By Ed Padilla, CEO
The commercial real estate community is in the midst of its biggest challenge since 1991. There is no shortage of opinions, but accurate forecasting is nearly impossible in this environment. Capital markets have reached a point where it’s difficult to know what will be available in the immediate future, not to mention when the market will recover.
How bad is the current credit crunch? By any standard the real estate industry is already in a recession and some properties may have difficulty finding a loan under any parameters. Now more than ever it is our intention to earn your trust and deliver on our value proposition. It is our plan to be here providing the best advice possible and clearly setting forth options. Many firms will turn inward and begin to cut, if not totally leave the business. NorthMarq is committed to be here, in this sector throughout this cycle.
My suggestions:
-
If you are considering refinancing a loan or selling a property with a maturity pending in the next year, do it now. Capital will get tighter in the near future.
-
If you have the resources and ability to hold and underwrite a position you should consider buying CMBS. Spreads are at record levels and purchases today will look brilliant in the long term. Consider vintage and balanced pools.
-
Forget last year’s value numbers and think to values three to five years ago. Values peaked in 2006 and of course, the first quarter of 2007 when a record $130 billion of commercial real estate transactions traded.
-
As opposed to historical norms, in this cycle the asset class is following the credit crunch. Commercial real estate has been dragged into this credit crunch based on loss of confidence in other financial instruments. Many investors still have no clue what assets they were buying under the CMBS rating agency label. Fortunately, in most cases the core asset still performs and supply is generally in balance. Unfortunately, illiquidity will now drag values down.
-
If you are in the multifamily industry, get closer to Fannie Mae, Freddie Mac and FHA. They are playing a key role in maintaining liquidity and resulting value in this sector.
As one developer client tells me, “This time we are not responsible for the downturn.” “Wall Street” takes the largest portion of fault, and will pay the price for some time to come. Leveraged financial entities buying into engineered returns that were always just out of reach created an environment that now looks untenable. Unfortunately, it didn’t appear as obvious to all of us as it was being created.
Most importantly, we all should remember that from this cycle significant wealth will be redistributed and created. It’s in the interest of us all to be on the correct side of this formula. Making the wrong moves now will have little defense. The right moves begin with doing everything we can to hold and grow our assets (whether they are bricks and mortar, debt or equity positions or building market share with quality people).
