On the surface, it’s a bad combination: $1.4 trillion in commercial real estate debt maturing through 2010, limited capital and 7 million job losses since the start of the recession. Despite the sour-tasting mixture, signs of liquidity returning to the market as well as stellar buying opportunities may make next year a bit more palatable for investors.
“Although troubling times are ahead for many investors, lifetime opportunities are forming for the real estate cycle players with cash in hand,” according to the most recent PricewaterhouseCoopers Korpacz Real Estate Investor Survey, which polls major institutional equity investors who invest primarily in institutional-grade property. Investors who are patient, but also daring and selective will acquire high quality assets in markets such as Boston, Washington, D.C., San Francisco, New York and Austin.
Compared with the drought of debt in commercial real estate over the past 12 months, there is evidence that capital will be available to refinance 2010 maturities. For instance, Inland American Real Estate Trust, a real estate investment trust based in Oak Brook, Ill., recently announced that it has refinanced or retired $684 million of its 2010 debt maturities. The remaining $90 million, slated to mature in the second half of the year, is currently being marketed.
“This achievement is indicative of the high quality of Inland American’s real estate assets, and the strong interest of lenders in our portfolio,” said Lori Foust, chief financial officer with Inland American, in a statement. “With approximately $500 million in available cash on hand, we obviously have much more liquidity than we need to retire the remaining $90 million with or without financing.”
Equity REITs raise nearly $10 billion
Since March, the 14 Fitch-rated equity REITs have raised $8.3 billion through the unsecured debt market. An additional $3.4 billion has been raised through bond tender offers and issued common equity, bringing the total to $9.8 billion.
However, whether or not REIT managers wish to continue deleveraging in 2010 remains to be seen, according to the agency. Additional stock offerings would hit common shareholders with a “double dose” of stock dilution and per-share earnings growth.
Liquidity also will play a key role in the asset sales that do come to market, Fitch reports. Properties that come to market will likely reflect commercial real estate companies seeking to delever their balance sheets. The aim is to improve cash flow rather than cleaning up portfolios by disposing of lower-quality assets.
Although the ratings agency forecasts greater liquidity and access to capital in 2010, Fitch still maintains a negative outlook for the U.S. equity REIT sector. That is primarily because the firm’s property-type outlooks are either “negative” or “stable” and are likely to remain so until mid-2010 at least.
Broken down by property sector, Fitch expects that multifamily REITs will continue to be negatively affected by the record-setting unemployment rate, now above 10%, the highest rate in 20 years. In addition, vacancy rates will be pressured by greater housing affordability and first-time owner tax credits as well as an expected decline in household formation. The 2010 outlook for multifamily is “negative.”
Retail REITs also received a negative outlook for the coming year as unemployment continues to weaken consumer demand, pressuring retailers and retail REITs’ ability to maintain occupancy and cash flow.
In contrast, Fitch’s outlook for office REITs are “stable” for 2010, an improvement from mid 2009. Improved balance sheets are projected to offset some of the deterioration in property fundamentals. “Moreover,” Fitch reports, “rated REITs with strong liquidity positions may be able to seize revenue-enhancing acquisition opportunities.”