Encouraging signs emerge for investors with cash

If you are on the transaction side of the commercial real estate business, you may feel as if you are an unwilling participant in a video of heavy metal band Quiet Riot's "Bang your head" song where nonstop music streams to your ear in ever louder chords.

Every day is similar to the last. Deals are few and far between, and they just don't close.

Welcome to the life of a real estate broker in 2009.

Various industry research reports support what many are experiencing.

Investment sales transaction volume is down about 70 percent compared with the same time last year, according to Real Capital Analytics.

The reasons: Money is scarce. Investors lack an appetite for risk. Values have fallen more than sellers want to realize. The days of easy money are gone.

But amidst the doom and gloom, a number of encouraging signs emerge, particularly for private or local investors who have some cash.

Private buyers or local investors for apartment properties now make up more than 80 percent of transaction volume, Real Capital Analytics said. This is up significantly from prior years when institutional money and real estate investment trusts, or REITs, were more active and crowded out local investors.

Industry reports indicate piles of opportunistic money are sitting on the sidelines in so-called "vulture funds."

These funds have been gathering up cash for the past few years to swoop in when the bottom falls out so they can get 20 percent-plus returns while taking minimal risk.

Unfortunately for the vultures, very few risk-free deals where 20 percent returns are achievable are taking place.

Deals are getting done the old-fashioned way - by putting together a local buyer who can make a well-priced acquisition, but who doesn't necessarily need 20 percent-plus returns to make the numbers work.

The Apple REIT Companies, based in Richmond, are very actively buying, highlighting how transactions are occurring today. Among its local holdings is the downtown Richmond Marriott.

The Apple companies have raised capital in a string of non-traded, public REIT share offerings dating back to 1999. The most recent one is called Apple REIT Nine Inc., which offers investors an approximate 8 percent yield.

So while vulture funds are waiting for their risk appetite to meet their return targets of 20 percent and closing very few deals, Apple REIT Nine is listed as the 16th most active buyer across all property types in the United States for the last 12 months.

Another encouraging sign comes from life insurance companies and pension funds that are becoming more active.

Roughly $810 million of new loans were committed by participants in the Giliberto-Levy Commercial Mortgage Survey of pension funds and insurance in July 2009, the strongest month since September of 2008.

Rates for 5and 10-year mortgages are in the 6.5 percent to 7.75 percent range and there is some floating rate money available at much lower rates, according to the John B. Levy & Co. national mortgage survey.

Community banks continue to be competitive, but not all are actively lending.

Seventeen banks that received TARP money through the Treasury's capital purchase program did not make their required preferred dividend payments between March 31 and June 30, a July report from the Government Accountability Office said.

More recently, other banks also have indicated that they will suspend the preferred dividend payments due the government.

These reports seem to be the exception, but the sign is troubling. A bank that can't make preferred dividend payments to the Treasury may not be healthy or able to lend more money to needy borrowers.

While no local banks that took TARP money under the capital purchase program have taken the drastic step of suspending preferred dividend payments, several banks in Central Virginia have hobbled along during the current economic crisis.

The other major commercial mortgage player in the market that has struggled is Capmark Financial Group Inc., a Horsham, Pa.-based mortgage banking company and lender that has a strong local presence as a Freddie Mac seller-servicer and Fannie Mae lender.

The embattled company has entered an agreement with Berkshire Hathaway Inc. and Leucadia National Corp. that enables Capmark to raise cash quickly by selling its lucrative commercial servicing business, even if Capmark files for bankruptcy. Capmark said recently that it may file for bankruptcy protection. Fitch Ratings downgraded Capmark's issuer-default ratings last week.

For commercial real estate participants, the news is just another brick in the wall that we bang our head against day after day.