LNR and CIII are selling a tremendous amount of product through a large auction now and the FDIC has another $700 million portfolio to be sold in the 3^rd quarter 2011.

We believe we are at the tipping point towards a more normalized market where new originations will commence in early in 2012 reflecting normal CMBS output and lending patterns similar to 2005 and 2006.

Though 2012 will see more distressed debt opportunities we see an overall slow down as the economy and its recovery finally impacts real estate positively.

Last month I interviewed Sam Zell where he stated that inventory (supply) would be waning since little new real estate product has been constructed in the last four-and-half years in either multifamily or office development.  Sam noted that demand is still weak but the sheer lack of new inventory will increase the value of existing real estate as certain properties become more obsolete and placed out of service.  Eventually demand will return, which will  push values back up.

So, what has occurred since then? What sectors are hot?

From February 2009 to June 2010, 102 multi family properties were sold at auction and the variance between asking and sell price was 90%. From July 2010 to April 2011, the variance was 82%. More sales occurred however, with 132 multi-family properties with a total value of over $2 Billion sold at auction in just a ten month period.

The number of office properties sold at auction increased significantly. While only 108 office properties sold at auction during the February 2009 to June 2010 timeframe, the number increased to 202 sold during the recent ten month timeframe. The total dollar volume was just over $1 Billion. During the earlier period, the variance between asking and sell price was 75%. The gap closed during the most recent period, with average asking versus average sell at 99%. The data suggests that the overall average does not reflect steady monthly occurrences but rather sharp peaks with average sales prices surging in some months and dropping in others.

Industrial/flex property auction sales are up as well. Last year, when we compared half year 2010 sales to 2009 sales, we found a ten percent increase in number of transactions brought to market. During the entire earlier period, 132 industrial/flex properties sold at auction and average asking price to average sales price was 65%. When we look at just a recent 10 month period, the number jumps to 174 industrial/flex properties valued at just over $300 Million traded at auction. Prices during the earlier period were becoming more aligned and have continued. The former data showed a slight increase in the variance between asking and sell price, or 67%. Of interest is that the gap has narrowed in the most recent 10 month period with average asking to sell prices showing a variance of just 81%.

Retail property auction sales are also up. Retail properties being offered for auction dropped by more than 40% during the first half of 2010 as compared to the last six months of 2009 and were 20% less than the first half of 2009. During a 17 month period, 341 retail properties sold at auction and the variance between asking and sell prices at 70%. More consistency is found over the recent 10 month period when 299 retail properties with a total value of $1.1 Billion were sold at auction. We witness sharp peaks with high average selling prices surging in some months and dropping in others, with overall “average prices” suggesting a gap of just 1% or a variance of 99% when comparing average asking to sell prices.

While we had not considered land sales at auction last year, there were 191 transactions with a total value of over $1 Billion during the July 2010 to April 2011 timeframe. Average sell prices were 65% of average asking prices.

NAI Global has also witnessed increased interest in auction sales, with greater activity in sealed bid PowerSale, live and online auctions programs over the same period.

To learn more about NAI Global’s accelerated marketing program, visit www.naiglobal.com/powersale, or contact Patricia Faulkner at pfaulkner@naiglobal.com.

However, achieving that ideal has been elusive because there is an inherent conflict between debt and equity brokers.  Simply said, the equity broker is programmed to seek a sale of the asset from the client while the debt broker would rather that the client refinances that very same asset.  What is lacking here is a protocol that is in the best interest of the client which is identified before the debt and equity brokers begin selling their services. 

Integrating debt and equity brokers has been a challenge in our industry for years.  When compensation is tied directly to a capital event such as a sale or a refinance how can the true needs of the client be foremost in the brokers’ minds?  This inherent conflict continues to be a challenge in most brokerage houses to this day.  The goal of integrating the debt and equity brokerage disciplines can be compared to finding the Holy Grail – a never-ending search. 

The solution to this challenge does not lie in how fees are shared and does not lie solely in the hands of the client.  Often the client does not know the solution and is seeking advice in a conflicted environment.  The solution lies in the integration of the thinking between the debt and equity brokers themselves. 

The better the members of a capital markets team know each other, the better the communication – which leads to minimizing conflicts.  Often a joint call to determine the needs of the client results in the client’s satisfaction with the advice received and a broker-to-broker determination of how fees will be shared.  This can only work if the brokers know and respect each other and realize that both of them are in this business for the long term – AND THAT THE CLIENT COMES FIRST. 

Those who manage debt and equity brokers cannot underestimate the value of team interaction.  The same value that is put on a broker/client relationship needs to be put on the equity/debt brokers’ relationship. 

Fostering this type of camaraderie is just good business.

But why?  I have seen countless examples where the notes secured by commercial real estate have traded for values that exceed the underlying fee.  Is it because the investor perceives value that is not obvious to the seller, or is it because the seller, oftentimes a regulated commercial bank, is so motivated to shed the asset that it is willing to leave money on the table? Or is it because the capital that has been impatiently sitting on the sideline has now determined that deals must be done regardless of the price? Or is it because, like the market, knowledge also has a market cycle and that knowledge is currently out of balance, favoring sellers over buyers? 

What knowledge could be out of balance?  Perhaps the experience gained through the last few years of working out of or collecting loans, wherein commercial bankers have realized that the time, cost and exposure is far more expensive than a less informed and experienced note buyer realizes.  Several recent studies have shown that the collection, foreclosure and ownership of an asset for the first year of holding title can cost 25-35% of the note value.  So it follows that the experienced lender who is willing to recognize the true collection/ownership/disposition cost is net-selling the note at a  discount of  25-35%. 

But is the less experienced, unsophisticated note buyer aware of the same cost, or is the perception that the note seller is simply coming in line with the market and the spread between bid and ask is finally converging?  The truth is likely somewhere in the middle.  All the market forces extenuated by the recent experience of bankers points to a trend that at least for now, plays in the favor of the note seller; but further, the reality in practice is often what I would call entitlement value.  Like the value creation that is achieved when a developer goes through the entitlement process, taking raw land to the point where it can be sold to a builder or end user, (a process that takes both up-front capital, incremental capital and experience) the collection/workout process similarly presents an opportunity to take advantage of a vision and goal.  For the commercial lender, the goal is to rid the balance sheet of the asset and the bank of the borrower, and oftentimes in the process, lender fatigue sets in.  But for the buyer, the vision and goal is to obtain title as quickly and efficiently as possible.  Where the bank has focused on the broken promise to pay, the note buyer simply wants to gain control.  That difference in vision and goal means that often the note buyer can compress the time and cost associated with “collecting” the loan.  So although there are still costs including attorney’s fees and time value of money, the investor is able to compress both time and cost creating a small positive arbitrage.

One idea is for banks and others to invest in “Pre-Diligence,” a term coined by the NAI Global Special Asset Solutions team.  Today the commercial distressed debt industry is attempting to use tools developed in the RTC days such as auctions, sealed-bid programs and direct offerings to move product in a market overwhelmed by volumes of foreclosed properties not experienced heretofore.   To a significant extent the problem of offering such massive numbers of commercial assets to the market is a problem not of real estate as much as it is a problem of information, or more accurately the lack of information.

Pre-Diligence is a process that first collects all available information on foreclosed assets in the lenders files; including title reports, subdivision plans, environmental reports, photographs and as much information as the bank has and then places that information is a searchable and digestible form so potential buyers can find, study and consider the potential value of each asset. In short, Pre-Diligence is a form of MARKETING that is more attuned to the needs of buyers.  Ironically, in a market flooded with “opportunities” the need to present opportunities to those with equity to invest is more important that in markets that are in a more normal equilibrium. To see NAI Global’s approach to Pre-Diligence take a look at www.assetresolutiongroup.com. For those interested in this program please contact Rhyne Brown at rbrown@naiglobal.com for details.

The sales of those few Trophy assets are also the ones that major publications report on when they declare that the worst is over.  The recent sale of the Pritzker/Hyatt Office Building in downtown Chicago is an example of a trophy selling to California-based The Irvine Company for $625 million,  or $420 per SF. 

The divide between Trophies and Trash is also tracked by two diverging indexes.  The Green Street Advisors’ Commercial Property Index tracks 47 REITs, which in summary didn’t report the low as low and the rebound bigger than the Moody’s/Real All Property Type Aggregate Index, which tracks all same asset sales over $2.5 million. The Moody’s index, not surprisingly, reported a lower low and a much more modest rebound. 

The trash is obviously the other assets,  the dime-a-dozen suburban office buildings that are trading at per pound value and sometimes not more than dirt price, and non-anchored retail centers that were built ahead of the rooftops and now sit next to corn fields in the Chicago collar counties and next to cactus-filled deserts in Phoenix.  The retail properties are oftentimes half empty and with little hope of attracting  tenants that can afford to pay anywhere near the rental rates that justify their one-time value of $300 per SF.  The challenge as a buyer is to determine what type of property you are buying, not be teased by the notion of comparison to buildings that are defined as the other and pay accordingly.  There are markets for both, but the prices differ as much as corn does from cactus.

The Commercial Property PowerSale™ is an accelerated marketing program developed by NAI Global to match motivated sellers with investors and owner/users searching for prime investment opportunities. This unique marketing program gives sellers the opportunity to sell their asset quickly, reducing their holding costs and securing true market value for the property.

Interested buyers will have an opportunity to bid on industrial and retail/restaurant properties in 10 states. Large industrial properties include a 416,000 SF former Lenox plant on 56 acres in Galloway, NJ, near Atlantic City; a 238,000 SF industrial property on 40.6 acres near Chattanooga, TN; a 217,000 SF industrial facility in Salem, IN; and a fully entitled 300-acre mixed-use development opportunity in North Port, FL, between Sarasota and Ft. Myers.

The PowerSale™ also features 34 closed restaurants in Delaware, Florida, Georgia, North Carolina, Ohio, Pennsylvania and South Carolina, offered by a national lender. Building square footage ranges from 1,200 to 9,300 SF and includes former Wendy’s, Hardee’s, Boston Market, Golden Corral, Chevy’s, Waffle House, Roadhouse Grill, Pizza Hut, Sonic, El Pollo Loco, Popeye’s, Bennigan’s, Church’s, Papa John’s and more.

Prospective buyers and sellers interested in learning more about the Commercial Property PowerSale™ should visit NRC.com/PowerSale or call +1 800 747 3342 x102.

This statement is ever present in our industry. Seemingly overnight brokers, young and seasoned, had to learn new terms and rules of engagement. What is the relationship from default to BOV to controlling an asset? Is a Chief Credit Officer senior to a Special Servicer? Or is the Receiver the most popular guy at the party?

At NAIOP, CCIM and SIOR chapter meetings conversations of getting in the REO game persist. However, very few brokers are realizing a significant market share in this segment over others. What separates the broker who successfully represents an entire account for a given bank, lender and/or servicer from the broker who might acquire a one off listing if any?

You must be able to surpass expectations by finding answers to meet the client’s needs. Before you can find answers, however, you must first understand what the client’s needs are. An example would be how to structure an offer to purchase an asset from a bank or servicer. Why is the offer structure important, an offer is an offer right? Wrong.

A bank has regulatory restrictions that they have to manage. Once a bank accepts an offer and opens escrow they are required to write down the asset to the offer price. Now consider three weeks of due diligence goes by and the buyer falls through. The bank has just realized a loss without disposing of the asset. Multiply that by a dozen assets or more and it could equal bank failure.

This is why it is imperative for a bank to only accept offers from qualified buyers (substantiated with strong financials, track record, and verification of funds) with limited due diligence timelines. One other very important thing to consider is to schedule the closing at the end of the quarter.

-Hayim Mizrachi, CCIM

Hayim Mizrachi is First Vice President and Business Manager at NAI Las Vegas.

There’s still a big spread between the asking and bidding price, but servicers and lenders are starting to become more realistic in negotiating the terms of debt as cap rates continue to compress forcing a slight price increase.

We’re starting to see more momentum and more traction with on the transaction side as people come to the realization that it makes more sense to execute rather than delay as situation in the marketplace continues to evolve. Trends indicate we could see large increases in transactions as we head into September, October and November with numbers accelerating near the end of the fourth quarter. We should start seeing real signs of stabilization, price recognition of real values beyond the market bottom.

We’re also seeing traditional opportunity funds that were sitting on the sidelines starting to come into the market thinking that the bottom was hit and we’re now entering a rebound. Multifamily tends to be the most popular find for investors, as existing properties with cash-flow are more predictable than other investments in the market.

Developers are starting to surface in some areas, like Manhattan, looking for undeveloped properties where they can build new residential rental and condo projects. 

-Larry Selevan

Lawrence Selevan is Chairman and CEO of NAI Chesterfield Capital Advisers, a joint venture with NAI Global providing borrowers with restructuring advisory services.