Eminent Domain Report

This is the question John G. Ellis, MAI addressed at the IRWA Chapter 1 Fall Seminar last Tuesday. Mr. Ellis divided his presentation into four distinct questions:

1. What is the current state of the market;
2. How did we get to where we are now;
3. What are the trends looking forward; and
4. Have we hit bottom yet?

The picture painted by Mr. Ellis [PDF] was befitting of the Halloween season, and in some cases was downright depressing. Most submarkets are demonstrating reduced sales volumes, lower rents, higher cap rates, and lower sale prices. Mr. Ellis demonstrated how a 1.25% increase in the overall capitalization rate combined with a minor decrease in rental values (e.g. $0.25 per square foot) could result in land values declining over 40% under a residual analysis. He also surmised that in many cases, land values are actually being hit even harder.

To further exacerbate matters, Mr. Ellis projects cumulative financing shortfalls for commercial properties of $629 billion resulting from loan maturities from 2009 through 2012. To put this in context, Mr. Ellis reminded the audience that the federal government’s original bailout on the front end of the economic meltdown totaled $700 billion, meaning the commercial-property crisis may require stimulus of a similar magnitude.

Fortunately, several government programs may provide assistance. The Term Asset-Backed Securities Lending Facility (TALF) may (1) provide reasonably priced senior debt to the market, (2) restart the commercial mortgage backed securities market, (3) facilitate fixed income capital back into the market, and (4) facilitate liquidity. Mr. Ellis also discussed a Public-Private Investment Program, and other government stimuli such as federal infrastructure spending and Small Business Administration (SBA) loans.

While many pundits are speculating that real estate values have stabilized, Mr. Ellis reports that based on current projections, values for commercial properties may not hit bottom for another two to three years. I think it’s fair to say that the thought of several more years of declining values is far scarier than any apparition we might see on Halloween.