overall capital markets, says Mike Davis, executive director and investment specialist with Cushman & Wakefield in Tampa.

Bear Stearns in particular is not of great concern, but the possibility that others may follow is. Accordingly, the credit crisis worsens making it more difficult to finance deals.

"The whole capital market environment is an issue," Davis says. "On the other hand, the Fed is moving aggressively to support the banks and for low LTV (loan-to-value) and recourse borrowers. The margins are high for banks, thus they want to make the loans under those circumstances. We look for financially strong borrowers and want to speak with their lenders up front."

Ray Sandelli, senior managing director of CB Richard Ellis in Tampa, says the uncertainty in the financial markets is weighing on the institutions themselves as they try to assess risk and exposure moving forward. New lending commitments are more challenging and the process has slowed.

"This is a global issue and not something isolated to Florida's Gulf Coast," Sandelli says. "For those owners who have chosen to sell in this market, the response to well-located, quality properties has been rewarding."

Bear Stearns: stay tuned

JPMorgan Chase is still in talks for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.

The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal, struck only a week ago at the behest of the Federal Reserve and Treasury Department.

Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share - a figure that represented a mere one-fifteenth of Bear's going market price.

The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said.

REVIEW SUMMARY

Industry: Commercial real estate

Key: Helping clients get deals done despite the turmoil in the capital markets.