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VOL. 125 | NO. 51 | Tuesday, March 16, 2010

CRE Market Sweats Tight Times

By Eric Smith

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From Downtown to the eastern suburbs, from the airport to Millington, the landscape is bleak for commercial real estate brokers.

Everywhere they look, they see signs that the local market has endured and continues to endure its share of black eyes. In the past 12 months, for example, two of the area’s four biggest sales occurred on the Shelby County Courthouse steps.

One Commerce Square Downtown and the former Harrah’s office building in East Memphis faced foreclosure, and it’s something more commercial properties could see during the next year.

An equally troublesome trend is the dearth of stabilized, traditional deals.

Shelby County saw just 593 commercial sales between March 2009 and February, a 22 percent decline from the same 12-month period ending February 2009, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

The average price of commercial sales during the past year was $656,026, down 25 percent from $870,845 the previous period, while the total sales volume of $389 million was down 41 percent from $661.8 million.

Not surprisingly, number of commercial mortgages also shrank. Banks made 233 purchase mortgages in Shelby County between March 2009 and February, down 37 percent from 369. Those loans averaged $722,658, a 35 percent decline from $1.1 million; and the total mortgage volume of $168.4 million marked a 59 percent decline from $409.5 million.

Fearing fear itself

Tight lending has placed a chokehold on commercial investors, who often can’t get financing for their purchases.

But Crye-Leike Commercial president Dan Whipple said even those who can buy – be it through equity or an ability to get financing – are sitting on the fence based on the taxes they fear might be coming from the White House and Capitol Hill.

“The uncertainty of what is going on in Washington, D.C., is a huge deterrent to businesspeople making decisions,” Whipple said. “The uncertainty of this administration and the decisions they’re going to make that have tax ramifications for both individuals and corporations are severely depressing the return of a normal economy.

“Companies have funds; they’re just holding them. They’re not spending them. They’re afraid to spend them.”

The biggest sale here during the past year was One Commerce Square at 40 S. Main St., which fetched $20 million in a June foreclosure sale back to the lender.

Next was the November sale of the 787,500-square-foot facility at 5106 Tradeport Drive in Hickory Hill, which Conwood Co. LLC bought for $19.3 million.

And third was the River Trace Apartment Homes, a 440-unit apartment complex at 2165 E. River Trace Drive near Bartlett. GMF-River Trace LLC paid $17.8 million for the complex in December.

Dick Faulk, a broker at Crump Commercial LLC, said the market is still in its slowdown period, specifically harboring a “wait and see” attitude with regard to the banks and their lending practices.

But a handful of leasing and transactional deals in the mid-range of the commercial sector are still coming through.

“All in all, it still goes down to the basic meat of our market, which is between 50,000 and 200,000 (square feet),” Faulk said. “There’s enough good signs that things will turn around – but I’m not saying they are turning around now.”

Deal breakers

As for the top commercial property types that traded hands during the past year, vacant land over 1 acre led the way with 112 sales averaging $464,544.

Next came the following: apartments (68, $1.1 million); warehouses (62, $952,922); single-tenant commercial properties (54, $479,668); and office buildings (47, $1.2 million).

Jeff Moore, a commercial broker at Crye-Leike, specializes in the multifamily sector, which has remained somewhat steady compared to the overall commercial market. He said demand is hanging on, but being able to match that demand with loans has hurt business.

“The biggest challenge that we see on an all-too-often basis is lenders being willing to step in and do the financing when you’ve got a buyer and seller that want to do a deal,” Moore said. “That’s the element that seems to be missing more so than anything.”

Memphis also has struggled on the leasing side. The office market in 2009 saw a negative absorption rate of 169,861 square feet as vacancy rose to 18.3 percent marketwide, the highest since 1990.

And the vacancy rate for Memphis’ industrial space – about 195 million square feet total – ended 2009 at 14.5 percent, the highest rate since 2004.

But the prospect of some new deals on the horizon have given hope to brokers, said Wyatt Aiken, senior vice president of Commercial Advisors LLC and 2010 president of the Memphis Area Association of Realtors Commercial Council.

“I would say it’s cautiously optimistic for office and industrial,” Aiken said. “The mood for retail is decidedly concerned and a realization has set in that the retail market isn’t going to become what it once was again.” (For more on the retail market, see sidebar.)

Unfinished business

A host of unresolved issues remain in the CRE realm. First and foremost on everyone’s mind is whether massive foreclosures will strike companies whose loans soon will reset.

Close to $2 trillion in CRE loans are due in the next few years. Many borrowers are behind, and commercial banks’ ability to arrange workouts with them will be paramount for the market to withstand the coming storm.

It’s such a big deal that Suzy Gardner, a senior examination specialist at the Federal Deposit Insurance Corp., spent two hours last week talking to local commercial bankers and lenders about “prudent” CRE loan workouts.

Gardner drafted the prudent CRE loan workout guidance last year, a document many commercial bankers soon will become familiar with.

“A lot is coming up for reset,” Gardner said. “One of the reasons why I dropped everything to work on the CRE guidelines last fall was because (banks) are going to need to know what our expectations are for these workouts when you decide workouts are in your best interest.”

Also, because businesses have suffered decreased sales, fewer tax dollars will go to the federal government this year.

PROPERTY SALES 51 333 19,446
MORTGAGES 68 383 22,433
BUILDING PERMITS 138 688 40,004
BANKRUPTCIES 34 238 12,486