The End Is Near (for This Recession).

So read some of the economic placards that have been trotted out in policy statements these days with catchphrases such as 'Sustainable Recovery.' 'Recession Is Coming To An End.' 'Policy Actions Having an Effect.' 'Seeing Green Shoots of Growth.' and 'The Crisis Has Stabilized.' Many pointed to the more than 2,000-point climb in the Dow Industrial Average over the last three months as proof that federal stimulus measures appeared to be having an effect in rousing the slumping economy.

Just this week, chief economists from JPMorgan Chase & Co., Wells Fargo & Co., PNC Financial Services Group, Morgan Stanley and others said they expect the economy to "recover from its deep slump by late summer." The group that makes up the Economic Advisory Committee of the American Bankers said they expect the nation's gross domestic product (GDP) to increase 0.5% in the July-September quarter -- this after falling a projected 1.8% in the April-June period.

Such signs have raised hopes that the end of the recession may be in sight and that it is time to turn attention to making money again among real estate investors and service providers. We put those questions to CoStar Group customers and readers. Do they see the end in sight and what do they see the future holding for the commercial real estate industry? This article will address comments on the first question. Next week, we'll look at what the future holds.

So, is the end of the recession near? Not as far as commercial real estate is concerned, was the overwhelming answer we received.

"Since they repaired the Hubble Telescope last month, I suppose someone could argue the end of the downturn could be theoretically 'in sight.' Otherwise, the way we see it, not so much. The system is still too much of a cauldron of bad debt, soon-to-be bad debt, nonexistent credit availability and weak employment drivers," said Steven D. Sandler, CEO of Crosswind Capital LLC in Rye, NY.

If you compare the economy to a boxing match, the recession has probably delivered its worst blows. But according to comments made by CoStar Group readers, commercial real estate may still have more rounds left to fight and the recession may still have a knockout punch:

• Federal initiatives are prolonging the hurt by artificially propping up banks' troubled real estate assets.


• Maturing debt loads and rising loan defaults will continue to keep property values and deals down for a long time.


• Consumer spending is weak and continues to fall because of deteriorating net worth in home values and rising unemployment.


• All of which are continuing to hurt property fundamentals, and will likely continue to do so until real growth returns, which is not in sight.

The following are excerpts of comments and insights from wide sample of real estate executives across the country who say the industry is still in for a protracted fight. Next week, we'll take a look at what the industry can look for and what it will look like when recovery does begin. To weigh in that topic, email me at Mark Heschmeyer

Federal Initiatives Prolonging a False Sense of Hope

I believe the real question lies in what the Federal Reserve System will do. They can exponentially create liquidity or illiquidity with their actions. Given that they are a private bank with little real oversight, it is hard to say what their motives are and what their actions will be. As we all know, commercial real estate won't recover until banks start making loans again. The credit tightening has caused massive devaluation and has resulting in an evaporation of trillions of dollars of wealth in this country. Private central banks have historically manipulated markets all over the world. Unfortunately, I think our Federal Reserve Bank is no different and we're experiencing that.
Jerry Corbier, President & CEO of JK/C Partners Inc. in Indianapolis, IN

The downturn will not bottom out until the government pulls away from the podium. Until then, we will continue to see fluctuations in the economy and a snail's pace velocity in real estate. For example, we learned yesterday that [President Obama] is seeking more power to take over any company "too big to fail." With that news, foreign stock markets declined, as did our market. Even though real estate works in conjunction with the economy, the federal government has added even more downward pressure via TARP [Troubled Asset Relief Program]. TARP has created a stalemate in the troubled asset arena. As long as money is pumped into banks without having to off-load assets, we will not see the RTC-type discounts.
Trent Siskron, Associate at NAI Houston in Houston TX

While the perception exists that we have weathered the economic storm it is just not the case. Trillions of tax dollars expended by the government has provided some temporary relief in the housing markets by slightly loosening lending strings. However, credit requirements are still very stringent and this is keeping many potential homebuyers out of the market. Additionally, due to the amount of money being printed and circulated by the government interest rates will start and continue to rise leading to another housing slump that is just over the horizon.
David Ballard, Principal NAI El Paso Huntington Group LLC El Paso, TX

Problem Loans Will Continue To Keep Property Values, Deals Down

The end will not be in sight until the CRE debt piece is figured out. By that I mean that we need to figure out what is going to happen with the next 3-5 years of CRE maturities. There will not be an end in sight until the balance-sheet lenders face the reality of the impending losses in their CRE portfolios. They need to establish market prices for REO and bad loans and then transact with fresh equity.
Jason M. Sisk, Vice President of Circle Capital Partners LLC in Englewood, CO

There are many properties that can service the debt but are not worth the debt. When these loans mature that is when the problems will start.
Steven P. Miller, Partner at Viking Partners in Cincinnati, OH

People seem to think that the recent rise in the stock market signals that the recession is coming to an end. I think it is a little premature. I do not see any indication that the banks are ready to start lending money again on commercial properties. Got a retail center? Try to get it refinanced. With the new underwriting standards they are using, chances are you will be coming out of pocket with a large amount of cash. The banks will still have to take a lot of real estate back before this is over. Banks will also have to understand that they will not be able to get 100% of the loan amount back if they want to sell that loan.
Bill Archer, Vice President of John Bowles Co. in Dallas, TX

I believe we may be emerging from the bottom but we have a major hurdle ahead of us. When the economy was steaming ahead between 2005 and 2007, we saw deals being purchased and financed on income projections that would seem unthinkable today. Deals that were acquired using short-term debt of 5 or 7 years are going to have to refinance in this new environment. Unfortunately, the days of 95% occupancy, for any type of product, are behind us. Lenders have become increasingly conservative, and they have no motivation to change their tight underwriting standards since there is little competition in the lending market. Some owners are going to find that their new LTVs are well below their existing debt balances. Their choices are to inject additional equity or sell.
Patrick Beahm, Partner at PPQ Development in Metairie, LA

If we're out of the recession and unemployment suddenly nosedives back to 5%, vacancies fall, and net operating income begins growing immediately, it will do little to address the loan maturities. Properties will continue to trade only when the debt is maturing and the owners are forced to either re-finance or sell. When it's time to mark those assets to market, valuations will be lower without a doubt. The bigger question is whether they will trade hands thus establishing a floor or whether the current sponsors re-negotiate with the note holders.
Marty Busekrus, CCIM, Investment Sales at NAI - Rauch Weaver Norfleet Kurtz & Co. in Fort Lauderdale, FL

No Consumer, No Recovery

The bottom has not been reached in retail. Vacancies in the Whittier area are increasing and rents are still headed downward.
David Johnson, Partner at Johnson, O'Neill & Associates Inc. in Downey, CA

An alternative opinion to a quick 1.5- to 2-year recovery touted by many groups is that there can be no recovery because of the decline in consumer spending due to an individual's perceived loss on their net worth based on their home value.
Brian H. Strout, Acquisition Manager at Sciens Real Estate Management in Greenville, SC

The long and short of it is that so far, this seems like a recovery without the consumer. And I just don't think that in an economy driven 70% to 80% by the consumer, that a consumer-less recovery is possible. The credit card default rates are another telltale sign of mounting problems. Americans are running out of spending power from every angle (home equity, personal credit and now, income loss from job losses). And we haven't even seen the bubble start to burst in commercial.
Tony O'Neill, Broker at Voit Commercial Brokerage in San Diego, CA

I represent Healthy Fast Food Inc. They have a new branded concept they are opening up across the country called U-Swirl Frozen Yogurt. From a tenant point of view, HFFI along with my other clients are still very concerned about consumer spending, unemployment, consumer confidence, foreclosures, and the economy as a whole. If we have hit the bottom, then it is our view that we are going to stay there and bounce for quite a long time. U Swirl is only doing screaming deals. The kind where the landlord is screaming, not the tenant.
Ron Opfer, CCIM, Broker with Coldwell Banker Premier Realty in Henderson, NV

My assessment is that the economy will pick up starting fourth quarter of 2009 but the employment situation will only start to increase during first quarter of 2010. I think the worst of the commercial real estate market is still yet to come. Commercial markets will be in recession through mid next year.
KC Sanjay, Senior Economic and Real Estate Analytics at Guaranty Bank in Dallas, TX

Property Fundamentals Weak and Getting Weaker

I don't think the end is anywhere in site for a commercial real estate bottom. The CMBS market has yet to even start clearing the defaults. when these sales really start, they will dwarf the RTC volume. What these properties will sell for in a market without leverage is anybody's guess. My feeling is that the 25% percent down of years gone by will remain the same, although in the future, that will be the whole price! Just when things may hit bottom in a year or two, we will most probably be faced with hyper inflation, which is at best a forced savings account for performing assets, but at worst an additional huge stress for non-performing real estate. What will a half empty office building be worth in a declining market when prime is 14%? It is a scary thought.
Andrew J. Segal, President of Boxer Property in Houston, TX

I do not believe the end of the recession is in sight yet. The new 90-day moratorium on residential foreclosures commencing just [this week] will only exasperate a more severe response of the residential markets' attempt for correction upon expiration of the 90-day moratorium. The commercial real estate correction has only just begun and it will be a painful and significant correction. I believe 2009 will prove to be the worst single year of the last 50 years. Keep in mind; every office job loss represents a minimum of 250 rentable square feet, which goes idle and far more in other property types. When you do the math - it's staggering. Now factor in deleveraging the CRE universe, increased cap rates likely to settle in the 9% - 11% range based on stabilized income, increased cost of capital, high vacancy/availability rates, additional unemployment each month including continued historical layoff's post-bottom with a beginning recovery and the lack of debt and equity needed to help a correction along. . . what do you have? Answer = we have the "perfect CRE storm" and much restructuring to accomplish with no end in sight soon.
Richard A. Hawthorne, Principal of Hawthorne Cos. in Santa Monica, CA

The capital and debt markets for real estate remain dysfunctional. Moreover, there remains a large gap between the expectations of sellers and buyers. This means that virtually no arm's length commercial real estate sales are taking place. The small numbers of sales transactions that are reported mostly have been distressed sellers or workouts and do not establish an "arm's length" price or even a trading market. Until properties trade freely and with frequency, investors will remain reluctant to bid on acquisitions from fear of "catching a falling knife".
Louis J. Rogers, CEO of Rogers Realty Advisors LLC in Glen Allen, VA

In my humble opinion, the end is not in sight. The peak was way too high; hence the valley will be very deep. I handle leasing and asset management of over 200 units of multi-tenant industrial and office product in Southern California and Las Vegas. Tenants continue to struggle and request rent relief, space reduction, early termination of their leases and the like. While the volume of these requests has decreased since January/February, they still are a concern to landlords. Many simply do not renew when their leases expire and close their businesses. Rental rates have dropped 20-30% in the market and occupancy has dropped 20% in the past 8-12 months. New leasing activity is primarily tenants moving to downsize and reduce their monthly rental cost. Very few "new" deals coming to my properties are truly new tenants in the market.
Jeffrey W. Eales, Vice President - Asset Management & Leasing at Birtcher Anderson Realty LLC in San Juan Capistrano, CA

Think of what is happening in the various real estate types -- every sector -- especially what you see happening in the hospitality sector. How long will its "reorganization" take? With that as a background, and regardless of what the TV pundits keep doling out … the call on where we are is sadly an easy one: We are still in the hunkered down position. These "bad news" markets will continue to reflect non-positive financial and lease requirement / utilization realities. All of the "recovery" you/we/all are hoping for will ultimately come from "occupancy" and the corresponding financial support. And, we haven't seen anywhere near the end of the financial problems and the attending weak / changing occupancy demand.
Jonathon C. Keith, Partner at Thunder Creek USA in Bend, OR

Next week, we'll take a look at what the industry can look for and what it will look like when recovery does begin. To weigh in that topic, email me at Mark Heschmeyer

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Download this story and all of the stories in the Watch List Newsletter here. The Adobe pdf version also includes all of this week’s leads of distressed properties and loans of concern, lease cancellations applied for in bankruptcy proceedings, all of the local and national facility closures & layoffs, banks with distressed real estate portfolios and lists of loans approaching their maturity date. Plus the pdf version contains bonus news items not found in these columns or the CoStar Group web news pages.

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