Monday, July 6, 2009

2009 BOMA International Conference: Searching for Value in All the Right Places

Marc Intermaggio, Executive Vice President, BOMA San Francisco and Margot Crosman, President, BOMA San Francisco, before the Town Hall discussion.

At the 2009 BOMA International Conference, your BOMA San Francisco Advocacy Team attended a Town Hall discussion that provided an insiders view on how to find opportunities in the commercial real estate (CRE) market. The all-star panel, moderated by Andrew C. Florance, President and CEO of CoStar Group, consisted of:
The following is a synopsis of the panelists' discussion:

The current recession: What's happening now?
  • The current economic climate is worse than the 1974-76 downturn in the United States. Why? This recession not only affects the U.S., but it has also impacted the economy of every major industrial nation around the world.
  • Job losses are the worst since World War II.
  • Commercial lending is crippled.
  • The U.S. vacancy rate for CRE is projected to be 19% by 2010 with an average lease rate of $29.45 per square foot in the 2nd quarter of 2009 (adjusted for inflation).
  • The Class A price per square foot from 2006 to the 2nd quarter of 2009 has dropped 50%. This is what the industry experts call a 'return to normal'.
How does this recession impact the commercial real estate industry?
  • The CRE industry has over $1.3 trillion in loans to refinance and there hasn't been a clear signal on who will take the lead on this issue (e.g., private financial institutions or the U.S. Government). Of the $1.3 trillion, $1 trillion is bank owned debt.
  • To complicate matters even further, many property owners have seen their property value decline by 30-60%, thus reducing a substantial amount of equity they may of had in a healthy marketplace.
  • The situation has become so egregious that tenants are now underwriting credit on behalf of landlords.
  • In short, there has been a dramatic shrinking of debt capacity and a remedy has yet to appear. As such, expect massive loan defaults in the future.
Who will be able to weather the storm?
  • Those CRE owners that have properties generating positive cash flow and are of the appropriate size for the current market will be able to survive this recession. At present, the properties that are selling are developments that have been valued at $30 million or less.
  • Those owners that are 'under stress,' e.g., properties with negative cash flow, and larger developments with high exposure, will not be able to stay afloat.
What's the remedy?
  • Loan underwriting needs to be tightened.
  • The CRE market is looking for a multi-year approach to this crisis, with multiple access points to capital.
  • Now is the time to deploy key capital to new opportunities. Since the capital markets are frozen in the near-term, look to acquisitions (with cash flow) to balance your CRE portfolio.
What acquisitions should I be looking for?
  • Apartments: rental stock has not been developed to respond to 'echo-boomers' and to those who have lost their houses in the subprime mortgage collapse.
  • Hotels: an investment to consider when the market is bad.
  • Debt: a loan to own strategy. You can purchase most debt for .40 to .50 on the dollar.
  • Multi-tenant, metro office complexes and industrial properties are also attractive acquisition options.
What can help me right now?
  • Remain flexible. CRE had changed dramatically and you'll need to be more innovative and creative to stay in the market.
  • Keep your clients happy: tenants are renewing their leases as moving to a new space has become costly.
  • Reduce your immediate and long-term expenses.
  • Lenders are now factoring in the operators (i.e., property managers) in their loan decisions.
  • Maintaining a deep relationship with CRE brokers is of the utmost importance to get in front of potential lease deals.
  • Going 'green' (e.g., LEED certification and using green products) gives you a competitive advantage. LEED certification, in the panelists' opinion, is now the minimum standard for CRE as it has permeated every facet of the industry.

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