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....

Merry Christmas!

A joyous Christmas to you all!

Warning Signs

PCRE colleague Tim Mehan has penned a very good piece on the many warning signs of the problems within our economy. Specifically, the looming inflation that the government denies is either here or around the corner, and yet all the signs are there.

Drop in at Tim's Ohio Industrial Real Estate Blog and ponder why bond values are crashing and how inflation is going to boost commercial/investment real estate values.

Very nicely written.

In The End, New Tax Bill Helps Investors

The tax bill signed by President Obama will be a boon to commercial/investment real estate. No question about it.

Though it could have been better (re-instating the death tax was clearly a mistake in my opinion), the moves will help quell the near-term fears of many business people, will spur more jobs and physical plant investment, and more. Among the better decisions: not messing with capital gains taxes and extending the 15-year depreciation for qualified leasehold improvements.
Plus, by cutting Social Security payroll taxes and estending jobless benefits, along with mortgage insurance deduction, people will have more money in their pockets. Thus, increased consumer spending will benefit retailers, which will help the retail real estate market and eventually, industrial real estate. Maybe yes, maybe no. An interesting theory. Everything put together does trend toward the positive, though.

I'm not alone in my assessment. In a Globe Street article, Dennis Heskey, senior adviser at AlixPartners, says leaving the capital gains taxes the same rate through 2012 helps the REIT market. REIT investments are a dividend play and this has the potential to help the REIT market, he says.

Adds Harvey Berenson, managing director in the Business Tax Advisory group at FTI Schonbraun McCann Group in New York City, says the extention of the 15-year depreciation for qualified leasehold improvements will encourage investment in rental property.

Overall, there is less uncertainty. There still are other problems looming, but uncertainty about tax implications -- at least for the next 24 month -- helps lessen fears of investors overall. And as Martha Stewart might say, that's a good thing.

House Passes Tax Package

Unlike how it is being presented by much of the media, the U.S. House of Representatives sometime in the middle of the night last night passed an extensive tax bill, which continues the existing tax rates for all Americans for the next two years.

After more than a week of fierce debate the majority voted against increasing taxes.

In the bill, the estate tax, more commonly known as the "death tax," has been reinstated, but at a lower rate than confiscatory bureaucrats had hoped for. Also, there are a number of provisions that allow businesses to take up to 100 percent depreciation on various property categories (equipment, etc.) in order to stimulate production and hiring.

There will be more to come . . .

International Monies Making A Difference

Two trends occurring (its all cyclical you know...).

One -- Domestic money is staying closer to home these days. Investors who have been putting capital into boom opportunities around the globe are keeping their seed money in the U.S. or the region these days.

Two -- International monies are once again making their way to the U.S., as overseas investors worried about world events, politics, trends or what have you, are sensing more stability -- and bargains -- on U.S. soil.

In fact, regarding the latter, only the U.S. and the United Kingdom are currently experiencing an increase in investments from overseas investors. The rest of the world is seeing a drop in foreign capital coming to their shores.

Says Kamil Homsi, president of Global Realty Capital, "the world has become more regionalized due to the uncertainty and the unstable indicators such as employment and consumer confidence." Homsi, whose company has offices in New York and Dubai, told Commercial Investment magazine in its November/December 2010 edition that the global recession has prompted investors to be more cautious about not only the types of properties they are buying, but also where those properties are located.

And commercial/investment properties in the United States, with its one-two punch of battered prices, and a stable government with no civil unrest (generally, but thats a post for another day), are prime targets for international international investors looking for what they consider to be safer havens for their monies.

Large portfolios are being split into chunks that appeal to a wider range of investors.

Here is another trend -- The capital constraints that still exist in the investment market are generating more business for some international brokers. REITs and other money brokers are getting more calls, and uncorking a lot of unused capital that has been sitting waiting for some of the dust to clear.

The best news? International investors who banked in years past on exhorbitant appreciation (many expected to double their money in only a couple years) have scaled back their expectations. They are buying smart these days, and conducting extensive forensic accounting on any project they look at. I can't blame them. A lot of people lost big because they jumped into huge projects on a wing and a prayer.

But wings and prayers don't add to the bottom line. And as notes, they can't be sold for they have no value. The value proposition needs to be clear. If it is, international money will make a move.

Which is good news for the marketplace here.

I Am Honored

Received an unexpected surprise last Thursday morning during our annual Columbus Real Estate Exchangors (CREE) holiday breakfast. Outgoing president Jim Simmons honored me with a memento for my work on the executive committee. Technically, as a past president (from three years ago) I am an outgoing trustee.

I didn't expect anything. Thanks Jim! And thanks to my colleagues for the off-line kudos and remarks throughout the morning. I have enjoyed working with all of you, as well!