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The Raub Report March 2010 Commercial Real Estate Newsletter for San Antonio

by admin on March 1, 2010

How is it going in CRE (commercial real estate)?  Well, commercial transactions declined 64% in 2009, according to Real Capital Analytics, piled on top of a significant decline in 2008.  On the commercial financing side, sales of commercial mortgage backed securities (CMBS) fell to $12.2 billion in 2009 from a record $237 billion in 2007, according to JP Morgan Chase & Co.  Yes, that is a decline of 95%, or should I say evaporation?  This has removed the major source of financing for building owners.  What about foreclosures?  Only 14% of an estimated $150 billion in distressed US CRE has been taken back by lenders according to Real Capital Analytics.  However, values have declined by more than 40% from the 2007 peak, it is estimated by Bloomberg.

 So it’s not going so well, huh?  Is there light at the end of the proverbial tunnel? 

Problem 1. There will be no help from the banks.  Banks generally made a lot of their money loaning on real estate up to a few years ago.  It’s a hard asset and is solid collateral, until things got a bit out of hand (see reference: 40% decline in value).  Will there be another RTC auction & chaos?  No. “Extend and Pretend” is the mantra of the regulators.  Re-write the loan terms and try not to foreclose. 

Problem 2. If there are a lot of foreclosures, these will drive down the values of the already depressed market.  Some say, “We need this good flush.  Get this property out of failed hands into new operators?”  This is primarily heard from the prospective “new operators” who have raised lots of money for vulture deals.  But the Government has chosen not to go down that road.  So instead of the Big Flush of Foreclosures, we are going to have a prolonged “healing” period in which everyone extends, pretends, and looks forward to a better day somewhere down the road when values will improve.  THIS will take some time. 

Problem 3. Banks cannot move these loans off their books; thus, they can not free up capital for new lending, the Regulators want them to reduce their exposure to commercial real estate anyway, and the CMBS market has evaporated (see reference above) removing the major source of exit financing for the banks; therefore — as the apparent consequence of all this — new loans are not happening much.  

 But remember, please, San Antonio is still doing the best out of almost any metropolis in the U.S.A.; for example, the February 12th San Antonio Business Journal says that we lost 6,300 jobs in 2009 but are projected to gain 22,000 in 2010!  That’s on a par with our best years, and 2011 may follow this trend.  Mark Dotzour, the Texas Real Estate Center economist, says businesses are accumulating cash and suppressing demand.  Once there is clarity from D.C. on what the new rules will be for business, then, there could be a rapid surge from the pent up demand.  Businesses have fixed their balance sheets and so have consumers; now, it is time for the governments to do the same.

That is to say, within the next year — with job growth surging and development shut down — we will reach a point where occupancies and rents rise quickly.  Banks will not meet the demand for new building because the Feds are sitting on them.  It’s good time, now, to buy for a three to five year hold, in my opinion.

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