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Can the Building Sales Market be Good and Bad at the Same Time?

By Robert Knakal

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In recent weeks, Streetwise has looked at the divergence of opinions and perspectives present in the marketplace. There is significant optimism and pessimism present at the same time so the question becomes, Can market conditions actually be positive and negative at the same time? I believe the answer is yes but it is dependent upon individual circumstances.

There are many indicators in the market which lead us to be optimistic. Unemployment, the metric which most profoundly impacts the fundamentals of real estate, appears to have bottomed and we are starting to see job growth. Inflation appears to be in check and even the most bearish economists don't see inflation as a short-term problem. Interest rates, while edging up, have not caused any significant increase in borrowing rates. When the Fed ceased its asset buying program at the end of March, we saw upward pressure on interest rates, particularly at the long end of the curve as the 10-year T-bill, which had consistently hovered around 3.5%, rose to over 4% for a brief period. Last Friday it closed at 3.625%, a surprising result after the Fed announced 10 days ago that it would begin a program to sell a trillion dollars worth of assets over time.

Rental rates appear to have bottomed as well. In both the commercial and residential sectors, concessions are being reduced and, in a few cases rents are rising. I actually spoke to two bankers last week who told me that they were dropping commercial lending rates due to the competition with other banks to put money on the street. This, to me, was a remarkable and eye opening occurrence.

In our building sales business, the positive signs are abundant. The supply of available properties for sale is growing. This supply is increasing as lenders and specdial servicers are coming to terms with assets that are underwater and have little hope of being turned around. We have seen a tangible increase in notes and REO that these entities are coming to market with. Additionally, discretionary sellers are beginning to place assets on the market as they feel the palpable optimism that exists in the market.

While supply has increased, this additional supply has been met step-for-step by increasing demand. Activity on all of our listings continues to be excellent as all three of the demand "food groups" are in full swing. These include high-net-worth individuals and families, institutional capital and foreign buyers. Due to this overwhelming demand, we saw, for the first time in many quarters, prices rise in the first quarter of 2010 in some segments of the market. In other segments, prices continued to slide. This dynamic, however, is certainly indicative of a bottoming in pricing.

This all sounds very positive, but you may ask, What about all of the properties with negative equity in them? The fact is that, even with fundamentals becoming healthier, they will not revive at a pace quick enough to bail out most of the distressed assets that are in the market. Therefore, it is entirely likely that we will have improving positive conditions in the market while simultaneously seeing an active distressed asset component. Based upon the substantial number of distressed assets that exist, it would not be at all surprising to see distressed assets come to market over an extended period of time, two or three years perhaps.

One investor I spoke to last week told me that he believed distressed assets would be present in the market as far out as 2016 and 2017 when the 10-year CMBS loans that were originated in 2006 and 2007 mature. His belief was that growth will exist but will be too slow to recoup all of the losses experienced in this market downturn. I certainly hope he is not correct.

Presently, we see many positive signals in the market indicating that we are emerging from the malaise we have been living with.  Things are certainly looking up for our market; however, distressed assets will be part of our playing field for years to come. So the answer appears to be, "Yes", things can actually be good and bad at the same time. It all depends upon which side of the fence you are sitting on.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career having a market value in excess of $6.2 billion.

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