Experts: CRE at Standstill, Will Get Worse

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CHICAGO-Even optimists have lost words. The best thing that can be said about commercial real estate, after the House of Representatives voted down a $700 billion bailout plan Monday, is that the industry lags somewhat behind what’s going on in the financial market today. Most experts agree that, after a shaky past month or two, a standstill has come over the industry, as financing has dried up, jobs get cut and corporate America holds its collective breath as politicians duke out the country’s future.

Bob Bach, SVP and chief economist with Grubb & Ellis, has tried to be optimistic, but even he was at a loss for words Monday. “This whole thing is stunning on a number of levels,” Bach tells GlobeSt.com. “I think something will pass in the next few days. A plan like this is necessary, though it’s not going to get us out of the woods. There will still be bank failures and mergers. The bill was supposed to restore confidence, but there’s no guarantee banks will start lending again even if it does pass.”

The latest word is that government leaders are frantically meeting, cajoling and strategizing to have another vote on Thursday. There’s still some time before commercial real estate is heavily affected, Bach says, as there’s far fewer delinquent loans for the CRE side as compared to the 15% of residential loans. “If I was a developer, I would go ahead and continue planning, but I’d shop carefully for a loan, and make sure I really consult with the bank. I’d look carefully at the demand, and make sure it’s as stable as when I dreamed up the project. I’d develop scenarios for best and worst cases, and figure out how to survive if the worst happened, or if it’s better to wait until a plan passes to see if the markets stabilize.”

He says companies that lease space are going to also have a large effect on the commercial real estate market. “The bottom line, this is going to make tenants a lot more cautious. They’ll likely ask for short term extensions, and will likely hold on leasing and investment decisions for awhile,” Bach says.

Though Todd Mintz, an EVP with UGL Equis in Chicago, says this unprecedented downtime is going to get worse before it gets better, he thinks tenants will be able to benefit. “With limited or no access to debt, it’s going to make deals a lot harder to do, and difficult for developers to build in the next 24 months,” he tells GlobeSt.com. “There has been some hesitancy in the past 30 days by corporate America for decisions on commitments. However, today my phone was ringing off the hook, all our national clients were wanting help on the best strategy to handle this crisis. With what happened with firms like Lehman and Merrill Lynch, I think we’ll be able to help a lot of clients hoping to take advantage of situations where owners will have excess space to fill.”

However, Mintz agreed it’s going to get worse for everyone until next year. “The next 90 days is going to be rough, we’re going to see a permanent adjustment to the economy. It may even end up to be hard on tenants. If companies like Trump are trying to renegotiate their debt, eventually these buildings may be taken over by lenders, who will manage the property and will make it a longer process to put deals together,” he says. That is, until tenants also feel the pinch to downsize. UGL also handles Wachovia as a client.

Steve Chaben, regional manager of the Detroit office of Marcus & Millichap, says he’s positive about the future. Of course, coming from a state that leads in unemployment, foreclosures and manufacturing job losses, there’s nowhere really to go but up. “It’s true it’s a desert out there regarding financing, and not just in Detroit, though misery loves company,” he tells GlobeSt.com. He says the $25 billion in low-interest loans for the auto industry, that President George W. Bush will soon sign for, is boosting the spirits of the Motor City. “I’m bullish on the bailout. If we can get credit back into the marketplace, commercial real estate will be the first to see activity. People will return to real estate, as other investments will look shaky.”

Strength, quality and available cash will determine who survives the next year, says Jim Clark, managing principal with EnTrust Realty Advisors, an affiliate of the Chicago-based Alter Group. “It will be strong firms with strong balance sheets and strong relationships with banks that will be able to have the best selections in terms of transactions going forward,” Clark tells GlobeSt.com.

He says developers are more cautious, more inclined to do build-to-suit projects than spec, and are selling quality assets, or those in a niche, such as medical office or student housing. He says loans that come due in the next year will drop the other shoe for some companies. “I do think in the next six-to-12 months, you’re going to see a lot of carnage where developers can’t finance their deals, and there will be a flight to quality,” Clark says. “That will be opportunity for strong groups with cash to bring in the equity needed. Investors that are not dependent on leverage will probably be looking for deals for the longer term.”