Commercial Real Estate activity has been slowly improving for the past few years, but underlying fundamentals are far from strong. As 2012 approaches, billions of dollars of CMBS loans are coming due and it is still uncertain as to how this refinancing will be handled.
In an already heavily bifurcated market, the division may grow even more between quality assets and struggling assets. Ed Wlodarczyk, senior vice president of Corporate Real Estate and Capital Market Services at UGL Services in Chicago, recently participated in a Q&A addressing the concerns and issues facing capital markets and the effect it could have on commercial real estate.
Q: The first wave of refinancing from the big CMBS days of the past decade begins next year. An average of $400 billion needs to be refinanced each year for the next five years. Banks will take care of some of this, but the CMBS market is only a fraction of what it was. What will make up for the lack of CMBS?
A: CMBS started a recovery in 2010 and activity increased in the first half of 2011; albeit a smidgen of prior levels of volume; however, credit market volatility and uncertainty has resulted in failed issuances and below market projections for 2011.
Life companies, REIT’s, Private equity and foreign capital sources will be called upon to fill the void of CMBS. Pressure will also be made in the recovering money center banking environment to restart lending.
In any event, underwriting fundamentals and asset valuation will be the key to handling maturities moving forward.
Q: Could this refinancing trigger a significant re-pricing of the industry?
A: “Pretend to extend” and CRE workouts have had successful results. However, we still are in and will be for some time, a bifurcated marketplace of “haves” and “have nots”. This phenomenon will result in pricing adjustments. Smaller regional and community banks will continue to face liquidity challenges and will be forced to ask for additional equity from sponsors looking to refinance the asset.
The bottom line is that debt incurred at the peak of the market is coming due at a time of severe economic uncertainty, where “the have nots” are still difficult to refinance, mainly because the debt is still estimated to be in excess of the value of the underlying real estate or at loan levels exceeding current underwriting standards.
Q: What markets are attracting capital right now?
A: High quality, stable assets located in major markets like Chicago, New York, Los Angeles, San Francisco, Washington and Boston are in high demand. Multi-family assets are still at the top of many institutional and private equity lists, followed by industrial, retail and office. Also, there has been an uptick in hospitality across the same geographical areas.
Q: Who is buying right now?
A: The first half of 2011 saw an increase in transaction activity in the Chicago marketplace in office and industrial transactions from the prior year, albeit still significantly lower than peak levels. Buyers of office assets included private equity-32%, cross border investors-28%, public REITS-22%, institutional investors 15% and users-3%. Institutional investors made up almost 50% of the buying population of industrial assets followed by private equity-29%, users-12% and public REITS-10%. Highlights include the sale of the ENV Apartments, The Wrigley Building, Pannatonni Industrial I-55 Portfolio, Parkway Office Portfolio, 200 S. Wacker, and 200 W. Madison.
Q: What is your outlook for the Chicago market?
A: It will be like “Groundhog day,” where everything stays the same. At least through the third quarter of 2012 with a strong emphasis on jobs, consumer confidence, and political landscape as it relates to taxation and deficit management within the CBD and State.
Key drivers will continue to showcase the metro area as a “gateway” city which will draw investors’ appetite to increase their holdings in the marketplace.
Ed Wlodarczyk is the senior vice president of Corporate Real Estate and Capital Market Services at UGL Services in Chicago. He is responsible for leading the integration of these service platforms with the company’s Advisory Services strategies and initiatives and is a member of the senior management team. Ed most recently spent three years with Transwestern Commercial Services as Senior Vice President of the Midwest Region. Wlodarczyk hold a degree in Business and Communications from Loyola University Chicago.