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Real Estate Market Can’t be Looking Back

Recovery Won’t Lead to Peaks as in 2007

By Jonathan D. Epstein

March 2, 201

The commercial real estate market is starting to come back — slowly but surely — but it’s not likely to reach the unrealistic peaks of 2007 ever again, a national property expert told a crowd of Buffalo-area property-and economic- development officials Tuesday.

Just over two years after the real estate markets “fell off a cliff” during the financial crisis, investors, developers and lenders are regaining their taste for commercial properties, said Dean Schwanke, a senior vice president with the Urban Land Institute in Washington, D. C.

Lenders and other financiers are coming out of their shells with strengthened balance sheets and at least a willingness to do deals again, he said.

“We are coming off from the bottom. We have more buying opportunities,” said Schwanke, who is also managing director of the organization’s Capital Markets Institute.

And there’s plenty of equity capital available for developers and big investors, such as insurance companies and pension funds, with the best opportunities found in the increasing demand for apartment buildings.

“The demographics are fueling the apartment sector,” he said. “People are no longer buying homes. They’re renting.”

However, while conditions are im-

proving from losses of 30 to 50 percent, that doesn’t mean transaction levels will return to the peak, Schwanke said. “Think more about 2003 than 2007. That’s the new normal,” he said. “If we can get back there, that would be great.”

Western New York has been protected from the worst of the national real estate crisis. Since the region never experienced a real estate boom, it also never went bust. So the problem of banks getting stuck with distressed properties or the potential for consolidation of developers isn’t an issue in this region.

“Our market is somewhat of an aberration,” said Carl J. Montante Sr., founder of Uniland Development Co., who spoke as part of a panel discussion after Schwanke’s remarks. “Our development community has always been far more conservative than the rest of the country, and the risk-taking is far less than in other parts of the country. . . . Do I envy the vibrancy of other communities? Absolutely. But some of that vibrancy leads to excess.”

Schwanke and the panel, which also included Mark J. Czarnecki, president of M&T Bank Corp., and Thomas A. Kucharski, president of Buffalo Niagara Enterprise, spoke during a special Urban Land Institute program in the Burchfield Penney Art Center to present the ULI’s 32nd annual “Emerging Trends in Real Estate” report.

Developed in conjunction with accounting and consulting firm PriceWaterhouseCoopers, the report is based on surveys and interviews with 875 industry leaders nationwide in August and September, and is designed to both reveal current attitudes and provide a forecast.

Schwanke said real estate professionals are still concerned about issues such as job growth, refinancing, vacancy rates, deleveraging, income and wage changes, interest rates and tax policies. So one option is to just sit back and wait. “It’s siesta time. Don’t do anything for a year or two,” he said.

Property buyers include both public and private real estate investment trusts, private local investors, private equity or hedge funds, cross-border investors and institutional or pension funds. “There’s no shortage of equity capital,” Schwanke said. “We have a lot of pension funds and insurance companies investing in trophy assets.”

But that’s not the case with lesser Class B or C properties, especially those facing massive balloon payments on maturing loans.

“If you have a vacant property or anything with a problem, it’s not easy to refinance or sell,” Schwanke said, adding that many “will probably be foreclosed on.”

Nationally, the ULI report found that coastal markets tended to do better with investors than inland areas, with cities such as Washington, New York, San Francisco, Seattle, Los Angeles and San Diego being among the best performing markets. By contrast, the upper Midwest is struggling.

By property type, apartments topped the list in terms of demand, followed by industrial and warehouse properties, with hotels, office space and retail lagging behind. Moderateincome apartments are more attractive for investors than high-income, and downtown offices are better than suburban offices. Hotels are “bouncing back” with better occupancy rates, but the retail sector faces too much vacant space, with more being built.

jepstein@buffnews.comnull