Recession or opportunity?

The commercial real estate world in the south-east of the United States – and in particular Florida – continues to hold its breath having seen an average 22 to 31 percent drop in value since its peak in 2006 – with the bulk of the damage from devaluation of properties purchased at the peak of the market in 2006 and 2007 now past – the market is now worrying about the deals completed in 2005 and earlier.

With banks and entrepreneurs going under at an alarming rate, the market is ripe for picking up deals reminiscent of the boom-days of the 1990’s – or maybe that is the 1880’s and the preverbal ‘gold rush’.

Cash is king and opportunities in the United States abound for foreign investment with the promise of an
E2 Visa, (the E2 investor visa is a nonimmigrant visa that permits foreign investors and their employees to live and work in the United States). However as attractive the opportunity might look from afar, you must step carefully in a mind field of the realtor’s version of ‘cat and mouse’ – and yes there is swamp land.

Out of the various commercial sectors, the hospitality sector has demonstrated the most volatility due to the daily resetting of rates and the discretionary nature of the business. Demand from both leisure and business travelers remain low, although there is an indication that 2010 will see a modest improvement.

Though delinquencies remain low, the office sector will see stress in the coming months, as unemployment climbs through the coming year and longer term leases come up for renewal. Vacancies have reached 15 percent nationwide and are expected to rise higher. However, larger central business district markets continue to outperform suburban markets, landlords are facing a swift decline in base rents – giving the tenants the upper hand.

The retail sector struggles due to consumer spending, increased vacancies, and limited store openings.

Today’s average cap rates are now higher than they were in 2004 and the average price per square foot or per unit being paid today are either at or less than 2004 price levels.

So are we at the bottom, will 2009 see stabilization in the market? Where it is unclear are the vast amount of projects that came out of the ground in 2006-2007 highly leveraged by entrepreneurs looking to make a quick buck – and bankers feeding on the greed.

So now it’s the day of reckoning. The winners are those with cash to invest. The losers are those without. As the projects face foreclosure – opportunities abound as the principles and bankers attempt to shed the “toxic” projects.
Example at hand, an older 30 unit apartment complex in Tampa, Florida – purchased in 2005 for $3,300,000. The new owners sunk an additional $1,000,000 to renovate the units to ‘as new’ condition, converting them to condominium (known as commonhold in the UK) at an investment of $143,333 per unit. The apartments were put on the market for an average of $200,000 in 2006-2007. The market then started to collapse and no units were sold. In April of 2009 the bank foreclosed on the principle loan of $2,700,000. The bank is now offering the property for $2,000,000 ($66,666 per unit). You might think that is a steal – however the appraisal comes in at $1,700,000 ($56,666 per unit) – and the liquidation value of $1,000,000 – $30,000 each. And that is the price the building will sell for.

Should the apartments now be rented, rather than sold, the income would be an average of $800 a month per unit – Gross Income of $288,000 – net operating income (after tax, insurance and operating costs) of $150,000. A bargain by anyone’s standards.

So for those people around the world in the position to make a move on property, its worth looking beyond your own backyard – there are some serious bargains to be had.

Paul Willies is the owner and Senior Commercial Real Estate Appraiser with Appraisal Development International, Inc. based in Tampa, Florida. Born in Bristol, England he is a Board Member and Past Chairman of the British-American Business Council of Tampa Bay. Tel: 01-813-258-5827, email: paul@appraisaldevelopment.com or visit: appraisaldevelopment.com