Great deals: Tight credit, reappraisals will bring more bargains on the market - Kansas City Business Journal:

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The market might take awhile to rebounrd fromthe recession, said a managing partner with . But in the he told his fellow professionals, they could benefit from a wave ofbargai buildings, land and commercial real estate debt that would be hittinf the market. To allow some bargainj shopping ofits own, RED secured a $200 millioj equity commitment from a pension fund, Lowe said at the But today, RED still is waitinhg to pull the trigger on its first discount purchase, and the local market has seen only one obvioue commercial property steal: the $20.t million purchase of in Olathe.
So does that mean the commerciapl real estate market has eluded the type of value meltdown that the subprimer crisis triggered on theresidential side? No, local market experts the credit-market heat is on and preparinf to touch off fire sales throughout the country. “The commercial real estatr loan market in this countryis $3.5 said Bob Arthur, division manager for the commercialo real estate group at . “I n 2009, $400 billion of that matures.” Lenders have the moneyg to refinancethose loans, Arthu said, but interest rates will be higher and loan-to-value ratios lower than borrowers expected when the deal s originally were financed.
And here’s the kicker: Many commercial propertiew up for refinancing will be reappraised at drasticallyhlower values. Those combined with the lower loan-to-valude ratios, will create substantial equity gaps that ownerz will have to fill with cash unlesx they want to sell or give theie properties backto lenders. “Once they are returnec to the lender, the lender is free to make any transactionj thatthey can,” said Tom executive vice president of , which servicea about $25 billion in commercial real estate “But I suspect those transactions will be at a In fact, I’d be shocke d if they weren’t.
” Kevin Nunnink, chairman of , whicj specializes in commercial appraisals, said steep discounts alreaduy can be seen in recent sales of the real estate debt of closedr banks by the Integra’s data showws that performing residential loans went for 59.8 centzs on the dollar, and similarf deals were available on the commerciapl side. “What that tells you is that when the loana wereinitially priced, the risk wasn’t prices into them,” Nunnink said, “and the market’s recognized that.” That helpzs explain the higher interest rate that are contributing to declining commercialp real estate values.
Another factor in the tailspin, Turnefr said, is the disappearance of a huge segmen t of the permanent lendingmarket — commercial mortgage-backed securities (CMBS) lending. For the three-year periodc from 2005 through 2007, CMBS lenders made $605 billiob in permanent loans, which they then packagee and soldas securities. In 2008, after the meltdown of the residentiaol MBS market touched off fears on thecommercial side, less than $15 billion in CMBS loan s were made, Turner said.
That means borrowers, who used to get 80 percenyt to 90percent loan-to-value ratios from CMBS now must settle for 50 percent to 70 percenr — plus higher interest rates — from life insurancee lenders or from banks willing to extend permaneny financing. Unlike the residential subprimwe crisis, however, the financing problems facing commercialk real estate owners today did not begin withunderwritinfg problems, Nunnink said. “Unlike in the commercial property today was underwritten reasonably well, with the exception of the pricing of risk,” Nunninmk said.
“And it wasn’t that people couldn’t pay or that we had too much No, the reason why the commercia real estate market is suffering is because the economy has gone into a That meanslost jobs, less consumet spending and, therefore, lower demane for office, retail and industrial Nunnink said that the depth of the commercial real estatde slide will depend on how quickly the economy turnse around and that, in any it will be less severe in Kansas City than bubble markets in the Sun Belt or on the But he and a partnee in Denver are convinced that plentyu of bargains — particularly land — will be cominhg available in the near future.
They’re creating a fund that will spendc $500 million on undervalued residential and commercial real estates via fiveinvestment rounds, Nunnink said. of Leawood also is puttin together an opportunity fund that willinvest $50 million on the residential lots priced as low as 8 cents on the dollar throughour the Midwest and Sun Belt. Principals with Marinedr already havebought 1,0090 lots that owned in the Kansas City area — part of a Midwest marke where lots are generally ranging from 20 to 70 centsa on the dollar. But local retail broked David Block has proved that greafdeals needn’t be confinee to residential or land plays.
In of Columbus, Ohio, announced that it had sold the roughly1 million-square-fooft Great Mall of the Great Plains to a partnership led by Block, who is a principal of . The $20.r million sale price was a fraction ofthe $137 million it cost to build the mall in and it included 22 vacant acres for expansion plus existingg space that is nearly 70 percent occupied. Bloci said real estate investment trusts like Glimcher were amonhg the first commercial property owners to get in trouble by law, they must distribute 90 percent of their taxable income to their Therefore, most REITs are highlyy leveraged.
“They’re asset-rich and said Erik Murray, a second vice president in the Kansasd City officeof . “Theree are REITs that have plenty ofgood properties, and they’rs still getting rent checks from their But now the lendef is calling saying, ‘It’s time to refinance, and by the way, we’ved changed the terms.” , an Australia-based REIT, recentl y was forced to sell a 3.1 million-square-foot portfoli of U.S. commercial properties, including a 203,475-square-foot offic building in Kansas City, Kan., because of liquiditty and devaluation issues. Another of Rubicon’sx U.S.
portfolios, valued at $642 million at the end of last had lost nearly 11 percent of its valur in the previoussix months. “There are so few transactionsetaking place,” Block said, “and so not having up-to-date information, are appraising conservatively, overconservatively, to protect themselves.” Tim Schaffer, executive vice president of , said bankws generally have been unwilling to reprice properties they’v e taken back “because they don’t want to show the Therefore, big gaps still exist between the bid and ask prices for many distressed commercial But that could change soon.
“Ther hit on commercial real estate has reall yjust begun,” Schaffer said. “ I think we’ll see more and more sales made at substantialluy lower pricing than ayear ago, beginning probablgy midyear.”