Home > Uncategorized > Office and Healthcare Investment Update – Jan 2011

Office and Healthcare Investment Update – Jan 2011

Houston’s office and healthcare properties investment market ended 2010 by doubting transaction volume over 2009.
There are numerous reasons to expect 2011 to continue with that trend.

Recent History
As everyone watched the value of properties nose-dive in 2008 and 2009, no buyer wanted to purchase a property only to see it lose more value.
Setters were slow to accept the reality of the loss of value in their properties.
As property owners dealt with increased pressures like loss of tenants, heavy mortgages, smaller income, and loan maturity dates, many produced appraisals from 2007 thinking that the 10-30% discount would convince a buyer of good value.
But even if a buyer wanted to purchase, no lender would or even could make a loan on a moving target.
 

Foreclosed/Distressed
Although Houston has seen some distressed activity, it is far less than the level in most other markets.
Foreclosed and distressed properties are expected to slowly become more available for the next few years; but lenders are being encouraged to workout problems or delay action with borrowers when possible.
Strong owners are finding ways to refinance and move their loans or reduce the principal amount.
Banks and servicers will demonstrate far more activity in note-sales, particularly when it comes to properties of weaker owners.
The notes will be sold to other investors who would be willing to go through the foreclosure process if necessary.
Most properties on the market will be those that were owned by weaker landlords.
Note sales will be characterized by portfolios of small balance loans in an effort to gain more efficiency and larger “loan-to-own” type transactions.

Buying Signs
Buyers, flush with cash, are anxious to place funds.
Many now believe they can read the office market well enough to purchase buildings again.
Although leasing fundamentals remain soft, core office and healthcare properties in prime locations have emerged as the preferred investment choice.
Positive signs include sellers and buyers closing the gap on their opinions of value.
The most notable deal last year involved Brookfield Properties Corp. acquiring Heritage Plaza in Houston’s downtown for about $325 million or about $270 per square foot from Goddard Investment Group.
This deal marks the second highest price ever paid for an office building in the Houston market.
 

Cash Buyers
Since little investment money was spent in 2009 and many in moved money from stocks to some type of savings or other investment vehicles such as REITs, there is a tremendous amount of cash waiting to be invested in the real estate market, currently viewed as a lower-risk investment than the stock market.
In 2010, cash buyers were plentiful, especially healthcare property investors; and this year, it is not unusual for us to receive several calls per week from cash buyers with good track records asking us to find properties for them to purchase.
For many investment groups, they must place the money that they have raised within a specified and somewhat short period of time or return it to investors.

Lender Activity
We predict Houston’s investment market will see an uptick in transaction volume with continued resurgence of lender activities and allocations for new loans, and interest rats at or near all-time lows.
The whispers of CMBS emergence in early 2010 resulted in roughly $10 billion of CMBS issuance nationally by year’s end.
That trend will continue in 2011 with projected volume in the $40 billion range.
Overall, we expect $1 50 billion of available debt capital from Life Companies, the Agencies and CMBS.
It is too early to determine whether banks will be a major factor as lenders in 2011.
 

Interest Rates
The stream of acceptable transactions will widen even as interest rates continue to creep up.
Bloomberg surveys 60+ economists to get their views on where interest rates are heading over the next 18 months; and they predict rates on average to increase only modest amounts.
(For the actual results of the survey, please email us.)

Sellers and Buyers
European closed-end funds that invested in ’02-’04 will target liquidation over the next several years.
The timing of their acquisitions allows them to provide an equity return even though prices have deteriorated.
Public-non-traded REITs will be the most aggressive buyers for the foreseeable future, competing for both core assets in core markets and Class A product in secondary markets as they seek to balance overall yield.
As debt resurges, individual investors will again become highly active.
The demographic momentum that drove their activity over the last decade has not changed; baby-boomers still need cash-flow and have few alternatives.
The result? More capital into REITs and more capital driving into small apartment, retail, office and industrial assets.

 

To Summarize:
Values have stabilized; cap rates have declined and continue to do so; cash is stockpiled; financing is available and investors are teed up.
There is optimism in the air.
Maybe not the “perfect storm” but lets hope for a good strong ocean breeze that keeps the wind in our sails.
Sellers, if you want to sell and can accept fair, actual income-based pricing, now is a very good time to put your properties on the market.

From the CCIM Gulf Coast Chapter, 2011 Forecast competition

By Henry Hagendorf, CCIM, LEED AP

and  Beth Young, CCIM, LEED AP

Vice Presidents, Investment Sales  – Grubb & Ellis

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Categories: Uncategorized
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