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U.S. Commercial Property Sales Reach Record Lows

Following is a summary of an article entitled “Commercial Property Deal Drought Worst in 18 Years” written by David M. Levitt for Bloomberg.com


By Ken Holman

Commercial property sales in the U.S. may be at the lowest volume since at least 1991, according to Dan Fasulo, managing director of Real Capital Analytics, Inc. The demise of Lehman Brothers Holdings, Inc., and the buyout of Merrill Lynch & Co., is curtailing commercial property lending and leading more landlords to default on loans, according to David M. Levitt of Bloomberg.com.

"The default rate on commercial mortgages held by U.S. banks has more than doubled in the second quarter to 2.88 percent. It may reach 4.1 percent by year end, the highest since 1993," according to New York-based Real Estate Econometrics.

"The Bloomberg Office REIT Index is up 19 percent this year, ... beating the performance of both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index," David Levitt writes. The increase is due primarily to investor speculation that REITs are poised to buy distressed assets.

The volume of transactions are thin, the cap rates are low and the prices are high, according to John Guinee, an analyst for Stifel Nicolaus.

"Investor interest in making deals may slowly return by the middle of next year, real estate services firm Jones Lang LaSalle Inc. stated in a report last week," Levitt writes.

"The volume of office sales in the second quarter was 97 percent less than the market’s peak in the first three months of 2007, according to Real Capital Analytics Inc," Levitt writes.

Unlike the days of the Resolution Trust Corp, a federal agency created in the early 1990s to dissolve seized bank assets, today there is no clearing house to help banks disgorge distressed properties.

"Based on Real Capital’s forecast, 93 percent fewer commercial-property transactions will be completed this year than in 2007. Just $2.1 billion of properties were sold in the second quarter. It was the eighth in the last nine quarters that office sales fell," Levitt writes.

"The largest commercial deal was Blackstone Group LP’s $39 billion acquisition of Sam Zell’s Equity Office Properties Inc. in 2007," Levitt writes. "So far this year, the sale of Worldwide Plaza in Manhattan in July is the largest at $590.3 million."

"In the first five months of this year, Real Estate Econometrics found that 17 lenders including New York-based JPMorgan Chase & Co. and Bank of America of Charlotte, N.C., were more likely to refinance or restructure property loans for existing clients than offer new loans by a ratio of two to one," Levitt writes.

"Maturing commercial property loans are high on the “worry list” of San Francisco Federal Reserve President Janet Yellen," Levitt writes. Yellen’s biggest concern now is with maturing loans on depreciated commercial properties.

“The economic forces hammering commercial property are unlikely to reverse any time soon,” said Yellen.