Commercial Real Estate Market may be in Better Health than Previously Though

Posted by admin on October 5, 2009 under Uncategorized | Be the First to Comment

Now that the housing market has stabilized and prices are beginning to rise, attention is turning to what is often called the next big crisis: commercial real estate.

Mortgage-backed securities helped sink the residential market, and worries are widespread that the $700 billion in such securities backed by commercial mortgages will lead to similar problems in that sector.

The traditional, core commercial holdings of banks also are under suspicion. Deutsche Bank estimates losses will amount to 11 percent to 15 percent on the $1 trillion in such mortgages held by banks.

A commercial version of the real estate meltdown, however, may turn out to be a calamity that is more anticipated than experienced.

And while the southern New Jersey commercial market is weak, it’s also showing signs of what may be the start of a rebound.

No surprise

J. William Mills, president of PNC Bank’s Philadelphia and southern New Jersey region, thinks a true crisis is more of a surprise.

“From a bank standpoint, one of the common themes everyone’s talking about is the next crisis is going to be in commercial real estate,” Mills told an investor gathering in Linwood recently. “My sense is that when you can tell what the next crisis will be, it’s probably not going to be a crisis.”

Mills said owners will be challenged to roll over debt with credit markets being tight. “People are going to have to come up with a lot more equity than they have in the past.”

But commercial lending requires more equity than residential loans anyway, and most of the loans coming due were made in the 1990s, giving a decade for equity to be built up, he said.

“So the challenges out there on the commercial side are not going to be as bad as some think,” Mills said.

New commercial lending, however, will remain tight because banks already have as much or more of real estate lending as they want.

“We’re very comfortable with 10 percent range of our entire asset base in real estate, which takes us to somewhere around $32 billion,” he said. “We find ourselves now with $45 billion in real estate. That makes it difficult for people like us to make forays into real estate.”

Regional community banks are performing a little better than those nationwide, according to last month’s Federal Reserve survey of Third District banks.

At banks in the district – southern New Jersey, eastern Pennsylvania and northern Delaware – 2.4 percent of loans are nonperforming, compared with 3.6 percent for banks nationwide.

For commercial real estate loans, the nonperformance rates are 5.4 percent in the nation and 3.5 percent locally.

Commercial real estate loans account for 72 percent of the nonperforming loans nationwide, and 67 percent of them in the region.

Local rebound

Richard P. Baehrle, commercial real estate vice president for Vanguard Property Group in Egg Harbor Township, said commercial is coming back locally.

“For the past year to 18 months, we have obviously experienced a tight market in the Atlantic County region,” Baehrle said.

Pockets of strength have remained, though, and now there are signs of growth in some areas and sectors, he said.

Professional office space in Linwood and Somers Point remains strong, with a vacancy rate of about 10 percent, he said.

An obvious sign of strength is Shore View Suites, 14,500 square feet of office space under construction at the former site of the China Outlet in Somers Point.

Expected to be completed in January, the space is drawing a lot of interest, according to Greg Cipa, vice president of business development for Gabriel Building Group, which has offices in Ocean City and Philadelphia.

“Honestly, I know there’s a lot of office space out there, but I’ve had numerous calls and a lot of showings,” Cipa said Wednesday.

Oddly enough, even though Shore View Suites is six blocks from Shore Memorial Hospital, a little more than half the interest has been from nonmedical professions such as legal, accounting and a satellite office for a national corporation, he said.

Baehrle said Northfield’s doing just about as well, with 15 percent vacancy, and the commercial markets in Egg Harbor and Hamilton townships are doing better than the national market.

An increase in inventory in Galloway has been a challenge the past couple of years. But in the past six months, Vanguard has signed seven leases there covering 30,000 square feet, he said.

Paul Tilton thinks the future there is good.

His Toms River-based T&H Homes is building 5,800 square feet of office space at the corner of Pitney and Great Creek roads.

Tilton said his Atlantic Professional Park nearby on Jimmie Leeds Road has done well, and the new building on the corner of increasingly busy Pitney Road should work, too.

“I’m aware that there’s a lot of space available. We’re tuned into the market. I think we’ve got a good spot, but who knows with this economy?” Tilton said.

Baehrle said the flex/warehouse market has been more difficult due to weakness in the casino and construction industries. There is currently about 40,000 square feet available in Pleasantville and Egg Harbor Township.

But there has been a recent surge in interest and activity there as well, he said.

“There definitely seems to be a much more positive outlook with the likelihood that the Revel (casino hotel) project is going to receive its funding and the housing market is on the verge of a steady rebound,” Baehrle said.

“We feel there will be a substantial amount of the space consumed when these two signs turn to a green light.”

By KEVIN POST; Business Editor @ pressofatlanticcity.com