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June 2009 |
Miller, Rubenstein,
Hoffman & Hawkinson
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The commercial real estate financing "crisis" still looms
 A pending crisis in the commercial real estate industry due
to a lack of available financing continues to be a very popular topic. And the discussions about it in Washington are beginning to get louder.
Landlords across the country are scouring sources of capital for any semblance of relief from the weight of billions of dollars in loans that will be maturing in the next 12 to 18 months. Without an adequate avenue for re-financing,
property owners and other industry professionals believe that commercial real estate will cause additional serious economic turmoil.
Congressional oversight committees have been meeting on how to address the myriad of additional ways to kick-start commercial lending after a change in loan terms from the Term Asset-Backed Loan Facility, or TALF, ignited limited positive
energy. TALF was designed to offer financing options to holders of asset-backed securities. The impact of it has yet to be felt, even after the Fed extended it to the Commercial Mortgage Backed Securities (CMBS) market.
Many believe the ineffectiveness of the government's actions is stemming from Standard & Poor's recent announcement that their opinion of CMBS was not favorable. Additionally, many of the CMBS that S&P downgraded were not technically
worthy of such a rating because not more than 75% of the underlying mortgages were in default, leaving many industry analysts confused.
In what seems to be another example of how complicated investment vehicles and subjective consideration can create havoc in an industry, the rating agency's announcement is believed to have again shut the lid on commercial credit that the
Fed and industry lobbyists tried to pry open.
A recent commercial real estate market report by Ernst & Young stated that the financing problem was considered the most vital consideration for the industry. The report was in agreement that despite the government's best efforts to get
things moving, very little capital is changing hands.
While the pendulum swings between Wall Street and Washington, many commercial real estate landlords are bound to their half-empty buildings and mounting mortgages. While the current market conditions have reaped untold benefits on tenants,
who are seeing outstanding lease terms and aggressive renewal pitches, there is no telling what impact the collective collapse of several large commercial real estate owners could have on the nation's economy. Chances are, it would not be
good.
The signals on the severity of the current conditions do remain somewhat mixed because positive signs have been seen in select markets around the country. Commercial real estate foreclosures in April 2009 were much less than what most
analysts predicted, and investment in Real Estate Investment Trusts has leapt to $10.7 billion this year, more than in all of 2008.
Additionally, there is a good deal of healthy skepticism about S&P's ratings announcement. Many Industry specialists and columnists see it as nothing more than self-preservation, as the ratings agencies were slammed for not being as alert
during the housing meltdown. S&P may simply be trying to position itself out from under any additional scrutiny.
While it's clear tenants will continue to be in the driver's seat for several more laps around the market, there is hope that the financing issues may start to dissolve. It's certainly worth keeping an eye on.
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GM, Chrysler and commercial real estate
 The bankruptcies of General Motors and Chrysler have left
the health of Motor City's commercial real estate market in jeopardy. Even more troubling is the avalanche of financial dilemmas the collective filings will cause in the communities across the country that support all the suppliers,
vendors and parts makers that depend on the solvency of the auto industry.
The automakers' distress will not only impact entire supply chains, the impact on occupancy rates in those areas will be quickly felt. Augmenting the agony will be the inevitable failure of many second-tier suppliers - companies that
machine tools for auto parts manufacturer - because while federal bailouts insures against losses to direct suppliers of GM and Chrysler, it does not protect their second-tier dependents.
It is not simply a drop in order revenue that's affecting the smaller companies; it's also a new form of credit crisis caused by the smaller companies reliance on Detroit. Once healthy parts suppliers, tool and die companies and metal
casting plants are now considered substantial credit risks. Thus, they are left to fend for themselves to seek alternative ways to fund operations.
The government is pushing SBA 7(a) loans on smaller suppliers. However, those loans require personal guarantees from any one who holds a more than 20 percent interest in the company. For companies that exist to service the auto industry,
it's simply too much risk.
In the last six months, 15 metal casting companies have gone out of business and if current trends are any indication, 30 percent of the nation's tool and die makers will soon be forced to close.
American Axle & Manufacturing Holdings Inc., an axle producer, will see $300 million disappear from its annual revenue as a result of GM'S financial distress and Chrysler's production stoppage (the company's assembly lines have not been
running since early May). The two carmakers account for more than 90 percent of American Axle's total revenue.
The San Francisco Chronicle reports that 70 percent of the approximately 15,000 parts supplied to General Motors come from smaller, independent companies that contribute 600,000 of the 2 million jobs attributed to American's auto industry.
A large number of those suppliers employ less than 100 people, making them extremely vulnerable to sudden revenue declines.
Not surprisingly, the industrial real estate sector will be hit especially hard by the bankruptcies, as General Motors plans to close two assembly plants before the end of this year in Wilmington, DE and Pontiac, MI while Boston,
Jacksonville, FL and Columbus, OH will experience the closing of parts operation facilities and warehouse centers. Not far behind those closings will be the failure of the regional suppliers for those plants, adding even more industrial
and office vacancies to their respective markets.
More than likely, some of the closed GM facilities will be too highly specialized for most uses, making them difficult dispositions.
Still, the trend of weakening companies will soon translate into more affordable office and industrial space. Like car buyers seeking that next great bargain, healthier companies needing office and industrial space may be able to secure
attractive options once occupied by auto industry players.
For example, home mortgage provider Quicken Loans has been exploring options in Detroit for thousands of employees. Many in the city are now pushing for them to take over the GM headquarters building in the well-recognized Renaissance
Center, which will lose the majority of its occupants as a result of the its namesake's restructuring. Quicken was planning a new construction project in downtown Detroit but current economic conditions curtailed the effort a number of
months ago. General Motors' previous director of real estate is now an executive at Quicken, making the potential for the relocation even more of a possibility for the city.
It's difficult to assign a true dollar amount to the failure of two companies the size of GM and Chrysler, despite the bailout numbers and job cut figures bandied about in news headlines. Because of increased vacancy rates, space
consolidations and depressed real estate markets left in the wake of restructuring plans, the costs will only continue to rise.
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Reports show that Green building is becoming a priority
 Despite growing uneasiness on Wall Street and now in
Washington about the credit availability in the commercial real estate industry, landlords remain committed to the environment, which is good news for tenants who have long demanded more energy-efficient buildings from which to operate.
Helping support the continuing growth of green construction is several more recent case studies of substantial cost savings as a result of implementing energy-conscience initiatives. Savings are being found not just as a result of better
materials, newer technology and an in increase in LEED education but also because many companies - tenants in commercial office buildings - have empowered the movement by encouraging employees to implement operational changes.
While evidence points to current economic conditions as a driver for companies to cut costs where ever possible, Turner Construction Company, a nationwide commercial building contractor, published a study that stated 75% of commercial real
estate executives stated that the credit crunch will not derail any plans to build more environmentally-friendly properties.
In a report jointly published by Real Estate Forum, BOMA International, the U.S Green Building Council, and GlobeSt.com, it was stated that more than 80% of commercial landlords have set aside money in 2009 for green projects and upgrades
and 45% plan to increase those investments in 2009.
The joint study showed that there is more cooperation between tenants and landlords on the matter. Once showing resistance, landlords are now offering tenants educational opportunities to learn more about how to conserve around the office.
These sort of findings are important to the industry, as landlord resistance to changes in HVAC usage policies, building-wide recycling or cleaner air technologies, for example, was severely hampering the pace at which tenants nationwide
could implement green projects.
In some parts of the country, the efforts of some innovative real estate professionals are setting the stage for an entirely new, albeit small, sector of commercial real estate: the clean energy market. Vacant land parcels and empty
industrial parks are being prepped and converted to attract only companies that supply renewable energy, market clean energy products or produce energy-efficient technologies. Master plans for this use are already recorded in Los Angeles,
Mesa, AZ and Annapolis, MD.
In New York, the Saratoga Technology and Energy Park, which opened in 2001 amid little fanfare, has helped push the clean tech space market to 30% annual growth.
In Florida, an office and industrial park focused on clean technology companies is scheduled to break ground in 2012 and will serve as the commercial hub of an "eco-city" called Destiny, which will be located about an hour south of
Orlando.
McGraw-Hill Construction found in a study released earlier this year that in just four years, the total green building market will double from $36-$49 billion to $96-$140 billion. Therefore, by 2013, green buildings will make up 20-25% of
all new commercial real estate construction projects.
With such an increase in proposed green construction and more cooperative landlords, a tenant's search for eco-friendly office space should become substantially easier in the coming years.
Nevertheless, it remains crucial that if a building's green track record is indeed a priority, that in-depth research be done to determine any claim's authenticity. The U.S. Green Building Council has seen an increase in exaggerated or
premature claims of LEED certification and misrepresented energy savings. It shouldn't take more than brief research into a property's operating records to determine proof of savings.
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