Commercial Loans and Fun Blog

Commercial Real Estate Investors Are Close to Capitulation, Which is a Bullish Sign

I work as the Controller of Blackburne & Sons Realty Capital Corporation, one of the oldest private money (hard money) commercial lenders in the country.

Daily, trust deed investors call our office to inquire about the status of one of their particular investments, to question the amount of a disbursement, or to simply check-in on their overall portfolio. A couple years ago, the substance of the calls consisted of simple accounting questions or a request for a brief update.

For the past three years, given the deteriorated condition of the commercial real estate market, unfortunately many of the calls received today entail a scared or panicked investor, wondering how their investment(s) will survive.  While each investor’s concern is voiced differently, the underlying emotions associated with those concerns tend be to be similar relevant to market conditions. I’ve facilitated investor calls five days a week, eight hours a day for the past 4 ½ years; but only after a seminar with Tony Woods, author of “The Commercial Real Estate Tsunami”, was I able to identify the investor emotions exposed in those conversations.

 

A chart provided in Woods’ book, courtesy of Westcore Funds of Denver, Colorado entitled “The Cycle of Market Emotions,” is a fabulous tool to understand the underlying emotional cycle. Examples of emotions are euphoria (the best feeling possible), down to fear, panic, capitulation and finally despondency.

Present day, I believe the majority of investors’ emotions seem to be in the area of panic or capitulation, based on the substance of calls and reactions to updates.  However, just recently more and more investors are becoming submissive (i.e. despondency). These particular investors still call for updates, but the information provided is no longer a shock or disappointment; rather considered par for the current market conditions.

It’s always darkest before dawn… so I remain optimistic for our loyal trust deed investors that again (hopefully sooner than later) the feeling of hope and relief in trust deed investing will be restored.

Angela Gimenez is the Vice President and Controller of Blackburne & Sons Realty Capital Corporation.  The opinions expressed are her own.  She can be reached at 916-338-3232.

I read a fascinating statistic in a Bloomberg article this week.  Commercial real estate values soared 19% last year, the second largest annual increase in history.  Too bad the statistic is utter nonsense.

Bloomberg's statistics were based on closed sales of commercial real estate; but what about the 35% of all commercial properties that are sitting there with no tenant and no buyer?  These older commercial buildings definitely have not appreciated.

Take a drive around your town.  You'll see vacant commercial and industrial space everywhere.  I postulated in a recent blog post that most of these older commercial buildings may never a have tenant again.  They will be bulldozed before they are ever again leased. 

Here is what is really happening.  Commercial real estate is separating into two halves.  The top 40% of all commercial real estate that is modern and well-located enough to attract and keep tenants is appreciating.  With ten-year Treasuries yielding under 4.5%, investors are desperate for yield.  They are therefore bidding prime commercial real estate sharply up in value.

The bottom 35% of all commercial real estate is vacant, and it is not selling for any price.  Therefore the value of older, vacant commercial real estate has not been counted in Bloomberg's statistics.

This bottom tier of commercial real estate is not generating any income, and a good argument can be made that many older, vacant commercial buildings are less than worthless.  The owner has to pay real estate taxes.  The owner has to heat these buildings in the winter.  The owner has to maintain fire and liability insurance on the building. The owner has to maintain the aging roof and pay for a security system.  Many absentee managers have to pay for property management.

The truth is that if a relative died today and left me a large, vacant, older commercial building in a non-prime location, I would refuse the legacy.  I wouldn't want the large, old commercial property, even if its replacement cost was millions of dollars.  All it would ever do would be to cost me money.

Bottom line:  Commercial real estate is separating.  Prime commercial real estate is smoking hot.  Many older, vacant commercial properties are now worse less worthless.

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Commercial Real Estate Investors Are Close to Capitulation, Which is a Bullish Sign

I work as the Controller of Blackburne & Sons Realty Capital Corporation, one of the oldest private money (hard money) commercial lenders in the country.

Daily, trust deed investors call our office to inquire about the status of one of their particular investments, to question the amount of a disbursement, or to simply check-in on their overall portfolio. A couple years ago, the substance of the calls consisted of simple accounting questions or a request for a brief update.

For the past three years, given the deteriorated condition of the commercial real estate market, unfortunately many of the calls received today entail a scared or panicked investor, wondering how their investment(s) will survive. While each investor’s concern is voiced differently, the underlying emotions associated with those concerns tend be to be similar relevant to market conditions. I’ve facilitated investor calls five days a week, eight hours a day for the past 4 ½ years; but only after a seminar with Tony Woods, author of “The Commercial Real Estate Tsunami”, was I able to identify the investor emotions exposed in those conversations.

A chart provided in Woods’ book, courtesy of Westcore Funds of Denver, Colorado entitled “The Cycle of Market Emotions,” is a fabulous tool to understand the underlying emotional cycle. Examples of emotions are euphoria (the best feeling possible), down to fear, panic, capitulation and finally despondency.

Present day, I believe the majority of investors’ emotions seem to be in the area of panic or capitulation, based on the substance of calls and reactions to updates.  However, just recently more and more investors are becoming submissive (i.e. despondency). These particular investors still call for updates, but the information provided is no longer a shock or disappointment; rather considered par for the current market conditions.

It’s always darkest before dawn… so I remain optimistic for our loyal trust deed investors that again (hopefully sooner than later) the feeling of hope and relief in trust deed investing will be restored.

Angela Gimenez is the Vice President and Controller of Blackburne & Sons Realty Capital Corporation. The opinions expressed are her own.  She can be reached at 916-338-3232.

Interesting Report from National Mortgage News Online

No one can be terribly surprised that the other shoe has finally fallen.  According to a June 22nd report from National Mortgage News Online:

Commercial Real Estate Prices Fall 8.6% in April

Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007.

According to Moody's, the large negative return for April likely reflects that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging. "The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," says Moody's managing director Nick Levidy.

The South has been the worst performing region over the last year, with an annual decline of more than 20%. Commercial real estate has performed worse in Southern California than in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.