What a Week...And it's Wednesday

During the past week we've had a whole year's worth of financial markets drama including the bankruptcy of Lehman Brothers, Bank of America's acquisition of Merrill Lynch, the last-second government bailout of AIG, and the subsequent drop in stock market values worldwide.

For the commercial real estate industry, this week should serve as a reality check for those who have refused to accept that property values must come down as the general economy continues to weaken. Any property owner with a Lehman Brothers mortgage, AIG property insurance, or with Lehman, Merrill, or AIG as tenants should be feeling at least a tiny bit nervous. On a more market-wide basis a huge amount of investor capital has been wiped out by the decline in the stock markets, and the capital that is left will be even more cautious about entering the real estate markets. This will mean even stricter underwriting for all types of investments going forward, and a continuing denominator effect for institutional real estate investors who are limited in the percent of their portfolio allocated to commercial real estate. We have already begun to see more onerous terms from some of the lenders we work with even while things are still shaking out.

The good news is that the disruption in the markets should finally force the sale of a significant number of assets and set new pricing levels that make sense in today's markets. Once investors figure out where prices are, under the new reality, transaction volume should increase going forward even if the dollar amount of transactions declines alongside pricing. We've already seen one 'distressed' asset sale due to Lehman's bankruptcy with Barclays' agreeing to buy Lehman's NYC headquarters along with two New Jersey properties for $1.5B.

As is always the case in a downturn there are certainly opportunities in the current turmoil, and finding them should provide for an interesting market going forward.

Llenrock Group