Monday, December 20, 2010

Projecting Commercial Real Estate Values

According to the Moody’s REAL Commercial Property Price Indices (CPPI), US commercial real estate prices have declined 42.7% since the market peaked in October 2007. However, in September the index posted the largest one month price increase in the index’s nine-year history, a 4.3% increase. Since bottoming out in the third quarter 2009, the index has generally flattened out with monthly volatility partly based on economic uncertainties and a lack of sales volume. The lack of sales volume is partly due to the lack of available mortgage funds.
With over $1 trillion worth of commercial real estate loans expected to mature between now and 2013, lenders appear to be placing significant importance on restructuring existing loans, as opposed to making new loans. “Delay and Pray” practices delay foreclosures by altering the terms of payments, and/or extending the time a borrower has to pay down a loan. Federal Deposit Insurance Corporation Chair Sheila Bair said in an Oct. 13 speech that these policies are useful in helping the commercial real estate sector recover by offering opportunities to restructure.
At a recent American Bankers Association conference that I attended, there was much chatter about the adverse effects that the Dodd-Frank bill will have on the cost of credit. Hank Paulson, the former Treasury secretary, opined in The Wall Street Journal that  higher capital and liquidity requirements will give us more stable long-term growth. He rejected the notion that these requirements will slow economic growth. In the short term however, with many smaller banks concerned about the adequacy of their capital reserves, commercial real estate lending seems to have decreased in priority at many institutions.
According to the November 29th edition of the Mortgage Employment Index from, the headcount in real estate finance employment dropped by nearly 1,000 in the third quarter 2010. In October 2005, mortgage employment peaked at 535,400 based on government data. In September 2010, the industry-wide headcount had decreased to 246,400, according to the index.
As we move past 2010, it appears that the industry can expect more conservative underwriting standards in 2011. As banks rewrite existing mortgages, the burden of deriving reasonable market value estimations on distressed properties will fall on the shoulders of the real estate appraisal industry. With many markets experiencing large vacancy rates, volatility in rental rates and terms, and fewer sales, creativity and a solid knowledge of appraisal fundamentals are essential in estimating the market value of unstable properties in unstable markets. In deriving value estimates utilizing discounted cash flow methods, there are numerous projections that need to be made, and the reasonableness of each projection is key to obtaining a reasonable value estimate. Such projections require substantial research and thus an investment of time. In deriving market values utilizing direct capitalization techniques, there are fewer projections required; however each projection takes on paramount importance.
Many predict that commercial real estate values have bottomed out, and that they will remain at these levels until employment picks up and occupancy rates increase. With economic distress spreading in Europe, US states teetering on bankruptcy, and an uncertain political landscape, any projection on where commercial real estate values are headed is clearly subjective.
-Jonathan Fischer, MAI
Jonathan Fischer, MAI, is a Managing Director in NAI Global’s New York City office and works with investors and financial institutions as a member of NAI’s Special Asset Solutions group.

Bass Pro Shops deal raises economic hopes for Harlingen

HARLINGEN — A cross-section of larger Harlingen businesses that stand to be affected by the Bass Pro Shops development have little doubt that the 100-acre Cameron Crossing Development will attract more retailers to the city.
City officials signed a 20-year lease with Bass Pro Shops on Dec. 11, setting the stage for a large retail shopping center north of the Expressway 77/83 interchange, near Spur 54. The Harlingen store will be Bass Pro Shops’ 57th location.
Landing the large retailer is a hopeful symbol for those who desire to see the city progress with more shopping choices, more sales tax money flowing through the local economy and more jobs.
The store has posted one job listing, seeking a general manager for its Harlingen store. It is not yet accepting applications for hourly 
Former Harlingen mayor Connie de la Garza, a commercial real estate broker, said the development of the site won’t happen overnight, but it’s a positive step for the city.
"Phone calls have been made and people are starting to see what they can do, but with the holidays, it’s not going to happen until the first of the year," de la Garza said of serious business inquires related to the deal. "The bottom line is the news is out there and it’s starting to make wheels turn."
De la Garza confirmed that he represents a client who is interested in building a hotel as a result of the Bass Pro Shops deal. His client hasn’t yet committed to the hotel construction, but "he’s going to start seriously putting down the numbers to see how it will work."
Jim Gissler, developer of Harlingen Corners, the 50-acre shopping center where Bed Bath & Beyond and Kohl’s are among the stores that have opened, said his development was excited to have the outdoor retailer "as a neighbor that will be a great regional draw."
"We will benefit from increased traffic naturally, as will the entire city, as a result of the announcement," Gissler said of the lease with Bass Pro Shops.
Les Morris, a spokesman for Simon Property Group, which owns Valle Vista Mall, said he could not comment on the benefit or competition for the mall that might result from the Bass Pro Shops-Cameron Crossing development.
"Traffic numbers for any of our properties, or the portfolio as a whole" are not revealed "because we view them as unreliable," Morris said.
In addition to Valle Vista Mall, Simon Property Group’s regional mall portfolio consists of La Plaza Mall in McAllen and the Rio Grande Premium Outlets in Mercedes.
Morris said in an e-mail that as of Sept. 30, Simon Property’s occupancy was 93.6 percent, up from 92.8 percent a year earlier, and sales per square foot were $483, up from $449 a year earlier.
"Well obviously, all I can tell you is we, for many years, have had a strong presence in the Valley and believe it is a very successful property and have a loyal base on both sides of the border," Morris said of the mall, which opened in 1983.
The largest retailers at Valle Vista Mall are Dillard’s, JCPenney, Sears, Forever 21 and recent addition — Big Lots.
Bass Pro Shops says more than 100 million ...
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