Slowing Economy Sifts Sands Under Investment Market

Friday, August 15, 2008

-New Mexico Business Weekly- Tom O'Connell

There are still real estate investment opportunities in Albuquerque, but projects are harder to finance. Banks want more cash and preleasing in the deal, and are more way than ever about speculative building. Investment brokers who had what would normally be done deals on the table are seeing projects disappear before closing on them.

"It's moved so quickly, where there was financing six months ago, and now it's not there," said Patti Peizotto, an investment broker with CB Richard Ellis in Albuquerque. "It's devastating. It's taken the heart out of the investment market. If you can't finance it, that puts a screeching halt to the deals."

Peixotto estimates transactions on investment properties at her firm are down about 60 percent from the same period last year. In addition to increasingly difficult financing, buyers and sellers more and more do not see eye to eye.

"You have a gap between what buyers are willing to pay and what sellers are willing to sell for," she said. "There's a gap between buyers' and sellers' expectations. Sellers are still focused on last year's prices because they were very good."

Kyle Seals, a real estate investment officer with commercial mortgage banking firm Q10 Realty Mortgage & Investment Co., also cited a gap: "Buyers and sellers are farther apart based on where financing was a year ago, and expectations haven't come around."

Seals said the change in business over the past year has been "dramatic." Acquisition loans, which a year ago accounted for 75 percent of Q10's transactions, are way down, and the majority of Q10's business these days is refinancing. The firm's volume is half what it was last year, he said.

The players have changed too. While commercial mortage-backed securities accounted for $280 billion in loans in 2007, Seals said, they did only $6 billion in the first quarter of htis year. Life insurance companies are the main providers these days of long-term fixed-rate loans, he said.

The decline in retail expansions has been hit to the development of investment properties, which lenders tend to be more willing to finance if a national retailer is already signed on.

"We haven't seen as many projects as in the past," said Pat Sanchez, vice president of Wells Fargo's investment division. "of course some of the national retailers are looking to not expand as aggressively, which has hindered some of the new developments coming on line. But there's still opportunity for people to do projects in town if they can get the national retailer to commit. There's still opportunity in Albuquerque."

Sanchez confirmed that speculative projects are very difficult to get in the ground, but that can help developers.

"We don't like a lot of spec projects, and that can be to the benefit of our borrowers. They can do their due diligence and get dome preleasing done on the project, which will give it a better chance of getting approved. I think in the past you had developers wanting to do more spec. In today's world, it helps having more liquidity and moe preleasing."

Red flags on projects include limited liquidity and 100 percent speculation. Sanchez and Seals said lenders are looking for more cash and are scrutinizing developers' previous projects more closely.

Peizotoo remains optimistic.

"You just have to find a way to make it work," she said. "It's got to get better, and ther's always a way to put a deal together."

A newcomer to the market, Scottsdale, Ariz.-based Esterra Development, just started a build-to-suit division, a concept that could take some of the pain out of investment real estate. Esterra is growing its presence in Albuquerque, beginning with its building of the new IHOP near the Albuquerque International Sunport.

Esterra develops investment properties-retail centers and restaurant franchises-for investors, for whom it can also arrange financing.

"If they have good credit, profitable stores, are part of a national or regional chain, we're able to go to our own financing sources and acquire everything, 100 percent," said Gary Arnold, president of Esterra.

The build-to-suit concept is an additional way to finance a project that requires less cash upfront, Arnold said

"If you're an operator of a restaurant chain and you don't have a lot of cash, rather than having to use your borrowing power or cash to do that, you can let a developer like us come in and do it for you," he said.

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