Small Deals Reign So Far In 09

What a difference a year makes. The Houston unemployment rate from Texas Workforce Commission's February 2009 report topped of 6.4% (versus last year's 4.3%). This, combined with frozen credit markets and an uncertain economy means most of the office deals taking place these days are the smaller ones weighing in at $10 million or less.

"There's really no rule of thumb these days with regard to small deals versus large deals other than the fact the larger the deal, the harder it is to commence," explains H. Dan Miller, senior managing director with Holliday Fenoglio Fowler LP's Houston office. "Obviously the larger deals require more equity, meaning smaller deals are easier to get done in today's climate."

Rudy Hubbard, managing director with Transwestern's investment services group in Houston adds there are some larger deals trading between $20 million and $50 million. But most of these deals are being completed with existing debt and assumable mortgages, he explains.

Grubb & Ellis Co. senior vice president Logan Brown tells GlobeSt.com there are two reasons why the small deals are going through while the larger ones have all but stalled. For one thing, the smaller buildings aren't as expensive, so they're more affordable to private buyers that have the ready cash on hand.Second, "these can, for the most part, be financed through the local banks. The smaller buildings are a sweet spot for a lot of these local and regional banks," Brown says.

None of this means sellers and buyers are eagerly jumping on the transaction bandwagon, though. Brown acknowledges that market murkiness is causing confusion on the buying end, as potential investors simply don't know where, or when, values will bottom out.

Hubbard agrees, adding that there is still a disconnect between sellers' desires and what the buyers are willing to pay. "On the buying side, we're seeing some opportunity funds that are actively looking, but their price threshold is lower than sellers are willing to accept," Hubbard says.

The brokers do point out that the gap is narrowing. Brown explains that some sellers are becoming more motivated because of debt that is coming due. Sellers are also becoming more realistic about what the market will bear, he adds. Even with a realistic seller and an eager buyer, getting the debt is another obstacle. Though local and regional banks have available funds, it's not easy to pry the money free. Many of the deals require anywhere between 20% and 25% down, with LTVs between 50% and 60%.

But until the market clarifies, things will remain stagnant. Miller says he's telling clients if they don't have to sell right now, not to do so. If, however, a disposition is absolutely necessary, "I tell them they might want to think about selling sooner than later," Miller adds. "If you have a stabilized building with no near-term rollover exposure or have recently renewed a major tenant in a long-term lease, the best time to sell is as soon as you ink that lease."