Commercial Real Estate Update
The Other Shoe Is Dropping: Where we are and how we got there.
The Met 2 building (center, under construction) is one of three tower projects that will add almost 2 million square feet to an already struggling downtown Miami market. [Photo: Aerial Photography Inc.]
What Florida’s Markets Have in Common
» Little new construction begun recently
» Projects under way often finish empty
» Vacancies are up, rents are down
» Troubled buildings can’t pay to build out space for tenants or pay broker commissions
For that explanation, turn to property values — down 35% since 2007, says Moody’s Investors Service — and the banks.
The fortunes of commercial real estate and Florida banks are joined at the hip. Florida banks have $56 billion in loans for commercial real estate on their books — 34% of bank assets, according to FDIC reports.
They aren’t doing well. Severely distressed loans at Florida banks, as a percentage of assets, are 15 times what they were in 2006. At the end of the second quarter, Florida banks had $5.1 billion in commercial, apartment and construction and land development loans in default, up from $274 million in 2006, according to FDIC reports.
The worry is that commercial real estate owners won’t make good on the estimated $530 billion in loans maturing nationally in the next three years, triggering a new wave of bank failures and killing any budding recovery.
“A challenging situation right now. There’s no question about that,” says Bill Moss, senior managing director and Florida regional manager for CB Richard Ellis.
How We Got Here ...
In the late 1980s, money from S&Ls fueled overbuilding. The culprit now, as in the residential market, is again easy credit, but this time it led to overvaluing, not overbuilding. The juice came in part from commercial mortgage-backed securities. Commercial property loans were bundled into securities sold as investments. Industry newsletter Commercial Mortgage Alert says such securities issues nearly tripled to $230.2 billion in 2007 from 2003.
Property prices inflated. At the peak in 2007, buyers were paying the highest multiples of a building’s rental income in at least 30 years. “Money was so accessible that people were buying buildings at ridiculous prices,” says Damien Madsen, a partner at Morrison Commercial Real Estate in Orlando. “When the music stops ... all of a sudden you’re owning something you overpaid for.”
Florida, with $2.1 billion in delinquent loans backing such securities, was third in the nation as of July, accounting for 8% of the national total, according to Horsham, Pa., credit-rating agency Realpoint. Agents for securities have filed foreclosure actions this year over properties ranging from a shopping center in Pembroke Pines to a warehouse in Miami.