MARKET INSIGHTS
August 12, 2010

Richmond Times Dispatch, 8-9-10:

The good news is that commercial real estate lenders are voraciously competing for loans.

The bad news is competition, like sales activity, is confined to about five cities in the country.

Perhaps the LeBron James in this commercial real estate all-star game is Washington.

As one lender put it, "the closer you are to the printing press, the better chance you'll have of getting some business."

Another lender unfortunately described just how exclusive the area is that is attracting capital: "We are focused on Washington, D.C., but only inside the Beltway."

A recent sale of the Evening Star Building at 1101 Pennsylvania Ave. in Washington fetched a mind-boggling $790 a square foot, and there is talk that other buildings currently on the market will surpass $900 a square foot.

These numbers indicate a strong desire for investors to put their money into real estate again. But if "frenzied" describes Washington and four other markets, "frail" is more apt for virtually everywhere else.

The antithesis of Washington might be the south Memphis, Tenn. apartment market, where a recent sale had heads spinning for a different reason.

The 912-unit New Horizon apartment complex recently sold for $2.1 million after costs, an awful price amounting to less than $2,500 per unit considering that the average in the country in 2009 was $72,306 per unit.

Not surprisingly, the sale caused an issue for the lender, which took a hit of $35.2 million.

In addition to spending $7 million to get the property ready for sale, the complex already had a $30.3 million mortgage on it originated by SunTrust in 2006, according to Commercial Mortgage Alert. SunTrust sold the loan into a securitization where it became a part of a pool of loans sold as commercial mortgage-backed securities.

So the final tally that the lender had in the complex was $37.3 million.

While losing all of a first mortgage plus an additional 16 percent is a hard way to make a living, selling properties and loans at market-clearing levels is a positive sign for lenders and the real estate market.

Other lenders such as BB&T and PNC Financial Services Group are taking bold steps to sell nonperforming loans and real estate.

This strategy sometimes causes additional write-offs, but ultimately it will lead to a quicker healing process for banks and the real estate market.

With fiveand 10-year Treasury yields pushing all-time lows, low commercial mortgage rates continue to be the norm for the best quality deals. The rates range in price from 4.75 percent for a 5-year rate to 5.75 percent for a 10-year rate, according to the John B. Levy & Co. National Mortgage Survey. The rates for community banks might be slightly higher.

Rates for properties in the central business district of Washington are going to be lower.

Geographically, Richmond is a little closer to the U.S. Treasury's printing press than south Memphis, which perhaps explains the recent activity in the Richmond region's commercial real estate market.

After a long period of no significant investment sales activity, several recent transactions have shown that the market has a surprisingly strong pulse.

Two vacant office buildings in the Innsbrook Corporate Center in western Henrico County sold to Capital One for more than $17 million, according to several area brokers. The Innsbrook Center I and Innsbrook Center II have a total of 192,187 square feet of space.

The sale price of $90 a square foot is a testament to the location of the buildings and long-term strength of that sector of the market.

Another transaction involving Bell Creek Commons, a Best Buy-anchored retail center in Hanover County, is making its way to the closing table as well.

The 46,743-square-foot center was listed for $11.25 million on LoopNet, a commercial real estate national listing service by Jones Lang LaSalle. According to area brokers, the sale price likely will be about the listing price, which indicates very solid value.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com.