Another positive trend in the marketplace has been the acute imbalance between supply and demand. Demand in the market significantly outpaces supply, leading to sales prices that are probably higher than economic fundamentals would dictate they should be. This is encouraging discretionary sellers who have adopted a wait-and-see attitude.
Some of the negative trends we are seeing in the marketplace are obvious. We have already seen the Federal Reserve begin its exit from the marketplace, as its asset-buying program was halted at the end of March. We saw an immediate impact on interest rates, as the 10-year treasury rose from the mid-3s to over 4 percent. This increase has not impacted mortgage lending rates yet, but some participants in the marketplace believe that it will shortly,
Lending is still tight, with much more strict underwriting than the market is accustomed to. The demand for refinancing proceeds is tremendous and, unfortunately, even if the banking and insurance industries were operating at full capacity relative to real estate lending, they cannot accommodate the demand for refinancing.
The shadow banking system provided as much as 40 percent of commercial real estate debt during the bubble-inflating years of 2005 to 2007. There has been some resuscitation within this sector, but it has not even scratched the surface in terms of a meaningful comeback. The CMBS market in particular, which was a $320 billion marketplace in 2007, has produced only a few transactions since the summer of 2008, and those have occurred, primarily, at extraordinarily conservative loan-to-value ratios. This type of lending will assist only a very narrow slice of the market.
While the supply-demand imbalance has helped value, we anticipate the supply of properties coming to market to increase over the next year or two as distressed sellers finally start to deal with properties that are fundamentally insolvent. We have seen a significant increase in the flow of these assets as we move further into 2010.
Massey Knakal’s Special Assets Group has completed more than 1,100 valuations for banks and special servicers, giving them an idea of the value of the underlying collateral for their loans. From September of 2008 to September of 2009, we obtained only 12 exclusive listings from these efforts. From Oct. 1 through the present, we have received 66 exclusive listings, demonstrating a significant shift in the flow of distressed assets coming to market.
Additionally, we expect discretionary sellers to continue to feed the available supply of properties, and as supply rises, it will lower value moving forward.
So while 1Q10 results were disappointing, we believe the market is poised for significant increases in activity throughout the balance of the year, as supply increases and the massive amount of capital waiting on the sidelines for buying opportunities will have the ability to act.
If things continue as we expect, 2Q09 through 1Q10 could very well be viewed as the bottom of the investment property sales market during this cycle. We hope this is the case.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,050 properties in his career.
