SBA and Commercial Finance and Investment News

2009 is best forgotten.  2010 is the time of the cash crunch, the debt crunch, and increasing realization by commercial real estate sellers that they are going to have to get real if they want to get liquid.  As CRE multimillionaire guru Sam Zell said recently at a press conference, his old advice of “Survive ’til 95″ which was oft quoted during the last crises, has been replaced by, “Come Clean by 2013.”   Bid asked spreads are going to narrow.  Sellers wanting that 6 cap will settle for 8.5.  Reality will set in.  Maybe 2010 is not the bottom, but it’ s close.  It may be the BEST year to buy your own building — or invest in something in CRE.

And WHERE does one invest?

Here are the seven cities — economies driven by OIL and TECHNOLOGY — that may lead us out, says RERCC (Real Estate Research Corporation):

• Austin, Texas
• Houston
• Oklahoma City
• San Antonio
• Seattle (tech and engineering)
• Salt Lake City
• Denver

And WITHIN the Seven Cities, what property types will lead?

The top three are:

• Multifamily
• Central Business District Office
• Industrial

And at the bottom of ALL, beneath even retail power centers?  Hotels.   If you have a hotel, you can lower your ADR (rate) EVERY DAY to meet and greet lagging demand.  Until employment picks up, and we are PAST the end of the tunnel, if you own hotels, every day may likely be more depressing than the last.  Bummer.  Multifamily or owner user.  That’s what I would buy.  Or lend upon.

Happy New Year from NYC!  This from Bob Bach at Grubb and Ellis,  courtesy John Clapp at SERVICING MANAGEMENT.  Something remotely but encouragingly upbeat yesterday:

“The good news is that the freefall we saw in 2009 is over, and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again,” says Bob Bach, Grubb & Ellis’ senior vice president and chief economist. The company predicts an increase in sales volume of 20% to 30% over 2009’s levels, with prices perhaps dropping another 10% to 20% to accommodate buyers’ expectations.

Claims that commercial real estate is the “next shoe to drop” are exaggerated, Bach says. Comparing the potential commercial real estate fallout with losses tied to the subprime crisis, he notes that “the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages.

 “Nevertheless, losses will mount over the next several years,” he adds. “If banks aren’t lending because they’re coping with losses in their real estate portfolios, this could impede the economic recovery.”

Grubb & Ellis expects the national office market’s vacancy rate to hit 18.5% to 19% by the end of the year, which would make it the highest vacancy rate for that sector since the firm began tracking national data in 1986. The sector’s recovery depends heavily on job growth. Bach projects sustained growth in employment is “unlikely” before the second half of this year.

“The fact that the recession has come and gone, however, should provide the certainty necessary for tenants to start making decisions,” he says. “We may see leasing volume increase in 2010 as a result.”

In its quarterly data book on commercial real estate and multifamily finance, published Tuesday, the Mortgage Bankers Association said that monthly job gains need to be in the 125,000-150,000 range in order to reverse the rise in unemployment.

“Gains of this magnitude are not expected in the months ahead,” the report said. “Accordingly, the unemployment rate is apt to increase somewhat further before peaking in the spring of 2010, and then beginning a gradual, slow decline during the remainder of the year.

The industrial market, which saw increased vacancies and negative net absorption in 2009, has the potential to recovery more quickly than the office, retail and multifamily sectors because it’s less dependent on job growth. While Grubb & Ellis expects vacancy in the sector to reach 11.4% by the end of the year – 70 basis points higher than year-end 2009 – a new report from the trade group Institute for Supply Management suggests the manufacturing sector is rebounding sooner than expected.

Based off results of a survey of U.S. purchasing managers, the report showed the institute’s manufacturing index hit 55.9 in December, its highest reading since April 2006.

“Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction,” TD Securities economist Millan Mulraine wrote in a note to clients, according to a San Francisco Chronicle report

YES there are Trillions of dollars sitting out of the market — waiting for the reprice in commercial real estate to happen, waiting for sellers to get a grip.  Ten percent caps , I say TEN, are on the way — and the more management intensive stuff like motels and hotels will be in the TEENS.  Raise the cap from 6 to 10?  You just lost 40% of your value.  As I write this, here in Colorado, bankers pretty much agree that real estate along the Front Range ranks, from WORST to BEST:

1.  Residential land, unfinished

2.  Finished lots

3.  High end residential

4.  Retail

5.  Office

6.  Multifamily

7.  Industrial, still holding its own, but with vacancy having crept up to 10 or so and cap rates on the rise.

The moral:

Do guaranteed loans and agency paper.  USDA.  SBA.  FNMA. 

Contact me at tim@cpcommerciallending.com (303) 656-3232 we are built to help you get going.  And we have a correspondent (premium) program in selected markets for highly experienced shops.

SBA lending is “off a cliff,” down by half from last year.  Yet the guaranteed portion of these loans are selling for 8 and 9 point premiums.  USDA guaranteed loan participations are earning 6 to 10 points on gthe secondary.  Do it right and that’s huge gain on sale potential under FASB 166. 

Sheila Bair said Tuesday that she expected bank failures to continue at “a healthy clip” for the rest of 2009. She said the failures would continue in 2010, though she wouldn’t predict how many, adding that she was particularly concerned about the commercial real estate industry causing more problems for financial institutions.

Those of us with community bank ties see the scramble for non interest income and performing assets.  SBA and USDA can provide part of the answer, folks!  It’s time to take the message to our colleagues in community banking.  I am!

Fitch Ratings, following Moody’s lead,  insists  the next big round of bad news for banks will come from commercial real estate loans. “Virtually all major property types [multifamily, office, retail and industrial] are suffering from rising vacancies and declining rents,” a recent Fitch report warned.   OK  so all the Chicken Littles have said the sky is falling.  And it is.  Who is going to lend IN to a market where cashflows and values continue to plummet and we cannot see bottom and examiners and the rating agencies are on high alert and reserves have to be added continually?  If I were a credit guy, count me out. Sorry, but 55 is the new 65.  No wonder Johnson Capital has gone to a flat desk fee in its Denver office.  It’s the only way to survive the continually increasingl;y justified credit meltdown even among life companies.

Mid 2010 for commercial real estate, that’s the “turn,” so they say. Here is Reuters this morning:
“The National Association of Realtors said the commercial real estate market slowed to its lowest level in 15 years during the second quarter. “The reduction in commercial real estate activity is expected to last at least through the first quarter of 2010. Any meaningful recovery is not likely to occur before the second half of next year.” And our friends at Moody’s say: The value of commercial property in the U.S. has plummeted 27% this year, and the decline is likely to continue, Moody’s Investors Service said a report. In June, the Moody’s/REAL Commercial Property Price indices dropped 1%, the rating agency said. “It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial real estate report. ”

The action is in SBA, folks 7A right now, 504 right around the corner as the poolers start to line up once the administrative regs are complete — something we expect within the next 90 days, or sooner.