Commercial Real Estate Professionals Try To Sort Through the Disarray in Financial Markets

Calabasas, CA (PressExposure) January 30, 2012 -- The buyer, who has been trying to buy an office building from one of Busekrus' clients, said his seller better sell quick as the stock markets were tanking.

Busekrus contacted the seller who responded with a different take, saying instead that everyone is shifting to hard assets so he's thinking about raising the price.

What's a broker to do? From the range of responses we received for this article, Busekrus' experience is not an isolated incident.

Jared Williams, asset manager for Acquired Asset Group of the BB&T Asset Resolution Division in Palm Beach Gardens, FL, said he has halted the search for buying commercial property for now, saying he plans to remain liquid and start to evaluate more international investments.

Luke Wood, partner with Haverwood Management in Austin, TX, was glad to see the markets recover on Tuesday and said his strategy on commercial real estate investments has not changed. He expects to continue acquiring properties for the remainder of 2011.

Those dichotomies pretty much sum up the disarray in commercial real estate markets this week following Standard and Poor's expected but nevertheless staggering move to downgrade the U.S. debt ratings.

"There is no doubt that we have entered into a period of uncertainty, as the S&P downgrade of U.S. debt ignites a new round of confidence crisis globally," Tim Wang, Ph.D., senior vice president of Clarion Partners in New York told CoStar Group. "This news couldn't have come at a worse time after the recent GDP downward revisions, indicating a much deeper recession in 2008-2009 and softer recovery from 2010 through Q2 2011 than originally anticipated."

"Although the long-term impacts of U.S. debt downgrade are unclear at this moment, investment risks have elevated substantially over the past few weeks," Wang said. "A double-dip recession would widen risk spreads, shrink capital availability, discourage consumer spending, and reduce demand for commercial space."

"While we always use sensitivity analysis in our underwriting process, today we are paying particular attention to the downside scenarios in our investment selections," Wang added. Based on the Federal Reserve Board's words this week it sounds like real estate as a business could be in for a bumpy ride over the near term. The Federal Reserve's Federal Open Market Committee met this week and issued a statement saying "economic growth so far this year has been considerably slower than the committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed."

The FOMC now expects a somewhat slower pace of recovery over coming quarters than it did just a month ago. Moreover, downside risks to the economic outlook have increased, it said.

The FOMC said it decided to keep the target range for the federal funds rate at 0% to 0.25% at least through mid-2013.

"The U.S. faces multiple challenges including tepid economic growth, gridlock in Washington, and an unsustainable debt trajectory. The inability to enact a comprehensive solution to the economic and debt concerns led Standard & Poor's to lower the long-term rating of the U.S. debt from AAA to AA+," said Asieh Mansour, PhD, CBRE's head of Americas Research. "While we anticipate continued stock market volatility, commercial real estate will not fare as poorly because it remains a preferred asset class, within a well-diversified multi-asset institutional portfolio."

Andrew Little, an investment banker with John B. Levy & Co. in Richmond, VA, said that although the downgrade has made market participants more anxious, and the immediate impact is widening spreads, the cost of capital for better quality commercial real estate has not gone up.

"The bond market certainly doesn't believe there will be any U.S. Treasury default, but prospects of continued political gridlock and further downgrades has investors of all kinds trying to figure out where to put money," Little said. "Commercial real estate doesn't look too shabby when compared to many of the alternatives."

However, Little added, "The unfortunate reality, double dip recession or not, is the U.S. economy is weak. That means we will continue to see weakness in commercial real estate related to corporate belt-tightening, consumer pull back and tenants failing."

Press Release Submitted On: January 30, 2012 at 6:11 am
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