As with other New Jersey businesses, commercial real estate companies are watching and waiting to see what will happen with the economy. So too are the capital markets that provide debt through bank loans to purchase real estate and equity investors who are looking to invest funds in buildings in exchange for an ownership interest.
Banks are still hesitant to lend money and it will take at least another year for capital markets to loosen. And although financing is still available for strong assets, even these loans are not as large, and the owner must put in more equity. The increase in equity counterbalances the increased risk for the bank in a market where many borrowers may be overleveraged.
Another issue facing the industry is that demand for commercial real estate, which is in part a response to the availability of loans, bids up and down the value of buildings. Prior to the recession, ease of access to financing inflated real estate values, but as money tightened, demand has gone down and the value of real estate has diminished considerably.
The real estate industry is not only waiting for freer money on the debt side. It also needs to see what will happen with commercial mortgage-backed securities, says #b#Joseph Taylor#/b#, president and CEO of the Matrix Development Group in Robbinsville. These securities are the commercial real estate equivalent of residential loans that went bad and signaled the start of the economy’s current downward plunge.
Commercial loans were similarly sliced up and sold to Wall Street portfolios, and now many of those loans are maturing as commercial real estate values have dropped significantly. “We are waiting to see how banks and government will handle distress in commercial mortgage markets,” says Taylor.
Taylor will be part of a panel on “Real Estate in New Jersey: Capital Markets and Beyond,” on Thursday, March 11, at 8 a.m., at a breakfast meeting of ICREW NJ at the Woodbridge Hilton. Other panelists include #b#Andrew Merin#/b#, vice chairman of Cushman & Wakefield; #b#Kevin Welsh#/b#, senior vice president of CB Richard Ellis; and #b#David Welsh#/b#, managing principal of Normandy Real Estate Partners. Cost: $75.00. For more information, call 609-585-6871.
Taylor offered several observations on issues facing the commercial real estate market in New Jersey:
#b#Loans coming due in a depressed market#/b#. Much of the debt placed on commercial loans is in the three or five-year time frame. As these come due, banks must decide whether to continue financing them, and their decisions will determine how property owners proceed.
“Sooner or later banks and owners have to either sell properties so that the banks can get paid off, or find a way to extend loans to when values will come back and support loan amounts,” says Taylor. “Or banks will have to take discounts on mortgages, as they did on the residential side, and investors will have to put more equity into transactions.”
#b#Valuation of properties#/b#. As banks make new loans, they are protecting themselves by requiring a higher equity investment in relationship to the debt they are supplying. Whereas the debt-equity was 80/20 in the stronger market, it is now more like 65/35, whereby the borrower has to put down 35 percent of the asset’s value.
#b#Demand by asset type#/b#. Market conditions vary based on asset type — retail, office, or industrial. In the north of the state, the market for offices is likely to languish in current conditions, with not much new leasing.
“The office market in northern New Jersey is already overbuilt, and since not lot of job growth is coming, there is not a lot of reason for companies to take more office space,” says Taylor. Because demand on office space is not great, he says, companies will have a larger supply to choose from and will get it at a lower rent, hence the value of buildings will be much less.
Apartments, on the other hand, might do well. “There is always a demand for housing,” says Taylor, “and those who can’t buy will probably want to rent.” Another characteristic of apartments is that they are resistant to the massive fluctuations in vacancies and occupancies that office space is subject to.
“They don’t go empty all of a sudden the way office buildings do,” says Taylor.
Both retail space and the industrial real estate in New Jersey that supports retail flows by storing consumer goods that come into the ports are tied more directly to consumer spending habits than job creation.
Demand by region. “A lot of real estate values are driven by what happens in New York City,” explains Taylor. As a result, demand is stronger in areas like Hoboken, Jersey City, Fort Lee, and Hudson because they are offshoots of New York. “They are less expensive than working or living in New York and have the advantage of being right next door,” says Taylor.
Philadelphia has a much more modest effect, and on southern New Jersey only, whereas New York can affect the state as a whole. “When New York has a weak office market, New Jersey has much weaker office market,” says Taylor.
Taylor graduated from Bowdoin College in 1979 with a bachelors in English and history. His father was in investment banking and his mother raised Taylor and his five siblings. When he was looking for his first job, he sent resumes to a variety of industries, including banking and real estate, which were big at the time. He landed a job with Tishman Management and Leasing in New York City, where he worked in managing and leasing office buildings.
Thinking that real estate development opportunities in New Jersey were exciting, he left Tishman and helped form Matrix Development Group in 1981 at age 24, with a single investment in New Jersey-CenterPoint at Exit 8A, an 1800-acre mix of commercial, industrial, and residential properties. Matrix was formed mainly by Randall Hack, founder of several capital investment firms in Princeton, including Capstone Capital on Province Line Road, and Nassau Capital Advisors on Vandeventer Street, which manages a portfolio of investments in private companies on behalf of Princeton University’s endowment. From 1979 to 1988, Hack served as president and CEO of Matrix.
Ultimately the state of capital markets in New Jersey depends on the economic realities of employment and consumer spending and upon how problems on the debt side are resolved over the next 6 to 10 months. “Until that is clear,” says Taylor, “a lot of equity capital available for real estate will sit on the side lines and be patient.”