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Investors hear some gloom, a glimmer of hope at ABA seminar

Tuesday, September 22, 2009 by Laurel Chesky

A group of real estate professionals painted a somewhat gloomy picture punctuated with a glimmer of hope for investors at a land development seminar on Friday.

 

The annual seminar, held at the downtown Omni Hotel by the Real Estate Law section of the Austin Bar Association, featured presentations on local transportation projects, affordable housing programs, water rights, credit markets and an overview on the state of local real estate markets. Attending the seminar were attorneys, investors and real estate professionals.

 

In a discussion on finance and credit markets, the panelists agreed that the Austin real estate market has not been as hard hit as other parts of the country, such as California and Florida. However, money for current and future development projects has dried up locally because banks that have lent heavily in down markets have pulled back on lending.

 

The credit crunch follows 10 years of “very little cash going into projects,” said panelist Brannin Prideaux, executive vice president of IBC Bank. Instead of the traditional ratio of 50-50 cash to debt for development projects, developers in the last decade were financing 80, 90 and 100 percent of projects, which led to some unwise projects. “A lot of people were in the market that probably shouldn’t have been in the market,” Prideaux said.

 

But the downturn spells good news for investors looking for deals, said panelist Sterling Silver of Comerica Bank. “For those developers and investors who are smart and have cash, there are an abundance of assets for sale and the interest rates are low.”

 

“There is money out there looking for deals,” said panelist Greg Hallman, a finance professor at the University of Texas.

 

All three panelists advised developers to look to regional and community banks without national exposure for financing in the future. However, lenders will likely return to more traditional 50 percent financing on real estate projects, they said.

 

“Cash is in, spec is out,” Prideaux said.

 

In an overview of local real estate markets, panelists said that office and industrial space and multi-family dwellings are currently in over supply, which has driven down rental income. Also, demand for raw land has dropped while retail space rents and single-family home prices are holding steady.

 

With a 14 percent vacancy rate and rents averaging at $43 per square foot, the office real estate market has held up well in Austin’s central business district, said panelist Chad Marsh of the Endeavor Real Estate Group. “It’s a landlord’s market, no ifs, and or buts,” he said.

 

However, office vacancies in the northwest and southwest area of town are up to 26 and 22 percent respectively, driving down rents and bringing new construction to a screeching halt, Marsh said. The Austin market has more than 10 million square feet of vacant office space, he said, which could take up to eight years to fill.

 

Industrial space vacancies have reached about 21 percent, the highest since the late 1980s, said panelist Scott Flack of Live Oak Gottesman, a local commercial real estate firm. “We basically have no demand to speak of,” he said.

 

Conversely, retail space has remained relatively healthy with a current occupancy rate of 90 percent, said panelist Parker Estes of the Weitzman Group, which developed the Triangle multi-use complex. However, a flat future is expected for new retail development. “We’re not going to be building new shopping centers for several years,” he said.

 

Job losses and a blizzard of new apartment construction have led to a decline in the value of multi-family dwellings, said Dick Obenhaus of the Apartment Group, a multi-family real estate brokerage firm. Apartment construction has sharply declined, with only 1,300 new units expected for 2010, compared to 8,000 new units in 2008 and 7,500 new units this year. Occupancy is expected to slip from 94 percent in 2007 to 86 percent next year, bringing with it a 9 percent decline in average rent.

 

“We’ve got 3.5 years of supply to absorb,” Obenhaus said. “Anyone who bought (multi-family dwellings) in 2005, 2006, 2007, their equity is gone and the property is probably not worth 100 percent of their debt today.” However, future demand is expected to reignite apartment construction by 2012, he said.

 

Meanwhile, single-family home builders are gobbling up cheap lots and planning to continue building next year, said Richard Maier with the homebuilder D. R Horton.

 

“Sales prices (of homes) are still holding, even though volume is dropping,” Maier said. Meanwhile, “We’re buying lots at 20-60 percent less than we did a year ago.”

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