Commercial Real Estate a Buy
Here are some numbers we reported yesterday from Trepp, a leading provider of CMBS and commercial mortgage information and analytics:
- Commercial MBS delinquencies rise 502 percent from a year ago to 6.07 percent.
- Hotel CMBS delinquencies jump 900 percent to nearly 14% of all loans in default.
Those are just a few ridiculous stats that I need to throw out to preface today's premise that commercial real estate is a buy.
Am I nuts?
No. Look, there is definitely going to be more pain before we see any gain, but after two interviews today, I started to think that maybe it's not all blood and guts in the market.
"We have seen a trend that keeps ticking upward, and we currently do not see a reason to say that that has plateaued, so we don't think the other shoe has dropped yet," says Trepp CEO Annemarie Dicola. But on the flip side, she adds, the investors are circling. "We find that a lot of our users are combing through the data looking for some interesting distressed opportunities, to try to find the overvalued properties that maybe now should be revalued and invested in."
We already know that Harry Macklowe is jumping back in to the lot vacated by the old Drake Hotel in Manhattan. Also, Blackstone Group is going after Highland Hospitality, a lodging REIT, despite the nasty numbers I wrote above. Why? There is activity, especially in the office sector.
"There's a significant increase in the velocity of leasing, and by velocity I mean the number of square feet leased on a monthly basis," says Steve Siegel, Global Brokerage Chairman at CB Richard Ellis. "New York, for example, the first five months January through May we had an average of 900,000 square feet leased and from June until the end of December we had 1.8 million, so roughly a 100 percent increase per month."
There is also more activity in retail, of course depending on where you are. If you add the fact that commercial real estate construction has ground to a halt, and there is not the oversupply in commercial that there is in residential, you also see the positives. I'm also told lenders are working harder to save some of the delinquent loans, which Dicola calls a "green shoot." And that's making investors' ears perk up.
"What we have seen at trepp absolutely is a lot of new entrance to the CMBS market, a lot of investor groups that have been forming, circling and studying a lot of the data, and we see a lot of preparation for investor activity in this market," says Dicola. She cites three successful CMBS offerings at the end of 2009 after an 18 month drought. Investors have built up cash, and "volatility has now created a market for them.
Siegal agrees: "I think it's the time to get in; it was probably the time to get in a few months ago, but by no means can anyone assess where the real bottom is. The question is: Do you want to be in at the bottom and maybe sustain being at the bottom for a long time, or do you want to buy on the way up with plenty of room for increase in terms of your investment. I think that's where we are now. You also are beginning to see a lot of the landlords around the country that were having difficulty with their properties, high vacancies, financing coming due, working out their issues with the banks."
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