The Real Deal Miami

Capital to return to commercial by year’s end

By Jennifer LeClaire | February 25, 2010 02:42PM

The notion of costly deleveraging and growing numbers of distressed properties make for a grim outlook for access to capital for South Florida commercial deals in 2010.

Most analysts predict commercial real estate vacancies will continue to rise while rents decrease across South Florida. Many expect the market to hit bottom this year.

According to a 2010 emerging trends in real estate report by PricewaterhouseCoopers and the Urban Land Institute, 2010 and 2011 will present generational opportunities for investors to buy at near cyclical lows, nationally and in South Florida. Access to capital remains a critical factor.

Vanessa Grout is vice president for acquisitions at New Valley, a Miami-based subsidiary of Vector Group with $250 million ready to spend on South Florida distressed properties. She said she expects banks to loosen up in 2010.

“I see an opportunity to fill in some of the gaps in the capital
structure that are created by stricter lending requirements when the
debt matures or becomes troubled,” Grout said. “In situations where the borrowers are still in the project, the debt coverage is thin and very close to triggering lock box covenants.”

In that scenario, the lender would require that all property revenue be directed to [the lenders’] control. Grout said current property owners in this situation remain concerned about the near future.

“Investors will urge more deals to close if they are able to structure
a deal with low interest rates and a purchase price just below book
value while allowing the bank to have a limited equity position once the asset is sold,” Grout said. “Land will continue to decline in value but most banks with the ability will hold the prime pieces.”

Gavin Campbell, managing principal of Steelbridge Capital, a
privately-held, real estate investment company in Miami, said most
markets are at or near bottom from an operational perspective. Still, sales values are not fully at bottom. He expects prices to continue sliding in many submarkets and subsectors in the face of extremely limited debt.

“Debt capital will continue to be scarce, although 2010 will be a
remarkable improvement over 2009, with insurance companies leading the way,” Campbell said. “Private investors, including high net worth [individuals] and hedge fund-private equity firms with local expertise will be the most active. Institutional investors are still on the sidelines.”

According to the Emerging Trends report, investors believe capital
will slowly begin to flow back into commercial real estate markets throughout the country by the end of 2010, led by all cash investors seeking quality assets. The debt markets will start to rebound too, the report predicts, but remain “far from normalized” in the wake of unprecedented deleveraging.

All this means that any lending will be conservative, expensive, and extended only to the most-favored banking relationships.

According to the report, REITs, including ones that are comprised of refashioned mortgage pools and private equity funds will start to provide loans to battered borrowers but at a steep price.

Tim Conlon, partner and U.S. real estate sector leader at PricewaterhouseCoopers, said only cash buyers will benefit from the emerging opportunities.

“Investors will need to be patient and transaction trigger points will
be improving job numbers, visibility into asset pricing and stepped-up tenant deals,” Conlon said. “Equity investors will need to focus on quality assets and expect to hold for at least a five- to seven-year period during the recovery, allowing fundamentals to slowly improve.”