by Andrew Johnson - Sept. 17, 2008 12:00 AM
The Arizona Republic
Sales of commercial properties in Phoenix and other big cities were sluggish prior to the recent shakeup on Wall Street.
Lehman Brothers' bankruptcy and Bank of America's plan to buy Merrill Lynch, among other developments, is just further evidence of how dramatically the commercial real-estate landscape has changed this year, local industry analysts say.
Sales of office towers, shopping centers, warehouses and apartment buildings in the Valley hit a standstill in summer 2007. A major cause was the virtual disappearance of commercial mortgage-backed securities - pools of loans on commercial real estate - as a fundraising vehicle.
Banks issued the securities to investors as a way to raise more money to lend to buyers of commercial properties. CMBS issuance slowed dramatically late last summer as financial institutions responded to the residential mortgage meltdown and overall nervousness on Wall Street.
The result has been less money available to finance the purchase of commercial real estate. Lenders also require property buyers to put more money down up front on deals.
In response, sales volume has fallen locally and nationally. For example, the amount of money spent to buy office properties in metro Phoenix reached $3.1 billion between August 2006 and July 2007, according to data provided by Cushman & Wakefield of Arizona Inc.
That number fell nearly 42 percent to $1.8 billion between August 2007 and July.
"All those creative Wall Street financing vehicles - many of them are imploding now, which means there's just less liquidity, and it ripples through the entire system," said Chris Toci, an executive director with Cushman & Wakefield of Arizona Inc. in Phoenix.
Toci has brokered some of the largest commercial building sales in the Valley, including the $93 million sale of one of the Hayden Ferry Lakeside office towers early this summer.
Lehman Brothers and Merrill Lynch both invested in commercial real-estate loans and properties. Both investment banks previously announced plans to spin off or sell some of these loans to other companies amid souring conditions in the commercial real-estate market.
Commercial real estate is considered a riskier investment today because of rising vacancy rates, lackluster rent growth and instability of tenants operating in housing-dependent industries.
Delinquency rates on commercial real-estate loans still are low, but they have risen in the last year. The delinquency rate of loans in CMBS pools reached 0.53 percent at the end of the second quarter, up from 0.31 percent a year ago, according to a September report from the Mortgage Bankers Association.
Those factors, plus varied property price expectations, have created an impasse between buyers and sellers.
Toci and other brokers say there are many cash buyers in the market looking for deals, but sellers aren't lowering their prices just yet.
"There is plenty of capital looking to buy real estate at the right price," said Craig Henig, managing director of CB Richard Ellis Inc.'s Phoenix office.
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