What 2010 holds for commercial real estate

As the "aught" decade comes to a close, for the real estate industry it can best be described as a wonderful love affair that came to a fiery ending.

Developers experienced a glowing, bubbly kind of relationship with lenders and in vestors in the early part of the decade.

But the past year saw an unwinding of that love. More specifically, many developers probably think of "I Hate Everything About You," a song by Canadian metal band Three Days Grace, when they reflect on 2009.

Long-term banking relationships were thrown out the window as lenders cut off credit to struggling borrowers as both battled for existence.

And pressure from investors, lenders and tenants made developments come to a screeching halt across the country and in our backyard.

Now, perhaps worst of all, 2010 brings no real clarity on where things are headed or how the market is going to climb out of the mess it is in.

Commercial real estate values peaked in October 2007 and have since fallen 43.7 percent in aggregate through October 2009, according to the most recent Moody's/REAL Commercial Property Price Indices report.

Interestingly, the most dramatic part of that drop occurred in the past year, as values are down 36.4 percent since October 2008.

The report hinted at good news by mentioning that the pace of decline has slowed and transaction volume has started to pick up. Unfortunately, such massive declines in value are hard to manage effectively.

The difficulty in managing the fallout is best depicted by current delinquencies in loans that were originated, bundled together and sold as CMBS (commercial mortgage-backed securities).

According to Realpoint LLC, a Horsham, Pa.-based credit-rating agency, delinquent balances of loans sold as CMBS grew to $37.93 billion in November 2009, a 440 percent increase from November 2008 when only $7.03 billion in balances were delinquent.

By Realpoint's estimation, 4.71 percent of all loans that were originated and sold as CMBS are now delinquent, and that percentage could grow to as high as 9 percent in 2010, according to the report.

So while the calendar turned the corner on 2009 and moved into 2010, problems remain in commercial real estate.

Despite the clouds, real estate investment is expected to pick up in 2010, both in purchases and in loans. Many permanent lenders (life insurance companies and pension funds) are heading into the new year with larger appetites than last year and more aggressive underwriting guidelines to attract borrowers.

Although U.S. Treasury yields ended the year at the high end of the trading range for 2009, according to the John B. Levy & Company National Mortgage Survey, rates have remained somewhat steady.

Today, permanent lenders are providing new loans that price from 5.65 percent to 6.65 percent for five-and 10-year mortgages. Cheaper, floating rates are available from community banks, and loans for multifamily properties also price lower.

Beyond the fallout of 2009 and veiled optimism for 2010, a number of localities are struggling with the dramatic shift in outlook for projects and budgets that were planned in an entirely different environment.

While Dubai and Las Vegas deal with massive projects that are half-filled and half-completed, communities across the U.S. are dealing with smaller-scale versions of the slowdown.

The Richmond area has a number of high-profile projects limping toward reaching their potential. It is likely that scaled-down versions of planned developments will emerge when the dust settles.

For example, homes at West Broad Village and Magnolia Green will most certainly fall short on scale and value from the original plans.

Chesterfield and Henrico counties are already struggling with declining assessments related to residential development. They now will be hard-pressed to maintain assessments on commercial development.

Both counties had small adjustments to commercial assessments in 2009 despite property values dropping some 43.7 percent across the country.

Chesterfield has a smaller problem than Henrico as commercial assessments account for 13.7 percent of the total real estate assessment base versus 31.1 percent in Henrico.

An example of how far assessments can be off on commercial properties is the former Qimonda facility in eastern Henrico.

Henrico assesses the property at $95,536,700, down from $155,934,100 when the property was occupied. The 210-acre property is being sold and will likely fetch less than $25 million in sales proceeds.

It is clear that Chesterfield and Henrico will need to draw up battle plans for fighting reassessments in 2010.