A wave of foreclosures will hit the commercial market in late 2009. Commercial property values already have fallen 20% to 30% and sales volume has dropped 70%. Cap rates will rise to 9% and above.
That’s the assessment of O.C.’s newest commercial real estate guru, Glen Esnard, who came to Santa Ana in June as Grubb & Ellis’ president of Capital Markets. There’s a lot of new talent coming to O.C. as the result of the merger a year ago that resulted in Grubb’s headquarters moving from Chicago to Santa Ana.
According to a Grubb news release, Esnard is the former president of brokerage services at Colliers International. He came to Orange County after nearly 30 years of commercial real estate experience. In the newly created position as capital markets chief, Esnard is responsible for directing Grubb & Ellis’ investment brokerage business, which includes its Institutional Investment Group and Private Capital Investment Group. We asked him about his recent forecast that commercial foreclosures will soon rise.
Us: You recently forecast a surge in foreclosures in the commercial real estate sector. When will this occur and how bad will it get?
Glen: We anticipate the first significant waves of foreclosure activity to hit as we move into the second half of 2009. It is difficult to anticipate the magnitude. However, one of our benchmarks is CMBS loans (commercial mortgage-backed securities) that originated in 2005-2007.
Due to several factors, not the least of which was that they originated at the peak pricing point in the cycle, we view them as the loans most vulnerable to foreclosure. There are roughly $50 billion of such loans due in 2009 in the CMBS sector alone. This is where we believe the surge will commence.
Us: What types of properties will be affected?
Glen: Clearly all property types will be impacted, however we see the greatest vulnerability in hotels, retail, office then apartments, in that order, although currently apartment properties seem to have an edge based on direct lender feedback. Also at high risk are properties currently under development that started the process before 2008.
Us: How will this surge in foreclosures manifest itself in Orange County?
Glen: In Orange County I would anticipate foreclosure activity in freestanding retail, think Circuit City type scenarios, and new, highly leveraged office and “B” office. Those are the sectors where we are seeing the greatest relative erosion in pricing and the greatest impact from eroding market fundamentals.
Us: What’s triggering this surge?
Glen: The causes are fairly simple. Loans that were made at the peak of the market with the highest prices at the highest loan to value ratios in the cycle are extremely vulnerable to any value erosion. Unfortunately, the collateral, the property standing behind those loans as security, has seen values fall significantly due to the lack of financing and deteriorating fundamentals, lower lease rates and increasing vacancy rates.
There is only one conclusion; many of these loans coming due cannot be refinanced at their current loan amount. In some cases, the owners may have lost all their equity and have no motivation to hold on to the property.
Us: You said that 60% of defaults are on loans originated in 2005-07. Why?
Glen: It’s actually 57.5% and that number applies to the securitized, CMBS, sector. First, there were a lot of loans made in those years. Second, that period saw the most lax underwriting. Third, and perhaps more meaningfully, those loans were made at the peak of the market and are the most vulnerable to pricing erosion.
The real estate standing behind a loan made in 2002 has seen enough value appreciation that even if it’s market value declined it still, likely, has a healthy loan to value ratio and somehow, some way, it can be refinanced.
Us: How will rising foreclosures affect tenants? Will they have to move when banks take over properties? Will maintenance and quality suffer?
Glen: With very, very limited exception, a foreclosure should not impact tenants. Their leases will withstand the foreclosure process, so their position should be secure. The reality is that as a property nears foreclosure, or sometimes as it nears default, the landlord will start to hoard cash and reduce his effort and investment in property maintenance and management. He anticipates the loss of the property and stops taking care of it.
Lenders, on the other hand, are determined to maintain value of the collateral (the property), so they will often manage properties to higher standards. There is also a process in which the lender can request that the court place a receiver in place during the foreclosure process to maintain the integrity of the asset and monitor the cash flow.
Us: Will rising foreclosures help pull down commercial property values as they have in the residential sector? How far will they drop from the peak? When will it hit bottom?
Glen: This is the “million dollar” question. I would suggest that values have already fallen between 20-30 percent; we are just not seeing transactions to document the lower price levels yet. You cannot have sale volume drop by 70 percent and experience only negligible price erosion.
The fundamental laws of supply and demand will not allow that to happen. Now a major money center bank is using cap rates (net operating income divided by price) that average 8.5 percent for valuing REIT properties. That is a 26 percent increase over the average cap rate in effect during the peak years of 2005-2007 and implies a value decline of 21 percent. Goldman Sachs projects cap rates to rise to 9-9.3 percent, an even greater jump and corresponding value drop.
As Harold Ramis’ character said in “Ghostbusters,” “This is big. This is very big. There is definitely something here.”
I should add that this is not all bad. The end of the beginning phase is when pricing clarity reappears and there is some degree of pricing predictability. Until that happens, conventional lending cannot enter the market. When we see more conventional lending reappear we will be at the beginning of the end.
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Wow, someone in the real estate industry actually warning of a foreclosure wave coming instead of telling people “it’s a great time to buy”
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Let me guess, he’s not a client of Pat’s either!
wont be long before theyre foreclosing on the OC registers building
those guys are worse off than the L.A. Times arent they? by the
way how many “journalists” do you guys need to do stories on
real estate? lansner collins padilla — better get ready for some
downsizing boys– times are tuff out there ya know
Rants:
I am calling you out on your post above. You write like the taunting, spoiled brat you are. If you dislike Register “journalists” so much, go spew your hate elsewhere.
Rants pants like runts at others bad chance.
One day rants bad chance will make him punt in his pants.
OC is going to be a ghostown, empty building, closed stores, and illegals squatting in the once overpriced homes in Irvine. Sad OC!
Well the wave was bound to wash over the residentail and commercial market as well, everybody stand in line to take a bath over this!
The senate doesn’t care what we need they are saying let them eat cake.
Rants sells Insurance for a living. Enough said.
Don’t worry the fall TARP will cover it, after the summer Option-ARM TARP. After all we can just keep printing the money!
PAT V is calling me out- just what the hell does that mean?
if anyone around here is spoiled its your sorry ass- overpaid
over rated phony poser- go back under your rock and hide like the
b**** you are
shockg — our resident underwater homedebtor — is a janitor
Grubb & Ellis is arrogant like government employees. Now let see how they handle business in bad time.
Rants:
Typical. You think I am overpaid because I make a good living. It has nothing to do with how hard I work or how good my thought process is.
I called you out on what you wrote because it’s the height of arrogance and boorishness (http://www.thefreedictionary.com/boorishness) to taunt the very people and organization making it possible for you to have any voice at all.
Without this blog, you would have no audience. I have one virtually every day without needing to “rant” here. If that makes me a poseur (you misspelled it for your intended use — see http://www.thefreedictionary.com/poseur) than I am glad to be one. So tell us what you are, exactly.
Come on Pat. Take it easy on Rants lol. He’s getting a lot of pressure at home to go out and buy a house. His parents are ticked off that he’s still living at home with them and won’t (or can’t) move out.
The real estate blog of the OC Register should be name changed to “Bitter Renter blog”.
Regardless what the topic of the blog is, within 2-3 post, it’ll turn into either “blabla, ….I’m so smart, I still rent….”, or “blabla, prediction of another 5% price cut by next month ….”.
Good news for you guys, by your prediction, by year 2012, most house in OC will be in the $50-100K price range. Prepare your offer now.
In Rants world everyones a pony, they all eat rainbows and poop butterflies.
Pat,
“I make a good living”
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You leave that open to interpretation.
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Compared to many other professions in here, you’re making a substandard wage.
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You have a real estate license and you make charts.
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Your charts have miss-calculated and miss-guided you from acknowledging one of the biggest housing bubbles of all time.
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Similar to the crooked CEO’s who steered their shareholders into financial ruin , you were successful in steering homebuyers into buying homes that have fallen 50% in value, because they followed your advice.
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Now, you’re forced to voice your swayed and rude opinion under many aliases. (i.e. ws)
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Mister polite guy only shows his face when he decides to post under his true identity.
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If we archive your older posts (before you went underground) we can see how you erupted into temper tantrums when anyone whispered the word housing bubble.
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Rants has saved more potential homebuyers from facing foreclosure and bankruptcy by giving honest advice and a plethora of insightful and accurate information on this blog.
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You should be apologizing to the public for being a contributor in creating this housing mess.
Bill said: “Rants has saved more potential homebuyers from facing foreclosure and bankruptcy by giving honest advice and a plethora of insightful and accurate information on this blog.”
Bill, It’s funny how you say it’s impossible to talk down the market on this blog then you make comments like this. So which is it? I really believe this blog cannot influence the markets. Judging by this comment and the many hours you spend on this blog pushing your cult like agenda, It seem like you actually do think you have an influence over the market. It’s sad that you are so desperate. And I don’t believe for a second that you have a normal job. Your livelihood depends on selling annd buying homes You are a speculator and nothing more.
Bill:
Quit defending Rants. His issues with who I am or what I do are insignificant. My issue with his post is that he was simply mean, and taunting Jon and others who give him a voice here. What exactly was his post intended to do, besides that? Where was the great content you consistently give him credit for?
And you do NOT understand my business. The fact that you reference graphs and charts proves it. They are simply a limited extension of my thought process. I have helped major franchisors and real estate companies create many $ Millions in revenue. My firm negotiates mergers and acquisitions. It values real estate companies. It is not in the business of graphs and charts.
As to my income from all of the above, it takes care of me and my family quite nicely. As to what others may earn here, I have never asked, nor do I care. It was Rants who called me overpaid. Anybody who says such a thing is coming from a place of insecurity about their own income.
Comments here do not have a direct effect on the market, but people like myself do come here looking for bits of news and insight, and I must say that rants has posted links to many articles that I’ve found useful to my market watch. Pat has also contributed useful posts. Afterall, one cannot make an informed opinion without researching both sides of the puzzle. But I personally scan past the silly banter and posters for the few nuggets of data and informed opinion. As an aside, didn’t Pat once concede in 2006-2007 that he would advise his own daughter to wait out the market a bit?
PAT V whatever you get patd is too much- you were too clueless
to see the biggest bubble in the history of the world right in
front of your beady little eyes– and you consult people on the
real estate market– thats a friggin joke– you didnt know jack squat
two years ago and you dont know jack squat now– the register helped
perpetuate this ponzi scheme by giving idiots like you and gary watts
credit for actually knowing anything about markets so I call them out
if you have a problem with me- we can handle that anytime you want-
anywhere you want-
ATTENTION ; ATTENTION ; NEWS BULLETIN”"The Republicans had a private and Special Prayer meeting this a.m. in the Republican chamber in the Basement of the White House . Forty Members of the Repub. Senate knelt down in Prayer led by ‘ Father Limbaugh and it began,’” Dear Father in Heaven , we earnestly pray with all of our cold Hearts that the Obama Presidency Fails , Father ” Please, Please help us to Destroy, and Sabotage his earnest attempts to heal the Country that Clinton destroyed in the last eight years” Amen P.S “Father ,please send some more Bean-O for Father Limbaugh”
Rants if you knew what you were talking about I’d have some sympathy for you, but you don’t. You’re a little man with a Napoleonic Complex that is playing Tee-Ball in Yankee Stadium. I’ve tried to tell you and your chorts that if you cling to your tiny little fundamentals you’ll get stomped on. The game is rigged. Yeah you got it right on the down side but for all the wrong reasons and you’ll be sitting here blinking like an Owl in a snow storm when Wall Street takes the market back up again with out warning.. Wake up, fundamentals don’t move markets they are they result of market movements, they are symtoms of larger aspects of the manipulation of the market by Wall Street. Get over yourself.
Wow!
600m job losses and 6m forclosures!
Looks like whomever is buyin will have a lot to choose from!
Boy rant’s you sure opened a can of worms,LOL.
I know you love it!
Stucco
How in H will Wall Street take the market back up? See, here you are again HH, with baseless fear mongering to ensure that people buy out of fear and not for their best interests. Why would you care if people bought a home or not, if you didn’t get something out of it? I have said time and again, I won’t buy an over priced, substandard home based on fear or your attempts to play down the obvious real estate market forces that are driving prices lower. And if I can’t buy the home I want, then I’ll rent or move where I can buy. The fundamentals will return to this market someday and if you insist that the Fed programs will save the OC market, then what happens when those programs end? What happens when the forecasted inflation arrives because of the all the stimulus spending? What happens when the US bond rating is down graded if the stimulus doesn’t work? What happens if unemployment continues to rise? None of these thing ever come up on your radar or in your analysis because to you, they distract from the NAR/CAR sales propaganda of “change the psychology of the buyer”, make them fear on buying now. The fundamentals that you claim don’t move market but are a result of markets? I’m afraid you have that backwards. Markets are DRIVEN by fundamentals once they are allowed to exist. Repeat after me: THERE IS NO MORE FREE MONEY.
Rants:
You wrote — “if you have a problem with me- we can handle that anytime you want-anywhere you want…”
I refuse to go there with anyone who does not have the huevos to post under his or her own name. Do that, then you will be welcome to visit my office and discuss whatever issues you may have with me, and I will do the same with you.
Admit it. You do NOT have the cajones to post here for everyone to know who you are. I DARE you.
Meanwhile, as to you again calling me overpaid, Jon’s audience knows my earlier statement is true: “Anybody who says such a thing is coming from a place of insecurity about their own income.”
Your alias is perfect. (See http://www.thefreedictionary.com/rants.)
Fencewalker:
Quit defending me.
I underestimated the large number of poorly underwritten mortgages that fueled the mess we are in — which I have written here — and Rants takes issue wih that. He sees me as part of a much larger REIC that takes advantage of peope who are not smart enough to arrive at their own conclusions by studying the pros and cons of buying or selling. He actually believes that people (I think he refers to them as “sheeple”) made their buying decisions based ENTIRELY on my opinion. He gives me way too much credit.
I get none of the credit for the $ billions made by those who bought early in the cycle, and will take none of the blame by those who bought late. I would like to think anybody buyung a home is adult enough to own their decisions, whether they work out well or poorly.
Rants believes otherwise.
“anyone who does not have the huevos”
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“You do NOT have the cajones”
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“Admit it”
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“I DARE you”
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This is hardly the demeanor or tact of a successful businessman.
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At least rants doesn’t have to use multiple identities to speak his mind.
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You constantly posted your propaganda during the bubble years, assuring everybody that home prices would never fall and inventories would never grow, but you never once mentioned while home prices shot up 200% over the last 5 years incomes only grew by 15%. Even though many posters in here were sounding the alarms by informing people the math doesn’t add up you decided to turn a deaf ear and chose to attack those who opposed your view while continuing to make rosy statements amid growing signs of a housing downturn.
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Well, home prices have dropped a record amount and we have also witnessed a record inventory year, the exact opposite of what your information implied.
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To this day you have never provided any information indicating price drops or growing foreclosures, increasing defaults or high inventory levels on this blog. You refuse to publicize information that would indicate any type of downturn in real estate.
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Mr. Lereah says he was pressured by executives to issue optimistic forecasts, what’s your excuse fencwalker?
Bill:
It was Rants who challenged me and offered to meet me anywhere, hence my response, with which you now take issue. (You do not take issue with his challenge, I noticed.)
As I have stated here before, I seem to be one of very few with the guts to post under his or her real name…and to be willing to take the heat for any position I post. Your friend Rants gets to stay under his rock, even while posting incendiary content. I have to come out from UNDER mine — which I do only occasionally — because the exercise here is so inane. (Witness today.)
Your conspiracy theories about my “multiple personalities” are just those. Jon has IP tracking, and a private email address for me, which I use with each post to prove my legitimacy. He can call me out on it if he wishes.
first off any man who posts under the name HELEN is a
panzy– period- I already told HELEN where I am for
every UFC FIGHT- DANNY K’S sports bar in orange
first seat at the front corner of the bar wearin my USC
baseball cap– I’ll be there again on the 21st. helen
real simple show up or shut up - which you wont because
youre the consumate girlie man ……….
PAT V your original intent for posting on ths blog
was for free advertizing exposure for your company
real data strategies– just what data and startegies did
you give to your clients that helped them in this market–
NOT A DAMN THING thats what- you dear sir are a phony
and I’m giving you the same offer I gave HELEN– danny k’s
in orange on any saturday night theres a UFC show
first bar stool at the corner– I wear my USC baseball cap
so you cant miss me— how hard is that?
Rants fancies himself a tough guy, so he’s free to act like a jerk 24/7.
Of course I’ve never seen a really tough guy challenge a woman to a bar fight before, so maybe Rants is just a jackass.
mikey I dont fancy myself a tuff guy- I get my ass
kicked about five times a week at the gym where
I work out– you see .. you dont have to be tuff to kick a
realtors butt — and just for the record helen is a man
or at least that what he says- and this “jerk” has been
giving honest accurate advice on this blog for
the past three years FOR FREE- a simple thank you
would suffice
can i come to watch the fight?
Rants and I told you I’m not about to fall for that trick where I go looking for you in a sleazy bar while you get my license number and run a DMV check on me so you and your slime friends can try to find something to smear me with and start a campaign of harasment . I know your kind, you can’t stand opposition of any kind so it must be destroyed. And guess what I don’t have to shut up or put up or play any little small minded game that you choose. I play things my way. I post what I want when I want and there is nothing you can do about it.
just like I said — youre a girlie man
But I’m a smart girlie man
This guy knows nothing. Check out his background. Does the word “fired” mean anythng? Can’t believe the Register doesn’t do it’s homework.
Being in residential real estate I fail to realize how this mess impacts the commercial market. Commercial property has not seen the disparity that the residential real estate market has, but it has to be coming sooner or later.