Some Interesting Thoughts…

Perspective, opinion, prognostication, prediction, frame of reference…Point of View

These terms all describe what our clients seek in us. Advice, good counsel and our thoughts on where the market is headed. Navigating the market used to be much easier in the past than it is today, to be sure!

Some things that we’ve observed over the past year:

Where are the Distressed Deals? – Investors are anxious to “buy deals” whether from the government (FDIC), from CMBS lenders and traditional banks, or from “distressed” sellers. Unfortunately, these “deals” have failed to materialize in large part.

Buyers Are Plentiful – there’s never been as many value oriented “tire kicking” buyers looking to steal a deal than we’ve seen in the past year. For every buyer we have talked to, there were scores more lined up behind them ready to sink their teeth into the latest distressed offering. The reality of the matter was that the severe lack of truly distressed assets in the market left many investors restless.

Sellers Are Resistant – Unprecedented reluctance to sell on the part of owners was the dominant theme of 2009 and for good reason. Unless an owner was forced to sell for a non-market motivated reason, there was high probability that the asset would trade at a number that was either less than their debt, their basis, or both. Coupled with this scenario was the fact that many long-time owners with a very low basis or no debt were not sellers either, feeling that the market was still in a volatile state of flux.

Disconnected Pricing – Unwilling to bend to the market’s terms, owners that we met with understood that the market had fallen, but were unwilling to take their losses today, favoring a more stabilized market in the future. The truth of the matter is that many of these owners were counting on a much quicker recovery, hoping that they can beat the cycle and sell into an “up” market. Some of these owners simply will not be able to hang on long enough for the recovery to occur, given the in place debt coverage ratios that they are trying to sustain on their property. We see this as being the breaking point that will help to define new pricing going forward.

General Malaise – Shell-shocked by the precipitous drop in the stock market as well as the disconnect in their property values, owners felt “poor” for the first time in decades. Even if they had managed to survive prior recessions, this one just “felt different”. Most owners, and many buyers sat on the sidelines all year trying to sort through the market and look for signals of any kind to decipher where things were headed.

Our Impressions for 2010:

Many economic and industry experts report that 2010 will feel much like 2009 and that there won’t be any material changes this year. We’re happy to report that the New Year has brought a new sentiment and we strongly disagree with the “official” opinion. In fact, here’s a summary of a few things that we’ve already observed in this very young year:

Price/Value Stabilization – The “free fall” of pricing has stopped and there are actually a few sales comps in the distress category which have framed the bottom of the market from our perspective. We feel we may be turning the corner, given a number of factors including investor and consumer sentiment as well as increasing visibility and activity from investors.

Buyers “Jumping Off the Fence” – Many buyers are getting tired of waiting for “killer deals” and are starting to get restless. The improved sentiment and positive economic indicators are pushing the early adopters to get serious on offerings. The multi-housing sector, usually an early predictor of activity in other sectors, is exhibiting much higher levels of offer activity on properties than in recent past.

Lenders are Lending – Contrary to popular belief, Government Agencies (Fannie Mae and Freddie Mac) are not the only lenders in the market today. Two of the largest office transactions in San Diego County were completed at the end of 2009, with financing at 65% LTV from a large national bank and 50% LTV from a regional lending institution respectively.

Optimism for the market ahead – Investors are just plain tired of being depressed about the market and are ready to start taking control of their future. Fear and uncertainty about losing their properties to CMBS Special Servicers or traditional bank lenders has waned in the wake of a large wave of loan expirations. With most banks doing loan extensions or workouts on properties to side-step foreclosure, many owners feel like they have “dodged the bullet” on losing their properties to loan expirations. Owners have now turned their attention to shoring up occupancy and property performance. Conditions should continue to improve as this year unfolds - early indications show that leasing activity and foot traffic are increasing in all sectors. In fact, according to CB Richard Ellis 4th qtr statistics, total office and technology leasing activity for November and December 2009 totaled more than 1.5 million square feet in San Diego.

Enthusiasm for new offerings – Consistent with our thoughts on the impending recovery, buyers are taking a strong interest in new offerings that are being brought to the market today. The volume of e-blast “views”, phone calls, general inquiries and property tours are all up, and began to increase just before the end of the year. Many of these buyers were hopeful that they could get a head start on the market, or even entice a seller into an “end of year” deal. We see this sentiment continuing to grow throughout 2010.

via  Travis Buchanan

RBC Wealth Management, a division of RBC Capital Markets Corporation.

Member NYSE/FINRA/SIPC.