Property Sales Plunged 85% in First Quarter

The pace of commercial-property sales in the first quarter was every bit as dismal as it seemed.

A paltry $3.7 billion of large properties changed hands nationwide from January through March, accelerating the downturn in volume that started in the second half of 2007. The total fell from the already-depressed levels of $12 billion in the fourth quarter and $25.2 billion in the year-earlier period, according to Real Estate Alert's Deal Database (see list of largest deals on Page 5).

The paucity of deals reinforced widespread predictions that 2009 will be a lost year. Brokerages report that offering pipelines are all but dry. Spooked by falling price expectations, many prospective sellers have either pulled listings or decided not to proceed with offerings. While there could be a spike by yearend if sales of distressed properties pick up, even that is expected to be minimal.

"We're looking at the middle of next year before we're in any kind of upswing," said the acquisitions chief of one real estate fund.

Overall, sales of office, retail, multi-family, hotel and industrial properties were down 85% from a year ago and 94% from $58.9 billion in the first quarter of 2007, when the market was peaking, according to the Deal Database, which tracks sales of $25 million or more.

Office properties accounted for almost two-thirds of the total, or $2.3 billion. Retail sales ranked second, at $645.3 million, followed by hotel ($431.7 million), multi-family ($229.9 million) and industrial ($43 million). The numbers are likely to rise slightly as additional deals come to light, but not change materially.

In addition to the deadly combination of a weak economy and tight credit, the sales market is being dragged down by uncertainty about how the market will absorb the anticipated flood of distressed loans and properties. That overhang has made both buyers and sellers wary. While sellers are still largely holding the line against dumping properties at fire-sale prices, buyers for the most part seem content to wait for distressed properties to fall into foreclosure.

One acquisitions executive at a real estate fund said he wasn't tempted to buy now, even though capitalization rates have already risen generally to the 7-9% range from 4-6% at the market peak. "Why would you buy properties now, when you might be able to buy properties from bankrupt REITs at 11% caps?" he said. In an indication of how far he expects prices to fall, the executive said his bids on auctioned loans are based on achieving a 20% unleveraged return.

The supply of distressed offerings so far has been limited to a few bank-owned assets and a smattering of FDIC loan auctions. Market players say lenders have dragged their feet for more than a year, putting off foreclosures and workouts in the hope that government bailout programs might soften the blow. Even though the U.S. Treasury Department has now announced its program for spurring the sale of troubled assets, it will still be months before the effort gains any momentum.

Until then, investors and brokers said, the shadow inventory of distressed assets will clog the market, partly because of the difficulty of lining up debt financing. "How can you write a loan if you don't know what the collateral is worth?" said the president of one national investment-sales brokerage.

The few nondistressed sellers that do have properties up for sale are largely conducting quiet marketing campaigns in order to avoid being branded as forced sellers. Indeed, even though they are starved for assignments, investment-sales brokers say they're advising clients to obey two rules: Don't sell unless you absolutely must; and if you have to sell, do it now, before prices drop further.

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