Tuesday, June 2, 2009

Why There Are Very Few CRE Sales

According to Sam Zell, the lack of CRE sales is a result of a combination of falling values and low interest rates. An excerpt of a post from Todd Sullivan’s Valueplays (reporting on a Bloomberg interview with Zell):

“Well, there’s been a lot of speculation and a lot of journalists have written about the impending demise of commercial real estate,” he said. “First of all, I think that the fact that interest rates are as low as they are means that even if people are under water in commercial real estate, they still can carry it. And if you’re under water and you can carry it, the last thing you’re going to do is sell it, because you don’t get anything.”
“So therefore, that’s why we have no transactions,” he said. “And I think it’s going to take two or three years before we start seeing that happen.”

This does not hold true, obviously, if the CRE is not generating income (i.e., land, condos, new construction with no leasing). As you would expect, it’s these types of assets which are experiencing foreclosures, note sales, etc. For the rest, I agree with Zell that we’re looking at a prolonged reset to normal transaction volume.