Commercial property starts feeling squeeze

Commercial property activity in South Florida is at its lowest in 12 years, but that could all change in the second half of 2009.
A surge in distressed sales could be coming from investors facing the double threat of shrinking revenue and the inability to refinance loans. Also, some publicly traded real estate investment trusts with plummeting values are selling area holdings as they restructure their operations.
“What I am certain of is towards the back end of the year we will see an increase in commercial sales, including office, retail, industrial and some hotel,” said Gavin Campbell, founder and managing partner of Miami-based Steelbridge Capital, a private investment firm specializing in Florida commercial real estate assets. Campbell expects the most noticeable hike in commercial activity in the fourth quarter.
Many private investors who bought commercial property over the past five or so years have too much debt and could be forced to sell as loans mature. Refinancing isn’t impossible, but it’s difficult, and far from cheap. Owners who bought in the boom years of 2004, 2005 and 2006 using five- to seven-year commercial loans will begin to encounter problems at the end of this year.
A big factor is how lenders will treat them,” Campbell said. “One of two things will happen. Banks will work with them and give them some breathing room or say ‘Heck No. We need our money.'” Campbell foresees many investors selling because they cannot refinance.
If sellers price realistically, buyers make themselves known.
“There are a huge number of buyers,” said Stephen Nostrand, executive vice president with Colliers Abood Wood-Fay in Coral Gables. “I’ve been in the business for 30 something years and there is as much money waiting — and that is the key word — for what they perceive to be the time to purchase. Values have to reach a plateau where the buyer can underwrite the risk to value ratio.”
Some REIT properties are already up for sale, such as General Growth Properties’ Bayside Market Mall in Miami and Indianapolis-based Duke Realty Corporation’s 90,000-square-foot class A office at Sawgrass Pointe — currently the regional headquarters of Research in Motion, maker of the Blackberry.

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Heading into the second half of the year, more REITs will start selling off select properties that are valued higher than the portfolio stock price.
“What is likely is these REITs will start to sell assets to pay down debt,” Campbell said.
Nostrand describes a board game in which the investment trusts try to unload properties with stabilized rental rates and high occupancy rates. “If they are realistic about pricing, at the end of the day they could end up receiving more revenue from the sale of those assets than anyone would pay for stock value,” Nostrand said.
Campbell predicts that billon-dollar institutional investment firms, such as pensions or endowments, will also face the same refinancing woes.
“Because of their size, they can handle debt, and they have borrowing power on their own. I am more optimistic about their futures than the smaller private firms, but at some point they will have to sell some assets to free up cash for other uses.”
A rush to sell commercial property has been mostly avoided by many investors because these properties draw income — unlike, for example, a condo developer holding onto empty units — but vacancies are rising and rental rates falling.
“I think a lot of this flex space is going to become foreclosures,” said Bruce Bartholomew, of Bartholomew Realty Inc. “We are going to have a lot of inventory coming back onto the market.”