Tight lending tanks commercial property sales
(Crain's) — Commercial real estate sales in the Chicago area sank in the first quarter as four major asset classes had volume declines of greater than 80% compared with the year-ago period with lending still scarce and investors wary the worst isn't over.
Deals for retail properties were practically non-existent, as just two shopping center sales closed in the quarter for $12.5 million, down 99% from the first quarter last year, according to data from research firm Real Capital Analytics Inc.
Apartment sales fared only slightly better at $32.9 million, down 94% from the first quarter last year. Office building sales plunged 85% to $218.6 million while industrial sales slumped 81% to $77.1 million.
While the recession and dim prospects for rents and occupancies is playing a role, New York-based Real Capital Analytics blames much of the stalemate on the debt markets.
Two years ago, commercial mortgage-backed securities (CMBS) and Wall Street firms provided 60% of the financing used to acquire commercial properties. Such debt has financed just 2% of deals since last September.
"The unwillingness of any other group to step in to help fill this massive funding gap is a primary reason that sales volume has fallen so far off the peak," Real Capital Analytics writes.
Regional and community banks have doubled their share of acquisition financing, to 12% from 6% two years ago. But the most substantial changes have been that in the first quarter almost half of all deals involved assumed debt, while 7% of sales involved seller financing. Such deals — typically where the seller takes back a first mortgage — were "unheard of during the market peak," says Real Capital Analytics.
In the local industrial market, active buyers are those with all-cash or financing in place and they're still not making deals, says J. D. Salazar, managing principal of Downers Grove-based industrial brokerage Champion Realty Advisors LLC. He says the issue is the wide gap between what buyers are willing to pay and what sellers are willing to accept, and that the economy's performance in the rest of the year will determine which side has to move.
"If we're at the bottom now, and things get better in the third and fourth quarters, buyers are going to have to ante up and pay a little more than when thought they were going to get bargain-basement prices," says Mr. Salazar, who expects that's the most likely scenario. "I frankly think the worst is over for us."
Mr. Salazar points to the "non-existent" pipeline of new industrial buildings being developed in the Chicago area, and also says the market hasn't been flooded with sublease space — suggesting companies are holding up better than expected.
Similarly, in the local office market, one downtown investment sales broker says the supply of new office space has been kept in check, noting the apparent failure of Hines Interests L.P. to get financing for a new, 1.1-million-square-foot tower at 444 W. Lake St.
"The supply spigot was turned off," says Michael Vesper, an executive vice-president with CB Richard Ellis Inc. in Chicago.
He says buyers looking for distressed opportunities downtown may be disappointed because the market's vacancy remains relatively low and many building owners don't have debt coming due imminently.
"A lot of the investment money on the sidelines is looking for distressed sales," Mr. Vesper says. "Maybe it's not going to be as bad as people think."
The suburbs may be another story. One lender, Hartford, Conn.-based Realty Finance Corp., has a deal pending to sell a 131,800-square-foot office building in Schaumburg for $4.5 million less than two year afters providing a nearly $14-million loan mortgage for the property.
Related story: Lender in deal to sell Schaumburg office building at loss
Separately, the 390,744-square-foot National Plaza complex in Schaumburg was recently hit with a $40-million foreclosure lawsuit after its owner, Chicago-based Marc Realty LLC, stopped making its mortgage payments in March.
Real Capital Analytics notes that nationwide would-be sellers are at least at the table. In the industrial market, the ratio was about 6-to-1, with offered volume of $8.3 billion in the quarter and sales of $1.3 billion. In the office market, ratio was about 3-to-1, with $9.5 billion for sale vs. $3.6 billion of closed deals.
"Digging deep to find any positive news," writes Real Capital Analytics of the national office market, "sales did increase slightly in March over February."
