Commercial real estate looks for a way out of woods

October 1, 2011

Real Estate

Somebody had to be elected the optimist in a room full of commercial real estate professionals gathered Sept. 22 for a panel discussion organized by the Mississippi CCIM Chapter.

The job fell to Leland Speed, longtime real estate investor and interim chief of the Mississippi Development Authority.

The task was not made any easier by the news that the Dow fell another 100 points from the time he parked his car and walked into the Lakeland Drive headquarters of the Mississippi Association of Realtors to join a panel discussion on the future of commercial real estate.

“The sun will come up in the morning,” Speed offered.

Thus began a three-hour discussion among Speed, Thomas E. Newton of Net Lease Alliance; Richard Hickson, retired CEO & chair of Trustmark National Bank; John Barton, a Parkway Properties senior VP; and Wayne Pierce, president of Heritage Properties.

Newton, whose Montgomery-based Net Lease Alliance develops retail space, said his sector is in its third year of hitting the brakes after barreling along at hazardously high speeds. “We’re at a standstill,” he said, predicting he and other retail developers have to pay penance at least a half-decade longer for doing projects that lacked a sound assessment of risk.

“We’ve got another five years of a bad economy and a capital-constrained” lending climate.

Less bleak was Speed’s assessment for his sectors – office and industrial leasing. “I take a little brighter view,” said Speed, who is chairman emeritus of real estate investment trust Parkway Properties and warehouse-industrial development company EastGroup.

He said his optimism for EastGroup comes more from the significant number of prospects it is working than its leasing volume. “We’re working a pretty good number of contacts. We have five spec projects, with good leasing on three of the five.”

Hickson, who retired as CEO of Trustmark at the end of 2010 but remained its chairman until spring, said capital constraints on commercial development will remain until regulators regain confidence in banks doing land loans.

Still trying to rebound from losses incurred in the real estate bust, regional banks in Mississippi and elsewhere in the South are “completely shut down as far as real estate,” thus leaving the lending business to community banks of $300 million or less in assets, Hickson said.

As a result, commercial and industrial development loans in Mississippi have barely grown above the $2 billion mark, he added.

Today, if a commercial developer is going to get a loan, “it’s going to be at the 100-year-old bank in their town with which they likely have a relationship,” Hickson said.

The reason goes back to December 2007, just before the start of the recession, when federal regulatory agencies agreed among themselves that a bank’s lending on commercial construction and land development should not be over 1 percent of a bank’s capital, he noted.

Many of the regional banks at the time had commercial loan levels two to three times their capital, according to Hickson.

So the regionals won’t be back in the commercial development lending arena until the excess lending levels clear, he said, and added he doesn’t expect the clearing to occur until the housing market recovers.

He said he nonetheless is confident developers in the Jackson metro area can get loans in the $3 million range, provided they have some liquidity and have shovel- ready projects.

Further, he said knows of at least two places commercial developers with some liquidity can get loans of $10 million.

Meanwhile, the Wall Street Reform and Consumer Protection Act, more widely known as Dodd-Frank, restrains lending as bankers struggle to conform to the new rules they know of and the new rules that regulators are still formulating, Hickson said.

The former banker said the best hope is that part of Dodd-Frank will be repealed before it turns “your bank” into a non-profit entity like the post office.

On a somewhat brighter note, Barton, senior asset manager for Parkway Properties since 2007, said to not expect significant numbers of commercial foreclosures nationally even though many of the commercial loans refinanced during the boom of mid-decade come are up for renewal in 2012 and 2013. Look for more of the “extend and pretend” reality, Barton said.

Lenders do not want title to the property, he added. “They just want to sell the note.”

Big maturities are coming due in 2012, Barton said, but “absent a big market to take them out, I don’t see a lot of foreclosures.”

Newton, the retail developer, said reports he’s seen say new construction of regional retail complexes in the United States at the moment is limited to one in New Orleans and Lakeland, Fla. “That market as we know it is dead right now.”

He said Net Lease Alliance has 10 projects underway but all are for single tenants.

Best Buy, he said, had three million square feet of new space under construction in 2008. Today it plans no net increase, he said, and added the story is much the same with Target.

But all is not bleak for Net Alliance, according to Newton. “Occupancy has not been a problem. Our leases are going well. Our out-parcel sales are going well.”

The industrial/warehouse sector is a segmented market that today is showing demand for larger product, according to Speed.

Phoenix a year ago had 14 different industrial buildings of a half million square feet or more that had stood vacant for four years. “Since the first of the year they are down to two,” he said.

“We’re seeing the big boxes going away” from the list of vacant properties.

EastGroup has scouted Las Vegas for an extended time trying to get a deal on one of its many vacant industrial/warehouse buildings. It hasn’t happened, Speed noted.

“The good stuff is in very strong hands. The fact that the good stuff is in strong hands bodes well.”

Speed said EastGroup bottomed out at 88 percent occupancy on its industrial properties but has rebounded to 91 percent occupied and 94 percent leased.

“We’re just now starting to get to the point where we have some pricing power in the individual submarkets.”

He said a fear of inflation has led him to keep leases at three to five years. “I’ve been totally wrong,” he said, but added he worries that once he gives up his theory he’ll be proven correct.

In noting signs of strength in the high-end segment of the office market, Speed cited the leasing success of Parkway’s recent acquisition of 50-plus class A office tower in Atlanta’s Buckhead community. Parkway bought it at 92 percent occupancy a few months ago and today it’s full, he said. “There is life out there, I guess is what I’m saying.”

Barton said class A properties have generally fared well across the country.

In Jackson, “We had a vigorous year in our class A. We did 80,000 square feet of new leasing – that’s a lot for Jackson.”

He attributed the up-tick in leasing to improved employment numbers that accompanied the arrival of the new year.

That up-tick in jobs has vanished, leaving Barton to caution: “Not only are we not burning up the woods. We’re not out of the woods.”

No comments yet.

Leave a Reply