By Gibson Kerr
Buy, Sell, Refinance, or Do Nothing? Real estate owners and investors always have choices. In times of uncertainty like our current environment, the majority of people opt to do nothing. Whether it is because people are gripped with fear or as a result of historically weak market dynamics, the number of closed property sales dropped precipitously in 2008. What should you, as an owner and/or investor, consider as we enter 2009 amid continued uncertainty? Here are some questions you should ask yourself:
1. Where are the opportunities to buy?
2. Is it even possible to sell property in today’s environment?
3. Will I be able to refinance, and under what circumstances?
4. What are the risks of doing nothing?
Buying opportunities exist today and are expected to get more plentiful throughout 2009. Many properties that were listed for sale in 2008 did not sell. We are starting to see more frequent price reductions and, in fewer cases, owners turning properties over to their lenders. An estimated $160 billion in commercial loans are coming due this year, and many of those borrowers will have to: a) invest additional equity into the property, b) find a mezzanine lender or equity partner, c) sell the property, or d) hand the property back to the lender. Many will choose options “c” and “d”, which will create some interesting buying opportunities later this year.
If you own a property and are considering selling it this year, your obvious concern is whether you might be selling at the bottom of the market. While prices may be down from the 2007 peaks, they are not likely to increase for two or three years. If you need to sell during this period, you will still be able to find a buyer provided that you are realistic about your property’s value.
If you are considering a sale/leaseback, you will be encouraged to know that demand remains strong among investors for good-quality, income-producing real estate. In fact, sale/leaseback transaction volume actually increased in 2008, indicating a flight to quality as investors turned away from speculative deals with “upside” in favor of lower returns with predictable cash flows. Unfortunately for sellers, cap rates are slowly returning to their historic averages, and are now 50 to 100 basis points higher than in the 2007 lows.
What about refinancing? With the demise of the CMBS market, and many banks and insurance companies on the sidelines, the remaining active lenders are being increasingly selective and tightening their underwriting standards. Appraisers are struggling to determine values in the absence of recent comps. Expect your lender to request a loan-to-value ratio of 65% or less with debt coverage ratios of at least 1.25. Many borrowers are opting for short-term floating loans, with the anticipation of obtaining permanent financing in two or three years when the markets (hopefully) will have stabilized.
Many other borrowers will end up renegotiating with their lenders. If their debt is non-CMBS, but rather portfolio debt on the balance sheet of the lender, borrowers may be able to buy the debt at a steep discount, possibly for only a fraction of the outstanding loan balance. This not only improves the borrower’s balance sheet and cash flow, but will free them up to acquire other assets.
The final option for property owners and investors is to do nothing. While this may seem to be the safe alternative, sometimes inaction is risker than action. Many owners who rejected offers last year, for instance, wish they could turn back the clock and accept those terms today. Similarly, sellers refusing to lower their asking prices may be well-advised to drop the price now in order to avoid further valuation declines later this year. For borrowers, taking a proactive approach with your lender may enhance your bottom line. And if you’re a buyer opting to remain on the sidelines, you may miss out on the greatest buying opportunity since the RTC days.
Feel free to contact me with any questions…