Over the past year, the amount of commercial real estate trading hands has plummeted and values have dropped, leaving many owners with assets they can’t sell.
In many instances, loans are coming due and those owners are unable to refinance because of the banking meltdown.
“We’ve gotten through most of the pain in residential real estate, but the pervasive feeling in the financial markets is we haven’t seen all of the pain in the commercial real estate market,” said Jeff Thredgold, an economist with Vectra Bank Colorado. “There is a fair amount of distressed properties around the country that has to be dealt with, and there is a fear of the unknown that has led to a decline in major transactions.”
During the 12 months ending March 31, transaction volume across all property types in metro Denver dropped 75 percent to $1.5 billion, compared with $6.2 billion during the same period last year, according to a report complied by LoopNet, a commercial real estate information services provider.
Those deals that are getting done are commonly smaller properties financed with private equity.
Nationally, the volume of commercial deals dropped 70 percent to $110.4 billion in the 12-month period ending in the first quarter, from $371.4 billion a year ago.
Still, Denver is faring better than markets such as San Francisco, Los Angeles and Phoenix, where home values plunged after peaking in 2006. Total commercial deals in San Francisco plummeted 91 percent to $1.3 billion during the 12-month period, and in Las Vegas and Phoenix, they dropped 82 percent to $696 million and $1.5 billion, respectively.
“Commercial property transactions are at the lowest point we have seen this decade, which makes sense given the economic uncertainty and difficult lending environment,” said Dan Fasulo, managing director of Real Capital Analytics, a New York-based commercial real estate market research firm that provides the data for the report. “Real estate is an industry that relies on debt in its normal course of daily business, and when lending tightened up, there was no question that transactions were going to fall significantly.”
Commercial real estate loans aren’t likely to have as big an impact on the banking industry as residential mortgages have, Fasulo said.
“Commercial property loans will affect banks on a one-off basis where bad bets were made, but I don’t foresee any systemwide troubles in our future because of this,” Fasulo said.
Office
No office buildings over $2.5 million sold in the metro area during the first quarter, according to the report.
Investments in office properties plunged 76.5 percent during the 12-month period to $678 million.
“The majority of capital is sitting on the sidelines waiting for other buyers to establish where new pricing and yields are,” said Patrick Devereaux, a director of the capital markets group in Cushman & Wakefield’s Denver office. “No one wants to be the first to stick their toe in the water.”
Devereaux estimates that pricing has fallen as much as 30 percent since the market peaked in late 2007 or early 2008. It could fall another 30 percent over the next two years, he said.
Retail
Retail transactions were down 48.7 percent to $430 million compared with the same period last year.
“The numbers are way off, but it does feel like in the last 60 days that the gap between buyer and seller expectations is starting to come together,” said Adam Christofferson, first vice president and regional manager of Marcus & Millichap’s Denver office.
The properties that are selling are smaller, single-tenant properties such as Walgreens and Burger King. And they’re selling to private buyers, rather than institutional investors.
Apartment
Investments in multifamily properties dropped 70.1 percent to $528 million. Transactions during the first quarter totaled $29 million, compared with $194 million during the first quarter of 2008.
“The days of order-taking on big investment deals are over,” said Pat Stucker, senior director at Cushman & Wakefield. “There is still a big disconnect between what buyers will pay and what sellers expect.”
The deals that are getting done are with private money for B-grade properties. Stucker also is concerned that newer properties or those under construction are at the greatest risk of becoming distressed.
Steve Rahe, senior vice president at Grubb & Ellis, said buyers have been waiting for the market to hit bottom before plunging back into investment deals.
“I would expect that investment sales activity would not pick up until the smart capital — the sophisticated and experienced buyers — feel as though the investment market is either at or very close to the bottom,” Rahe said. “I think in the second half of the year it will pick back up.”
Industrial
The industrial market is faring the best among property types, declining just 38.6 percent to $404 million for the 12 months ending March 31. There were $40 million in transactions during the first quarter, compared with $207 million last year.
“There’s more investor demand for a well-located industrial property,” Christofferson said. “The perception is that many of (the properties) are a bit more stable and a little easier to manage.”
Margaret Jackson: 303-954-1473 or mjackson@denverpost.com
