Commercial Property Values

The panel speaking at today's Georgia CCIM Chapter monthly meeting agreed that the Fair Market Value of most commercial properties in the US has dropped by 30% in the last year.
10% of the drop is due to the decline in Net Operating Income (NOI) resulting from increased vacancies and tenant defaults. The other 20% is the result of increasing capitalization rates.
The increase in cap rates reflects a decrease in demand for commercial real estate along a perceived risk associated with acquiring commercial properties.

Observations on the Market

The next big crisis in real estate will involve credit and valuations of commercial real estate properties. Many commercial properties have loans with 3 to 5 year "call provisions". With a call provision, the lender has to be paid in full although most of the time the lender will adjust the interest rate and "roll the loan over". The problem is that many commercial properties, especially retail properties, have lost value in the last year. That coupled with the fact that many commercial lenders are afraid to lend to anyone means that otherwise economically viable properties may face foreclosure when their loans come due.
Because, the market has come to a standstill, commercial appraisers are having difficulty finding recent comparable sales to use in their appraisals. This coupled, with stricter underwriting standards by lenders (if they are lending at all), will create a perfect storm for the commercial real estate industry. It will also, as always, create lots of opportunities for those who have a stockpile of cash.

The Stimlus Package

It looks like that the House and Senate are close to an agreement on President Obama's proposed stimlus package. I have very mixed emotions about it's potential cost and whether or not it will be effctive. I do, however, feel very strongly the Housing Tax Credit proposal is very wothwhile. As of this posting, the amount of the tax credit is still up in the air.

The Tax Credit should have a positive effect, along with historically low mortgage interest rates, on the single family residential market. It should also have an positive effect on the condo market in Intown Atlanta that reportedly has an oversupply of about 5,000 units. Many of these projects depended on "first time" buyers. These buyers typically had very little cash to put down and many depended on lenders being willing to provide 100% financing. When that source of financing disappeared, the condo market crashed.
Developers that take advantage of the Historic Tax Credits or the Low Income Tax Credits have a mechanism whereby they can sell their credits at a discount and convert the credit to cash that can be used as equity in their project. If a condo purchaser is able to convert his or her tax credit to "cash" at a closing, then conceivably they could qualify for an FHA loan at 96.5% LTV or a 90% to 95% conventional loan. Reducing the inventory of unsold condo units will not have an immediate effect on the unemployment numbers. It would keep these unsold units from going back to lenders and help to stabilize the county's financial system. That would be well worth the cost of the tax credit!

Amtrak and the Beltline

Amtrak recently announced that it is considering using the right of way of the northeast segment of Atlanta's proposed Beltline to access the proposed intermodal station in Downtown Atlanta. Of all of the quadrants of the Beltline, the northeast quadrant is probably the most viable in terms of future development. Apparently, for Amtrak, it's the easiest path to get a passenger train downtown. Many individuals, businesses and governments pick the path of least resistance without much thought about the consequences of the decision or looking seriously at alternatives. A great local example is the MARTA rail line. Instead of building rail to population centers and places of employment, MARTA chose to build along existing railroad corridors and the biggest complaint the public has about the system is that it doesn't "go anywhere I need to go."

For years, passenger rail service to New Orleans and the Northeast used the tracks that roughly parallel Marietta Street northwest out of downtown to intersect the main north-south line near Inman Yards and the Atlanta Waterworks. My guess is only reason that Amtrak does not want to use this route is that they may be competing with Norfolk Southern's freight trains for access to the rail lines.

Amtrak needs to seriously look at this and other alternatives. Using the Beltline right of way would seriously damage it's chance for success. This would be a huge setback for the City and it's intown neighborhoods.