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Top 10 Threats to CRE This Summer

Myriad of Problems Could Hold Back Full Recovery
June 20, 2012
While traditionally a time for rest and relaxation, this summer could pose further threats to the fragile recovery in the commercial real estate industry. Ongoing and pending distresses in the market are numerous and troublesome -- and for the most part are the type the industry can do little about.

We asked CoStar Group news readers to identify the most troublesome threats they see to the CRE market this summer and they identified nearly 20. For the most part, readers did not separate problems in the housing industry from threats they see in CRE. Government actions and inactions figured prominently. Readers said pending capital market regulations, Fannie Mae and Freddie Mac's handling of foreclosures, and the federal government's inability to reach any consensus or compromises were all working to keep CRE markets and the economy in general from gaining solid footing for a sustained recovery.

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"The inability of the federal government to reach any consensus or compromises, and their continual pandering to special interest affects both our relationship internationally, and at home. And I am talking about both major parties," said Marilyn Martin of Columbia Valuation Group Inc. in Seattle.

Steve Miller of Steve Miller & Associates Real Estate near Knoxville, TN, said: "The way Fannie Mae and Freddie Mac are handling the foreclosures, our housing market will never recover. Fannie and Freddie have only one or two agents in each area to handle all the foreclosures. Most real estate agents are avoiding even selling the foreclosures because of the paperwork and time involved."

David Zier, principal of Melvin Mark Cos. in Portland, OR, said, "CRE depends on a healthy and growing economy. The economy grows when private sector business can make a profit, and expand. The huge burdens of taxes and regulations that have been put in place or threatened for 2013 clearly have dampened private sector growth the last three years."

Susan Lawrence, president of Real Estate Strategies Inc. in Winter Park, FL, said the private sector has to share some of the blame. "CRE is in danger. To borrow a phrase from comedian Dennis Miller, the industry looks like 'a cosmic bunny hole.' There is a lack of certainty about the future that could keep CRE slugging along for many years. The entrepreneurial spirit found among real estate owners, lenders, operators and developers is being beaten down by expensive over-regulation, threatened tax increases, and fundamental uncertainty as to whether owning or lending on real estate is worth the hassle. Interest rates, jobs, housing, the Eurozone problems, slow markets, etc. - the CRE industry can roll with those things as it has in the past. What the industry can't roll with is that the concept of real estate profits has become uncool to the people running our government."

But without further ado about where the fault lies, here are the Top 10 Threats to CRE this summer based on reader responses, counting down from 10 to one.

No. 10: Risk Aversion

Risk aversion is a major threat to the real estate market and our economy, resulting in too much excess property on the market. The biggest part of the problem is no one wants to take a big hit and move on to the next level.
Morton Stein, broker, Trace Realty, Franklin, TN

No. 9: Inability to Sell Properties Quickly

Commercial real estate will continue to bounce along the bottom as it has been for the past two years. There is such a backlog of underwater properties still, that it will take several more years to get them all worked out. Therefore whether the economy rebounds significantly or it plummets sharply, the net effect on asset values will be minimal.
Marty Busekrus, senior associate, CBRE | Capital Markets, Boca Raton, FL

No. 8: Aggressive Competition for Prime Real Estate Investments

While job creation and the proposed changes in the tax laws will have the greatest impact on the overall economy, the variable that will most impact CRE is overly aggressive lenders that are over leveraging assets and limiting recourse -- leaving few viable exits in the event a weakening economy leads to rent compression, higher vacancies and/or increasing interest rates.
Gary Owens, senior vice president, California Bank & Trust, San Diego, CA

No. 7: Potential Increases in Interest Rates

The repeated concern my clients vocalize is the specter of rising interest rates. I am seeing this play a huge role in financing decision and hold strategies. Many times guys are opting to pay higher costs for debt if they can get a 10-year or 15-year term on a loan to hedge bets on where rates will be upon maturity. Also, some guys are even willing to endure the brain damage of a HUD loan, as they put the deal to bed for good when they close on the 223 Loan (a 35-year, fully amortizing loan product).
A.J. Beachum, senior sales associate, Income Property Organization, Bloomfield Hills, MI

The world's liquidity would seize up if we were to see a spike in interest rates. The tipping point for the economy has always been interest rates. The Fed through the Treasury control interest rates.Luke Wood, partner, Haverwood Management LLC, Austin, TX

No. 6: Inability to Acquire Capital or Financing

One of the main reasons the housing recovery continues to stumble is that of most of the U.S. population has an inability to acquire capital or financing. The banks and mortgage companies will look for any reason not to finance a residential purchase or a refinance because they cannot sell the loan to Fannie Mae or Freddie Mac due to over restrictive under writing criteria. No one can qualify for the lowest interest rates in 60 years because the banks do not want to lend money to the average Joe.
Mike Austin, Madera County Assessor's Office, Madera, CA

No. 5: Housing Recovery Keeps Stumbling

The secondary reason for the housing recovery stumbling is the asset impairment of the housing stock due to the banks unreasonable demands regarding selling their foreclosed inventory. There are multiple millions of properties sitting vacant for years due the banks inability to properly market and sell these properties in a reasonable amount of time. Until the banks are willing to take some of the losses and not rely on Fannie Mae or Freddie Mac's insurance policies to cover their past bad financial decisions the residential sector cannot recover. As we have all seen time and time again, businesses cannot thrive and commercial real estate assets values will not improve until the residential sector comes out of its slump.
Mike Austin, Madera County Assessor's Office, Madera, CA

No. 4: Financial Condition of Tenants

With little to no hiring going on our existing tenants aren't expanding like they had been. Some of our tenants have bid work so tight they can't turn a profit; so they're renewals won't happen and their ability to fulfill they're obligated lease term is in question.
Wade Johnson, Jr., property manager, Shockey Cos., Winchester, VA

No. 3: Disorder In - or Even an Outright Breakup of - the Euro-zone

If there is a lack of foreign capital investing in the U.S., we will see less deals. I see that as a threat.
Damon Jordan, principal, The Swearingum Group Inc., Detroit, MI

We see this as a primary threat. Interest rates will go up for bonds and debt if European banks and the Euro crashes.
Luke Wood, partner, Haverwood Management LLC, Austin, TX

No. 2: Existing Debt Overhang from 2006-2008

There is still a pipeline of properties that have yet to be dealt with. You can only kick the can, delay and pray, hope and cope, for so long.
Nick Miner, vice president - investments, Commercial Properties Inc., Scottsdale, AZ

Existing lenders are more and more willing to work with borrowers to extend or modify loans. I believe these extensions will backfire in the next few years when the huge refinance bubble comes.
Doug Austin, vice president, NorthMarq, San Diego, CA

No. 1: Lack of Job Creation

All of the threats are part of a larger threat to CRE which is now "stagnation" and not "recession." There is no real overall economic growth taking place. Some sectors, like health care or recently autos are bright spots. But until there is real job growth in the 5% range this economy will continue to limp along impacting CRE for the near term and beyond.
Phil Cody, principal, The Cody Co., Milford, MI

Job creation is the No. 1 problem or lack thereof. If jobs could be created, people could/would spend money and that should kick start a demand of goods and drive manufacturing. Bring manufacturing back to the USA!
Greg Hunter, senior director / industrial specialist, Commerce Real Estate Solutions, Salt Lake City, UT

Lack of job creation seems the biggest stumbling block. Our part of the CRE business, office, is directly dependent upon job growth. Without additional employment there's no need to take on additional space.
Brian Hennessey, senior vice president, Colliers International, Encino, CA

The economy and CRE markets have proven resilient in the face of these threats from some time. Here's hoping we see these threats diminish by the fall. Enjoy the summer.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.
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