In need of a sorcerer, sales come to a halt

Like the steady stream of water-toting brooms that could not be controlled by Mickey Mouse in Disney's "Fantasia," bad economic news keeps multiplying. On the jobs, spending, home sales and corporate profit fronts, the news seems particularly bad.

As with the apprentice in "Fantasia," the public seems overwhelmed and is looking for a sorcerer who can magically get everything back to normal.

The U.S. government plans to start spending to get things normal again.

Commercial real estate is still waiting.

Sales of commercial properties have come close to a halt. As one report projected, "sales should increase over the year for two reasons: 1) Volume can't fall below zero, and 2) Distressed sales are just starting to occur." Lenders and distressed sellers alike are starting to change their view on what constitutes a good sales price.

A tool used by New York-based Real Capital Analytics tracks distressed and potentially troubled commercial real estate assets. It defines distressed property as that held by a lender or soon to be held because of delinquency or default or because an owner is in bankruptcy. "Potentially troubled" includes a maturing loan, a failed or troubled development, or a tenant bankruptcy.

As of Jan. 26, this database included $29 billion of distressed and $87.9 billion of potentially troubled assets. While the numbers are staggering, the good news is there's anecdotal evidence indicating lenders are starting to move these distressed assets. In the next 12 to 18 months, we should see more distressed asset sales. The ever-changing plan to buy troubled assets off the books of lenders is where the magic of the government can help.

As it stands today, however, there are still few normal lenders or loans out there. Whereas fixed-rate loans from life company lenders that approached 75 percent of value were fairly common in 2007 and even early 2008, a 60 percent loan from a life company would be considered normal today.

According to the John B. Levy & Co. Inc. National Mortgage Survey, fiveand 10-year commercial mortgage loans are pricing in the 6.5 percent to 7.75 percent range.

Apartment loans can price lower and obtain higher leverage, but now even that is coming under attack. Multifamily borrowers are finding that the government's hand as a lender is not as sure and steady as they may like, particularly with the two major government-sponsored entities, Fannie Mae and Freddie Mac.

Fannie and Freddie keep changing their guidelines and making it more difficult to get higher-leverage loans at reasonable rates.

The stricter lending criteria are due not only to a lack of sales, which obscures current values, but also the inability to predict the economy's impact on property-level cash flows.

Still, there are a few signs of hope here in Richmond. Torto Wheaton Research, an affiliate of CB Richard Ellis, recently completed an apartment research piece on Richmond for the winter. Richmond's vacancy rate is among the best in the country (ranked 14th out of 50) at 4.6 percent and is expected to stay there in 2009 while rental rates move up slightly, on average.

Also, while sales are clearly off from prior years, several transactions here are making their way through the pipeline and, according to Wink Ewing at CB Richard Ellis, apartment activity is still strong. Perhaps with a little helping hand from the sorcerer, activity will normalize before we all drown.