Thursday, December 30, 2010

Things Are Looking Up

Just had lunch with a colleague from Chase Bank. He told me that his group lent way over their budgeted (read: expected) lending cap for 2010. Major markets were California, Indiana and -- get this -- Michigan. Even those areas with bad economies are seeing things come chugging back.
Sure, underwriting terms are more strict, but business is getting done and money is being lent. It is too easy to stand around and blame the banks for not lending money when there are other reasons certain projects don't obtain funding.

This news, mixed with reports that commercial real estate values are rising, is super news. In 2010 we did not see a huge drop. In 2008 and 2009 (truly starting at the end of 2007), we saw a 40 percent drop in values overall across the U.S. We have seen increases in prices in top markets across America. Pricing may well have bottomed, but we still have yet to see what is coming in 2011. There are reports that banks are going to dump some product next year. Time will tell.

There will be a broadening of buying in 2011, as REITs kick loose funds they are overloaded with, cash-heavy investors come into Class B and Class C products, and distressed assets. Some are calling the trend a "gradual thawing" of lending. Again, my conversation with my colleague from Chase (he works in a major operations center here in Central Ohio) indicated that even the most conservative of banks -- Chase is one of these -- are starting to push more money out the door.

CNBC's Closing Bell had a discussion of commercial real estate values a few days ago. It is definitely worth watching.

Even multifamily which stayed fairly stable was hit in 2008 and 2009, and values remain below where they might have been. Still, they are in stronger shape than commercial buildings, industrial and other segments.

Trophy assets, according to the guys on CNBC, those properties of $10 million and over -- in the top half dozen markets in the U.S. -- were up some 40 percent in value.

Further, National Real Estate Investor is saying similar things. That fundamentals are improving. Manufacturing expanded for the 16th straight month in the U.S., even though jobless figures havn't budged much. In addition, investors flat out are expecting stronger performance from the economy, as evidenced by 10 year treasury yield reversed a year long decline. This is a critical benchmark for commercial real estate lending.

Things just may be improving. My only concern is inflation. There will be a broadening of the buying appetite and interest rates continue to remain low. But what of the money supply that we are cranking out and how that impacts acquisitions? Current owners are going to see benefits. Those who aren't in yet may be impacted by inflation if they wait another year.

More to come....

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