Real Deals

The lonely cry of the commercial real estate agent

Staff WriterApril 30, 2009 

Hello ... ooo? Anybody out there ... ere?

At least that's the cry of commercial real estate brokers, who are learning just how hollow the market can get.

During the first three months of the year, investors spent roughly $50 million on offices, apartments, warehouses and shopping centers in the Triangle. That's about 94 percent below the total during the same period a year ago, according to data from Real Capital Analytics, CB Richard Ellis and Grubb & Ellis/Thomas Linderman Graham.

It is believed to be the slowest quarter in at least a decade. The quarterly average sales volume during the previous 10 years has been about $286 million.

"This is just a testament to where the capital markets are right now," says Ben Kilgore, an investment sales broker at CB Richard Ellis in Cary.

Three years ago, a flood of capital was competing for commercial real estate across the country. Investors paid particular attention to -- and record prices for -- buildings in the Triangle, where job growth spurred demand, rising rents and healthier returns.

As lenders tightened up in late 2007, requiring borrowers to pay more equity into deals, the highly leveraged investors who fueled the run-up fell out of competition.

Many owners are content to hold for now, hoping for the lending faucet to be turned on soon. Those who have the cash to buy are waiting for prices to drop.

A wave of distressed properties may come ashore if the lending crisis drags on. Landlords with maturing debts may have difficulty refinancing. And landlords will have a tough time covering loan payments as vacancies rise. "We're right at the threshold for a lot of properties," says Jim McMillan, a broker at Grubb & Ellis/Thomas Linderman Graham.

The shutdown has made it especially difficult to place a consistent value on properties.

"It's impossible," McMillan says. "You put 10 people in a room and they'll come up with 10different values."

There's no question values have dropped. What's unknown: How much more will they drop?

The national commercial property pricing index compiled by Moody's and Real Estate Analytics has dropped 21.5 percent since its peak in October 2007.

"There is no evidence that commercial real estate prices have reached bottom," Neal Elkin, president of Real Estate Analytics, said last week.

Locally, investors will be keeping an eye on The Streets at Southpoint. The Durham mall is mostly owned by General Growth Properties, which filed for bankruptcy protection a couple of weeks ago, after billions of dollars in debts came due. The Chicago company may still need to sell some properties to appease lenders.

The 1.3 million-square-foot mall is one of the region's most successful, which is a double-edged sword for General Growth. The company may want to keep a prime asset as it reorganizes. At the same time, because of the mall's success, the property may appeal to the few investors able to close such a deal these days. And because of General Growth's need to settle debts, the company may be compelled to sell.

If it does, that buyer could get a bargain. General Growth's stake in the mall has a tax value of about $170 million, an assessment made at the top of the market. (The company doesn't own some space occupied by anchor tenants, tax records indicate).

Frank Acierno, a Delaware investor, is reportedly taking a close look at Streets. Acierno, whose company Allied Properties owns about a dozen East Coast malls, didn't return messages seeking comment. But he told The News Journal, a Wilmington, Del., newspaper: "We're definitely in serious conversations for that property and several other places."

When asked about it, General Growth spokesman Jim Graham replied by e-mail: "We don't publicly discuss private discussions about possible sales of assets."

Definitely maybe.

Raleigh officials are making it costlier for developers to get water. The City Council this week approved a $500 increase in the new connection fee that will go into effect July 1. And Councilman Russ Stephenson said he supports gradually increasing Raleigh's capacity fees until they are on par with Cary, which charges $5,261.

That would mean big annual increases as Raleigh currently charges $1,666 for a new connection. New connection fees in the Triangle range from $1,787 in Knightdale to $8,000 in Holly Springs.

Stephenson and others who support higher connection fees say the additional revenue will provide relief to rate payers, and ensure that new growth pays more of the cost of extending the water and sewer system.

Councilman James West, however, expressed concern about piling on fees at a time when the construction industry is already reeling.

Revenue generated by the new fees is likely to be much less than if the council had made this move a few years ago.After years of averaging about 5,000 new connections annually, Raleigh expects less than half that many this year.

Ideas Architecture is among the latest real estate-related companies in the Triangle to seek protection from creditors, as the lending crunch is limiting new projects.

The Raleigh firm this week filed for Chapter 7 bankruptcy protection. The company, which reported net income of $49,883 in 2007, lost $137,469 in 2008 and 2009. It owes creditors $538,140, but has only $60,248 in assets. Among its debts: $48,000 in rent owed to Highwoods Properties.

Efforts to reach Ideas executives failed Wednesday. The company's phones had been disconnected.

Staff writer David Bracken contributed to this column.

jack.hagel@newsobserver.com or 919-829-8917

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