Experts advise: Don't give up on commercial real estate

By Wendy Soderburg

With the current housing bust wreaking havoc on the national economy, it's natural to assume that the residential credit crunch is having a negative impact on commercial real estate as well.

Not surprisingly, it's true, according to a panel of experts who spoke at the UCLA Anderson Forecast's June 18th conference in Ackerman Grand Ballroom. But although the panelists agreed that the outlook for commercial real estate was far from rosy, they weren't predicting outright disaster, either.

The panel was moderated by Charlotte Chamberlain, external expert with the Analysis Group, who opened the session by drawing attention to information that had been imparted earlier that morning during the UCLA Anderson Forecast's report.

"By historical standards, there is a huge glut of unsold homes on the market," Chamberlain said. "But the supply of homes for sale is being pushed up by foreclosures, even as the demand for new homeowners remains weak. Prices are plummeting — as Dave [Shulman, UCLA senior economist] mentioned, they're down more than 27%, according to DataQuick in Southern California. It's gone from a median of $505,000 to $370,000 in just one year."

The housing situation has definitely restricted the number of commercial real estate projects being undertaken, said panelist Robert Osbrink, executive vice president of transaction services for Grubb & Ellis Company. One of the biggest problems, he said, is the way money has moved through the system.

"It took a while, but it finally impacted the commercial projects," he said. "If you look back historically, the cycle of development in any growing area moves from residential, to retail support of the residential, to industrial support, and finally to the office [properties]. And as the money moves through the cycle, you see it impact each one of those categories, about in that order."

David Doupé, international director of capital markets for Jones Lang LaSalle Americas, Inc., added, "The challenge in the commercial real estate business is that, although there is perhaps not a direct link between residential and commercial real estate, the funding sources for commercial real estate lenders are basically the same.

"In the old days, life insurance companies used to be your principal lenders on commercial real estate. And during that period of time, your commercial banks were providers of debt for commercial real estate projects. Unfortunately, the residential subprime mortgage meltdown immediately infected every other aspect of securitized debt, and commercial real estate is a huge portion of that."

Renata Simril, senior vice president of Forest City Residential West, Inc., pointed out that the CMBS (commercial mortgage-backed securities) market is putting a great strain on most of the commercial sector's properties.

"As everybody knows, a year ago debt was relatively abundant and cheap and required little equity. We joke around that if you could breathe, you could get a loan at more than 80% loan-to-value, loan-to-cost, depending on where you were," she said. "Today, you're lucky if you get a call back from the lender, and you have to be a very good project sponsor to get a call."

When asked what they thought were some of the best property types and locations, the panelists' answers varied widely, from large office properties ($150 million and up) in Chicago and New York, to industrial buildings and multi-family apartment buildings in California, to hotel properties in downtown Los Angeles.

They also had advice for people looking to invest in commercial property.

"If you want to finance something, do it now," said Gary Tenzer, principal and senior director of George Smith Partners, Inc. "Liquidity is going to get worse by the end of the year, so don't wait."

Osbrink agreed. "There is a lot of globalization and activity, so the worst thing to do would be to step aside right now," he said. "Stay in the property, broker the deal. It will turn."