Credit crunch ices commercial real estate deals

Real estate investment sales are falling off and prices dipping, brokers say, as the credit crunch puts a damper on large commercial real estate transactions.

Leading real estate investment adviser Eastdil Secured has seen monthly deal volume plummet from $19 billion to $5 billion nationally during the second half of 2007.

The lack of credit has particularly hit deals valued at more than $150 million, according to Eastdil Secured Senior Managing Director Jeffrey Weber, who spoke at a Urban Land Institute 2008 forecast Nov. 29. For those deals, prices are averaging 10.4 percent less than initial valuations, Weber said. In contrast, deals less than $150 million are still outpacing initial valuations by 1.3 percent.

"Those over $150 million have really taken it in the shorts," said Weber.

He added: "Today the mood is one of 'I don't want to make a mistake.' The debt isn't there for the mega-deals."

The scarcity of capital is also rewarding sellers of core downtown assets, rather than value-add properties, according to the Eastdil research. Of core downtown projects under contract, 2.4 percent are coming in at over the initial asking price; value-add properties are going into contract at 4.4 percent less than initial asking. Value-add properties are generally in need of capital improvements or have high vacancy rates, and thus pose more risk and higher potential rewards.

"We've had deals in which we have had no real fall-off, and others have fallen off 10 to 20 percent," Weber said.

The drop in monthly deal volume puts San Francisco back at levels seen during 2005 and 2006 -- respectable years, but far from the run up seen at the start of 2007 when Morgan Stanley bought the 3.9 million-square-foot former Equity Office portfolio for $2.8 billion, or an average of more than $700 a square foot.

"In the short terms we've clearly seen the peak, prices have come off what we saw earlier," said Weber. "On a long-term basis I think we're far from a peak."

Tom Sherlock, a managing partner of Buchanan Street Partners, said he has seen a 10 to 15 percent drop in prices. He said lenders are increasingly insistent on underwriting deals based on what is -- current rents, for example -- rather than what is projected in the future. With higher interest rates and spreads, banks are unwilling to take chances.

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source: bizjournals.com