This week, MortgageOrb checked in with Howard Ecker, president and CEO of Howard Ecker + Co., a commercial tenant-representation company. Ecker discusses the effects of declining asset values, underwater properties and reluctant buyers on the commercial real estate market and highlights the opportunities now available.
Q: How much longer do you expect commercial property values to fall? When might they finally hit bottom?
Howard Ecker: Commercial property values will continue to fall as long as there is no positive job growth. Without positive net absorption, there is very little reason, if any, for values to stay where they are.
In order for landlords to attract tenants, their only vehicle is to reduce rents, which directly relates to lower property values. In most of the major office markets, there is a substantial vacancy, if not directly from landlords via subleases, by major users who have substantially downsized.
It is my opinion that it could be somewhere between two and five years until this situation reverses.
Q: You have mentioned that you expect many lenders to ‘begrudgingly’ take ownership of underwater properties – would this typically follow a failed attempt at a loan modification, or are lenders not pursuing that option in the first place?
Ecker: I personally do not believe that lenders, with few exceptions, will make major efforts to attempt loan modifications. As indicated, with rents continuing to fall, how do you modify the loan to reflect continually reducing rents with no end in sight?
Q: When might buyers return to the commercial real estate market? How will their deals differ from those in the previous era?
Ecker: Buyers are returning to the commercial real estate market – even now, when quality assets are available with a substantial upside. An example of such an asset is 2050 Main in Orange County, Calif., which is located close to the John Wayne Airport. The property has undergone a very high-quality improvement with a large amount of vacancy. A sale should be completed within weeks.
Q: Where are the opportunities in distressed debt and distressed properties right now?
Ecker: Both the distressed debt and distressed properties are theoretically available in virtually every primary and secondary office market. Properties will be traded when buyers become creative to deal structures.
I do not know exactly how this will manifest itself in new ways in order to take advantage of excellent opportunities, but new structures will have to be employed in order to make transactions work.
Q: Given the lack of buyers in the market, what can property sellers do? How should they adjust their expectations?
Ecker: I really do not know what sellers can do to package their properties more attractively. However, one area that all sellers must be willing to look at is the ability to market their properties on the Internet in order to reach a worldwide buyer pool.
With the Dow weakening against the euro, European buyers are looking at lower prices simply based on currency, and a combination of their currency edge and their lower prices may bring them into the market faster.
It is very difficult for buyers to adjust their expectations, but one must realize that the market dictates price and value. Unless you are willing to accept the reality of market conditions, a seller will never move his property.