When You’re Stumped, Ask Glen

By Bob Bach, Grubb & Ellis:
This last week before Labor Day, I have come down with a bad case of writer's block. For inspiration, I turn to my friend and colleague, Glen Esnard, president of the capital markets group at Grubb & Ellis. About six weeks ago, when I last caught up with Glen, there was great concern in the equity and bond markets that the economy could be headed for a double-dip recession, and Glen wondered aloud whether commercial real estate investors might pull back as a consequence. But neither scenario has transpired, at least not yet.

This last week before Labor Day, I have come down with a bad case of writer’s block. For inspiration, I turn to my friend and colleague, Glen Esnard, president of the capital markets group at Grubb & Ellis.

About six weeks ago, when I last caught up with Glen, there was great concern in the equity and bond markets that the economy could be headed for a double-dip recession, and Glen wondered aloud whether commercial real estate investors might pull back as a consequence. But neither scenario has transpired, at least not yet.

In fact, transaction volume continues to increase even as the economy has decelerated. Glen reports that buyers, sellers and lenders alike are getting more comfortable with pricing. The big complaint for about a year after the financial markets crashed in September 2008 was that there was no visibility into pricing because so few transactions were being done. Transaction volume, while still low, is up by two-thirds through the first seven months of this year compared with the same period in 2009, and the economy, though it clearly has slowed, is scraping by without actually slipping into reverse. Barely detectable interest rates seem like they will be with us for awhile, which makes the yields available on commercial real estate look very good in comparison.

According to Glen, more distressed assets are coming to market, but banks and special servicers are limited by their capacity to push the properties back out the door. Nevertheless, they are getting more skilled at triage, able to decide with more confidence how to handle incoming troubled loans. Lenders are confident enough in values and in their own capital reserves (in the case of banks) to make decisions. The process is still ponderously slow, but more distressed assets will be offered for sale in the remaining four months of this year and 2011. The greater mix of distressed assets in the pool of transactions will put downward pressure on aggregate price indicators such as the Moody’s/REAL Commercial Property Price Index. Indeed, the latest reading for June fell by a sharp 4 percent following several months of increases, but this was due primarily to the greater number of distressed assets in the mix of properties that sold during the month.

Lastly, Glen notes that the most aggressive buyers lately have been non-traded REITs that are flush with cash. Examples include KBS Realty Advisors’ purchase of 300 N. LaSalle in Chicago for $655 million or an eye-popping $503 per square foot, and the acquisition by the Grubb & Ellis Apartment REIT of 2,676 units for $182 million.

Overall, both Glen and I agree that the commercial real estate investment market has been fairly successful at navigating the still-troubled economy and financial conditions. The level of distress remains elevated, but deals are getting done and the market is on a multi-year path to righting itself.