Brokers wonder when lending spigots will flow again
- December 1, 2008
by Paula C. Squires
By mid-summer, commercial real estate broker Mark Douglas was on track for a very good year. With another seven deals in the works, the Richmond broker expected to top his previous record. But by the first week in October, “The deals blew up,” recalls Douglas. “This would have been my biggest year ever if I could have gotten the deals closed.”
Douglas runs the office group for Thalhimer/Cushman & Wakefield, one of Virginia’s largest commercial real estate companies. His refrain is a familiar one across the state. In fact, 2008 may well be remembered as the year of The Big Squeeze. As financial markets tightened in the face of the country’s most serious financial crisis since the Great Depression, credit dried up and financing became as elusive as a winning lottery ticket.
Even projects already under way felt the pain. Several in Virginia, including The Marquis at Williamsburg, ran into problems. Construction stopped earlier this year on the 1.1 million-square-foot mixed-use project after contractors filed liens against developer Premier Properties. Premier defaulted on its loan,
and the primary lender, New-York based CIT, foreclosed on the property. It wants to salvage the project and has lined up a consultant to retool The Marquis.
Five big box stores were completed and are open, including a JCPenney, Target and Best Buy.
The government’s October surprise — a $700 billion emergency bailout for the financial sector designed to take on the worst debts from the subprime housing
debacle — is expected to boost liquidity in the markets. Yet, players in commercial real estate still are reporting financing hardships. Carol Honigberg, a
partner at Reed Smith who heads up the Real Estate Group for the law firm’s Washington and Virginia Region, shared a recent example.
The head of one of the major title insurance agencies in Northern Virginia told her that a lender pulled out of a deal last month for a fully completed
office building that was 92 percent leased. One of the tenants, though not a major one, was Yahoo. “The day that Yahoo announced that it was cutting 10
percent of its work force, the lender pulled back and refused to lend at all,” says Honigberg.
Ultimately, the lender agreed to close the loan but only after requiring more upfront in equity and going with a smaller loan amount. “That’s perhaps
somewhat of an extreme example,” adds Honigberg, “but there have been many lenders that have pulled commitments entirely as the market got worse and the
balance sheets of banks got shakier.”
Plus, lenders are demanding lower loan-to-value ratios for commercial projects. These days, some lenders won’t lend more than 50 percent of the value of a
building, notes Honigberg, a big drop from the 70 to 80 percent ratios granted just a few years ago.
In a nutshell, “The rules of the game clearly changed during 2008.” Honigberg, who has worked in commercial real estate for three decades, explains: “There
was a significant slowdown, a significant change in underwriting standards … and that made it very challenging for both developers and institutional
investors to have a good feel for what the market really was at any given point in time and to get things done.”
Still, the news isn’t all bad. With few new buildings delivering in 2008, many tenants renewed leases early in a bid to lock in favorable terms and avoid
costly relocation costs. “The majority of the deals were renewals in 2008 in Northern Virginia,” says Paul Schweitzer, executive vice president and
co-branch manager for the McLean office of Studley. The firm represents tenants and manages the real estate portfolios for national corporations, including
General Dynamics and SRA International.
Both tenants and landlords can benefit from early lease renewals. Landlords may agree to lower rents when tenants restructure deals and commit to a longer
term. While tenants enjoy reduced rent costs, landlords enjoy a reliable income stream.
Another bright spot? Attractive concession packages. Schweitzer says some landlords in the Reston/Herndon office market — a sector that delivered many new
buildings before the real estate slowdown — are offering tenants free rent for the first few months.
In other market sectors, where office space isn’t that plentiful, Studley saw rental rates rise in all three of Virginia’s major commercial real estate
markets: Northern Virginia, Richmond and Hampton Roads. “Inside the Beltway, in Arlington and Alexandria, vacancies were low and rents continued to rise,
but not as fast as years prior,” says Schweitzer. For instance, rates for Class A office space being re-let increased from the high $30s to the low $40s per
According to Studley’s most recent market reports, overall rental rates for the Norfolk/Hampton Roads office market rose slightly from last year’s rate of
$18.10 per square foot to $18.67, with Class A buildings renting for as much as $21.21. The vacancy rate dipped slightly to 9.7 percent compared with 9.9
percent in 2007.
Metropolitan Richmond also saw a slight bump in overall rental rates to $18.62 per square foot, compared with last year’s average rate of $18.23. The rate
for Class A property was $21.38. Vacancies ticked up to 11.1 percent, higher than last year’s 9.9 percent.
While other real estate companies saw transaction volume drop in 2008, Studley’s tenant-driven business went up, although Schweitzer wouldn’t disclose by how
much. “The beautiful thing about commercial real estate is that leases expire.”
The year 2008 also brought change to Virginia’s commercial real estate landscape. GVA Advantis, a company that competes in all of the state’s major markets,
moved its headquarters from Atlanta to Washington and came under new leadership. Serving as chairman of the board is Jeffrey T. Neal, co-founder and previous
principal of Monument Realty, a Washington-based real estate development company. Neal plans to implement a new vision for the company, beefing up
construction management and focusing on client-driven development.
While it’s tougher to get deals done in the uncertain economic environment, Neal remains optimistic about 2009. “There’s still a lot of money waiting on the
sidelines, just waiting for the right time to buy.”