Spike in Distressed Property Sales Is A Healthy Sign, Says Moody’s

Spike in Distressed Property Sales Is A Healthy Sign, Says Moody’s

May 25, 2011 10:14 AM, By Matt Hudgins, NREI Contributing Writer

An index of U.S. commercial real estate prices fell to a cyclical low in March that was down 47% from the peak in October 2007. So why should investors be happy?

The Moody’s/REAL National All Property Price Index measures price changes on completed sales of apartment, office, industrial and retail properties. A 4.2% decline in the index since February stems in part from a surge in transaction volume among distressed properties, which accounted for more than 30% of March sales.

Click chart to enlarge

Mushrooming trading of distressed assets means that investors and lenders are realizing losses on their distressed assets on a massive scale. Experts say that process is painful, but those price corrections must occur in order for the nation’s commercial real estate market to regain its footing and for overstretched property owners to de-lever and bring cash flows into positive territory.

“Importantly, we’ve now set a post-peak low in the all-property index simultaneously with a post-peak high in distress transactions,” observes Tad Philipp, director of commercial real estate research at Moody’s Investors Service, which publishes the index.

In other words, the decline in the all-property index doesn’t necessarily mean commercial real estate values are dropping. The recent dip is more a reflection of the larger proportion of transactions involving distressed assets, which bring down the average. Indeed, in primary markets where distress represents only a small fraction of transaction volume, asset values are well into a recovery cycle.

Primary price leaders

“The commercial real estate world in the five or six primary markets is as active as it has ever been in terms of desire for the properties and pricing, the backdrop being that interest rates are low,” says Bill Collins, an executive managing director who oversees the capital markets group at Cassidy Turley in Washington, D.C.

With risk-averse investors focused on a handful of gateway markets that include places like New York City, San Francisco and the nation’s capital, competitive bidding has been pushing up transaction prices in those metros for some time, Collins says.

“You’ve got a lot of capital looking to be placed,” says Collins. “The fact that there’s only 60% leverage available and 40% equity required to close a deal really doesn’t matter; people don’t need to stretch their dollars because they have this accruing pool of dollars they need to place.”

Indeed, Moody’s researchers found that average prices in the primary markets already show marked improvement. An index of non-distressed, trophy properties — those valued at $10 million or more and located in one of six major U.S. markets — in March showed property prices have risen 26.7% from a trough in December 2009.

(The six cities covered in the index are Boston, Chicago, Los Angeles, New York, San Francisco and Washington.)

In fact, pricing gains are evident among trophy assets even when distressed transactions are included in the calculation. A separate Moody’s index measuring trophy property sales including distressed deals indicates that prices have risen 22.9% since that index bottomed in July 2009. “This is consistent with liquidity in the commercial real estate sector first returning to prime assets in capital-attracting cities,” says Philipp.

Crank up the volume

A recent pick-up in transaction volume is a sign that the U.S. commercial real estate market is on the mend, because moving distressed properties through the system sets the stage for recovery, according to Moody’s.

In March, there were 182 repeat-sales transactions totaling nearly $2.5 billion, a significant increase over February’s $1.26 billion volume and 115 repeat sales. March had the second-highest number of repeat-sale transactions since 2008, the total only exceeded by that of December 2010, which benefitted from being the end of the year.

Moody’s uses repeat sales, or multiple sales of the same property over time, to calculate price changes in its indices. Looking at the larger transaction spectrum, sales of U.S. commercial real estate valued at $5 million or more totaled more than $28 billion in the first quarter of 2011, up 77% from $15.9 billion one year earlier, according to Real Capital Analytics.

Moody’s national indices showed declining prices across property types in the first quarter. Industrial recorded the largest decline, falling 7.7% from the previous quarter to a post-peak low. Office was down 7.1% from the previous quarter but was up 1.9% from its low in the third quarter of 2009.

Apartments were down 4.7% from the fourth quarter of 2010, but were up 14.1% from that sector’s low in the third quarter of 2009. Retail was down 4.5% from the previous quarter but up 9.4% from a bottom in the second quarter of 2010.

Investors can expect the all-property price index to “bounce along the bottom” until more distressed assets move through the market, Philipp predicts.

On a positive note, the special servicers that handle distressed conduit loans in commercial mortgage-backed securities (CMBS) are resolving those debts at a rate about equal to the pace of CMBS debts falling into delinquency. That is resulting in a fairly stable delinquency rate, which stands at 9.22%.

Taken together with swelling transaction volume, the commercial real estate industry appears to be making progress in dealing with distress, says Philipp. “The resolution process for this transaction cycle appears to be well under way.”


Land Update: What is going on with the old Hooters location on St Rt 125

We pride ourselves at keeping the facts updated to the public.

We are certain most travelers passing the St Rt 125/Beechmont Ave exit at Interstate 275 have noticed the old Hooters restaurant was torn down recently, this type of change always leaves those passersby to wonder what is going on with that real estate. It has been a passion of ours to keep the local public informed on road, highway, commercial and residential building construction changes or additions, if locations of interest are noticed, please contact us and we will investigate and report our findings for you.

Hooters and their parent company have decided the land where the restaurant was located has a higher potential to lease the location without the building standing, opening the ground to more potential clients. A very high traffic piece of real estate is currently marketed by Edge Real Estate Group offering lease of the ground (1.017 acres)  “Preference is to ground lease or BTS.  Asking $75,000/annum on a ground lease.  May consider a sale, but at a steep multiple”, according to Dan Sutton of Edge Real Estate.

Edge Real Estate Group has put together this marketing brochure Hooters-Former_LAND_REV_2.2.11

Cautious Optimisum for 2011

Cautious Optimism for 2011

Jan 7, 2011 10:08 AM, By Ed Watkins, Lodging Hospitality Editor-in-Chief

 Members of the Lodging Hospitality roundtable believe 2011 will be better than ’10 and certainly ’09, but they’re not completely sold.

 “We saw RevPAR improvements in 2010, so we’re cautiously optimistic 2011 will be a stronger year, driven primarily by gains in occupancy,” said Keith Pierce, president of brand operations in The Americas for Wyndham Hotel Group. “But it’s still a fragile environment, and any major negative economic occurrence could hurt us pretty quickly.”


Robert Habeeb, president and COO of First Hospitality Group, was a little more bullish, forecasting RevPAR growth of six percent or better this year. “And it’s not illogical to believe we’ll see some real significant rate appreciation as we get into a more normal supply and demand cycle,” he said, citing particularly strong growth in urban markets. “We’re finally getting some traction in downtown Chicago, which is a market that has lagged in rate for the past year and a half.”


Bjorn Hanson, dean of the Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University, applied a statistical analysis to his outlook for the year. According to Dr. Hanson, in the last six hotel industry cycles, the second year of recovery (in this case, 2011), hotel demand grew between 5.5 and six percent, versus the long-term growth rate of 2.2 percent. The consensus outlook for demand growth in 2011 is three percent, he said.

Read Full Story Here

Record Property Price Gain Could Be Temporary


Record Property Price Gain Could Be Temporary

Dec 8, 2010 10:36 AM, By Matt Hudgins, NREI Contributing Writer

U.S. commercial real estate prices climbed 4.3% in September from the previous month, according to the Moody’s/REAL Commercial Property Price Indices (CPPI). That’s the largest one-month gain in the index’s nine-year history, and is encouraging for a market that has wrestled with deflated property values for nearly three years now.

Yet experts debate whether the gains will last, or will instead prove to be one in a series of severe fluctuations. The spike is small in relation to the overall, 42.7% value decline the index has tracked since the market peaked in October 2007. The CPPI measures transaction price changes for commercial real estate assets based on repeat sales valued at $2.5 million or more. 

And there is no guarantee that September’s positive performance will be repeated in a year marked by index volatility. In the first nine months of 2010, the All Property Type Aggregate Index has logged five monthly gains and four monthly declines. In fact, the past year’s ups and downs have nearly balanced out: The All Property Type Aggregate Index was up just 0.3% in September from a year ago.

Moody’s analysts chalk up the recent volatility to economic uncertainty and low sales volume. But the changing mix of trading properties is also having an effect on index values, according to Dan Fasulo, managing director at New York-based Real Capital Analytics, which provides the sales data reflected in the Moody’s/REAL Indices.

Many of the assets selling today involve some form of distress, which can result in lower prices than willing sellers would accept, explains Fasulo. Investors, too, are branching away from an exclusive focus on core assets in primary markets to acquire real estate with greater risk profiles and lower prices. “There are lower-quality assets now in the data set and it is causing these pretty violent changes month to month,” says Fasulo.

Results were mixed among property types, with apartments and retail showing price gains while industrial and office assets continued to lose value nationwide.

In the largest metro areas, retail and office properties showed positive returns exceeding 9% in the third quarter from the second quarter. Industrial properties logged losses of nearly 10% during the same period, according to Moody’s.

Think big picture

Commercial real estate price indexes have been good, general indicators of pricing trends, according to Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association.

“The (upward) trajectory was pretty clear during the 2005-2007 period, and you had pretty clear (downward) direction in the 2007 through early 2009 period,” observes Woodwell. “Since then we have seen those fluctuations, and it’s hard to pin down exactly what those mean.”

Fluctuations may obscure subtle trends, as Woodwell points out. On the other hand, the volatility that seems to be clouding index returns may in fact be a close indicator of pricing trends, according to David Geltner, director of research for the MIT Center for Real Estate and one of the engineering forces behind the CPPI’s methodology.

“This type of extreme volatility probably largely reflects what is actually going on in the U.S. commercial property market, as asset markets typically display greater volatility during periods of fundamental uncertainty, rapid economic and institutional or political change, and transition in the markets,” Geltner writes. The MIT researcher’s observations on the September index results are posted in a column titled The Professor’s Corner on the Real Estate Analytics LLC website at http://www.realindices.com/. Real Estate Analytics developed the Moody’s/REAL Indices.

Plenty of data

Insufficient data, at least, is no longer a hindrance to price index calculations, according to Fasulo. Low sales volume in 2009 has given way to a more robust market this year, with 153 repeat-sale transactions in September alone, Moody’s reported. Sales volume by dollar amount jumped to $3.7 billion from $1.85 billion in August. That gave September the largest dollar amount of repeat-sale transactions since January 2008.

“There are certainly enough data points to calculate the index at this point and we are way past the low point of the transaction cycle by now, so I don’t see that as being a problem going forward,” says Fasulo.

Geltner suggests that mushrooming sales volume is perhaps the best corroborating evidence that September’s pricing gain is the beginning of an upward trend. Looking beyond repeat sales to include all commercial real estate sales, September trading volume was $10.4 billion, a two-year high. “Indeed, volume has been trending gradually upward every quarter this year,” he writes, “with energetic activity in both the upper/trophy and bottom/distressed segments of the market.”

Taking a long-term look at the indexes, Fasulo notes that the severe decline in asset values that began in late 2007 had run its course by the third quarter of 2009. He reads the results from the 12 months since then as indicating a market at the bottom of the transaction cycle.

Further, he believes that’s where the market will stay until returning job growth and economic expansion can boost demand for commercial real estate. “Until underlying fundamentals recover in a really strong way, with rents and occupancy levels showing a clear upward trend nationwide, you’ll continue to see the index bounce along the bottom.”

Record Property Price Gain Could Be Temporary

Slowly, the Shopping Center Industry is Striding Toward Recovery


Slowly, the Shopping Center Industry is Striding Toward Recovery

Nov 10, 2010 11:47 AM, By Denise Kalette, NREI Managing Editor

ATLANTA —When Gar Herring, president and CEO of Dallas-based developer The MGHerring Group asked a luncheon crowd at the Southeast Conference of the International Council of Shopping Centers (ICSC) on Tuesday if they thought the recession was over, an overwhelming majority of hundreds of attendees raised their hands to show they feel it isn’t over yet.

Just a year ago, commentators were comparing the U.S. economy to that of the Great Depression of the 1930s, Herring said, but despite the prevailing sentiment that shopping center developers, owners and managers are still enduring hard times, there are a number of signs that the industry is improving.

Same-store sales rose in the first nine months of 2010 on a year-over-year basis by 3.4%, according to ICSC, said Herring, who is vice president of the group’s Southern division.  And ICSC forecasts that holiday retail sales will increase by 3- to 3.5% over 2009 levels, the largest spike since 2006.

“Conditions are improving, albeit slowly,” says Herring. “We can draw encouragement from the fact that retailers and shopping center operators have responded creatively to the many challenges thrown their way since the dark months of 2009.”

Shopping center professionals and brokers have put their leasing, management and marketing skills to “the sternest imaginable test,” and now shoppers are returning and traffic is up at the retail centers, says Herring. “Retailers have generally shifted from a position of having to mark down a glut of excess inventory to selling at full price.”

However, the retail tide is not yet lifting all boats. The discount sector remains strong and the luxury segment of the industry has been strengthening, but the middle market has been slower to rebound.

Discounter Dollar General plans to expand its 9,100 stores by another 1,200 within two years. Fast food retailer Burger King plans to add 500 stores, while Quiznos will add 1,200. 

As jobs and consumer spending lead to greater sales and profits for retailers, and renewed demand for store space in malls and shopping centers, retail leasing is expected to strengthen further.

Occupancy perks up

The number of properties with occupancy below 80%, the tipping point for severe distress, declined in the third quarter compared with fourth-quarter 2009, according to the CoStar Group. However, among community shopping centers, the number of properties with occupancy of less than 80% is still increasing somewhat, as is the number of regional malls with high vacancies.

Still, the number of power, lifestyle and strip centers with occupancy below 80% has declined since late 2009.

The 12.9 million sq. ft. absorbed in the 62 largest U.S. retail markets in the third quarter demonstrate the fifth consecutive quarter of positive absorption since 2009, when the market recorded 26.7 million sq. ft. in negative absorption, ICSC reports.

“As long as the recovery continues in the broader economy and the amount of new supply delivered remains low, retail vacancy rates should continue to decline through mid-2013,” says Herring.

Meanwhile, rents are still declining but at a slower rate, and falling vacancies and shrinking supply are expected to gradually shift the imbalance between supply and demand and lift retail rental rates and sale prices.

‘Bust’ markets struggle

The national retail vacancy rate edged down slightly from 7.4% at midyear to 7.3% in the third quarter, although the availability rate — space that’s being marketed but is not yet vacant — is still hovering around a peak of 10%.

Some retail markets have fared better than others. In Texas, where the housing crisis did not cause as much economic harm as in other states, retail leasing and occupancy have remained stronger than in “residential bust” markets like California, Florida, Nevada and Arizona, says Herring.

In Denver and Atlanta, where retail space overhangs are a problem, recovery may take longer than in markets such as those in Texas. 

What will it take for the industry to recover? Restraint, when it comes to expansion, for one thing. And new ideas. “Getting our shopping centers back to full strength will, in many cases, happen because of the growth of new retail concepts,” says Herring.

“Retail chains that over-saturated prior to the global financial crises, and have been forced to cut back their store portfolios, are not likely to simply return to the kind of freewheeling expansion of the old days.”

Slowly, the Shopping Center Industry is Striding Toward Recovery

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