As the commercial real estate market pulls out of its free fall it is attracting wealthy investors looking for bargain prices, a hedge against inflation and potential income.
“Investors with cash could have excellent opportunities to seize market bottom plays by recapitalizing cash-starved owners or buying foreclosed assets,” said Stephen Blank, a senior resident fellow at the Urban Land Institute.
Commercial real estate traditionally plays a role in the investment portfolios of high net worth investors. Many of these investors held onto large cash reserves during the recession and are now looking for investment opportunities.
Investors with a net worth of $25 million or more – not including their primary residence – invest 10 percent of their assets in real estate. Nearly half say they plan to invest in rental property in 2011, while 44 percent plan to buy undeveloped land and 33 percent plan to invest in other types of commercial real estate.
“Real estate holdings are significant among 25 Million Plus households, most of whom own numerous properties,” said Catherine McBreen, managing director of Spectrem Group. “In fact, unlike other wealth segments, these investors seek opportunities in this market.”
One-third of High Net Worth Investors – those with a net worth of $5 million to $25 million not including primary residence – own rental property with an average value of $1.7 million, Spectrem Group reports. Entrepreneurs and business owners are the most likely to invest in commercial real estate.
“Prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital,” said the ULI announcing its “Emerging Trends in Real Estate 2011” forecast. Suburban office space is the least desired.
The commercial market appears to be recovering from a three-year decline that saw prices drop more than 40 percent from peaks in 2007. Prices have recovered slightly in the last three months of 2010, according to Moody’s REAL Commercial Property Price Indices, but many commercial real estate loans remain “underwater.”
About $1.4 trillion in commercial real estate loans are coming due between 2010 and 2013, and half the loans are underwater, or exceed the value of the underlying property, according to an industry report by the Foresight Analytics division of Trepp, LLC. The report estimates that $1 trillion worth of commercial real estate loans are underwater, with $271 billion underwater by 10 percent to 20 percent, and a further $251 billion underwater by more than 20 percent.
The largest commercial real estate loan losses are projected for 2011 and beyond, with bank losses alone ranging as high as $200 billion to $200 billion, according to a Congressional Oversight Panel study. Small and regional banks hold a disproportionate number of these distressed loans.
Large banks, those with more than $100 billion in assets, hold one-third of commercial real estate debt, while two-thirds is held by local and community banks, Trepp reports.
The loans most likely to fail were made at the height of the real estate bubble, but other potentially sound loans are now facing default due to higher vacancies and lower rental income during the Recession.
The ULI report, a survey of commercial real estate investors and professionals, recommends individuals considering commercial real estate temper income expectations to cash flows of 6 percent to 7 percent, lock-in leverage, focus on global gateway cities and exercise caution when considering distressed loan pools. The report identified the following as top five commercial real estate markets in the U.S.:
• Washington, D.C.
• New York
• San Francisco