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View DocumentFouy Ly - Article in California Real Estate Journal
Aug. 17, 2009
Quarterly Investment Report: Second-Quarter 2009 - Small Q2 Gains Hint at Increased Activity to Come
By JENNIFER CATERINO
CREJ Managing Editor
For real estate market watchers, the first quarter of 2009 was a tough act to follow.
Though the state's transactional volume of deals $5 million or greater had been on a steady decline since third-quarter 2007, according to Real Capital Analytics, a new low was set in the first quarter of this year when $1.3 billion in deals was recorded across all sectors.
Fast forward to second-quarter 2009. With just $1.9 billion in sales, there is little cause for celebration. But the figure exceeded that of the prior quarter, and many brokers say it belies the activity they are starting to see in the marketplace.
"Activity has been picking up. There are a lot more users that have come out to the market willing to ink lease deals and take advantage of the decrease in sale prices," said Mark Zorn, executive vice president, DAUM Commercial Real Estate Services in Ontario, who specializes in industrial product, which posted a statewide total of $366 million compared with $294 million in the previous quarter.
According to Real Capital Analytics, at $690 million in total transactional volume, the office sector led statewide, though multifamily trailed closely with $618 million. When compared with the previous quarter, the office, multifamily and industrial sectors posted gains of $215 million, $287 million and $73 million, respectively.
Retail transaction volume, mirroring the sector's woes, dropped $119 million from the previous quarter to $198 million.
Fouy Ly, senior vice president, Sperry Van Ness in Irvine, said he anticipates retail will experience further deterioration before rebounding.
"Through the rest of the year, we're going to see higher vacancies," Ly said. "We're going to see a higher amount of bank-owned [properties] and a higher amount of stress for the retail ownerships out there. We're anticipating it getting worse before it gets better."
Ly said capitalization rates for retail sales have been all over the board.
"For single-tenants, it's in the 7 percent [range]. For multi-tenants that are small, it's still relatively low in the 8-plus cap rate," he said.
Across the sectors, brokers reported capitalization rates in the mid-6 to 7 percent range, reaching 8 percent in tertiary markets. According to LoopNet Inc., the statewide 12-month rolling average capitalization rates inched up slightly across all sectors to 6.1 percent for retail, 6.5 percent for office, 6.9 percent for industrial and 5.7 percent for multifamily.
The active buyers, brokers said, are largely high-net-worth individuals looking for the bottom.
"This market allows them to compete with institutions because institutions are at a standstill," said Bob Safai, founding partner of Madison Partners in Los Angeles. "We are looking at values deteriorated from 20 to 50 percent in some markets. High-net-worth individuals get the full value [because] when you buy an asset you get a depreciation schedule."
Safai said the balance of the buyers mainly is comprised of opportunity funds, while pension funds remain on the sidelines trying to determine allocations.
Though brokers say both sides are inching closer to the middle, in light of diminished values and rising distressed sales, vestiges of the buy-sell gap remain.
Kitty Wallace, senior vice president in the Los Angeles office of Sperry Van Ness, quipped some brokers aren't looking for distress - they are looking for road kill.
"There is a group buyers not getting deals done because they have unrealistic expectations," Wallace said.
According to Wallace, the seller group has expanded, but that doesn't mean others aren't trying to wait out the market by holding or refinancing. Sellers, too, range from those whose pricing is unrealistic in this market to others willing to get deals done.
California boasted a second-quarter offering volume of $12.7 billion - nearly seven times what closed - according to Real Capital Analytics, but Rick Reeder of Grubb & Ellis|BRE Commercial in Carlsbad said there are few office and industrial properties on the market in San Diego County and there has been very little activity, so far, involving troubled assets.
"There is still talk that there will be a tremendous amount of property that comes to the market through foreclosure, the [Federal Deposit Insurance Corp.] or for various debt-related reasons," Reeder said. "But the sellers out there so far are sellers that needed to sell some properties due to fund redemptions or loans coming due."
Some distressed deals are getting done, however, and most expect that trend to continue into the next quarter and the remainder of the year.
For example, following second-quarter negotiations, Argonaut Private Equity Group closed on the $40.8 million note for the distressed 250 Montgomery St. in San Francisco for roughly 50 cents on the dollar - amounting to that region's first major Class A office transaction of the year.
Randy Getz, executive vice president and investment specialist with CB Richard Ellis in Sacramento, said it's still unclear how much distressed real estate will be hitting the market.
"It's still an evolving process. We really don't know how the lenders are going to deal with it," he said.
- E-mail Jennifer_Caterino@DailyJournal.com
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