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As with other commercial property types, industrial sales activity plummeted in the first half of 2009. The dearth of sales and price distortions caused by a growing inventory of distressed properties that sometimes sell for pennies on the dollar leave little grounding for establishing true value in the market. Reluctant to overpay, the majority of buyers are waiting on the sidelines, trying to figure out how to figure out which deals make sense.

According to Grubb & Ellis, a mere $2.2 billion of industrial properties valued at greater than $5 million sold in the first five months of the year. The figure was down 81% percent from the same period last year and substantially below the average for the three years before that. Moreover, according to Marcus & Millichap, in Q1 the inventory of distressed industrial properties increased more rapidly than the other primary commercial property segments.

As dramatic as the decline was, even more dramatic was the rise in cap rates. By Grubb’s calculation, the average cap rate for industrial deals was 8.1%, up from 7.4% in ’08 and 6.9% in ’07. Colliers pegs the cap rate significantly higher at 8.65%. But while cap rates are pushing higher, Marcus & Millichap says prices for industrial assets have declined only marginally. It attributes the relative stasis to the the fact that the majority of properties that sold had below-average vacancy levels but also had credit tenants in place. But an additional factor appears to be an already low average. Colliers pegs the average mmidyear sales price at $66.88 a square foot for completed product and $10.77 a square foot for land.

To a large extent, the low pricing reflects the impact of distressed property sales. While industrial properties make up only 2.5% of the total value of distressed US assets for the first half of the year, according to Real Capital Analytics, the figure is nonetheless up dramatically from a year ago, when it was under 1.5%. Hessam Nadji, managing director of research services for Marcus & Millichap, expects distress in the industrial sector to increase further in coming months as job losses and low demand for goods moving through warehouses and distribution centers reduce occupancy levels and lower rents.

RCA lists 199 US industrial properties valued at $1.7 billion as distressed as of June 30. About 120 of these have fallen into distress since the beginning of the year. Delta Associates finds the situation somewhat worse. Its statistics show close to $4 billion of distressed industrial properties at at the end of June, nearly double February’s level and triple the level of June ’07. According to RCA, warehouses and distribution centers account for not quite half the total, while flex properties account for about 40% and single-tenant buildings make up the rest.

What makes the distressed property situation even more distressing is that by and large these properties are not selling, even at greatly reduced prices. RCA says less than 7% of properties that became distressed since January have been resolved through either sale or workout. The situation may change shortly, says Grubb senior vice president and chief economist Robert Bach, as a growing number of buyers are raising capital in anticipation of the next wave of distressed assets coming to market.Financing, he adds, appears not to be the main obstacle to getting sales done. He says qualified borrowers can obtain financing for quality, well-priced assets, with debt-service coverage ratios of 1.25 to 1.35. The problem seems to more a matter of investors refraining from committing their money until they’re sure the economy truly is on the mend. While researchers at Marcus & Millichap agree that financing is available for quality assets and acknowledge some segments of the credit markets have started to thaw, they point out that risk aversion remains elevated, with weakening fundamentals possibly prompting lenders to further tighten purse strings in coming months.

According to Marcus & Millichap, all-in rates from commercial banks range from 6.3% to 7% with 65% to 70% loan-to-value ratios (LTVs), while rates at life insurers range from 6.8% to 8%, with LTVs of 50% to 60%. loans with greater than 50% LTV require some level of recourse. Terms from both sources vary from five to 10 years.

The brokerage notes that commercial banks and life companies appear to prefer multi-tenant over single-tenant assets. It says buyers appear in agreement, increasingly targeting multi-tenant properties because the impact of losing an individual tenant is less severe. Single-tenant assets require higher yields to attract buyers.

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