Emerging Investment Opportunities Give CRE Market a Lift

Stuck on the launch pad 12 months ago with the countdown on hold, the commercial real estate (CRE) market recently began firing its engines, letting investors and developers alike know that the much dreaded double dip in the economy might just be a passing storm. According to “Houston, We Have Lift Off,” the latest podcast produced by real estate investment-banking firm John B. Levy & Company, record low rates and the broadening of investment opportunities into new markets are giving the CRE industry the propulsion it needs to begin its ascent.

“Commercial real estate is showing signs of taking off,” said John Levy, founder of the Richmond, Va.-based company. “What makes this trend so encouraging is the fact that we most likely wouldn’t be witnessing forward motion if we were on the verge of experiencing a double-dip in the economy.”

Government policy has helped fuel the rise in CRE activity by holding down interest rates. In the summer of 2009, for example, borrowers were paying between 7-1/2 percent and 7-3/4 percent for 10-year, fix-rate money. Those rates have dropped dramatically by close to 250 basis points, and today’s borrowers are paying between 5 percent and 5-1/2 percent for the same fixed-rate money. Money is available, according to Levy. In fact, it is at an all-time low for many borrowers. And this scenario is the direct result of government policy, he added.

“What we are seeing now is that investors are looking for opportunities in places other than the usual five or six 24-hour cities like New York, Boston, and Washington, D.C.,” said Levy. “The prices have gotten so high in those markets and the yields so low that investors are turning their attention to second- and third-tier cities such as Atlanta, Charlotte, Denver, and Richmond. We see this as a debt-driven phenomenon. In many cases, 60 or 70 percent of the purchase price is between 4 percent and 4-1/2 percent.”

Levy also said, contrary to the popular perception that banks have their head in the sand when it comes to lending, they are contributing positively to the current CRE scenario by offering extensions on their loans. But those extensions come with a price, he warned. “The catch is that you have to bring something to the party. And that something may include offering a personal guarantee, holding the deed in escrow, or providing cash equity.