Economic Update – RE Valuation Remains Missing Link

One rippling effect of mall behemoth General Growth Properties’ bankruptcy may be that it will help re-establish something that’s been missing from much of the commercial property investment market for a while now: pricing.Sellers have been sitting on the sidelines, and so have buyers, waiting. GGP can no longer warm the bench regarding the disposition of at least some of its properties now. The market will thus ascertain those prices, probably to the benefit of healthier REITs and other major potential buyers, such as Simon Property Group or Vornado. High-profile bankruptcy sales may not be the only way for commercial real estate to find pricing metrics again, however. Some are betting that such mechanisms as auctions will do the trick as well. “When the market has a hard time determining the price point of a particular property, an auction can create competition that determines value,” John DeMato, president & CEO of Global Real Estate Auctions, told CPN.DeMato, a former vice president with Inland Real Estate Auctions, recently started Global with other former Inland execs to take advantage of what they see as a prime opportunity for real estate auctions. It used to be that auctions were more common for “properties with more than one potential redevelopment use, or that are unique in character or use,” he said. Those kinds of properties were difficult to value in any market. “Now, that definition–difficult to value–is being applied to virtually every property on the market because of the recent problems with overvaluation in appraisals and the tightening of lending standards,” DeMato noted. “Auctions aren’t last resorts any more.” According to the U.S. Department of Commerce, housing starts dropped 10.8 percent in March compared with February, when construction was unexpectedly up–an anomaly, probably. The March total represents an annualized rate of 510,000 units, and is down 48.4 percent from March 2008. Building permits were down 9 percent in March compared with the previous month, an indication that construction in the industry will remain depressed. That’s been interpreted as bad news for homebuilders, and it may be in the short run, but how many new houses does the market need at this point? According to some estimates, the U.S. has more than a year’s inventory of unsold residential properties on the market, while other observers claim that it will take two or three years to burn off the excess.In other housing news, RealtyTrac, which tracks residential foreclosures, said that foreclosures were up nationwide in March. The number of filings, ranging from default notices to actual repossession in RealtyTrac’s methodology, was over 341,000 in March, up 17 percent from February, and up 46 percent from March 2008. And which states continued to see the highest foreclosure rates? Nevada and Arizona. Wall Street shrugged off such numbers on Thursday. The Dow Jones Industrial Average ended up 95.81 points, or 1.19 percent, while the S&P 500 was up 1.55 percent and the Nasdaq gained 2.68 percent.