Musings before the release of Emerging Trends

Emerging Trends in Real Estate 2010 gets released on Thursday at the Urban Land Institute’s Fall Meeting in San Francisco.  I’ll have more to comment about the forecast, which I author, after PricewaterhouseCoopers and ULI unveil the report. But here are a couple of observations coming off several months of interviews (more than 900 industry leaders participated in this year’s survey—a record!) and writing the 2010 outlook:

The past decade of deal mania, owner flipping, securitized mortgage markets and ensuing bank failures has effectively delocalized much of the real estate business. Many borrowers no longer know who their lenders are, most CMBS bondholders don’t have a clue as to what assets back their bonds let alone where the assets are located. Many owners, who overpaid for and overleveraged properties, don’t have local roots in markets where they invest, and now scramble to cut losses and exit these markets no matter the local consequences.  And increasingly local banks become part of larger national and international institutions with no particular local focus. When real estate owners and lenders don’t have a stake in communities and neighborhoods, and use real estate investments as fungible assets to play against market cycles, the underpinnings and long-term prospects of these markets can be undermined.

Now tenants consider playing their own musical chairs, pulling up stakes and moving into new buildings to secure better rents and deals. But they must wonder about the creditworthiness of landlords and understand whether properties will be subject to battles among CMBS tranche holders, whoever they may be. Tenant heads had begun to spin with all the ownership changes earlier in the decade—now they must brace for bank takeovers or dealing with special servicers or maybe even the FDIC. It’s a tenant’s market all right, but who knows who your landlord will be.

And needless to say tenants need to be concerned about whether building services will be maintained. Given cash flow squeezes and the dire operating circumstances of many owners, repairs and basic maintenance may be delayed to cut corners. Forget about capital expenditures.  Properties are bound to show more signs of wear and tear, some may just turn shabby from neglect.

Clearly, owners with more liquid balance sheets and manageable debt service can poach tenants from compromised competitors. They’re in better position to negotiate deals, provide tenant improvements and other signing inducements, or just hold out until rents start adjusting up again. Obviously, the cash-rich will be in exceptionally strong position over the next months, not only in retaining and securing tenants, but also in acquiring distressed assets as they come to market.

And make no mistake--the next 12 to 18 months will be a great time to buy a cyclical lows—if you have the dollars to do deals. And for many players, that’s a big if.

See you in San Francisco!   

Comments

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I wonder what the new guidance will do for the "distress play".

http://online.wsj.com/article/SB125694507086819833.html?mod=djemITP

Basically, lenders don't have to do anything with their over-exposed loans so long as the borrower is making an effort. that's an over-simplification, but not far.

sickening.