Commercial real estate sales fall

2nd-best year in Denver history hit by housing woes

By John Rebchook, Rocky Mountain News (Contact)

Wednesday, December 12, 2007

It would be a record year for commercial real estate investments in the Denver area, if not for the financing woes plaguing the housing market.

Still, investors are projected to snap up about $4 billion in office, retail and industrial properties this year, almost a 25 percent drop from the record $5.3 billion in sales volume in 2006.

"That is a pretty significant decrease, but this is still going to be the second-strongest year in Denver's history," said Patrick Devereaux, a senior director at Cushman & Wakefield Colorado who released a report on the commercial real estate market Tuesday.

During the first half of the year, there had been $2.7 billion in deals, about 23 percent higher than the $2.2 billion in sales in the first six months of 2006.

But from July to December, Devereaux is estimating only $1.3 billion in sales, almost a 57 percent drop from the $3 billion in sales in the second half of 2006.

The culprit is the capital markets that are being ravaged by the subprime fallout for residential loans, Devereaux and others said.

Lease rates and occupancies are up, with downtown leading the charge, Devereaux said. "We were on pace for a record year until the crunch in the capital markets."

Nationally, fewer than 1 percent of commercial properties have entered into foreclosure, he said.

He said he doesn't know of one commercial property in Denver being returned to the lender, although it probably has happened to some small, second-rate properties.

But subprime residential loans were packaged with healthy commercial loans, which has made that complicated financial mechanism unstable, Devereaux said. More conservative insurance companies are taking market share from the conduit lenders, but their debt is more expensive, he added.

Unlike the residential market, where it is hard to sell a home, there are plenty of buyers who want to purchase investment buildings, Devereaux said.

"The interesting part is that usually sales slow in the market when fundamentals get poor," Devereaux said. "In this case, the commercial real estate fundamentals are extremely strong. It is a direct, reverse correlation to the residential market, which is extremely weak."

Jeff Fabian of Essex Financial said there no longer is investor demand for the bonds packaged by the conduit lenders on Wall Street.

In June and early July, before the subprime problems surfaced, an investor could get a 10-year, interest-only loan in the 6 percent to 6.25 percent range, he said.

Now, the same loan from an insurance company will cost 7 percent or more, and few lenders will allow more than three years of interest-only payments, Fabian said. "You would have to call this a correction."

Devereaux said most market watchers expect the problems to be ironed out by mid-2008. When stability returns to the market, there will be a huge pent-up demand by investors who were sidelined by financing woes, he said.

rebchookj@RockyMountainNews.com or 303-954-5207

Sales over the years

Year Amount* Transactions

1992 $0.365 118

1993 $0.460 143

1994 $0.790 153

1995 $0.575 137

1996 $0.885 159

1997 $1.3 173

1998 $2.2 164

1999 $1.3 144

2000 $1.3 144

2001 $1.05 175

2002 $1.04 177

2003 $1.3 196

2004 $2.09 289

2005 $3.2 317

2006 $5.3 283

2007 $4.0** 244

• December 12, 2007

  9:12 a.m.

  Suggest removal

  WarrenJimmyBuffett writes:

  I believe it is misleading to say that commercial real estate fundamentals are "extremely strong." Cap rates for investment properties are irrationally low and represent an unacceptable and imprudent belief/hope that commercial real estate values will continue to go up. As a result, the importance of cash flow/yield and risk is undervalued. The undervaluing of risk ultimately ends poorly. Just look to housing as a recent example. Housing prices bubbled and now, post-bubble, housing is in crisis. The same thing will likely happen to commercial investment properties. When it does, and only when it does, will the brokers admit that prices were out of whack and "a correction was necessary and healthy." (PS -- Denver is not "different," so don't let the brokers try to fool you with that weak argument.)