Capital Synergies Podcast

2009 Outlook for Commercial Real Estate Investors

2009-01-21T12:37:00.000-08:00

Capital Synergies podcast with Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics.

In this interview, Darbi and Dan speak candidly about the year ahead and what kind of challenges face commercial real estate investors in 2009 and beyond.

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DARBI: Hello, this is Darbi Worley, your host for the Capital Synergies Talk Show for real estate investors. Capital Synergies is brought to you by Steelhead Capital.

(fade music)

So today, guys, we have joining us Mr. Dan Fasulo, managing director of research for Real Capital Analytics. Dan is here to take a look ahead at the troubled commercial real estate market and hopefully, to give us a little insight as to what it is the investors might expect in the year ahead.

Dan, welcome back to the show.

DAN: Thanks for having me.

DARBI: So, Dan, obviously at this point we are no longer talking about if the commercial real estate investment market is in trouble. But the question really is, how much, how much trouble?

DAN: Well, it's pretty difficult to sugarcoat what's going on right now. This is the most difficult time I've seen in my 10-year career as a commercial real estate analyst. The debt markets are very much tied up right now. There is a significant amount of dislocation in this space. And as everyone knows, the commercial real estate industry is an industry that relies on debt in its normal course of business. So it's not a surprise to me that the industry would be under a lot of pressure given the state of the financial markets.

The other thing that has happened obviously is just the tremendous pressure that the capital markets themselves have put back on the general economy. This downturn was kind of led by the credit crunch and the lag part of that was its impacts on the general economy so commercial real estate is almost getting hit again, if you will, by the impact of the space market fundamentals which are crumbling in some parts of our industry.
Right now, we're seeing vacancies rise rapidly in certain markets and for certain property types and we're seeing rents fall significantly for the first time. The one bright spot we were kind of alluding to in early 2008 was the fact that yes, the capital markets are frozen up but, hey, the space markets are still good. There's still tenants paying rent, occupancies are good. But that trick is up. And now, tenants are going bankrupt in the office sector. In the retail sector, we have a big list of retailers that are going out of business. And at the end of the day, it puts a lot of pressure on commercial real estate owners.

DARBI: All right. So let's take a look at the major property types. You know, we look at the office, retail, apartments and industrial. Which of those in your opinion is taking the hardest hit right now?

DAN: Real Capital Analytics is the firm that tracks commercial property sales. So we figured out really quickly that we needed to shift gears in order to remain relevant in the marketplace.

So in this fall, we began not just tracking property sales, which there are fewer of, but we started tracking distressed properties, whether they were sold or not. Basically, we told our entire analyst team to track these properties and what we found so far is the biggest exposure to potential distress exists within the retail and office sectors followed by apartment and hotel. And it makes sense when you think about what firms have been greatly affected by the recent economic slowdown, whether it's the financial firms which are tremendous space users or under a lot of pressure because of the credit crunch, or whether it's retailers that have been just unbelievably impact by the slowdown in consumer spending in this country. So it makes sense that those two property types would kind of be at the top of our list for the distressed. That's not only here but will be coming this year.

DARBI: Yeah, I tell you just walking around New York City, I hate to say this but it seems like almost everyday, I'm noticing a new empty storefront. You know, it's frightening. So let's talk a little bit about the apartment sector. What in your mind are going to be the most critical benchmarks for investors in 2009?

DAN: It's hard to make general comments about the apartment sector because you really need to look at it on a regional basis or even a market-by-market type of basis before you can make a general statement. The conditions that exist in the New York City metropolitan area are completely different than the factors that are impacting the market in Phoenix, for example.

That being said, apartments already are probably the property type that's the most far advanced into the distressed cycle. If you remember, apartments are the most closely related to the housing bust that happened a couple of years ago now, and the kind of the first impacts we saw on the commercial property side was the fact that many condo conversion or attempted condo conversions fell apart in late '06 and throughout 2007 and then 2008. And we've seen a lot of those failed condo conversions already resell to a healthy party so I think whereas we might be in the first few innings for property types like office retail, I think we're in the middle of the game for the distressed cycle for apartment properties.

And I think as long as investors do their homework on a market-by-market and even a property-by-property basis in 2009, I think with the availability of GSC financing, I think there's some tremendous opportunities in the apartment sector right now.

DARBI: This may be an ill-informed question but it seems to me if home foreclosures are up, that would seem to indicate that apartment rentals would go up as well. Is that not the case?

DAN: Yes and no. Again, it goes back to the market-by-market situation. It depends on how much those foreclosures or those single family homes that are vacant really go into the general rental supply. If all of a sudden there's a hundred homes in your neighborhood that are available for rent, obviously it's going to have an impact on a rental apartment community down the street as far as what type of rental rates they can achieve. So it's very much a market-by-market type of situation.

DARBI: Okay. So according to one of your recent reports, the volume of potentially troubled commercial properties, including those with loans maturing in 2009, could top more than $80.9 billion. What is your take on this situation?

DAN: You know, that's actually a conservative figure as well.

DARBI: Really.

DAN: When we put together this troubled asset program, we were very careful not to go willy-nilly marking every property troubled. So we do have a strict methodology as to what we consider a troubled property.

Some of it resolves at the property level if a potential tenant is going bankrupt. Some of the trouble, actually a lot of the troubles at the ownership level where there might be an owner who overleveraged an asset and now is facing the refinancing risks and finds themselves underwater and in a situation where they need to get very creative in order to keep the property, whether to take on some new equity partners or to basically write a big check to stay afloat. And not every owner has the ability to write another check to keep their property above water.

So a lot of properties with the 2009 refinancing risks are winding up in our potentially troubled bucket and if we find that refinancing is not going to happen and an owner is going to wind up in the foreclosure process with their lender, then it would move from our potentially troubled bucket into our troubled bucket, or potentially lender REO when the lender actually takes back the property. However, on the flipside, if a miracle does happen and an owner can work out a situation where an asset can be refinanced, that property will be taken off our potentially troubled list.

But as of now, based on the kind of the capacity we see in the debt markets right now, there's just not enough capacity to handle the amount of refinances we have in this industry in 2009. And that's kind of why there were some powerful folks in the real estate industry, down in Washington, D.C. over the past few weeks, probably begging our case to the federal government that we need some support at a certain level. I don't think anyone wants to bailout anyone who's overpaid and overleveraged. We don't want to bailout those folks but we just want someone who has a normal healthy asset with stabilized cash flow and tenants that are paying rent. We want that owner to be able to refinance his property and when that is in jeopardy, we don't have a functioning market and that's when the government needs to help out.

DARBI: So are you seeing investors then becoming tunnel-visioned in regards to the troubled assets? And do you think that this will prevent the return of a more traditional sales volume and additional transactions?

DAN: Well, let's face it. I mean, we're not going to have a normal market until the distressed market gets cleared up. You know, you as an investor are not going to be buying something retail if you can buy something down the street for wholesale price, right? And it's going to take months if not a year to really clean up the distress that's in the market. One good thing about our program that we initiated here is we're going to be tracking the trouble on these properties over time and we'll be able to communicate to the market when a property does get resolved and a healthy third party comes in and buys the assets. Hopefully, we'll be able to communicate when we kind of see the cycle turning, if you will, where there's less and less troubled properties available for purchase.

DARBI: So speaking of the potential return to "normal" in commercial real estate, do you feel like the rules have been changed permanently by the past year of inactivity? Or is there hope to return to normal?

DAN: I guess it all depends on your definition of normal, right? I mean, life did exist before there was a CMBS market. Will the CMBS market come back at some point? Yes. When it does come back, it'll come back in a much more conservative format but in my opinion, at least I think it's a very healthy way of distributing debt around to people who can take the risk. But losing that source of capital has just made kind of the sales volume levels we were at over the last couple of years completely unsustainable for the future.

The future will kind of plateau at a sales level of maybe $100-200 billion worth of commercial property sales a year in the U.S. whereas top of the market in 2007, we did a half a trillion worth of property sales. In 2008, we're going to wind up with about 150 billion worth of property sales. However, like 55% of that was done in the first half of '08. So I think it's going to be a long time before we return to the record levels of activity that we saw in 2007, not only on the sales side but also on the pricing side.

DARBI: Okay. Now, what role did the banks play in all of this, in terms of capital availability and the loosening of the credit? Where do the banks fall on that? What is their responsibility?

DAN: Well, I mean at some point, if you're a bank, your core business is lending money, right?

DARBI: Right.

DAN: But right now, everyone is in kind of a protection mode, if you will, and no one wants to make a bad loan right now and I think that many are waiting for the economy to stabilize or at least some signs that the economy is stabilizing before they put out any more money, especially there's many lenders who feel they have enough exposure to the commercial real estate industry as it is already and they don't need any more. That being said, I think lenders will continue to work with their best clients, especially on the refinancing side this year and there will be money available for good assets and healthy owners. But I think on the margin, there's just going to be a tremendous a lack of debt financing for our industry in 2009 and it's going to create a situation that puts a lot of pressure on certain owners and certain properties and at some point, it's going to basically inflame all the distressed assets that are available for purchase by investors.

DARBI: Okay, well, let's talk a little bit about the government and where the government falls in. Turning first to the efforts by the government to bring interest rates down, how has that affected commercial real estate?

DAN: Yes. I mean, it's kind of a little different ball game between commercial and residential. We've seen rates fall dramatically in the residential side but I think at some point, it widens the spread of profit for a lender, right? Because their cost of borrowing goes down. So at some point, a lender is going to find that spread too attractive to pass up and the money is going to be put out to the market again. But whether it happens next month or in six months, I don't know. I think at this point, everyone is too worried about the economy to let the potential profit to blind them to the realities of fundamentals and where they're going to move over the next 12 months. It doesn't matter what your spread is on the loan you're making if next year, the property you made the loan on isn't performing, right? Now, I think everyone is just taking a wait-and-see type of approach.

DARBI: So when you say wait and see, is one of the things they're waiting on is for Obama to be sworn in? And what do you see in terms of what you're hearing out of Obama and his plans for the economy? How is that affecting the market?

DAN: I think it's definitely affecting the market tremendously. Not necessarily because Obama is not going to do the right thing but I think it's the uncertainty of what's going to be done more than anything else that's holding up the market. And I think it makes sense to me for the new Obama administration to put the rules in place as soon as possible. Investors don't like to play unless they know what the rules are and if you're a bank and you're sitting on bad assets or bad loans, you're not going to sell them for pennies on the dollar if there's a chance the government is going to buy those assets from you for 50 cents on the dollar, right?

So right now, the transition in government and the government's inaction or at least the government not communicating what they're going to do, is creating stagnation in the market. At some point, I don't even care what they plan to do but they need to communicate. Either they're going to help or they're not going to help and at least at that point, investors will know what the rules are. And at some point, investors will capitulate and say, hey, all right, I'm not getting helped out by government which is get rid of the stuff for nothing, all right? And then, that's when it starts the healthy market again. So it's the uncertainty more than anything else on what is going to happen that's holding up the market.

DARBI: Sure. Now, what about these recent changes in the stock market then? Has any movement in the stock market indicated to you that there might be a lessening of this concern investors are feeling?

DAN: Well, I guess I'll speak to the REIT market because it directly relate to commercial property. This significant disconnect between pricing in the REIT market and the prices for just commercial properties the way they're priced right now. If I'm an investor, I'm saying to myself, why do I buy a property that's for sale on the street at a 20% discount if I can just buy a REIT stock at a 50% discount and wind up as the owner of properties that way. So I think that disconnect is another thing that's going to need to be cleared up before a healthy property sales market returns again because either REIT stocks need to come up in value or property prices on the direct market need to come down significantly and I think we're going to see a little combination of both in 2009. The public market always have a tendency to overreact and I think they might have done that with the REIT companies this cycle.

DARBI: Okay. So speaking of looking ahead into 2009, what surprises if any do you see on the horizon? And what should our listeners be looking out for? What are some closing words of caution or advice that you can share with our audience?

DAN: Well, you know, it's going to be a challenging year. I think anyone who has the opportunity to take the year off, God bless.

DARBI: A good time for a beach island somewhere?

DAN: Yeah. That being said, I think the investors who are not stuck looking backwards, plugging holes in their portfolios. The investors that don't have those concerns of looking backwards, I think for those, there's going to be great opportunity in 2009 to take advantage of the dislocation. If we go back in time and look at the years of 1992, 1993, the kind of the depth of the last real estate recession, the investors who bought properties in those two years saw returns that are off the charts. Now, I can't tell you that 2009 is going to be that year but I tell you from an income perspective, property values and the opportunity is looking more attractive to me than it has in many, many years. I'm not shaking my head as much as to some of the prices being paid but at some point, investors need to take the plunge and not be worried about their assets falling another 10% to 20% in value. I think the real winners are going to be the investors who can pick up assets and plan to hold them for five to seven years. I also think this is going to be the year of homework. You know, you can't just make a blind blanket bet on a particular market or particular property type. I think investors really need to do their homework on a market-by-market, on a property-by-property basis in order to really find the opportunities that are out there.

DARBI: Okay. So speaking of homework, where would you advise our listeners to go to get more information on these critical trends in commercial real estate?

DAN: Well, there's a bunch of free data on the commercial property market and our new distressed product on rcanalytics.com and they can certainly send us an email or give us a call, we'd be happy to walk them through what's available.

DARBI: Great. Well, Dan, thanks so much for joining us. I know that now more than ever, our listeners appreciate hearing from someone that's really as close to the action as you are. We hope to have you back again soon with an update and we wish you and everyone at Real Capital all the best in the new year.

DAN: My pleasure. Thanks for having me.

(fade music)

DARBI: All right. So if you are an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure and check out the investment advisory services offered by our sponsor, Steelhead Capital. Just go to www.steelheadcapital.com and request your no obligation portfolio review.

This has been Darby Worley, your host for Capital Synergies. Thanks for joining us.

July Review for Commercial Real Estate Investors

2008-07-29T19:02:00.000-07:00

Dan Fasulo

Capital Synergies podcast with Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics and guest host, Mr. Michael Green, Principal and co-founder of Virtu Investments.

In this interview, Mike and Dan speak candidly about the current market slowdown and the challenges facing commercial real estate investors today.

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DARBI: Hello, this is Darbi Worley your host for the "Capital Synergies" talk show for commercial real estate investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage.

Today we have with us Mr. Dan Fasulo, Managing Director of Research for Real Capital Analytics. Leading the interview will be Mr. Michael Green, Principal and co-founder of Virtu Investments.

(fade music)

MIKE: Hi, Dan. Welcome to the show.

DAN: Oh, glad to be here.

MIKE: You know, interesting times we’re in these days. I think a lot of the listeners will be interested to hear your take on...on this market. I think sometimes in real estate things move so slowly, and...and lately, it kind of feels like we’re in...we’re in the stock market with real estate.

DAN: Yeah. There’s no question that, you know, sales activity has really fallen off a cliff, you know, over the past 6 to 12 months, and we’re actually running at that level that we haven’t seen since 2004. The second quarter of 2008, we’re looking at about 35 billion dollars worth of sales transactions that Real Capital has tracked, and the last time we’ve seen numbers this low are back in the first quarter of 2004.

MIKE: Unbelievable. Obviously, we’re seeing a result of both the available equity coming into deals slow down and sit on the sidelines and be more cautious, but also the availability of debt, particularly CMBS, given that that’s had such a tremendous impact on rising values, how much downside do you see in real estate values in the United States, given that credits are not available right now?

DAN: We supply data to Moody’s, create the Moody’s real commercial property prices index, and, you know, this massive liquidity of debt that came into our markets through CMBS really apexed at the end of 2006 into early 2007, where, you know, it’s basically a free-for-all. Anybody purchasing a property could get that financed by the CMBS market. And if you look at the index...the pricing index, it shows a pretty clear 10 to 15% price spike over that period, between the end of 2006 and mid-year 2007. So, you know, we feel that that...that 15% froth, if you will, on the market has kind of been wiped out, and, you know, if you look at some of the price points coming in on the deals that are actually happening...

MIKE: They’re proving that out?

DAN: Yeah, pretty much across the board, especially in, you know... they are more global markets on the coasts. It’s a little different story for certain property niches and types; anything that has a value-add component to it is really getting discounted heavily because the banks don’t want anything to do with future income anymore. They’re very much focused on, as you know, on what the in-place income is and, you know, whether a property has a really good story to it.

MIKE: Yeah, we’re seeing a lot of that...the old days of recourse lending is back, you know, and we were able to accomplish a lot of our value-add place, you know, with non-recourse financing over the last three years, and that’s pretty much gone out of the window since. So...

DAN: That game is over.

MIKE: Yeah, sort of back to the old business of going to your local bank and asking them to fill... if they’ll back you on a certain asset—and even they are more cautious because their balance sheets have been affected largely by a...you know, a lot of the single-family residential development-type deals that they’re...they’re involved in, and they’re having a mark to market and it’s just turning their balance sheets upside down.

DAN: Well, I’ll tell you what has kept the market afloat over the last six months have been the ability of, you know, the local and regional banks to loan to the commercial real estate markets. And, you know, this group had a lot of pent-up demand because they were shut out and getting outbid by the CMBS conduits...

MIKE: Sure.

DAN: ... for, you know, a few years. But we’re hearing anecdotally from many of our clients that many of those community and regional banks are not only under pressure from the Fed to make sure that liquidity is in good shape, but we’re hearing that many are hitting their...their entire 2008 allocations; they’re starting to hit them already and we’re only here in July. So...

MIKE: Yeah, I’m sure the Feds don’t want to see, you know, a repeat of the SNL crisis. So, they’re focused on that, trying to chew up all these, you know...all these guys that were...were selling CMBS bonds, but also making sure that the...that the banks don’t start going under.

DAN: Well, you know, I think the other question about different property types and what’s performing better than others, if any. Once, I was reading your questions over the past couple of days, I was going to mention multi-family, you know, apartment sales, which have held up relatively well compared to the other property types, because of the availability of the agencies financing...

MIKE: Yeah.

DAN: ... Freddie and Fannie, but now with the report that came out this morning and, you know, possible liquidity troubles...

MIKE: I know that Fannie and Freddie’s stock has been under a lot of pressure over the last few days, but I didn’t see the report this morning. What’s the latest news?

DAN: Well, there was a report that came out at Wall Street this morning that’s basically questioning their liquidity.

MIKE: Their solvency, huh?

DAN: And whether they would need to raise capital to go forward. You know,, obviously we know that there’s a kind of implied government backstop there, but, you know, they’re certainly going to be under a lot of pressure as far as putting additional capital out to the market, which is kind of in their mandate; help build the dearth of capital that disappeared with the CMBS

MIKE: Sure, being an apartment investor primarily, you know, we do feel like we’re in the place to be right now given that the fundamentals, the actual operating fundamentals, of the business are strong because we’re seeing a lot of people come back out of homeownership back into apartments, and yet the cost of construction and the financing available for constructions limiting supply, so... you know, our portfolio is as healthy as it’s ever been and just, you know, kicking off good cash; fortunately, most of it has permanent financing, it’s just where we are trying to execute on any type of new acquisition or any kind of sale where we’re seeing the market just stagnate because of, you know, lack of financing available and where it is available; as you point out, it’s in the Freddie and Fannie world, and I’ll tell you, if something was to happen there, we would see an absolute grinding halt to the business.

DAN: Yeah, it’s certainly pretty troubling. And, you know, I was watching CNBC this morning and they said—actually, the...President Bush assembled a team to kind of, you know, review the agencies and what their actual position is.

MIKE: Right.

DAN: I’m definitely going to keep a good watch on that.

MIKE: Keep a close eye on that, sure.

DAN: I think you had an interesting point in there. Something that hasn’t been really out there and highlighted as much as I think it should, and that’s how hard new development got hit by the credit crunch. You know, certainly development activity has always been seen as kind of the riskiest way for...for lenders to enter the commercial real estate base, and, you know, unless you’re a very established developer with a huge track record and a project that’s in the perfect location, it’s very difficult to get debt right now, and then you throw on the rise in construction costs and, you know, this is going to have a tremendous affect on limiting supply...

MIKE: Right.

DAN: (...) which, in many markets, is already pretty tight. And so that’s one of the biggest factors that’s keeping me bullish over the, you know, next two to four years, that there’s going to be a huge wave of supply coming in on the commercial side.

MIKE: You know, I was...you know, it’s so interesting to be, you know, in a cycle that isn’t driven by the supply-demand fundamentals. Usually, we see our real estate corrections, you know, occurring on the operational side when supply exceeds demand, and in this case, we’re seeing it, you know...it’s occurring on the...on the capital side, and largely as it relates to the original subprime meltdown is now, you know, tripled into our business and constrained credit to such degree that, you know, our values are dropping, not because of supply-demand fundamentals but because of the availability of credit. It’s...and I don’t, you know...I remember suffering a little bit of this in the late 90’s with the Russian crisis, but that only lasted, you know, six months. Do you have any idea? I mean, are you guys looking out and seeing it improve any time in the near future?

DAN: Well, you know, I think we really need to get the CMBS market jumpstarted again, and, you know, we’re all pretty confident that it’s going to come back, it’s just the question of when and in what format. I think we’re going to start to see some new issues trickling in the fall, and I’m hoping we get back to, you know, a more normalized situation in the middle of next year. But I think when it does come back, it’s going to look a lot more like it did when the industry was just going to go: you know, very conservative, under-riding LTV, and actually makes sense to a lay person.

MIKE: Sure. Real solid coverage levels, subordination levels for triple B’s that all of a sudden make sense.

DAN: I’ll tell you, you know, we have a very talented group of analysts here at Real Capital Analytics, and they’re all real estate people. And some of the CMBS issues got too confusing even for my real estate analysts, and that can never be a good sign.

MIKE: No. I was actually talking to someone the other day about how it might reinvent itself and I think to simplify it—even to simplify it into product types. I mean, I don’t think people would...people thought when they were diversifying these pools—you know, cross-collateralizing office and mobile home parks and hotels with apartments and single-family—you know, that that created a diverse pool, but what it really created was something that no one could even understand the vehicle.

DAN: Yeah.

MIKE: And how do you underwrite those...you know, the various default rates because they all are...tend to be different? You know, that made it hard to value those bonds, I think, and...so I tend to think it’s going to come back in a form that’s more simplified. If you want to go buy a pool of apartment loans, you can buy a pool of apartment loans—or you want to buy a pool of office loans. And hopefully they’ll be underwritten differently and priced differently.

DAN: Well, and there’s definitely going to be much more transparency demanded by the buyers...

MIKE: Sure.

DAN: (...) of the bonds in the future.

MIKE: Well, another question I had which I had sent over to you and I think is...is interesting in this day, is this idea of the falling dollar and emergence of overseas capital. You’ve seen some large transactions where some of these, you know, sovereign wealth funds have come over and bought some prominent buildings in the United States. You know, given the strength of the dollar and also the fact that there’s a, you know, credit crunch, do you see that continuing, and can it have, you know, a bullying effect on the commercial market?

DAN: Well, I...you know, certainly, the falling dollar is one part of the equation, but I’m part of that camp that thinks that too much has been made on the actual dollar fluctuation. I think it’s a little naïve to think that, you know, these savvy investors from around world—you know, someone sitting in their office in London says, “The dollar is down 1% today, let’s go buy American real estate.” I think this is just occasional...international property players has gone to the point where they’re more interested in geographical diversification and, you know, if the currency is moving in their favor, fantastic; maybe they’ll wind up buying a little more here in the States. So I think it’s a part of a consideration, but I think it’s possibly a smaller part than...than many believe.

MIKE: You know, are there other macro trends besides, you know, the emergence of overseas capital that...that you...you all are looking at, that you think are going to, you know, sort of have a major impact on real estate investing over the next 12 months?

DAN: Well, I think the wildcard is the economy, and that’s where we’re going to have to watch very closely. You know, many of our markets that are linked to the global economy and its continued expansion are holding up very well. You know, you’re in Manhattan, D.C., San Francisco, or L.A., you know, activity and pricing has certainly held up much better than your more domestically linked markets here in the States. My biggest concern is, you know, a global slowdown in economic activity, which really affects our entire marketplace. So, you know, the economy is the wildcard, but I think we’re still in the middle of this major structural shift around the world with, you know, emerging economies developing and this demand from a rising middle class. I don’t think we’re at the end of that structural shift, and I think there’s going to be tremendous pressure for new modern commercial real estate product in the future—and that’s keeping me kind of bullish, at least over the next decade.

MIKE: Got you. You know, one of the questions that I had for you was...was this idea of deleveraging. You know, I was...one of my counterparts was in Sacramento this past week and talking about how much the retail segment of the market is suffering; you know, retail developments that are built now that have no one to fill them; you know, those retail stocks have been hammered, the death of the consumers being chanted, you know. Can you...can you sort of explain...if you see, you know, this consumer over the last decade has had more liquidity than maybe in...in any decade in recent history given their ability to borrow against their home and so forth? You know, do you think that we’re now seeing a fundamental shift; that we’re not going to see a consumer in the United States that’s as affluent and able to make those same buys? And do you...do you feel that it has a long-term negative impact on retail investing?

DAN: You know, we’ve been asked this question for years now, several years, and I just don’t understand the American consumers at all. I don’t understand how we could keep spending. I don’t know if you saw, you know, a top story in the Journal today—you know, Wal-Mart and a few other retailers showed increase in in-store sales. It’s just unbelievable how we keep spending and I...I just can’t get my arms around it.

MIKE: Where there’s a will, there’s a way, right?

DAN: Yeah, I mean, it’s...you know, we’re used to...we need to start looking at our economy more from a global perspective as opposed to just our local markets, because, you know, the falling dollar, if it has had an effect, it’s in tourism and, you know, in the personal level. You know, we’ve certainly seen a tremendous uptake in tourism and business travel from overseas folks. And in markets where there’s that strong attraction, it certainly helped to buoy the retail market from a slowdown—domestic slowdown. But, you know, back to your point, there’s no question that if there is one segment of overbuilding in our commercial real estate base, it’s in the...it’s in the retail property type in your secondary and tertiary suburbs around the country.

MIKE: Right.

DAN: But interestingly enough, one of the hottest property niches right now is urban retail, and we’re still recording record pricing on sales for urban retail around the country. So...

MIKE: Well, so...we...you know, the interesting part is we’re probably in the most turbulent real estate environment that we’ve seen in the last decade, which, as we all know, creates opportunities. So, yes, if we can maybe just end with you summarizing, you know, your views of some of those opportunities and what they may be, and give some of the listeners an idea of where, maybe if they have access to putting their dollars, they should be looking.

DAN: Well, if I know anything, the one thing I know is I’m not very good at telling the future. I’m certainly an Econ 101 guy, supply and demand, and I would much rather overpay in an expensive market where I know the supply dynamics are in a buyer’s favor; you know, coastal markets like Manhattan, D.C., San Francisco, L.A, and Boston, even...even some segments in Florida where there’s restricted supply. I really see the greatest potential for growth in those types of markets. And, you know, Real Capital Analytics is the midst of international expansion right now, and I’ll tell you, our rental rates for most commercial property types are starting to look very attractive when comparing our levels to locations overseas.

MIKE: Right.

DAN: It’s keeping me very, very bullish especially on the international markets here in the States.

MIKE: Well, Dan, where can our listeners go to learn more about the reports and subscription services from Real Capital Analytics?

DAN: They can certainly go to our website at rcanalytics.com. There’s a wealth of free data on commercial real estate markets up there, and they can certainly put in their e-mail and sign up for a free trial of our service.

MIKE: Okay. Well, thank you very much. I really appreciate the time. I’ve learned a lot. I think everybody else probably has, too, and I appreciate it. And hopefully we’ll catch up again soon because things are changing so fast that we...we may have some new things to say.

DAN: My pleasure.

MIKE: Thanks, Dan.

(fade music)

DARBI: Excellent. All right. Thank you again to Dan Fasulo, Managing Director of Research for Real Capital Analytics, and Michael Green, Principal and co-founder of Virtu Investments for joining us today on Capital Synergies.

So guys, if you are an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage. Again, that web address is http://www.SteelheadCapital.com.

Global Market Report for Commercial Real Estate Investors

2008-07-18T16:29:00.000-07:00

Dan Fasulo

Capital Synergies podcast with Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics. On this show, Dan explores with us the emerging global markets for commercial real estate investors and offers key insights to capital trends and opportunities you won't want to miss...

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DARBY: Hello! This is Darby Worley, your host for the Capital Synergies Talk Show for commercial real estate investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director for Real Capital Analytics. Dan, welcome back to the show.

DAN: Thank you for having me.

DARBY: So, let's go ahead and hop on to the interview. So your focus is on global market for commercial real estate. Most of our listeners are U.S. investors, but increasingly, we hear of overseas opportunities that may be getting more attractive while our own markets recover. Do you see an increasing number of U.S. investors making that leap into the global market today?

DAN: We are seeing more and more U.S. investors interested in opportunities in emerging markets around the world. At Real Capital Analytics, our client base is really the institutional investors of the world.

DARBY: Right.

DAN: And it was really our clients that drove us to track data...

DARBY: Really?

DAN: ... throughout Asia and Europe over the past couple of years, and, you know, we began in 2006 and, you know, we were getting feedback from all of our investors, many of them are U.S. based, that, "Hey, we want to invest our capital over in Asia, over in Europe, but we just can't get comfortable with the type of information like the way you guys provide it here in the States."

DARBY: Right, right.

DAN: So, there's definitely an education process going on right now, but if you go across the board, almost every major global property player based here in the States has already announced their intentions to increase their allocations overseas.

DARBY: Yeah, and that really only makes sense.

DAN: Yeah. CalPERS, the largest U.S. pension fund, has already stated their intention to move their overseas real estate allocation to 50%, five-zero, from 15%.

DARBY: Wow.

DAN: And when you're talking about a multi-billion dollar pension fund, you could see the capital adds up pretty quickly.

DARBY: If you were to gauge the flow of U.S. dollars entering global markets, I mean, what kind of deal flow are we seeing?

DAN: You know, it's this...there's certainly this wave of geographical diversification going on right now. You know, kind of a way what happened in the stock world about 10 years ago where everyone realized, "Hey, we only have U.S. equities, we should really diversify geographically." And we're right now in the beginning of that wave, and I think the effects of the credit crunch and the domestic slowdown in the economy we're seeing here in the States has only speeded up that process and interest for U.S. investors to invest more capital overseas for diversification purposes.

DARBY: Okay. So in terms of the flow of capital, you know, it's heading out in the near future, what do you see about the longer-range future?

DAN: Well, I really see this trend continuing until investors based in the U.S. feel like they have the appropriate geographical split to get the best returns for their portfolio that are, you know, risk-adjusted. You know, there's a lot of risk in having your entire portfolio in just one country right now, and if that country, you know, undergoes economic downturn, you know, all your eggs in one basket, and every one's realizing the benefits of geographical diversification now.

DARBY: Okay. So, what about the other direction, you know, in terms of the inflow of foreign dollars into domestic acquisitions? We've seen a couple of major landmarks here in New York purchased by Middle East investors just recently; can you comment on that trend?

DAN: Yeah, this is a big week in New York with the announcement that the Chrysler Building was sold to the Abu Dhabi Investment Authority, basically the southern world fund of that country, and, you know, we've seen more and more trophy acquisitions here in the States by overseas investors, especially from the Middle East. It's a pretty simple equation. You know, these groups right now are benefiting from the run-up in oil prices. Their coffers are full of capital that needs to be placed in investments throughout the world, and, there's only a finite amount of places for them to invest their capital and, you know, they try to do it in a most efficient process that they can. And that's why they look for larger assets to buy, you know, billion-dollar plus, and there's just only a finite amount of property in the world that's worth a billion dollars.

DARBY: Yeah.

DAN: So, any time one of these trophy assets, like the Chrysler Building, does come on the market, we'd certainly seen a tremendous amount of bidding activity from foreign investors.

DARBY: Okay. Let's move on to China. The last time that your cohort, Pete, was with us, we spoke briefly about the China market-the opportunities, maybe even some of your concerns with pollution in the upcoming Olympics. What are your thoughts on China these days?

DAN: Well, it's just a tremendous market. We've been tracking a deal activity there for about two-and-a-half years now and it's already the fourth largest country for real commercial real estate investment. An overwhelming majority is going into the development of new properties. You know, they don't have the modern assets for investors to purchase so many institutional investors are entering the country through development activity with local joint-venture partners. There's certainly been a tremendous property boom over the last several years, and, you know, driven by their just overwhelming demographics-you know, you hear about all these...all these hundreds of millions of people entering the middle class and demanding all the types of modern services that other, you know, western countries have around the world, and it's just driving tremendous demand for all types of commercial real estate: apartments, retail, office, industrial...

DARBY: It's also driving the pollution issue. See, I heard this, Dan, yesterday that they will have as many drivers and as many cars as we do within 15 years, and they already have such a horrible pollution problem. How does that play into your market goal? Do you think about that kind of thing?

DAN: There's no question that our investors are concerned in such issues and you would hope that they would learn from some of those mistakes that the U.S. has made over the years, but unfortunately, it seems that every country needs to learn their own lessons. But this new middle class...and as the population there is becoming more well-to-do, they are understanding and recognizing and starting to speak out about the environmental degradation and, you know, the need for there to be some safeguards. Because, from reports we've heard, it doesn't sound like what they're doing right now is sustainable, and it's certainly going to have an impact in the future on investment activity in the way that offshore investors look at their market.

DARBY: So what about India? You know, I hear that there have been some improvements in the transparency of their commercial real estate market recently. First of all, can you talk a little bit about that for our listeners maybe who are unaware of what types of improvements have been made. If you could kind of like back up and give us a little bit of background on that, and then also do you agree with that? Do you think they really are more transparent? Is this a good thing? What are your thoughts there?

DAN: Well, there's no question many of the emerging markets around the country are becoming more transparent, albeit that coming off a very low base, so we still have a far way to go on the transparency part to really get to the point that investors feel overly comfortable the way they do in the U.S., in the UK, throughout Europe, and Australia -- and we're not there yet. But it is improving, which is certainly a positive sign. We are seeing a tremendous amount of capital, foreign capital, flowing to India mainly also through new development. You know, many of the similar trends that are being witnessed in China with the emerging middle class... we're also seeing that in India. And I expected with a billion people and with a much younger population than China, that not many people recognize, I think that India is going to have to be a place where global real estate investors have a significant allocation of their portfolio in the future in order to capture the growth that's going to happen over the next couple of decades.

DARBY: Okay. What about Australia? The past years have seen a lot of Aussie dollars entering the U.S. market, but today, according to Bloomberg, there's talks that Australian Real Estate Investment Trust may have to sell much of the U.S.' 67 billion dollars in overseas property assets. What do you think of that?

DAN: Well, I actually just got back from a two-week Asia trip where I spent a week in Australia, in Melbourne and Sydney, so I got some great first-hand information from many of the property players down in that market. You know, Australia has a situation where there's a tremendous amount of capital that flows into the major property players there through their state-mandated pension plan that basically contributes capital to these funds, these listed funds, every year. So, they're flush with capital, but unfortunately, some of these listed funds, have gotten so large that they've basically outgrown Australia as an investment opportunity, and they've having to look in other countries throughout the region and in the U.S. and Europe. And the Australians have been a major acquirer of commercial property in the United States, mainly retail centers, over the last several years, and some of those players got caught up in the middle of the credit crunch through their use of short-term debt financing, and that certainly sent some shock waves through these companies down in Australia and many of their stock crisis have become fully depressed because many fear that this could some liquidation or...excuse me, some liquidity concerns with those companies as ongoing concerns. And you know, correspondingly, we've certainly seen little to none, no Australian investment in the States this year, and until they turn their ship around, I think it's going to be a while before they are really a player in the States again.

DARBY: Okay. We're covering a lot of ground here, but then, you know, this is the global report. Can we move on the brick countries, which are Brazil, Russia, India, and China? Now, you obviously have already talked a little bit about India and China, but what about Brazil and Russia and their, I guess, relationship with the other two countries that we've already talked about?

DAN: Yeah, they all have their unique factors right now, and with the economic slowdown in the U.S. and throughout Europe, they've been the hot buzz word of the time right now, and more and more investors are looking to allocate capital in these markets which they consider to be great places for growth on the commercial real estate side. And you know, they just have great trends and great supply-demand demographics right now that make it a very attractive place to put your capital in real estate.

DARBY: Okay. Now, let's pretend that it's you, your personal finances; which one of these emerging markets would you be most interested in if you yourself were considering a cross-border investment?

DAN: If I myself, I would say none.

DARBY: Really?

DAN: I'm a big believer in buying what you know, and my base is here in New York and I do purchase properties locally, and real estate is always going to be a local business. That being said, major investors who are interested in investing in emerging countries, I would recommend that they find a very good local partner that they can work with, where they can get their interests in line, and that's only way to make it work.

DARBY: I'm assuming you have a relationship like that overseas.

DAN: We certainly are making relationships with many local firms, and it's the best way to go to navigate those markets which, you know, there are some transparency issues, there's always political risk, and I've already heard some horror stories from investors who, used the wrong local partner and are learning that this learning curve is not going to happen overnight, and you're going to have to team up in the beginning to really learn the market and be successful there.

DARBY: Right. Of all the trends in the global or national marketplaces, which ones do you think are potentially the most problematic for U.S. investors, and then after you speak of that, I'd sure like to hear some good news in what do you think are them most promising for U.S. investors?

DAN: I think the biggest wild card right now is the economy...

DARBY: Right.

DAN: ...and where it goes...

DARBY: Yeah. What do you think of Mr. Gramm's comments that we're not in a recession?

DAN: Well, you know, we're certainly not in a technical recession...

DARBY: Right.

DAN: ...but for many folks around the country, it certainly feels like one.

DARBY: Right.

DAN: And we've certainly slowed down significantly, and I don't think the full effects of higher oil prices have really run through the economy just yet.

DARBY: Right.

DAN: I think we'll continue to see that over the next 6 to 12 months. And, you know, commercial real estate has always been directly related to the economy and, you know, that's why many investors are looking to geographically diversify and look for locations where they feel like there is tremendous growth on the commercial real estate side.

DARBY: Okay. And what about the most promising trends for U.S. investors?

DAN: Many of our clients who are of the institutional crowd of the world, many of them are still very much flush with equity capital that they've raised and needs to be invested over the next 12 months, and it's just a question of when and where. You know, right now there's a disconnect between buyers and sellers because debt cost has risen significantly and, you know, buyers are looking for a discount right now, and sellers, for the most part, are sitting on relatively good fundamentals with many of their buildings being leased and have decided to just pull their properties from the market and wait for a brighter day, as opposed to you know, selling their assets at a discount. So, this game of chicken will have to come to an end at some point because investors are in the business of investing, lenders are in the business of lending, and we all have to get back to work.

DARBY: Right.

DAN: So, I think confidence and having confidence in the market is the most important thing that we could use right now to really jump start everything and get us going.

DARBY: Okay. So, let's talk about the light at the end of the tunnel... Imagine, if you will, that it's there. What does it look like? What kind of economic or political signs are you looking for that might signal a recovery?

DAN: Well, I think it's going to be a combination of things. You know, everyone is waiting for the presidential election.

DARBY: Yeah.

DAN: ...coming up here in the fall in the States, and there is always concern that policies could change especially related to the economy. And I think in this more challenging environment, I think if there's any significant public policy changes on the economics of the tax side, it could be a perilous event for commercial real estate industry. But overall, I think the light in the tunnel, something that keeps me very bullish right now, is the fact that we haven't really overbuilt in this cycle. You know, in the past downturns, it had been created by just a tremendous amount of oversupply, and that's just not the case this time. And it's really keeping me bullish that especially in your built environments like the coast of the United States, I really see a supply-demand scenario that is very favorable for commercial real estate investors over the near term.

DARBY: Any last words of advice or encouragement for our listeners?

DAN: In this challenging time it's very difficult to understand where pricing is and I certainly recommend that folks come to our website and look at some of our information, and we're happy to help investors disseminate the market and try to figure out where the true market pricing levels are.

DARBY: So, guys, if you want to get this kind of investment research data on a regular basis, you can subscribe to these reports at your website, correct?

DAN: That's correct.

DARBY: And what's the URL again?

DAN: www.rcanalytics.com

DARBY: Excellent. So, there are things they can look at right off the bat that are out there and available all the time, but they can also subscribe to receive the reports on a regular basis, is that correct?

DAN: Absolutely.

DARBY: So, that website again, guys, is www.rcanalytics.com. Excellent. All right. Thanks, Dan. This has been a really insightful discussion on commercial real estate, and I'm sure that our listeners appreciate you spending time with us today.

So, guys, if you're an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage. Again, that web address is steelheadcapital.com. This has been Darby Worley, your host for Capital Synergies. Dan, thanks as always for joining us, and we hope to speak with you again soon.

DAN: My pleasure, Darby.

DARBY: Take care.

DAN: Bye, bye.

Emerging Markets and Global Investment Opportunities

2008-05-18T16:37:00.000-07:00

Pete Culliney

Turn your volume up and take a listen to this highly informative and timely podcast from Mr. Pete Culliney, Director of Global Research for Real Capital Analytics, industry leader in commercial real estate trends, tools, and transaction analysis. In this edition Pete talks about the effects of the US economy on global markets and new opportunities for investors, including:

– A record setting flow of capital into China and abroad
– Current state of affairs in western and eastern Europe
– Emerging risks and opportunites in BRIC countries
– The rise of middle eastern captial in US investment sales
– Are US investors heading for a soft landing or hard fall?

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DARBI: Hello. This is Darbi Worley, your host for Capital Synergies Talk Show for Commercial Real Estate Investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage. So today, we are pleased to welcome to the show Mr. Pete Culliney, Director of Global Research for Real Capital Analytics. Pete, welcome to the show.

PETE: Thanks very much, Darbi. Pleasure to be here.

DARBI: All right. So we're actually sitting here in the Real Capital offices in the southern [ph] area of Manhattan. Okay. So, Pete, your focus is on global markets for commercial real estate. Most of our listeners are U.S. investors but we hear more and more questions about overseas opportunities. So first off, has the U.S. economy caused what some people are calling a "global slowdown" or are other markets still performing?

PETE: The answer is both to your question, Darbi. Players in the United States were looking to global markets before the slowdown really started to set in. Global investors for the last couple of years, or shall I say U.S. investors for the last couple of years, have been looking abroad, diversifying their investment strategies, looking for more up and coming markets, trying to insulate themselves from U.S. markets. We were on great upswing in the U.S. commercial real estate in the last, you know, seven years. We knew that it was going to come to some kind of an end. It's not coming to a dramatic end. It's coming to a really nice end for the commercial real estate industry. Volume is off very much but prices have not suffered dramatically in the United States. Someone more overseas but there's opportunity out there in a lot of different markets and there's also a lot of emerging markets throughout the world. And I think that's what U.S. investors are looking to get into.

DARBI: So if you were to gauge the flow of U.S. dollars entering global markets versus foreign capital investments and domestic deals, what does this look like today?

PETE: Overall, capital is flowing both ways, into the United States and out of the United States. We're finding that about 70 percent of overall capital spending takes place in the country of origin. So about 70 percent of buyers worldwide are buying in their local market and then that other 30 percent is flowing one way or the other. So overall that 30 percent of the deals coming in to the U.S. and into other markets globally are funds coming from other nations.

DARBI: Okay. Where do you see this bulk of capital going in the near and longer range future?

PETE: The amount of money that's flowing into China is phenomenal. China is the largest center of investment for money coming out of Hong Kong, which is acting as a pump of funds into China. It's also coming from Singapore, it's coming from Europe, it's coming from other parts of Asia, and it's coming from the United States. Most of this is flowing into land for development where the government is really seeing huge quantities of land to account for the growth of cities. There are 20 cities in China that are growing tremendously, second and third-tier cities, and it's a huge opportunity for commercial real estate. There's a huge demand for housing, for infrastructure, and for retail and other kinds of shopping and all of the kinds of real estate of living for the developing Chinese middleclass. It's a huge magnet for investors from all over the world, both local Asian investors and global investors.

DARBI: Okay. So often when economic pressures increase as they have done in the U.S. lately, it's easy to kind of lose sight of the global picture. Why do you think it's important for commercial real estate investors to remain aware of what's happening abroad?

PETE: Global markets help U.S. investors hedge against what's happening in the U.S. markets. When the U.S. markets are tightening or slowing down, there are other opportunities in developing markets elsewhere. Western and advanced markets are also slowing down considerably throughout Europe but in Eastern Europe there's still a very fair amount of growth; the same thing in Asia. The numbers are very close at this point. We thought early in the year that - and we definitely continue to think that this year is going to be the year that the Asian markets see a higher level of volume perhaps than U.S. or European markets. It'll be the first time that anyone's ever seen that happen. And it has a lot to do with the tightening in the advanced western markets. Deal flow is down 70 percent to 80 percent in a lot of U.S., Europe, Eastern Europe, Germany, U.K. There's money out there but without credit, there's no way to leverage the deals and make the numbers work for a lot of investors.

So they're wondering where else can they put their money. The high prices of advanced western markets aren't quite making it but the advanced returns that are available in developing markets, buying into development projects, working with local developers to fund new deals, or buying deals that are in progress, which they call a "forward sale," which is a very popular kind of transaction in Eastern Europe where there's no old stock to buy but a lot of brand-new stock, both in shopping, apartment living, and office properties coming into the marketplace and investors are buying these properties now, when they're half or three quarters completed and that's continuing to fund the development cycle in these markets by giving the developers the next level of capital to start their next project after these projects that are coming to completion in '08 and early '09.

DARBI: So let's look a little closer at some of these markets. There's been news that parts of Europe are seeing the same kind of hardships as we are here in the U.S. What's going on in Western Europe right now in terms of deal flow and property types?

PETE: The western advanced markets very similar to the U.S. markets, high reliance on the CMBS market to fund the debt that goes to making a lot of transactions over the last few years happen, comparing some statistics about CMBS issuings in U.S. and in Europe. We're seeing about 40 percent of U.S. and European deal volume. Western European deal volume is represented in the CMBS flow. So it's a tremendous amount of the market volume that was taking place over the last couple of years was being supported by that part of the debt market. With the evaporation of the CMBS market last August, September, a large significant part of the financing of these transactions have slowed down.

So we've just seen a tremendous withering of volume in U.S. and the major Western European marketplaces, London and in Germany, throughout the U.K. Prices are down in the U.K. more than in some other markets. Prices are not down so much in the U.S. because sellers are holding firm to what they're looking for. Their fundamentals are good; rents may still be increasing. They have good tenants; their tenants are not defaulting. So if the underlying fundamentals are strong, you're not having a capital call from your bank on your funding, then you can continue to work through the malaise and not have to sell your property for a return that's going to be sub par according to your planning.

DARBI: Right. Now you mentioned Eastern Europe before. Can you expound on that a little bit? Is there Overlay?

PETE: Sure. Eastern Europe is a developing marketplace. Eastern Europe is a place where a lot of these markets are in their first up cycle. These are places where the economy has changed radically over the last 20 years. And we've gone from a period of radical change from what happened in the late '80s and the fall of the Wall and crumbling communist systems, through a lot of political trouble and growing, shaking off the old. And it took these nations sometime to get their stride, but they're starting to really get into their stride now. And as I've been working on this global project, building a database and looking at every market here at Real Capital, it's been amazing to me the number of small markets that you wouldn't even think of where there's really exciting real estate activity going on, new modern shopping centers springing up for developing middleclass who wants to get out. They want to shop. They want to be out there. They want to buy consumer goods.

Anyone who travels throughout the world knows that there's a branded culture out there that you see everywhere you go. And there's something good and bad about being every corner of the world and seeing Prada everywhere you go. The good is that, wow, there's people here that can afford Prada and can afford to shop in this great shopping mall. So if you're in the real estate business and you see these quality shopping centers, quality live-work centers, nice office properties springing up, it's an impressive thing to watch in the real estate industry.

DARBI: Okay. So we've heard that for Asia the country again, as you mentioned, currently seen as the favored destination for foreign investment is China. Does your research…

PETE: Totally backs that up, yeah. I mean, the big - China they're buying a lot of developing land. It's just a huge country, so it has to be the biggest market. There's a whole…

DARBI: What do you think about this - the Olympics and all these protests and the torch Overlay?

PETE: Well, yeah, you know, they should have seen that coming, I think.

DARBI: Yeah.

PETE: I think the thing that's going to be the most interesting is if the Chinese are able to control the pollution issue there. And I come from here in New York where it's not the clearest of skies but it's not that bad. For athletes out there, I think that's going to - might - it could theoretically be an issue. You know, political issues that they have to deal with over there. And that's all part of the game.

DARBI: Yeah. Yeah, I do a sketch comedy here on Monday nights and we did a joke about the torch, you know, finally arriving in China and then they relit it and then they used it to ignite, you know, six new coal-fired power plants and garbage operators. You're laughing, not crying.

PETE: Yes. Overlay

DARBI: So it sounds like Japan may also be in financing troubles similar to ours. Is it true that they also relied heavily on the CMBS market? What's your take on that?

PETE: Yeah. It's - I mean, the numbers are much lower in Japan but they were - they are the real advanced, modern market in Asia. There's a couple of other smaller ones like Seoul. But China, Vietnam, and Malaysia, these are real developing up and coming markets. The advanced markets in that part of the world are going to be Australia, Japan, and these nations are going to therefore be part of the modern western financing system. They're going to have modern capital markets that use extensive REIT and other public structures and therefore they're also going to have public debt markets. So while they're not quite at 40 percent, Japan saw a significant amount of CMBS flow as well and their market has tightened as well but it doesn't seem as if this is going to really offset the economic gains that Japan has made over the last few years.

DARBI: Okay. So amidst all this slowdown, we've heard that investment in Asia and South America doubled in the first two months of this year, especially in the BRIC countries: Brazil, Russia, India, and China. What does your data say about that?

PETE: That's exactly what our data says. I mean, these nations, these areas of the world are still booming. They're the developing economies. Now, it's easy for the numbers to double when the numbers are kind of small. And the investment flowing into these places compared to the flows into Western Europe or flows into the United States into cities like New York, London, Paris where the numbers are in the multiples of billions, it's a smaller number of billions in these other nations. Eastern Europe is similar.

It's really the case down in South America where it's only been the last couple of years where people are starting to look there. Some long-term players like (Inaudible 0:11:22) have been down there for years, and they're really involved in the marketplace. But for the most part a lot of the new players since this BRIC phrase was coined a couple of years ago, I think by Morgan, people have been looking more and more at the South American portion of it and questions about Brazil come to me hot and heavy on an almost a daily basis from our client base. Questions on these other parts of the world as well, Russia, Eastern Europe, they've been hotter longer. The spike has been Brazil and other South American countries in the last couple of months.

DARBI: Okay. So what about if it was your money? If you were considering a cross-border investment yourself, where would you go?

PETE: I've got a fairly decent risk tolerance, so I would definitely be thinking about these things. You know, it's the risk-reward balance that comes in a lot of real estate. This isn't New York City. It's not a New York City office building. That in a lot of ways is a bond with a high-quality tenant that you know it's going to be there and paying for a long period of time. You go to Brazil or Poland or Romania and you have to make friends and partners with local groups. You have to hope you get in with the right people. You're vetting a lot of relationships.

But there's a lot more risk and there's also the chance for a lot more reward. And that's the game. So if you are a foreign investor and you know that you're going to get your, you know, 5 percent to 8 percent return for your investors and you're going to buy a high-quality office building in a high-quality, well-known marketplace, you're not going to (Inaudible 0:12:53). If you're going to buy an up and coming kind of office building where you're hoping to have in a developing market where their value is going to have a greater increase, you would think about maybe buying a quality office building at places like that and U.S. investors are.

There's also the risk that could come with being in one of these markets that if something happens in their economy, if there's some kind of political upheaval, that's not the way Brazil is operating these days or has been for years, so there's a lot more comfort with how these things, you know, will go forward and a lot more comfort with that you're going to be able to put your money in, you'll be able to get your money out with a very nice return.

DARBI: Okay. So let's move back over to the U.S. commercial real estate trends. There's word of a fairly strong push from wealthy Middle Eastern buyers to pick up real estate investment trusts in our market, particularly apartments. Is this trend anything to be concerned about? What are your thoughts on that?

PETE: If they're paying quality price then buyers and sellers are happy. That's what a good marketplace is all about. If people want to bring their money here - the great thing about a real estate investment is they can't take it home with them, you know.

DARBI: Yeah.

PETE: They can come and they could buy art, they can buy cars, they can buy anything and ship it away and we could think that we're losing something. They could - you know. But with an office building, apartment building, any kind of real estate investment, it's here. It's going to stay here. Do they maintain it? Do they upkeep it? Do they continue the quality of the investment? And is it going to grow for them? Yeah. And then maybe the next time around an American will buy it. We've seen it happen before and everybody makes a profit. Whenever anyone worries about one class or other of an investor coming in, I think it's just more activity; it's good for the marketplace.

DARBI: So the same thing happened with Australia in recent years with U.S. commercial properties. What's going to shake down from that? There are several Australian investments.

PETE: Well, the Australians have made a couple of really large investments in the United States over the last couple of years. Now (Inaudible 0:14:49) into some debt problems in the last couple of months and there's some issues whether they're going to have to unload some of their holdings here in the United States because they were over leverage. We'll see what happens with that.

Again it's all the business - do you over leverage, you stretch yourself too far in the credit crunch. There's a massive credit crunch going on. If you are in a situation where you were going to have to refinance at the end of 2007, you've got significant problems right now and we know who the players are that are caught in that kind of trap. But we also know that most players were not caught in the have-to-refinance-now. Maybe they'd like to but with rates are coming down, properties are still strong, hopefully there's not going to be a lot of distress in the marketplace that, you know, creates underlying weaknesses and causes a rough market. At this point, it seems as if soft landing is, as people were talking about, is kind of where we're at.

DARBI: Okay. Of all the trends in the global and national marketplace, is there one that you think is potentially the most problematic for American investors?

PETE: Again, it's always the risk-reward play, you know. Are there things that could happen in certain markets that could be really bad for investors? You know, there are all these issues. How do you get your money out of India? How do you get your money out of somebody's developing markets? You know, you can put together a portfolio in Malaysia. Are you going to be able to float it on the local stock exchange and bring your investment back home? Or are you going to have to just continue to roll that forward and hope that at some point, the capital flows are going to work a little bit more in your favor?

In a lot of these markets, they recognize that in order - and they're enhancing their systems. They're bringing in REITS. They're bringing in other public entities that make the markets a lot more efficient and make it a lot more transparent because they know in a lot of these developing nations that transparency brings deal flow, brings happy buyers and sellers, brings better prices for everybody. They know that happy investors who don't come up short and are able to go home with their profit or understand their loss are happy investors who are going to come back. Investors who feel they got burned by a political system going to be gun-shy investors who are not going to come back. So as the world develops and the world evolves, I think a lot of the developing nations realize that they want happy investors bringing their money in and out of their markets.

DARBI: Okay. So just to recap, what are some of the encouraging trends for U.S. investors? I think you've touched on a few of them. If you can kind of hit the highlights.

PETE: Encouraging trends for U.S. investors, I think that the home market is solid and stable. It's an encouraging trend. There's not a lot of pain out there here or in Western Europe. Volume is really down. But prices are still stable and I think that's something that's really a tremendous strength to our market and everyone should be kind of happy about that. A downturn or a softening without a lot of pain is, I think, a good thing. You know, I know a lot of people profit on the pain but it's a balance. And I think that where the market has - in the West has found a pretty nice balance as it slowed down. And I think that as the economies get through this credit issue and start to pick up, real estate is going to be at a nice plateau to start picking up again in the western markets.

If you are a risk player, a value-added player, you're into development, you're looking for higher returns, I think there's a tremendous amount of opportunity out in the world that an investor who is looking for that can really be happy with. I think the ability to invest in development in Asia and in Europe and in Central America gives you a tremendous amount of options to look at in terms of the economies that you're dealing in and the currency issues that you may or may not want to take into effect as to why you may or not want to get into a Euro or into a South American currency.

I think it's great to have a variety of opportunity plays. Variety of potential distress plays may be coming up for the people in the western markets who really got hurt by the credit crunch but it's not a tremendous part of the market. I think overall the market is really pretty stable. So while some people maybe aren't that busy these days, I think that the pain is not so thorough is really a great sign for the marketplace.

DARBI: Okay. Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytics?

PETE: We publish a variety of monthly capital trends reports on the U.S. market, looking at all the common property types: office, industrial, retail, apartments. We publish a quarterly hotel transaction that looks at the world. And we now publish a global capital trends report that comes out eight times a year being fed into the famous Real Capital Analytics Online Database. You can go in and you can see the actual transactions that are taking place behind the numbers, which adds a lot of transparency to the marketplaces and a big value of what we bring to the market. So if anyone goes to www.rcanalytics.com, they can download some of our sample global reports. First couple of issues are there for free. Sign up for a free trial. And if you're interested in becoming a client, we have a lot of subscription options available.

DARBI: And they can sign up right on the website. Okay, so give that website address again.

PETE: The web again is www.rcanalytics.com.

DARBI: Excellent. All right. Thanks, Pete. This has been a very insightful discussion on commercial real estate and I'm sure our listeners appreciate your spending time with us today. So, guys, if you are an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage.

Again that web address is www.steelheadcapital.com. This has been Darbi Worley, your host for Capital Synergies. Pete, thanks again for joining us and we hope to speak with you again soon.

PETE: Thank you, Darbi.

DARBI: This has been Darbi Worley, your host for Capital Synergies. We will see you next time.

March Commercial Real Estate Investment Trends

2008-03-19T17:44:00.000-07:00

Dan Fasulo

In this month's interview, Dan and Darbi talk about the questions and fears in today's uncertain capital markets, including:

– The current disconnect between buyers and sellers
– Why apartment property values remain strong
– The speculations surrounding CMBS markets
– Some notes of comfort going into the slowdown ahead
– The spike in properties being pulled off the market
– Risks of falling asset values and rising cap rates
– REITs and foreign market opportunities in 2008

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DARBY: Hello. This is Darby Worley, your host for Capital Synergies Talk Show for Real Estate Investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage. Today we have with us, again, Mr. Dan Fasulo, Managing Director of Research for Real Capital Analytics. Dan, welcome back to the show.

DAN: Thanks for having me again.

DARBY: So Dan is here to take a look at the recent activity in the investment sales market trends, and to share with us his take on some of the dramatic changes we've seen in the commercial real estate sector. Dan, so last time we spoke with you back in December, we talked about the affect of the residential sub-prime on the commercial market. Where do you think we stand today?

DAN: Well, you know, unfortunately, for whatever reason, too many investors clump up residential and commercial in the same bag, and the residential and commercial real estate markets are really two distinct marketplaces, and there's not much crossover. Where the crossover certainly is, is investor psychology and how that's impacting decision making on that side. I certainly don't think...besides maybe in the condo arena, there being a direct connection on the sub-prime part, however...

DARBY: So there isn't a commercial lending version of the sub-prime products with those high...?

DAN: Well, I think maybe your closest comparison could be the CDO Marketplace for commercial real estate, which many expect to have significant troubles as asset values have dropped. And CDOs usually represent the riskiest part of the loan structure, and many have expected the values for those types of assets to fall dramatically.

DARBY: And just to back up for a second. What does CDO stand for?

DAN: Commercialized Debt Obligation.

DARBY: Okay. You also shared with us some words of caution regarding secondary markets. Are you still feeling the same way about that?

DAN: Well, I mean, nationwide, everyone's being affected by the liquidity crunch right now, and just the lack of availability of debt capital. But certainly the U.S. hasn't been affected the same throughout. There's certainly a bifurcation going on between the more domestic based U.S. markets – which are arguably already in recession – versus the markets that are more linked to the ongoing global economic expansion – like your Manhattan, or San Francisco, and D.C. The primary markets with global exposure have held up better than your more domestic U.S. markets as far as activity and pricing. But we still are seeing declines across the board, unfortunately to report.

DARBY: So now, does the issue continue to be access to credit? Or are there other dynamics in play?

DAN: Well, at first there was certainly a credit crunch, and raised debt costs, and lenders really were putting more restrictions on who they would lend to, where geographically they would lend, but now I think we're moving into a period where there seems to be more economic uncertainty which is driving decision making at this point. And I say that comfortably because in our recent analytics that we've put together, in previous slow-downs we've seen, we track all the major buyer capital groups – whether it's institutional debts, or is it private investors – and previous blips on the down cycle we would always see one sector pull back and another kind of fill the gap. Right now, we're seeing an across the board slow-down in acquisition activity by all different capital groups, and it really seems to indicate that there is uncertainty right now in the marketplace, and there's certainly the disconnect between buyers and sellers right now. Sellers... and we've seen the situation over the last several months where we've seen a tremendous spike in offerings pulled from the market, where sellers would bring their property to market, and they would receive some bids for a particular asset, and they didn't like, basically, what the market was telling them. They didn't like their bids and they decided to just pull their property off the market as opposed to going through with the sale, and we've seen a tremendous spike in that activity. And that leads us back to the disconnect between buyers and sellers, and you have a situation where property fundamentals – occupancies and rents – have remained relatively strong, but the buyer is coming into a situation saying, “Hey, my debt costs are so much more expensive. I've got to put in more equity. You're going to have to lower your price.” Unfortunately, sellers just haven't come to the table ready to throw real significant discounts yet.

DARBY: Right. So as a follow-up to the question on the health of secondary markets, is there any hard data yet on how far values or cap rates may have moved?

DAN: Yeah. Well, I think it's obvious that from the height of the marketplace – probably in the summer of '07 – we're certainly down 10 to 15 percent for commercial property values nationwide. Now, it certainly varies on a market-by-market basis. In Manhattan it may be 5 to 10, in certain markets in the Midwest it may be 15 to 20, but there's no question that we've seen asset values fall and cap rates rise recently.

DARBY: Yeah. There's a big article on – it must be three or four weeks ago – in New York Magazine talking about how historically, real estate in Manhattan has been kind of impervious to market fluctuations, but because there is so much new commercial building going on in terms of condos, that perhaps five years from now it might be – for the first time maybe ever – better to rent in New York than to buy. Do you... what do you think about that?

DAN: That kind of moves over to the residential side a little bit.

DARBY: Right. So that doesn't affect the guy who's building the rental building or the condo? That doesn't qualify as commercial?

DAN: Yeah, I guess on the development side of it, but from my perspective development versus historical norms has been very limited in all the major markets across the U.S. like in Manhattan or D.C. And I think the market is actually tremendously undersupplied with new construction, and that's what gives me a little comfort going into this slow-down, is that we certainly have not seen the type of over-building on the commercial side that we have seen on the residential side.

DARBY: Okay. So following on with that, is there...would you say then that like the hotel or office industrial/retail space might be better than apartments? Or are other areas there are property tax that stands out as either particularly bad or surprisingly resilient in this market?

DAN: Actually, we've been a little surprised that multi-family property – apartments – have held up relatively well versus the other property types in the U.S. and we were sitting down a few months ago and trying to figure out why, and we came to a couple of different conclusions. One was: apartments in the U.S. already went through a significant correction in 2006, so we had a situation where we lost the condo converters, if you recall, and it really drove cap rates back up and shot prices down. So we had that significant correction already in apartments. And then on top of that, the debt markets haven't dried up on the multi-family side because Fanny Mae and Freddie Mac are still very active lenders there, and really giving some support for the debt markets for apartments where that support is obviously lacking for the other commercial property types right now.

DARBY: Okay. So where do we stand on foreclosure rates for commercial properties?

DAN: I think the latest report was that it's slight increase, but we've been very fortunate not to have any significant commercial default at this point. This goes back to the point we were talking about before, that underlying property fundamentals remain in relatively good shape right now. We're not seeing any widespread tenant defaults. While there may be decreasing occupancies in certain markets, overall occupancy levels and rent levels still remain at or near their record highs for many markets. So we haven't seen a situation where that many investors are in danger of a default. Probably the only investors that are really in jeopardy are the investors who purchase property at the top of the marketplace and then finance those investments with short-term financing. They're obviously in a very difficult position right now because the refinancing markets have pretty much dried up, or if not dried up they're on completely different terms than when the investor originally made the deal. So... all-in-all, I don't see any real significant situation where we have tons of commercial defaults unless there is an extended slow-down in the economy.

DARBY: Okay. There are some analysts that would say that for all practical purposes the CMBS market is gone forever. Do you agree with this?

DAN: No, I don't believe that at all. Not in the slightest. I think it's a very efficient way of placing debt. It really divides the risks appropriately among those who can take them. I think it's only...I think when it does reappear, eventually, I think it will reappear in a much more conservative format, probably the way it was when it was a novice product. But I think it's only a question of when it comes back, not if.

DARBY: Okay. So you don't think there's some kind of like hybrid of it that could emerge that would supplement it? Or...?

DAN: No, not at all. I think there's a lot of unfounded fears right now, a lot of misconceptions, and unfortunately, the same thought process that drove investors to really buy up all this paper originally is really driving the lack of activity now – if you know what I mean. It's just more investors need to be educated about what CMBS is, and what it could do, and I think it's a very efficient way of placing debt, and it will be back.

DARBY: Okay. So that leads me into my next question. So given that the forces of capital have changed significantly, what do private investors need to know to be able to adapt and succeed to the new market position?

DAN: Well, there's no question this is going to be a challenging year for private investors, especially if there's a necessity to access the debt markets. I think 2008 will be a great year for your private investors to really focus inward on their portfolio – just try to strengthen the core of their assets, improve property fundamentals, et cetera. And I think there will be many opportunities for investors who can use a significant amount of equity in their acquisitions. I think there certainly will be some great deals to be made in 2008, but overall it's going to remain difficult until the debt markets can return to a period of normalcy. We'll always come back.

DARBY: Yeah. Good times don't last, bad times don't last.

DAN: There's a lot of drama both ways.

DARBY: Yeah. So looking ahead kind of near term, what do you see on the horizon for the rest of 2008?

DAN: Real Capital Analytics – my firm – has expanded our operations overseas. I tell you, the more we venture out and start really tracking overseas markets, and understanding the fundamentals, and the pricing structures, I seem to get more and more bullish about the prospects for the U.S., especially in many of the major markets where there's no oversupply. I think 2008 could, if we're looking back, could wind up to be a very great buying opportunity for commercial property investors here in the U.S.

DARBY: When you say that the major markets, you're talking Washington, New York, but where...are there others around the country that are...?

DAN: I'm talking an overall. There's a good deal in every single market. You just have to find it. And there's bad deals in every market. I think if you're just trying to play a market, per se, I would be in the primary market for 2008, but on a deal by deal basis, you can find opportunity in every U.S. market right now. I just think that some of our global cities in the U.S. remain relatively undervalued versus our global counterparts that we're tracking – whether it's London, or Paris, or Moscow, or Tokyo. I think there's certainly value, and if you recall after the credit crunch occurred in August, and we had a corresponding fall in the Dollar about the same time versus the Euro and the Pound, and everyone expected this flood of capital – this flood of foreign capital – to come into our market, and it never really came. And it was... from many conversations with overseas investors, it mostly had to do with the economic uncertainty surrounding the U.S. economy as opposed to, “Hey, my currency is worth 5 or 10 percent more. Let's go buy in the U.S.” But there certainly is a mindset out there developing that on a risk adjusted basis the U.S. is starting to look more and more attractive to overseas investors. There's certainly some value on the rate side that many are noticing right now. It's rumored that for the first time some of the Sovereign Wealth Funds might be interested in maybe taking down a rate or two. It's rumored that Cutter is... their Sovereign Wealth Fund is interested in maybe partnering and taking down McGuire Properties – a major office based in southern California. So I think that there is going to be opportunity in 2008, and investors are just going to have to do the proper homework, and not make any blind bets this year.

DARBY: Yeah. And speaking of proper homework – and I'm going to guess that you're going to say this is kind of a case-by-case situation – but for people... regarding the management of their portfolio, is there a general word of advice that you would give in terms of buy, sell, hold?

DAN: Well, you answered my question originally. It always depends on the position of the assets, or whatever position the investor is in. But I think this is a great year to really focus inward on one's portfolio and improve it as much as possible, and bring it to market in a better day when the markets are really back to normal.

DARBY: If an investor feels that they really need to sell relatively soon, should they try and get out before anything gets worse?

DAN: That is not a mindset that we've seen much of at all. We certainly have not seen any type of panic selling yet, nor do I expect it unless there's some sort of severe economic downturn. We've seen none of that whatsoever.

DARBY: Okay, great. Well, Dan, if our listeners wanted to get this kind of investment research data on a regular basis, where can they go to learn more about subscribing to your reports from your company Real Capital Analytics?

DAN: They can certainly go to our website at www.RCAnalytics.com. We have a bunch of free reports up there that they can download, and they can certainly find all the information they want on the side.

DARBY: Okay. Say it one more time.

DAN: www.RCAnalytics.com

DARBY: Excellent. All right. Thanks, Dan, this has been a very insightful discussion on commercial real estate, and I'm sure our listeners appreciate you spending time with us today. So guys, if you are an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage. Again, that web address is www.SteelheadCapital.com. This has been Darby Worley, your host for Capital Synergies. Dan, thanks again for joining us.

DAN: My pleasure.

New Commercial Real Estate Investment Advisory Services

2008-01-09T17:53:00.000-08:00

Matt McLeod

Capital Synergies podcast with Mr. Matt McLeod and A Sean Aguilar, CCIM, both executive Vice Presidents of Steelhead Capital.

As a boutique real estate brokerage firm, Steelhead Capital specializes in the acquisition and disposition of multifamily investment opportunities, and the offers unique ability to provide the individual investor with an institutional approach to buying and selling multifamily investment property.

Steelhead Investment Advisors have a solid background in working with institutional investors, which are defined as organizations whose main purpose is to invest capital in real estate. At Steelhead, our goal is to give the same level of sophistication that we see on the institutional side to the individual investor who looking to buy or sell real estate for their portfolio.

Click to Listen (10:51)
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DARBI: Hello! This is Darbi Worley, your host for the Capital Synergies talk show for real estate sectors. And today we have with us Mr. Sean Aguilar, CCIM and Vice President of Steel Head Capital, along with Mr. Matt McLeod, also Vice President of Steel Head Capital. And Matt is also the head of their Investment Advisory Services division. Ah, good morning Sean and Matt, welcome to the show.

SEAN: Good morning, Darbi.

MATT: Good morning, Darbi.

DARBI: Great! Thanks for joining us. So, many investors, especially the more experienced ones, with portfolio values of, say five to ten, even hundreds of millions of dollars, realize the value of having independent, objective, investment advisors on their team. More importantly, these services help investors maximize their portfolio earnings and minimize their risk. So Matt, what does a buyer of commercial property gain by working with your buyer representation services?

MATT: We try to provide the individual investor with an institutional approach to buying real estate. We have a solid background in working with Institutional Investors, which we define as organizations whose main purpose is to invest capital in real estate. Our goal is to give the same level of sophistication that we see on the institutional side to the individual or "Mom & Pop" investor, who is looking to purchase real estate for their portfolio. We've identified tools which are essential to the success of the institutional buyer but typically are not utilized or available to the individual. What our clients gain is access to these tools and information which allows them to make more informed decisions when buying real estate. Examples of the services that we offer to our clients include Deal Flow or access to investments that we see, our market knowledge and insight, and our institutional strength underwriting. These services are crucial steps to the investment process and many investors just don't know that they are available to them.

DARBI: Well let's say that an investor from the Bay area comes to you with a smaller portfolio, maybe three or four properties and wants to expand; does it ever make sense for an investor... an investor in California to look outside the state for a new acquisition?

MATT: That's a great question, and the answer is yes. And let me give you an example. About four/five years ago, the Southern California market was seeing record sales prices. As a result, many apartment owners took the opportunity to sell their investments for strong returns. However, once they sold, they did not necessarily want to reinvest their dollars in the Southern California market as they felt it was at its peak. They also didn't want to go to Northern California that had already seen record sales prices.

Many wanted to look for a market where they could get more for their money and have the potential for appreciation rent growth. Many of the Southern California investors took their sales proceeds or investment dollars and purchased apartments in Las Vegas. Las Vegas, just so you know, at that time was seeing strong growth in the apartment market as people and employees were leaving high cost of living in California and moving to more affordable areas. The Las Vegas strip was also expanding as hotel construction was at a record pace, further driving up demand for housing in Las Vegas. I had an investor that sold a fifty unit apartment building in Los Angeles and traded it into a two hundred unit building in Las Vegas.

DARBI: Yeah, I was going to say, it's really... it's an opportunity to take advantage of the lower cost of living in another state without having to move there.

MATT: Absolutely! I can tell you that many investors who bought in Las Vegas from four/five years ago, made a wise decision as those investment dollars have doubled in that five year span.

DARBI: Okay. So what about if that investor wants to sell off only part of his/her portfolio? What's the reason for them to work with Steel Head, as opposed to simply listing the property with a realtor, or putting an ad on Loop.net or something like that?

MATT: Well, when it comes to selling a property, exposure and presentation are really the key elements in the sales process. And we have a system in place that creates the broadest possible exposure for a single property or for someone that wants to sell their entire portfolio.

DARBI: Okay. Great!

MATT: We use a direct marketing campaign, which uses a database that we have, that would actually match the property with the most likely potential buyer.

DARBI: So Sean, what do you think of all the talk surrounding the residential lending market? And what kind of impact do you see this having on commercial real estate investing? We've talked about this on our show a few times, but I'd like to get your input.

SEAN: Well, clearly, more recently the Feds lowered their discount rate as well as the Federal Fund Rate by fifty basis points and, you know, it's having an immediate impact on the market in the short term. Cost of credit, you know, which basically means from a homeowner or consumer point of view, your credit card debts are going to, your cost of debt will drop slightly for those residential owners out there who have adjustable... adjustable rate mortgages, you know, their payment is scheduled to go up, but maybe it won't go up as high as it was expected to because of the drop in the discount rate.

You know, that said, I think for the single family market there's, you know, there's still some pain out there still to be taking place and it... it'll probably take maybe nine months to two years to stabilize depending on which markets you are in throughout the mainland U.S. But its impact on the commercial real estate really isn't as big as I think everybody is perceiving it to be because they're basically two different asset classes.

We're still seeing a lot of activity on commercial real estate where there's been some hiccups, quite frankly it's, when you look at the amount of leverage being obtained by; on the institutional side with the hedge funds you know, clearly that source of debt is having its challenges in getting placing... in getting closed on. You're reading about it in the papers right now, when it comes to certain larger companies doing buy-outs of others. But in reference to the focus of our clients through our advisory services, we really think it's a benefit right now because they're not really playing in that field.

There's plenty of capital right now with the local banks and insurance companies, you know, the regional banks, they basically have been unaffected by what's been happening with this so-called credit crunch. The life insurance companies and the regional banks, if anything, their business has picked up dramatically. It's been the Wall Street money that's been having an impact closing deals. And for the market, we tend to work with; as much as we do business with the Wall Street, we still have all the other available flavors of lenders, if you will that we work with that are very much committed to doing deals.

So, our financing side for the real estate investing... the money's there, to lend ... I still think it's a good time to be buying real estate if you're buying the right property and you're buying with the fundamentals in, you know... just to kind of leverage off something that Matt said, you know, we've got the background here, we have kind of a platform and the experience, you know, we just don't source properties but we also do diligent analysis and financing. So...

DARBI: Sounds like it... it's still a good time to... sounds like it's always a good time to invest in commercial real estate but now, more than ever, it's not the time to really go it alone.

SEAN: Absolutely not! It's... yeah you really need a partner to, you know, somebody who is active in the market on a daily basis to help you anticipate where some of the hiccups may come and help you structure a way so that you could execute your plan so you can acquire the properties that you're looking.. but, you know, it's a good time to buy; interest rates overall are still low but you definitely need to partner with somebody that is active out there that knows what's going on and can help you get through the deal because, you know, as much as there is a lot of uncertainty out there, there's still good deals out there. You know, Matt referenced the experience with the South Cal. buyer selling and buying many more units in the Las Vegas area. You know, there... there's still good deals out there if you can find properties that have maybe rents that are below market at... therefore, you know, by increasing rents you can still get a really good return on the deal in lieu of, you know, what's going on out there in the capital markets.

DARBI: Great! So Matt, where can our listeners go to learn more about the New Investments Advisory Services from Steel Head Capital?

MATT: We invite everyone to visit our new website, which is www.steelheadinvestments.com.

DARBI: And there's all kinds of tools out there, correct, there is they can fill out a form and kind of get some information, kind of see where they're at with their deal.

MATT: And if they want someone to do a free evaluation of their property or their entire portfolio, we would be more than happy to get in touch with that person.

DARBI: Okay. Well before we close, you have any other final words of advice for our listeners?

MATT: Please take advantage of us. One of the best things about our service on the purchasing side when we're out there helping you try to find an investment property, is typically our fee is paid by the seller of that property so you get the advantage of all these great tools that we have at no cost. So really try to take advantage of what we have to offer.

DARBI: Outstanding! Well guys, thank you so much for coming on the show. It's really been a helpful discussion on commercial real estate and the New Investment Advisory Services from Steelhead Capital, your commercial financing advantage. Thanks for coming on.

MATT: Great! Thank you, Darbi.

SEAN: Thanks, Darbi.

DARBI: So, if you're an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the New Advisory Services offered by Steelhead Capitol. Especially in these changing economic times, having this experience on your side may be more important and wise than ever. So you can go to www.steelheadinvestments.com and request a no obligation portfolio review today. This has been Darbi Worley. I'm you host for Capital Synergies. Join us next time on the show and thanks for listening.

2008 Outlook for Commercial Real Estate Investors

2007-12-17T17:57:00.000-08:00

Dan Fasulo

Capital Synergies podcast with Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics. In this interview, Dan covers such timely questions as:

How does the weak dollar play into real estate values? Both in terms of the value of treasuries and how international investors view U.S commercial real estate as an investment option?

With all this uncertainty in the commercial debt markets, a number of folks were predicting far fewer commercial real estate trades. Are we seeing this in the data yet and is it isolated to secondary markets as many had predicted?

If you were to offer any advice for investors in 2008 what would it be? Do you see any areas in particular to steer clear off or any opportunities of note for the patient investor?

And much more... turn your volume up and take a listen to this highly informative and timely podcast from Mr. Dan Fasulo of Real Capital Analytics, one of the leading authorities in the commercial real estate investment market today.

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DARBY: Hello! This is Darby Worley your host for the Capital Synergies Talk Show for real estate investors. Capital Synergies is sponsored this week by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director of research for Real Capital Analytics. Dan is here to help us take a look back at the past quarter and the year 2007 and to share with us his take on some of the dramatic changes we’ve seen in the commercial real estate sector. Good afternoon and welcome back, Dan.

DAN: Thanks for having me again.

DARBY: So, let’s jump right into it. Recent housing start data showed a major uptake in multi-family start with another of home developers reorienting towards multi-family. What does the supply picture look like for 2008?

DAN: Well, there’s no question that more developers are shifting towards multi-family as the housing slowdown has certainly hit the condo marketplace pretty hard. There’s some competing viewpoints on this; on one side, the housing slowdown is creating more renters out there who are looking for apartments. As far as how that’s going to affect the market, I think it’s going to be really be a city by city type of scenario and some of the more overbuilt markets maybe in the Southwest or in Florida will certainly get more impacted than on more supply constrained markets on the coast.

DARBY: Okay.

DAN: And as far as the impact on values, you have to remember that multi-family property in the US really already went through a pretty significant pricing correction after we lost the condo converters in 2006. So, we haven’t seen the type of softening in the multi-family lending sector just yet that we may have seen with some of the other property types.

DARBY: Okay. How have the debt markets evolved since the last time we spoke?

DAN: Well, I wish I have some positive news on this front, but you know the CMBS market place as we used to know it is still pretty much shut down. I think, which actually has been a bullish sign, and which has been a little bit of a surprise to me is we kind of didn’t realize how much demand there was from the traditional lenders like portfolio lenders and insurance companies. And both of those groups have really been expanding their loan originations of the last few months to meet the needs of the marketplace. And you got to remember these groups were kind of shut out from the marketplace for several years. You know, being outbid by the CMBS universe which you know, just wasn’t giving them the spreads they were comfortable with. But, you know, they feel the... a market need right now and they’re certainly willing to lend but like always it’s on their terms. You know, buyers need to use more equity.

DARBY: Right. Do you foresee any better... uh, more competitive pricing for 2008?

DAN: I certainly hope so. And you know, I don’t think we’re going to return to the period of extremely oppressive underlying we saw in early 2007; about the only thing I can guarantee, right there.

DARBY: Okay. Are you seeing a rise in commercial real estate foreclosures, and if so, is there a particular product type or region that you know, is affected more than any other?

DAN: Simple answer to that is, no. You know, unfortunately, commercial real estate seems to get mixed up with residential into the same bag. But they’re very two distinct marketplaces and we certainly haven’t seen the type of defaults on a commercial side that have been present lately on the residential side of the equation. So, and you know, real estate fundamentals are strong nationwide right now. And I think that as long the US figures out how to stay out of recession, I really don’t foresee a tremendous waterfall of foreclosures in the near future.

DARBY: But with all the, you know, the uncertainty in the commercial debt market, a number of people were predicting far fewer commercial real estate trades; are you seeing that in the data yet, and is it isolated to secondary markets as many had thought?

DAN: There’s no question, Real Capital Analytic has tracked sales volumes that are off significantly versus the comparable periods last year. For September and October and even into November, for most of the major property types, sales activity is off 50 percent. Looking at individual property types, industrial and hotel have held up the best so far, but both of those are off slightly as well.

DARBY: Okay. Have you seen any real evidence yet for an upward move in cap rate and if so, how big is the shift?

DAN: I think I get this question maybe ten times a day. [Laughing] Um, there’s no question that we’ve seen cap rates move up certainly in notable percentage, however, it’s not a nationwide phenomena, and the best way to describe it is, I think the market has bifurcated into, you know the global US cities were cap rates have not risen as much and in some cases are basically flat versus the more secondary domestic US markets where there’s no question, we’ve seen significant rise in cap rates and for some property types, 50 to 75 basis point is easy.

DARBY: So, how about the shift that’s happening with the dollar, how does our weak dollar play into real estate values?

DAN: Well, there’s no question that makes US real estate more attractive to overseas investors. However, I just, you know, there has been a lot of press recently about this, whether there be a wave of new offshore investors coming in, buying properties here, I just... I don’t... I think if those overseas investors as to where they are in the US are more sophisticated than ever. And I don’t think just because the dollar falls 5 percent, you’re going to see a rush of new allocations. I think where the impact is, is if you’re a European investor and you’re looking to diversify, and you want to be in the US real estate, you just might wind up buying more at this point. You know, your currency is going further and you just might see overseas investors buying more than they would have, given, if the dollar was in a different position right now.

DARBY: And how does that affect the value of treasury?

DAN: Well, you know, I’m certainly not an economist and you know, commercial real estate is, you know, a small piece of the overall economic pie. So, I don’t think it can make a significant impact on the value of treasuries.

DARBY: Okay. So, if you were to offer any advice for investors as we had in 2008, what would it be?

DAN: Well, I’m certainly an Econ 101 guy and I strongly believe that even though you might overpay a little bit to get in, the supply-constrained US markets on the coasts, the ones... the markets that are very linked in to the global economic expansion and those who did might best, that’s for 2008. As far as other types of niche investments right now, I really see some opportunity in the mezzanine space, you know, we’ve certainly seen the situation where there’s less players right now in the mezzanine space than there was earlier in the year and the yields have gotten to very attractive levels.

DARBY: What about any areas to steer clear of?

DAN: Well, you’re going to get somebody upset right now. [Laughter]. But, I think your markets where they’re having significant effects from the slowdown in the housing markets would certainly be on my radar as markets to be very careful in. And I think secondary markets in general, where the market is dominated by private investors who rely and stick debt to purchase their properties will be the most affected. You know, your Manhattan-type markets where there’s such a diversity of capital sources and with more investors could just basically write a check and purchase a property as opposed to using a lot of debt. I think those markets will hold up the best.

DARBY: Well, they certainly seem to be; prices are definitely not dropping here in Manhattan.

DAN: They certainly aren’t. To give an example of that situation, you know, teachers, in a large pension fund just came in and purchased a building from Ethel Green on Park Avenue South and they did it with cash.

DARBY: Wow!

DAN: And you know, this credit crisis or credit crunch, whatever you want to call it, is actually creating opportunity for some buyers. I think it would have been very difficult for teachers to win the bid for that property earlier in the year where they might have been competing against several highly leveraged private investors.

DARBY: Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytic?

DAN: We offer a variety of different subscriptions and we can certainly work with different clients to meet their needs. Our basic subscription is an annual subscription which would give them access to all the transaction activity we have tried in the US through our website and it also comes with our companion, Capital Trans Monthly Reports and their individual market reports. We also have a new global product coming out that we’re really excited about. We’ve been tracking transaction activity overseas for over 12 months now. And we tracked over $400 billion worth of transactions globally, non-US.

DARBY: And so, where do our listeners go to learn more, if they want to subscribe to those reports, do they go to your website?

DAN: Certainly go to www.rcanalytics.com and we have a very simple website to navigate and certainly get all the information they need there.

DARBY: All right, great! Thank you, Dan. This has been a very insightful discussion on commercial real estate and I’m sure our listeners appreciate your spending time with us today. So guys, if you are an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the new advisory services offered by our sponsors, Steelhead Capital, just go to www.steelheadinvestments.com and request your no obligation portfolio review. That’s www.steelheadinvestments.com. This has been Darby Worley, your host for Capital Synergies.

October Commercial Mortgage Rates Watch

2007-10-15T15:08:00.000-07:00

Dan Fasulo

Capital Synergies podcast with A Sean Aguilar, CCIM, executive Vice President of Steelhead Capital, and this week's guest Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics. In this interview, Sean and Dan cover such timely questions as "How have recent interest rate changes financial events impacted commercial real estate investors?" and "If you could give one message of encouragement or advice to our audience on the subject of commercial mortgage rates and deal flow, what might that be right now?"

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DARBY: Hello, this Darby Worley, your host for the Capital Synergies Talk Show for Commercial Real Estate Investors, and today we have with us Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital, along with our guest, Mr. Dan Fasulo, Director of Market Research for Real Capital Analytics.

Sean and Dan are here to talk with about commercial mortgage rates, and to give us some insight as to the affects that recent rate changes have had on the psychology of investors in today's market.

Good Morning, Sean and Dan, welcome to the show.

SEAN: Good morning.

DAN: Good morning.

DARBY: Thanks guy for coming on. So in commercial real estate investing, we generally have three types of buyers, institutional, private investment and exchange. And each of these groups has been affected in some way by the recent turmoil in our capital markets, and more specifically with the recent interest rate adjustments.

So Sean, can you speak to the point... how have recent financial events impacted each type of commercial real estate buyers?

SEAN: Sure, I think the impact is on different levels, and more specifically the greatest impacts on the investment client, or the market in which we are currently experiencing interest rate volatility in the tightening of debt markets. Therefore from the banks, you know, we're seeing tighter credit standards, higher borrowing costs, if you will, and I think this is affecting every borrower at all levels except maybe the institutional buyer as they typically have the ability to pay all cash, and when they do use debt, it is usually at a very low leverage.

As for the private investment companies and the exchange buyers, they tend to take a shorter term view, if you will, and they tend to use high leverage. And they've clearly seen a major impact to their business these days in reference to loan proceeds, yields, and returns. And... I have to say that the impact is probably greatest upon them right now.

DARBY: Okay. Dan, talk a little about the psychology of sellers and buyers out there. How is it impacting deal flow today? And how are interest rates also impacting that psychology?

DAN: Well, you know, there's no question that the credit crunch that occurred in August had a significant act... impact on deal activity throughout the country. Now like Sean said, we've certainly seen the greatest impact being felt by, you know, your highly levered private investors. You know, the groups that were using 90 percent leverage. But I think, you know, what's great about the market right now is that the diversity of capital groups that are out there looking for commercial real estate in the U.S. And you almost have to bifurcate the different markets across the U.S.

Now the primary markets where, you know, there... there's been capital groups that have been ready to kind of fill the void when we lost these highly levered private investors, have sustained themselves relatively well considering the environment. And you know, it's the institutions that really have stepped up their buying recently. Even [inaudible 3:13] have comeback as of late.

But more of your markets that are dominated by private investors, we... we certainly expect to get hit the hardest over the next couple of months.

DARBY: Sean, what's the relationship between interest rates and cap rates in relation to this psychology?

SEAN: Well, I think as we know, you know, the interest rate it's a... it's comprised of a spread plus an index. You know for instance, long-term fixed rate are tied to a 10-year treasury which, you know, today is prob... you know, hovering around, you know, 470 and the spreads, you know, they've moved up to about 220 basis points more or less over, you know, from the past when I think on the same type of asset you'd be quoting 100 basis points.

So you know, clearly the interest rates have changed, you know, through this credit crunch, more specifically the spreads. And as for the psychology though, I think its fair to say that, you know, if you're a trade buyer you're not seeing the upward adjustment in cap rates yet that you like to see, which you know, because obviously, you know, translates to lower value, lower price. And you know, so they're not seeing the sellers lower their price to reflect the increasing cost of borrowing. And this is becoming a big concern for them because, you know, for... in reference to positive leverage, it's really not being obtained, or it's being limited because of the difference between the cap rates, and the interest rate. And, you know, it's impacting motivation of... of buyers doing deals, and again, this... like what Dan was saying, I think if we took the exchange buyer and the trade buyer, I think you see a big impact on them right now. You know, from the difference in interest rates and cap rates.

DARBY: Dan, since the spreads have widened, and therefore interest rates are reflecting these adjustments, where do you see cap rates going over the next 6 or 12 months?

DAN: Well, you know, there's no question, you know, if you just do some simple math. You have to believe that cap rates are going to move upward. However that being said, I have to go back to the bifurcation of markets, and you know, sellers are certainly holding... holding their prices relatively firm in the primary markets. However, you know, we track new offerings to the marketplace, and in secondary and tertiary markets we've definitely seen some rising cap rates on the offering side.

Now it's going to be interesting to see how that really plays out over the next couple of months. And whether, you know, the buyers are really matched up perfectly with the sellers.

DARBY: I mean, can you even venture a guess as... and in terms of the actual number or...

DAN: Well, you know, there's certainly some evidence already that cap rates have... have risen about 30 basis points in secondary and tertiary markets.

DARBY: Okay.

DAN: We have little evidence to show any type of significant increase in the primary markets just yet. I think what many investors were worried about was whether or not this credit event was going to move over to the general economy and push us into some sort of recession. But now that those fears have kind of dissipated a little bit, I think that we're going to see buyers and sellers start to get together once again on pricing by the end of the fourth quarter, and I think we'll see deal activity return pretty strongly.

DARBY: Okay. Sean, ultimately if we see sellers taking a more analytical approach to cap rates, isn't this what's going to lead to more activity in the commercial real estate market?

SEAN: Yes, I mean, you know again, kind of leveraging off what our counterpart Dan is saying here. You know, for the institutional borrower and the buyer if you will, you know, their activity probably really hasn't changed that much; and again, they tend to chase, you know, operate in these primary markets chasing Class A assets, and again, since they have the ability to pay all cash, or use very low leverage, or no debt at all, there probably won't be much moving in the price right now over time. And I guess that over time we'll see because the market will tell us.

But you know, we haven't really seen much moving in that either and we haven't really seen the activity change much on that. Maybe the interest into the properties because of the private investment companies maybe had to back off because they tend to use more high leverage financing to acquire those deals. But you know, there are... they're still out there, and the [inaudible 7:41] are out there buying, and actually buying deals now and taking a second look at deals because they're getting, you know, things at a... at a maybe a slightly higher cap rate, and so they're re-looking at deals, and getting active.

But I think in reference to, you know, looking at exit cap rates, and you know, more deal activity it's really going to be interesting for again, in the exchange market, what happens there because, you know, the sellers in the exchange markets, at least on the single tenant side for an example, or specifically more the merchant builders, the developers, I think they're going to have to start rethinking their cap rates, and to see, "Hey where do they need to be on the exit side," because the exchange buyers now actually have a... a viable alternative that they're looking at in reference to capital gains.

You know, there's con... some concern out there that the... there maybe a change of parties in Washington in reference to the White House. And capital gains, you know, are currently at a very low tax rate. There's a concern that that may be increasing with the change of parties in Washington, and so, you know, trade buyers are sitting there saying, "Well if I can't get the yield I'm looking for, maybe I should pay the tax, and take my cash and sit on the sidelines and see where the market goes."

So in reference to deal activity I think, you know, if we see the merchant builders start moving their cap rates we'll see some... you know, we'll see some good activity. I think if they're holding out, I think when it comes to the trade bar because of the time restrictions they're under, we may see less deals done there as they take cap gains and sit on the sidelines.

DARBY: Okay. So you sounded... you guys have both mentioned a couple of concerns of investors. Dan, aside from the concern over the general economy and the capital gains, are there other concerns of investors as they look at transactions over the coming months that you'd like to speak out... speak to?

DAN: Yes, you know, there's no question that the CMBS marketplace has been a key source of debt financing for commercial real estate over the past several years. You know, some have said it... it made up approximately 30 percent of the overall debt market. And I think whether or not that reappears, or the conduit window, I think that will kind of determine where we're going to go in the near term.

There's no question that many of the mega deals that have been financed over the last couple of years have used public financing and the conduit window. So I... I think depending on what form that reappears in upcoming months, I think that will really have a significant impact on whether these mega deals in the marketplace return.

DARBY: Sean, do you have any closing comments or questions for Dan?

SEAN: Well, in reference to a closing comment, I just think a... we're probably going to see a lot of private companies, if you will, and investment houses. You know, they are definitely re-looking at their yields, and I think you'll see an adjustment in expectations in returns for their clients. So we'll start seeing that filtering through the market.

But in reference to something Dan said, and I'd like to ask Dan because he referenced the CMBS market, Dan, can you give us some color in our eye, and some... some color on the current CMBS market in reference to securitizations, because that's usually how they recycle their money if you will, to be able to lend more out. Can you kind of give us a State of the Union on what's... what's currently happening in that area, and how it's impacting deals?

DAN: Well, there's no question that securitizations have stalled, and I think that many of the financial firms that are holding some of these notes are going to need to clear out their inventories before we really get started again. And there's no question that the lack of public financing for deals is... is having an affect on pricing. And you know, I think that, you know, for these mega deals pricing is going to have to come down because buyers are going to need to use some traditional forms of financing to get them done.

A good example of that was certainly the Archstone deal that just closed last week, and it... it took a completely different form at the end than what it originally was going to look like in the beginning when they went under contract.

Well, overall though, I think we're really bullish on commercial real estate in general. It still looks relatively attractive versus, you know, the other asset classes out there, and you know, for the most part, especially in primary markets, you know, supply is very much constrained, and fundamentals are strong. And I think we're gong to need more than this... this credit hiccup to really stop us from continuing to see a healthy commercial real estate market.

SEAN: Dan if I may just ask Overlay.

DAN: Yes.

SEAN: As a follow up, when you reference pricing for the... and specifically the Archstone deal, it took a different form, I'm assuming you're saying in reference to interest rate and terms, the interest rate probably increased if you will, and then that actually... in reference to terms and stuff, on Archstone, did it therefore require them to lower the price of the overall deal?

DAN: Well, from my knowledge they did not lower the price of the overall deal. What I was referring to as far as structure is... is bringing in some government sources of financing through Freddie Mac and Fannie May.

SEAN: Okay.

DAN: Which allowed the deal to get done at the existing, or the terms they originally agreed on. That's just... the fact that it got done in this type of environment is a very bullish sign for the marketplace, I believe.

DARBY: Thanks to Sean and Dan. This has been a very helpful discussion on commercial mortgage rates, and the impact that rate changes are having on the psychology of investors.

Dan, I know we don't need to tell this, but it has been a real honor to have you share this information from Real Capital Analytics, and we certainly hope to have the good fortune of your joining us again on the show in the future.

DAN: My pleasure.

DARBY: All right, very good. Again, if you're an investor, or in addition to financing looking for guidance in the acquisition or disposition of commercial real estate, be sure to checkout the new advisory services offered by Steelhead Capital. Just visit SteelheadInvestments.com, and request your no obligation portfolio review today.

This has been Darby Worley your host for Capital Synergies. Thank you again, Sean and Dan, and we'll see you next time on the show.

DAN: Bye, Darby.

SEAN: Bye, Darby.

DARBY: Bye, guys.

Preferred Residential Mortgage Program Offered by Steelhead Capital

2007-08-28T18:13:00.000-07:00

Britt Miller

Capital Synergies podcast with Mr. Britt Miller, Vice President of Steelhead Capital.

Many of today's home loans are in the same high dollar amounts once thought of as belonging to commercial properties. We're talking about one, two, three million dollar plus loans in top markets.

To respond to the complexity of these residential transactions, Steelhead Capital has recently launched a new platform called Preferred Residential, allowing you to leverage the experience of commercial mortgage brokers to finance your residential real estate.

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DARBY: Hello. This is Darby Worley your host for the Capital Synergies talk show for real estate investors and today we have with us Mr. Britt Miller, Vice President of Steelhead Capital. Britt is here to tell us about a new type of home of home mortgage called Preferred Residential. We’re going to speak about working with a mortgage company with a commercial lending background. And we’ll ask Britt for a few insights into today’s residential mortgage market. Good morning Britt.

BRITT: Good Morning.

DARBY: Thanks for joining us. So many of today’s home loans are in the same high dollar amount one slot of that belonging to commercial properties. We’re talking about one, two, three million dollar plus loans in top markets. In so to respond to the complexities of these residential transactions, Steelhead Capital a nationally recognized authority in the arena has recently launched a new platform called Preferred Residential.

Now Mr. Britt Miller our guest he’s the Vice President of Steelhead Capital and the head of this new division. To go with this new platform Britt is also going to tell us about their new website, steelheadresidential.com. And give us some insights into the current residential mortgage market. So just to start off today, what inspired your move from the commercial lending division of Steelhead Capital into the new Preferred Residential program.

BRITT: Prior to joining Steelhead Capital, almost three years ago now, I actually came from the residential world. I was on the wholesale side where I had started my own company with a group of partners. And what brought me back to the residential world although it is very fragmented and there is a lot of different players, I really believe there is a great opportunity to educate both your clients and also to really negotiate on their behalf.

And what I mean by that is and this isn’t a knock on the industry, it’s just a reality. I think over the last 4 of 5 years with the ease of capital that’s out there I really believe a lot of loan officers were looking for the path of least resistance for they’re documentation type, etc. So I saw it as an opportunity to take some of the disciplines I had learned on the commercial sides and really go out and represent my clients in their best interest and what loan would serve them the best.

DARBY: Yeah. You’re being kind, but there are a lot of guys out there looking for the quick dollar right?

BRITT: Exactly.

DARBY: [Laughs.] Sounds like you still have the perfect set – skill set and experience to launch this new program for Steelhead yes?

BRITT: Well another things as well - what really got me into the lending world was on the residential -being somewhat of an active investor myself - I actually thought that - and this is going back a number of years ago. I did think that I kind of knew the lending world and after getting closer and closer to the business and actually sitting on the lender side I actually didn’t know a lot the nuances that were involved in a residential loan. What’s the word I’m looking for? Part of me is I enjoy doing this by all means. I’m very passionate about it but secondly I’m really able to relate to people being an active investor, buying some properties. You know I think I’m able to give some people a perspective that they relate to.

DARBY: Ok. Let’s talk about your commercial lending background. Say I’m a homeowner looking to secure one of those one, two three million dollar plus residential loans, what advantage does your commercial lending background bring to that transaction?

BRITT: You know that’s a great question and I think its probably more relative given today’s climate in the lending market as opposed to even six months, a year ago. I think over the last year there has been a lot of tightening in terms of credit in the secondary market, and as a result lenders are doing a lot more due diligence on the borrowers than they were a year ago. And what I noted earlier by having that discipline on the commercial side, and what I mean by the discipline, it’s really fact-finding, gathering all the materials.

DARBY: The qualifications are a little more stringent.

BRITT: Exactly. Yeah and then being able to articulate what you have to your different capital sources. That’s really how you do it on the commercial side. On the residential side albeit the disciplines are a lot different and your focusing more on the creditworthiness of the borrower as opposed to the assets on the commercial side.

I’m seeing especially on larger loans the amount of due diligence, and the underwriting, the scrubbing that a lot of these lenders are now doing it requires loan officers to be on their toes. And with that I mean you have to make sure that you’re gathering all the proper paperwork, you know the file inside and out. The last thing you want is a surprise, i.e. the guy has a knock on his credit report. Where to be honest with you a lot of lenders, over the last few years didn’t necessarily have to go through a credit report closely. You know if his credit scores were there. So I think again just underlying it’s really the due diligence and the discipline in being able to serve up the package to the appropriate lenders. To make sure that you are finding a lending partner that can deliver.

DARBY: Let’s just talk about - let’s dive into the idea of actually getting a residential loan. I understand there are many ways to structure a residential loan? How do we determine the best possible financing for each person’s needs, each buyer’s needs?

BRITT: I think the first point is everybody’s level of expectation is a little bit different. Everybody wants the best terms. I think it’s very important to understand what is important for somebody and a perfect example is I had a recent closing done in Southern California where my client truly believed and I support this as well, if he was able to purchase a multi million dollar property for couple hundred grand less than what it was truly worth.

We had a situation where there was some moving parts with the seller who had to come to the table with actually some dollars because he was actually selling it for less than what his loan amount was. And in that situation the objective was we needed to close the sale in a short period of time so my number one priority was certainty of execution, I had a very tight timeline. Certainty of execution at the best terms that I could get.

DARBY: So does that usually bring with it a higher interest rate?

BRITT: You know what in this particular situation due to the lender that I went with, because I do a lot of volume with them I was very comfortable. I articulated back to my client I didn’t really think we were giving up a lot. I still covered the market. I probably took that deal to 5 or 6 different lenders and I still think at the end of the day we still came up with a loan that was very aggressive given the market.

DARBY: Right. So that also speaks to the years of experience you have. You’ve got relations you can draw upon I imagine to get the best deals for your clients?

BRITT: Well you know you hit on a really good point and what I find is and I think this is just the nature of all businesses, a lot of times you’ll find people that - and rightfully so that deserves the best deals that are out there. And I think when you net it all out, an effective mortgage broker you have to have confidence that they are going out and representing you in your best interest.

My approach is I’m not going to take a loan to the lender I do the most business with because I know I can get it closed. There are certain times when that approach is necessary but I think at the end of the day, if you know that your going out and covering the market and this is a discipline again that I think is transferable from the commercial lending world to the residential world.

If you’re covering the market your saying to your client that. “Hey I’ve gone out, I’ve talked to some portfolio lenders, I’ve talked to a couple local banks, I’ve talked to some lenders that are going to sell this. This is going to be a Fannie loan, etc. Here are the pros, here are the cons.” What I’ve actually done, this is for a larger transaction down in Palo Alto where home prices are two and a half million upward...
DARBY: Yeah.

BRITT: My client who is very sophisticated, you know - I took a template I use on the commercial lending side which outlined, you know - I think I took it to 8 or 9 different lenders. I showed the pros and cons of each, what the terms were, what the lender costs were, what the margin was going to be after the loan went from its ARM period, or from its fixed period to its adjustable period and I think that by demonstrating this to my client this is what I do behind the scenes, he was very comfortable with me.

DARBY: Yeah, yeah. You know you can’t really turn on the television these days without hearing about all the sub prime lenders and all the chaos that has been caused in the residential market. What do you think about all that talk and how much impact do you see this having on residential loans going forward?

BRITT: You know it’s…I think it’s been inevitable for quite some time and I think it’s a real wake up call pretty much for the entire industry from appraisers to loan officers, to underwriters, to processors, to borrows. And what I mean by that is honestly everybody’s affected right now. Yesterday there was an announcement from a large, large lender, who I would consider in the top five stating that on August 6th cumulative loan devalue for stated borrowers is being capped at 80 percent. We’re talking - that’s a significant change in the industry.

DARBY: And we saw that the stock market felt that yesterday. It’s not just the lending industry, it’s the whole economy!

BRITT: You know it’s an interesting time as well because, and I want to make sure people don’t take this the wrong way, I really believe and I touched on this earlier. You know the market has been this, it’s like there’s a loan for everybody. That has really been the approach.

DARBY: Right.

BRITT: And now it’s getting back to basics. Its getting back to an effective loan officer when they have some down time, when they’re not prospecting, or they’re meeting with the client, or they’re not putting together a loan package, you have to be on the phone with your lenders. You have to understand what is the underwriting criteria. How are they treated stated self-employed borrowers? What are they doing with the full borrower who has five separate entities? You have to really get into the nitty gritty and understand what are these lenders going to be looking for? It’s not as simple now as - the industry got so how should I say this - lax is probably the appropriate word.

DARBY: It was a thing like a free for all, yes.

BRITT: It got to a point where a lot of – you know, and again the lenders have to take responsibility for this as well, if you rewind and I’ll go back to 2004 which was not that long ago when I was on the wholesale side, there was not a significant pricing discrepancy between the - between showing no income and no asset verification versus going stated, stated. I mean literally stating what somebody makes and stating their assets. The lenders, the market had priced it maybe an eighth maybe a quarter difference. And as a result of that the entire industry was trained to go down that road.

DARBY: Right.

BRITT: Why would you do a ton of heavy lifting where the loan might not go through when you’re going to get maybe an eighth to a quarter break? So what’s happening now is like the brakes have been put on. Loan officers are now being required to reevaluate their pipe line. Reevaluate the type of borrowers their working with and at the same time you have to go back and reeducate some of your borrowers. It may be a year before somebody’s in a position before they can refinance.

So I think an effective loan officer in this transitional period has to be very proactive with their clients because, you know, it may take a twelve month period where we need to restructure you assets so you liquidity is sufficient to refinance out of your ARM that’s coming due August of ‘08.

And I think that in itself the last people who are going to figure it out is the borrower unfortunately and it’s the people that are in the business that are seeing this unfold on a daily basis. There’s literally been significant, significant press releases or announcements, for lack of a better word over the last 60 to 90 days that are paramount when comparing it to a year or two years ago. A year ago you could get 100 percent of devalue up to basically a million bucks. Some of the lenders may be a little bit less. You could go stated, stated, with a 620, 640 FICO score up to a 100 percent CLTD. That market is gone.

DARBY: Yes. And what I keep hearing on the news is that they were unscrupulous loan officers that were. I mean this was not in your loan market at all but borrowers were really kind of taking on way more than they can chew and not really understanding what they were signing up for.

BRITT: You know it is. You’re walking a fine line. I mean we’re talking about over the last few years a significant amount of money where if you’re sitting down with somebody and they’re looking at a $700,000 - $800,000 loan, depending on how you price it out, let’s just assume, you know you are talking a point, point and a half. That’s a loan officer that’s staring at possible $8,000-$12,000.

DARBY: Yeah.

BRITT: And I think everybody in the industry would agree if we’re being honest with ourselves, that there were some borrowers that probably should not be getting the loans. Especially if you looking at sub prime loans.

DARBY: So if I were looking to purchase a home right now what kind of advice would you have for me to obtain the best financing possible given current conditions.

BRITT: Find out what you can afford.

DARBY: Right.

BRITT: Find out what is going on in the market especially in the dynamic market that we’re in right now. And I’m a big believer that there always going to be transactions regardless of the market. It is pretty fluid.

But I think just as important you need to align yourself with an agent and that might be a referral of your mortgage broker, it maybe a referral of a family friend. Make sure you are engaged with somebody that knows the market that you’re in. And what I mean by that is at the end of the day an effective loan officer can definitely save you some money by all means but it’s just as importantly you need to make sure that you’re buying the right property at the right price.

I’ve seen some people repay by $50,000- $75,000 because they’re caught up in the moment. And I think that really pales in comparison to maybe a loan officer that’s doing your deal for an extra quarter of a point that may amounts to $2,500 dollars. But you’re going to turn around and pay an extra $75,000 for a property.

DARBY: Yeah. And I think it’s always good to have an objective opinion. When you’re buying a house there’s a lot of emotion involved, you know?

BRITT: Absolutely. And I think you bring up a really, really key point. You know when I go out and work with people and that’s whether it’s a real estate agent or whether it’s an attorney, whether it’s an accountant, a doctor, whatever it may be. I’m really paying somebody for their advice. If somebody’s just going to sit there and tell me sure you can do that. Yes you can do that, that’s not necessarily the type of person I want to align myself with.

And what I mean by that and how it relates to the business I’m in is I really believe there’s a lot of options out there people can work. There’s big banks, there’s Bank of America. Charles Schwab even has a lending program. There’s credit unions, there’s mortgage brokers, etc.

The advantage I think you really have is with the mortgage broker and I’m assuming here if the mortgage broker is engaged, their doing a lot a business, they have strong relations with their lending sources, the advantage you have is with a broker is this is somebody who’s doing it day in or day out. Their opinion should not be biased. Their opinion should be purely objective.

If Washington Mutual is the right loan for that given situation, Washington Mutual is that lender. If Aurora Loan Services due to the fact that it’s a non-owner occupied or going high LTD, they might be the appropriate lending source.

So my point being is as a starting point for somebody that’s maybe getting into the market for the first time or maybe somebody’s going through a transition and i.e. their starting their own business. Maybe they’re getting out of a particular field they’ve been in for 15 years, maybe they just made a large investment and their liquidity has been affected, I believe a starting point is a mortgage broker, they’re going to be able to give you a really good sense on what their options are, what their alternatives are, what it may cost them, what they may have to give up. And from there I would recommend go out and talk to a direct lender. See what they have to say.

DARBY: Ok. If our listeners want some more information about the Preferred Residential program, tell us the website again.

BRITT: It’s www.steellheadresidential.com.

DARBY: And are there some tools out there to help people kind of get started on the path to know what they can qualify for? What’s all available to our listeners on the website?

BRITT: What I would recommend as a starting point right now, I mean, I think it’s a very personal business. Everybody’s situation is a little bit unique. We will have on the website different loan programs that are available. But I firmly believe a 15 to 20 minute conversation can uncover a lot of information. A 15 minute conversation - let me restate that can basically replace 45 minutes to an hour maybe of going out and researching on your own.

DARBY: Great. Well, Britt, this has been a very helpful discussion on residential loans and your new program called Preferred Residential from Steelhead Capital. Thanks for taking the time to speak with us today.

BRITT: Thank you so much.

DARBY: And again congratulations on the launch of the new website www.steelheadresidential.com.

BRITT: I appreciate it. Thank you.

DARBY: This has been Darby Worley. Your host for Capital Synergies. We’ll see you next time.

Closing Phase of the Commercial Lending Process

2007-08-16T18:21:00.000-07:00

A Sean Aguilar

Capital Synergies Real Estate Investment podcast with Mr. A Sean Aguilar, CCIM, and Vice President of Steelhead Capital.

On this show, Sean speaks to us about the final phase of the commercial lending process called Closing and gives investors a sense of what will be required as the deal is finalized. Both new and experienced investors will learn from Sean's insights here.

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DARBY: Hello. This is Darby Worley your host for the Capital Synergies Talk Show For Real Estate Investors. Today we have with us one more time, Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital. Sean is here to speak with us about the exciting final phase of the commercial lending process called “Closing.” Welcome back to the show Sean.

SEAN: Thank you for having me.

DARBY: So talk a little bit about closing a commercial loan. What does that phase entail?

SEAN: The term the closing, actually once your loan has been committed, and you’ve paid your commitment fee and the loan’s been approved by the lender we go into what we call the closing of the loan. And that’s basically where all the final documents, the loan documents, the closing documents, all get assembled and all get ready for signatures and execution so that we can close and record the transaction.

DARBY: I remember from buying my house that this is a time when you get together a big pile of papers in front of you, and you have to sign about 40 different pieces papers. Is that similar in the commercial side?

SEAN: Yeah. Exactly, depending on if its multifamily, or industrial, or retail, your going to have your mortgage document, or your deed to trust, your promissory note, but your also going to have some additional items such as assignment the of rents, and the subordination non disturbing agreement document. So there definitely are some more documents that would need to be signed as compared to the residential side.

DARBY: Ok. So lets just to recap all four phases. How long does the whole deal take to put together start to finish. Is there an average timeframe that you can speak to?

SEAN: I think industry average, plus or minus 45 to 60 days, I think is... if everybody is really firing on all cylinders and paying attention to getting everything done, otherwise it could take a little bit longer and it could be done a little sooner.

DARBY: Are there any things that can come up at the very end of the deal that could stop the deal? Are there things people should be looking out for, you know, last minute surprises?

SEAN: Yeah it’s interesting you used the word “last minute surprises.” We kind of have a saying here, “Its not bad news that kills the deals, its surprises.” One thing to always do is once you get under application with a lender is ask for what we like to call “the closing checklist.” Basically its just a list of items of all the things that go into the deal.

Whether its title reports, appraisals, entity documents, reviews, that’s a good little roadmap, and it all ends toward the closing process. That will kind of help you provide any oversight to make sure there are no last minute surprises. They can really vary. That’s why when you get the title report you want to review it and make sure there’s no additional liens on there that the seller may not be aware of. And if there are liens on there, you just want to make sure that the sellers ... making sure that there’s sufficient equity in that property to pay those off so that you can close and take the property in your name and move forward, so the things along those lines.

Some things to keep in mind too, is then you go through these transactions is sometimes the lender that has the underlying loan on the property may require a certain amount of notification in order to have that loan paid off on the commercial side. And you just need to be aware of certain notification periods that may come into play because that could delay a closing. And that would be a surprise, and it could be an unfortunate surprise because it could add additional costs to the transaction on the seller side.

DARBY: How do your buyers find that information out? Is that something that you do?

SEAN: Well, we again, we provide a lot of oversights. When we communicate with the escrow officer on the transaction, we go through the title report, we tell them that, “Hey by the way, we know this need to get this released and this released.” We like to know and ask them, “By the way, have you sent out a demand for the payoff of that underlying loan?” And if they haven’t we ask them to do it, and if they have done it, if there’s any additional cost to it usually by then they’ve already communicated that to the seller. So again, we’re more so about being proactive and just making sure stuff like that is taken care of.

And then on the buyer’s side, something that could slow down the transaction is depending on what type of loan you are getting, and from what type of lender, they may want vesting or title held in what we call the “single asset entity.” There are certain entity documents or paperwork that needs to be filed for that, whether it’s the formation of the new LLC, Limited Liability Company, or a big corporation, or limited partnership. However you plan to take that vesting, it’s really a good idea to get that paperwork started ahead of time, and work with the escrow officer to see when it needs to be delivered in what format. If it’s a newly formed LLC, you need to deal with the Secretary Of State and get your formation documents done, and that’s something that could slow down a closing.

DARBY: Anything with the government definitely can slow down anything you’re trying to do. So for you guys, it sounds like you really do earn your keep on these deals. And I’m wondering how do you all get paid? Can you explain how your fee structure works?

SEAN: Our compensation is really simple. We charge a 1% placement fee for sourcing the lender and placing the debt on behalf of the borrowers, and since we do act more like a private banking group clearly we... our primary responsibility is sourcing that debt, finding that lender, and loan for the client, but we provide a lot of oversight as part of our program here, and so the 1% of the loan amount we think is very fair and reasonable fee at the end of the day.

DARBY: Is that a fee a borrower would pay on top of their purchase price, or is that... do they end up paying anymore for that, or does that just come out of the... ?

SEAN: Well its part of the overall closing costs. It’s added to the transaction cost clearly, but it’s not added to the purchase price in the idea where can it be financed, and now it’s treated as part of your closing cost which you would come out of pocket. That’s for a purchase.

If you were look into refinance, and if there was sufficient equity in the property, well then absolutely, we would get paid with the loan proceeds of the refinance. So it really wouldn’t be additional cash out of the borrower’s pocket. It would be paid through the loan proceeds.

DARBY: Well Sean you’ve really provided a great education on the entire commercial lending process. Is there anything that we’ve missed? Anything that you think our listener should hear before we close this thing up?

SEAN: Well, yeah I think just keep in mind that no transaction is the same, and no borrower’s objectives are the same. They may be similar, but not the same. Its an exciting process. I really encourage anybody that’s either on the residential platform, or has investment commercial property right now to stay engaged, and feel free to continue investing in real estate. Long term, it’s a great alternative and we’re here to help. If there’s anything we can do on our side to help somebody reach their goals of owning and managing on the real estate side, by all means, we’re here to provide that for them and be a big supporter and advocate for them.

DARBY: Great and how do they get a hold of you?

SEAN: They can call us on our toll free number, 888-951-6600, or they can reach us through the internet on the webpage at www.steelheadcapital.com.

DARBY: Well Sean thanks so much for sharing your time and your wisdom with our listeners. We really appreciate it.

SEAN: Alright Darby. Well thank you.

DARBY: Alright guys, join us next week on the Capital Synergies Real Estate Talk Show. My name is Darby Worley, and we’ll see you next time.

Underwriting Phase of Commercial Lending

2007-08-10T14:26:00.000-07:00

A Sean Aguilar

Capital Synergies Real Estate Investment podcast with Mr. A Sean Aguilar, CCIM, and Vice President of Steelhead Capital.

On this show, Sean speaks with the host about the third phase of the commercial lending process called Underwriting and helps investors understand core aspects of putting together a solid commercial real estate loan.

Sean describes in detail the importance of having expert help in preparing finacial documents so that there are no surprises or holdups along the way to closing.

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DARBY: Hello this is Darby Worley, your host for the Capital Synergies Talk Show For Real Estate Investors. And today we have back joining us again, Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital. So Sean is here to speak with us today about the third phase of the commercial lending process which is called "underwriting." Sean welcome back to the show.

SEAN: Thanks for having me back.

DARBY: Alright. So tell us, just give us kind of an overview of what underwriting actually means. What happens then?

SEAN: Well actually underwriting is the culmination of getting third party reports together, the entire report, the appraisal, any kind of inspections, and basically the operating statements. Getting everything altogether and having the banks underwrite it, if you will, so they can get it to the credit committee and get a credit decision.

DARBY: Okay. So this is the part when you find the lender that's best suited for us? Kind of a matchmaking process?

SEAN: Yeah. Basically by that time we've identified the lender and we've made application. Now we're going down the path with them. Application fees have been exchanged, and we're working towards the goal of completing the transaction.

DARBY: So what are some important things to think about as a client is going through this part of the deal. How do you keep the deal moving forward?

SEAN: Well I think communication is key. A lot of information is flowing back and forth, and you're dealing with a bunch of different personalities and different groups, i.e. the lender's side, your own side, the mortgage broker's side, the investment sales side, and you have title officers involved. There's a lot of information there, and it just needs all to be well organized and just processed thoughtfully. Great communication is the key, because lenders, you don't want to give them things in drips and drabble. You want to give them as much information as possible and really not hold anything back.

DARBY: So is that one of the things that slows people down?

SEAN Yes.

DARBY: You do things one piece at a time as opposed to presenting an organized package?

SEAN: Absolutely. Part of it is based off experience. You may think, "Well hey, I have this right now. Let me just give them this rent roll, but you may not have the operating statements, and if your a novice at it you may be thinking, "Well I gave you the rent roll, can't you start with that. But they really need the rent roll and the operating statements, because that's all part of the operating numbers of the property. And so you really need to try to give complete information to the lender because otherwise if do it piece meal, human nature being what it is, you're thinking, "Well can't you just start with that and get it moving?" It just really doesn't work that way.

DARBY: Yeah. So they can't do it one piece at a time, they have to have every bit of the package together to even get started.

SEAN: Yeah. Yeah. So then if you look back at the beginning of the process, when you're working with a broker that's putting the deal under contract for you, its always good to ask "What documentation do you guys have available for me to have once I sign up and go under contract with you?" So you when you look at the financials on the property, if they have everything great. But if the don't, well then you really need to encourage them, "We really need to get that together because my lender's not going to be able to do much for us until we have all that information to them."

DARBY: So who keeps track of all these various documents, and ordering the title, that kind of stuff.

SEAN: Well at Steelhead, we tend to provide the oversight, and really engineer the whole process. That's one of the things we do is, we get involved at all levels, and it's really our job to shepherd it through. So I would say your mortgage broker, and/or investment sales broker really should be providing the oversight on that to make sure it gets shepherded through. That's one of the things we do here because we realize based off experience that if you leave it for everyone else to try to do, nobody really steps up and quarterbacks the transaction through, and that's one of the things we do here in…

DARBY: I know that from buying a basic residential home how many documents are involved. I can't imagine how much exponentially greater an organizational packet is when you're talking about a big loan like this.

SEAN: Sure. There's a lot of moving pieces, and you really need to be able to know what to anticipate, what to see, and what needs to go where.

DARBY: Let's go back to that matchmaking phase a little bit, like when you're finding the lenders. How many lenders do you guys approach? Or do you kind of have such a good knowledge of who's out there, and who's going to be appropriate that you don't have to talk to a whole lot of lenders?

SEAN: Well its an interesting comment you bring up, because there's lots of lenders out there, and mortgage brokers like to be able to represent, "Oh we have access to 30, 40, 50, 60 different lenders for you." And from a marketing side that sounds really great when you're trying to prospect and procure for business. But the reality of it is, a good mortgage broker at the end of the day should basically after revealing the deal and sizing it up, should probably be able to find out who the most five or six most logical lenders are for that loan assignment. And that's really where the value of a good mortgage broker comes in, because he should be able to determine based off his bucket of lenders to choose from, who's the most logical lenders for that assignment. And again, as nice as it sounds to prospect, "Oh I have 60 different lenders I could put this loan in front of," the reality is you should really know who the most five logical strongest lenders suited for that deal are.

DARBY: To me that sounds like a time saving device too, like it could be a long process, but if you have already established from the beginning, narrowed the field so to speak, that seems like its going to save your buyers time.

SEAN: Well your right, you're right. Because you're under contract, and have deadlines to meet. And so again, the mortgage broker should really know, "Who are the most logical guys to take it to." Because it's still a time consuming process just to present it to five lenders. You need to submit it; you need to review it with them. You need to talk through the deal points, see where their comfort level is, and then you've got to get them to agree to issue a term sheet so that you can get an application, start underwriting it.

DARBY: So how long does this part of the lending process take? What's the average or is there one?

SEAN: The underwriting side?

DARBY: Yeah.

SEAN: Once you're under application, rule of thumb is usually you try to get the loan under it and with the lender anywhere from 30 days to 45. And part of that process is, just because it could take up to three weeks just to get an appraisal. Once that appraisal is in, it gets…the lender submits it, it could probably go to committee after that. They probably need a good week to pull everything together, because even though the appraisal hits the lender's desk, it still needs to be pre-underwritten by the lender before they go to credit committee.

So the underwriting process could take anywhere from 30 to 45 days. It could be a lot shorter depending on how well organized everybody is, and if the lender will actually schedule time ahead to process that loan on an expeditious matter, or it could be longer. So you really need to dialogue with your lender and all the people involved and see what a realistic timeframe is.

DARBY: Ok. Is there anything else we may have missed?

SEAN: Well on the underwriting side I just think you obviously during that underwriting time; you're getting a third party reports back, your property condition reports, and your appraisal reports. You may have an environmental report. Make sure you review them, and look at them. And at the same time you have your title report. When you get that title report make sure you get what we call the underlying exceptions with that title report, and review those, and you may want to have an attorney look at those because there maybe some certain exceptions to that title report that may not be good to have on there, and you may need to get it removed, and you may need legal council to help do such.

DARBY: Ok. Well if our listeners want more some more information about working with Steelhead where can they go for information? What's the website?

SEAN: They can to our website the www.steelheadcapital.com, or they're more than welcome to call us on our toll free number at 888-951-6600.

DARBY: Very good. Well Sean thanks so much for joining us again on our show, and guys join us next time when we will talk about the fourth and final, and very exciting phase of the commercial lending process called "closing." This has been Darby Worley, and you've been listening to Capital Synergies. We'll see you next time.

Qualification Phase of Commercial Lending

2007-07-16T18:30:00.000-07:00

A Sean Aguilar

Capital Synergies Real Estate Investment podcast with Mr. A Sean Aguilar, CCIM, and Vice President of Steelhead Capital.

On this show, Sean speaks with the host about the second phase of the commercial lending process, and discusses some of the core aspects of qualifying for a commercial real estate loan. Sean describes in detail the importance of matching the commercial loan product to match your exit strategy, along with an in depth discussion of prepay penalties as they relate to your investment goals.

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Acquisition Phase of Commercial Lending

2007-07-01T18:35:00.000-07:00

A Sean Aguilar

Capital Synergies Real Estate Investment podcast with Mr. A Sean Aguilar, CCIM, and Vice President of Steelhead Capital.

On this show, Sean speaks with the host about the beginning phase of the commercial lending process, and discusses some of the key differences between investing in commercial real estate vs residential real estate.

Sean offers quite a few tips for "doing your research" prior to selecting your property to purchase, and discusses some of the recent valuation of commercial assets in light of the increased cost of the residential market.

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DARBI: Hello, this is Darbi Worley, your host for the new Capital Synergies Real Estate Investment talk show. Today we have with us on the line Mr. A. Shawn Aguilar, CCRM and Vice President of Steelhead Capital. Shawn, welcome to the show.

SEAN: Thank you.

DARBI: Shawn is here to speak with us about the first phase of the commercial lending process, which is called the acquisition. We’ll also cover some important differences between investing in residential real estate versus the more risky and potentially profitable commercial market.

Shawn, before we dive into discussing acquisition, can you quickly list the three phases of the commercial lending process?

SEAN: First of all, identifying the property, if you well. Then acquiring it, and then once you’ve acquired it from the lending point of view, you need to gather the paper work that the lenders may need to underwrite that property. So whether it’s leases, financial statements on the property, provide that information together so that you can give it to a lender so they issue a term sheet. Once that’s done, and if you agree to the terms that the lender is willing to offer, then they’ll put you under application and from that point, that’s where things really start taking off. Then the loan starts getting processed, if you will. Once all the third party reports are provided and i.e. appraisals, phase one’s, property condition reports, the lender then will then submit it to their loan committee and render a credit decision. If you get approval, a commitment letter is issued. Then you move on towards the closing document, the closing process.

DARBI: So for our listeners who may have had experience with investing in smaller rental properties, maybe single family homes, what are the differences when somebody moves into – looking at bigger units? What do they need to look out for? What do they need to know?

SEAN: To clarify, you know in the residential world single family investments at that level, they tend to be between one- to four units, and there is a dedicated, specific financing vehicle out there for one- to four units. When you then move over to the income producing commercial world, then you’re looking at four food groups. Basically you’re looking at retail, apartment buildings, industrial, and office. The big glaring difference between the two is cash flow. Lenders and investors tend to analyze the cash flow in place of these commercial real estate investments. That’s what they’re used for, determining the actual amount of loan proceeds that the property can support. Where unlike single family properties, it’s not so much the cash flow that’s in place if it’s a duplex, triplex or four-plex. They really lean on the applicant, that individual borrower, look at his overall financial statements and stuff. That’s probably one of the biggest differences – that cash flow is what’s truly used for underwriting the commercial investment properties, versus the residential platform. It’s more hindering on the applicant’s financial strength.

DARBI: Is there a certain percentage that they should be prepared to have as a down payment on the investment?

SEAN: The real estate market is cyclical, and it’s really changed over the last four years, where you know five, six, seven years ago cap rates were a lot higher, which meant the values were lower. Deals were pencilling out at 75-85% leverage. So four- or five years ago, depending on the asset class you would come in with 20% down. Today, present day, depending on the asset class, cap rates have been compressed. This means they’re lower, which means values are higher. Because of the difference between interest rates and these capitalization rates, leverage today is depending on the asset class again. It’s anywhere from 55% to 65%, maybe 70% loan to value. So in today’s market, again depending on what you’re buying, you may want to budget 25% to 30% down.

DARBI: Okay. Is it a good time to get into this real estate market?

SEAN: I think it’s always a good time to get into real estate, because it’s traditionally a long term hold for people. There’s tax benefits from depreciation, if you will. There’s the opportunity to have income growth depending on what you’re buying, whether it’s apartment buildings or retail or office. You can always increase rents over time. But it really comes down to fundamentals.

What type of asset class are you buying? What’s the opportunity with it? Is it a building that has vacancies and that, you know, you’re buying it off the income in place so then if you lease out those vacancies, next thing you know is you’ve increased your cash flow. So there you’ve increased your value.

And interest rates are still favorable. They’re low, but the concern we have for our clients is just the spread between the cap rates that they’re buying at and if they’re getting that, what interest rate is, to make sure that they’re still achieving positive leverage, not negative leverage.

DARBI: So for the first time, the person who’s coming into it for the very first time, do you have a recommendation in terms of the four food groups, the four types of real estate? What’s the best step into this market?

SEAN: My consistent recommendation is “be prepared.” Know what you’re buying. Know why you want that asset class, and why you think you’ll be comfortable with it. Especially if you have no experience in it. You really have to do a lot of homework up front. Understand how these properties operate. Understand if there’s a management component required, and if you’re going to be self-managing it or hiring a third party management company. Understand the cost, because there’s big cost difference between whether it’s retail, apartment, industrial, or office versus if you’re coming through the one- through four-unit platform.

Right now we see a lot of people looking at apartment buildings because of the slow-down in the housing market; interest rates moving up; people tend to go back into apartment living. Homes become more expensive to buy right now, not just because interest rates are going up. So therefore they’re not able to qualify for as much loan dollars as they would to buy a home, so they may end up being renters for a longer period of time than they originally planned.

To own an apartment building right now, and what you’re seeing on a trend, you’re seeing vacancies decrease and occupancy rates increase. If you have an apartment building, or buy that, and you’re experiencing a scenario like that as a landlord or owner of the building, it gives you the opportunity to increase rents and therefore increase your cash flow. So there’s an opportunity there. You know industrial – deciding where to locate it, there’s opportunities in that market. Offices, obviously, have really rebounded over the last several years and are doing extremely well.

DARBI: Going back to the first-time commercial real estate investor, what resources do you recommend that they use as research tools? Where can they get their education on this market?

SEAN: What I would do is a couple of things. I’m a CCIM, which is a designation that basically reflects our commitment to the industry and the fact that we just want to be the best practitioner that we can be. I would have people go the web page at www.ccim.com. Have them look at that. Quite frankly there is some analysis tools that they can have access to. There’s also a list of fellow CCIM’s that are probably in their market, or in the markets that they would like to go buy properties. I would suggest maybe initiating a relationship with those individuals because they have a high level aptitude for what they do. That’s one way to help the potential investor get started.

The other area to go to is the internet – Market Watch and certain other on-line entities like that decent articles on how to buy investment properties and things to look at you. Googling real estate investment or commercial investment helps too. There’s a lot of data out there. You’ve just got to make sure you don’t get into analysis paralysis. More importantly, though, it helps to have somebody that’s a professional in that area that you could bounce off what you’re reading and what you’re finding. That’s where I would start off at.

DARBI: You mentioned in our pre-sale phone call a fear that you have about the market, about real estate guys, the real estate agents who are experienced in residential kind of trying to walk their clients through the commercial side when they’re not really…

SEAN: Yes, I think everybody has a specific expertise or area that they have a focus on, and human nature is a funny thing. You could be in residential real estate selling one- to four-units and be extremely good at it, and when the market slowed down, what tends to happen is everybody wants to jump into the next sector. You’ve got to crawl before you run, but unfortunately everybody wants to just take off and start to do commercial deals. The way they’re underwritten and the things to look at are unique between the two different platforms. You’re not going to learn over night.

One of our concerns is when we work on the transaction and then, if there’s a residential agent that’s representing a client of theirs that they’ve sold homes to in the past buying a retail strip center, and they want to be the agent of record for it, we can appreciate the fact that they want to keep the client relation. But our concern is how much they really know about that asset class or the risk that’s involved, that their client is acquiring? The reality is they’re probably better off just referring it to somebody in that field that does that full time and knows that market or that asset class a lot better. Because the buyer and client will end up having a disservice done to them because they’re assuming that, hey, their guy’s helping out on the financial side and they’ve done really well. And they make the false assumption that, hey; he’ll be able to do this for me.

I can understand the gravitation to that but the reality is, it’s a really risky play. You should be thankful for the people that got you to where they got you, but like anything else you may find yourself as a potential real estate venture that you’ve outgrown the relationship. That’s a normal thing. There’s no shame to that. But the key part is recognizing that. Everybody outgrows relationships, and you have to go out and find people that have the skills to take you to the next level. That’s just part of the basic formula of wealth creation. Nobody wants to jeopardize or risk what they have accomplished today.

DARBI: Again, the CCIM web site is a good place to find people who have the proper credentials and experience?

SEAN: Yes, yes it is. Because these people have been tested. They’ve been through some rigorous coursing. They all have a resume of experience that they had to have a transactional background in order to obtain the designation. They are really committed to being the best that they can be in their area of expertise. General to more specific, the CCIM network is very strong and very powerful. If a fellow CCIM doesn’t have access to a certain market of knowledge, there’s an unwritten rule that we call a fellow CCIM and they’re more than happy to help us out. At the end of the day we just want what’s best for the client, and what’s best for the profession.

DARBI: Before we wrap any other helpful hints or bullet points that our listeners should know about the acquisition process?

SEAN: Do your homework up front. Don’t be afraid to ask any – ask all and any questions. It is a big investment. Be cognizant of your timing. If you are using what I call “fresh” money, that’s fine, but it you’re selling an investment property like one of your one- top four-unit buildings you’re going to be doing a “ten-thirty-one” exchange. You truly need to be up to date on what the guidelines are to successfully perfect a ten-thirty-one exchange. You need to know how acquiring that next property ties into that with timing and just making sure that if you’re getting financing, that you have enough equity with the loan proceeds to acquire that replacement property. That would be something to think about.

DARBI: Great, well Shawn this has all been very helpful information. Thank you very much for joining us today. Until next time, this is Darbi Worley for Capital Synergies. If you have any questions for Shawn that you’d like answered in our next podcast, visit Steelhead Capital Commercial Mortgages and drop them a line. Thanks for listening.