Why we are buying in this uncertain market

In the past 5 months we’ve bought the following four properties:

• PT’s/Mexico Lindo
•Baptist  119 MOB
•Former Goody’s Galleria
•2,000 SF Downtown Homewood

What do they have in common?  They would have been impossible to purchase four years ago when the market was on fire. And had we been able to purchase them, we would have paid much more than what they ultimately cost today.

Commercial real estate can be a long cycle, 7-18yrs!

So the first thing you have to know is where you are in that cycle. There is a verse in the Old Testament, I Chronicles 12:32, “… the men of Issachar, who understood the times and knew what Israel should do…” These guys not only understood what was good for Israel, but they understood the times they lived in and how that effected what was ‘good’ for their country.

Context is the starting point.  Given that, are you better off buying assets today or three years ago? The answer is obvious, yet fear reigns with buyers, bankers and the media.

Warren Buffett says “Cash combined with courage in a crisis is priceless” and that is how we see ourselves, ready, willing, and able to buy very good real estate at very good prices.

If you hear of a good deal, please send it our way. If you are a broker and you bring us an “off-market” or pocket listing, you keep all of the fee.

One Data Point

Much has been made in the media about the coming collapse of Commercial Real Estate via problems with CMBS loans. Protective Life reported an excellent quarter today and I though it was interesting to see how their $1.1 Billion CMBS portfolio was performing.  To date, no real spike in problems.  Maybe they haven’t hit yet? Maybe PL is a good lender who hasn’t made many bad loans?  Maybe its overblown?  Time will tell….

Inflation and its effect on Real Estate

A couple months ago I posed the following question during an office meeting:  “what effects will a higher than normal inflation environment have on Real Estate Investments in general and on our portfolio specifically?”  We came up with a few answers that fell into 2 categories: postive and negative.   On the positive side, by owning existing buildings, you are at an advantage vs. to-be-built buildings as they will cost more to build given the effect of inflation on construction materials.  On the negative side, if you are holding properties with long-term, flat leases, the dollars that you put in your pocket after paying the mortgage will be worth less each year though no less in absolute dollars. 

And as if Mark Heschmeyer was in the room with us that day, he wrote this_article.

DW

How Far Will Housing Prices Fall?

Fortunately, those of us who live in Alabama have been spared the vicious and large declines in home prices. While there is still a ton of inventory and some slippage in values here, it pales in comparison to the mess in California, Nevada, Arizona and Florida. Yet we feel effects through the greater economy and the general mood of consumers.

How much longer do we have until prices nationally hit bottom? One very detailed report prepared by Wachovia Economics Group tries to come up with an answer. The Cliff Note’s answer is they project values will hit bottom toward the end or 2009 or early 2010 and home values will have lost 25% from their peaks in 2006.

17.8 Billion in CMBS Mortgages set to expire next year

A Realpoint LLC analysis of 75,002 mortgages that serve as collateral for 700 CMBS transactions in the United States found that 6,457 of those loans, representing $73.7 billion or 8.8 percent of the CMBS universe, are set to mature by next March. Of those, 1,125 loans with a balance of $17.8 billion could face problems because their collateral properties might not generate enough cash flow to support new mortgages that are as big as their existing loans. On the positive side, the report said because most of the remaining loans were originated 10 or more years ago, when interest rates were higher than they are today, they should have no problems getting refinanced. Those loans have also benefited from a general increase in property values.

Are life companies ramping up lending?

Most properties We buy are financed first through a community bank. When the time is right and assuming a deal is large enough we’ll try to get non-recourse debt either through a Life Insurance Company or a Conduit Lender. As most of you know, Conduits have practically dried up and their rates are way too high right now (around 7.75% compared to 5.25% for Prime and 6.25% for Life Companies). Many have predicted that now Life Companies have the non-recourse debt market to themselves they’d increase the amount of deals they’d do. Some are and some aren’t. This article from Co-Star talks about this subject in more detail. -DW

Good sources for economic and interest rate predictions:

If you’re like me, you try to look into the future to see where our economy and interest rates are heading. At Shannon Waltchack we own multiple properties, all with different mortgage, amortization and balloon schedules. It is vital for us to try “wring-out” as much cash flow from our properties as possible by keeping our borrowing costs as low as the banks will allow. We do this by following the markets and recasting notes to float when rates are heading lower (right now) and by trying to get fixed rates as or before they start rising.

One source we review is Wachovia’s Economic Commentary web page to read a succinct view on what’s happening in capital markets and to see their predictions for Fed, Libor and Treasury rates in the Monthly Economic Forecast section.

Are there other websites you consult to see rate predictions? Please share with us in the comments section. -DW