Posted by: BayAreaComRE | May 3, 2010

Bubble in the Capital Markets Drives Up Sale Prices

According to Real Capital Analytics, San Francisco has a total of 202 distressed assets worth $2.16 billion, and $385.9 million of that is tied up in 19 office properties. Moody’s CPPI Index is down 2.6% as of February 2010. As far as the mortgage industry, Oakland, Calif.-based Foresight Analytics, a unit of Trepp LLC, summarizes the latest figures.  “Although final figures for the first quarter won’t be available until late May, early estimates show that commercial mortgage delinquency rates rose to 5.5%, up from 5.1% in the fourth quarter. Early 1Q Estimates: Bank Commercial Mortgage Delinquencies Rise (via NREI Online).

So where are all the distressed assets on the market? “Buyers have also been clamoring for distressed situations, but so far that demand has largely been denied — the percentage of distressed office sales peaked in Q3’09 and has declined since to less than 5% by volume in Q1.” RCA. There is a bubble forming in the capital markets due to the dearth of supply, but a sudden influx of commercial properties could swiftly meet this demand. On the surface, everything seems to be falling into place for a large sell-off, a flurry of distressed properties hitting the market, but nothing has happened of the sort.

Robert Knackel writes, “Today’s massive spreads are allowing the banking industry to recapitalize itself, which was, after all, the Fed’s intention. Tremendous profits are being generated which can be used to write down bad loans incrementally. From the bank’s perspective, they are able to wait, make large quarterly profits, write-down bad loans and wait until the write-downs reduce book value close to market value. Once this occurs, distressed assets can be disposed of without incurring losses. For this reason the distressed asset flow has not been nearly what was anticipated.” Distressed Asset Update: Here They Come.

Arnold Schwarzenegger’s office garnered considerable interest for their large 7 building portfolio put on the market this year.  The offers were expected to teeter around $1-1.5 billion but several offers eclipsed $2 billion last week. While this is far from closing, it is a perfect example of the pent-up demand and lack of supply to feed it. See our coverage, State Receives Offers in Excess of $2 Billion for Office Properties.

Despite the green shoots in start-ups, social media/gaming and green tech, San Francisco will see depressed rates and greater landlord concessions in the quarters to come with the plethora of shadow space coming to the market and more consolidations with large institutions. Unemployment increased to double digits this last quarter in San Francisco’s MSA to 11% and inched up to 12.6% statewide. With all the rent decreases and high vacancies, building prices should be lowering and cap rates ostensibly should be rising, similarly to the national averages. But that is not the case in the capital markets.

“The year is off to a strong start with Q1 office transactions posting healthy gains in volume and sharp declines in cap rates. Sales of significant office properties reached almost $5.1 billion in the first quarter, marking not only a 37% year-over-year gain from Q1’09, but also the first quarterly year-over-year gain achieved since Q3’07, and though the dollar volume growth was more impressive than the growth in the number of assets traded, both were positive. Suburban asset sales totaled $3.2 billion compared to $1.8 billion in CBD transactions. – RC Analytics”

Our extensive coverage on the bottom of the market brings us to the same conclusion. We have determined for the time being that it is a great time to be a tenant and seller, not so much a buyer.

That’s just what we think. Tell us what you think. We are publishing a poll on our blog to gauge the opinions of you, our reader.


  1. […] reinforces our previous story Bubble in the Capital Markets Drives Up Sales Prices. Additionally, the US, and in particular major US markets like San Francisco, New York, Washington […]

  2. Awesome read. I just passed this onto a friend who was doing some research on that. He just bought me lunch because I found it for him! Therefore let me rephrase: Thank you for lunch!

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