Estate and mortgageRealSource.net Executives Discuss 2010 and the Distressed Asset Marketplace
[Note: To follow is an excerpt of a radio show interview conducted by Peter L. Mosca, host of Income Property Investment Talk dot com, with the executive team at RealSource: Michael Anderson, CCIM; founder and co-owner, Nate Hanks, CCIM; co-owner, and Blaine Walker, President and 2010 Chairman of the Realtors Commercial Alliance. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/1213009.]
Mosca: Gentlemen there are positives and negatives to all aspects of our professional and personal lives. With about 37 or so hours left in 2009 most in the real estate industry are grateful it"s coming to an end. Defined by many as the worst year in history, the hurt was deep, widespread, and palpable. Mike, how do you feel about the pending demise of 2009?
Anderson: First of all Peter I wanted to say congratulations to you and Dean for an amazing year of radio broadcasts. I"ve looked back at what you guys have done in 2009 and I think that that"s been a bright spot for all of us in the real estate industry. As far as 2009, it has been a tough year in a lot of ways. The market was overheated. In Greenspan"s words, "irrational exuberance was prevalent throughout 2007 and 2008." Lending was a little bit too easy and what happened was the inevitable market correction. I remember being at an Urban Land Institute meeting in Miami in late 2006, and the first guy got up that was a major developer of condominium space in Miami, and said, "ladies and gentlemen it"s over and the reason is that it"s not for lack of product and it"s not for lack of buyers, but pure plain and simple it is that we can no longer at these inflated prices even with cheap money get people qualified. They price themselves out of the market." That"s what happened.
Hanks: As you look around the commercial real estate industry values have gone down at unheard of rates, incomes have shrunk at phenomenal rates, and yet I was talking to some people the other day that have been oblivious to the recession that we are in. One was a nurse at a hospital and another worked for Delta at the reservation center. In our industry -- the one that we live, breathe, and eat 24/7 -- it has been a tremendous shake down and probably one of the worst single years in history as far as values and personal incomes. When there is such a downturn, there is always an opportunity.
Walker: You have to go back before 2009 to the housing market and the unwise lending practices, when the thought was that everybody in the United States should be a homeowner. That"s a great thought but it"s not practical. There are those that are not ever going to own a home. There are those that will be renters and we had lending practices that allowed almost anybody to buy a home and what happened is rather than stimulating a lot of those that couldn"t buy homes it also stimulated the investment market. We had people buying homes with the anticipation that they were going to go up rapidly because of the rapid increase that did occur and a frenzy was created. That feeding frenzy caused the market to go out of line and with the low interest rate and easy accessibility of cash that caused prices to go crazy. There were investors coming in and flipping properties, buying it and seeing that five and 10 percent increase per month in some instances but on an annual basis a minimum of 15-to-30 percent with land going up higher than that. As a result, you could see the writing was on the wall. The affordability index was totally out of whack, nobody could buy, inventory was built in anticipation of what appeared to be a lot of demand but then the demand went away once the affordability index went out of whack. In 2009, we"ve been seeing the results of that.
Mosca: One of the biggest positives in "09 was the fact that there were some terrific investment opportunities especially in the distressed assets marketplace. Can you talk about that?
Anderson: The only time you get a chance to see a wholesale market develop in real estate is when you have government involvement. I"ve seen this happen in the "86 tax revision when we lost the savings and loan industry and all of those values got so deeply reset and lowered not only just below the 30 year trend line but substantially below the 30 year trend line where there was a chance to participate in real estate investment at a wholesale market. Although those are traumatic for the economy and for all of us and the loss of the capital market is definitely devastating what is wonderful about this is that you get a chance to buy real estate in some cases well below replacement costs. That"s an opportunity I"ve only seen it twice in my career. It seems like these cycles, these deep resetting cycles only happen about every 20 to 25 years. 2009 was one of those monumental years for that opportunity. Remember, you make your money when you buy the property, but there has to be a clear exit strategy. Clearly the winners were those who invested in distressed residential. Our experience is out of our portfolios that we acquired and we participated in and there was a rush for land that was most surprising of all because it didn"t have a capital market attached to it. There was no real liquidity to it but there was an opportunity to buy at very, very deep discounted prices.
Mosca: Did 2009 cause the real estate industry as a whole to go back to the basics?
Hanks: Back to the basics in my mind is economics. You have to find the right markets. Finding them will be the biggest challenge as we are coming out of this. Back to the basics is also about picking the right assets. It"s doing the right due diligence in order for you to be able to understand what"s going on with that asset and the potential for it and the potential downside for it.
Walker: Getting back to basics means getting back to wise lending practices. Unfortunately, as I indicated before, we got away from making sure that a person had a job, they had income, they had good credit and that they had some type of a down payment. Now we are coming back to those fundamentals in the housing market. We are starting to see lenders review the borrower to make sure that they can qualify for the loan. In the commercial end, we are seeing the fundamentals stand very strong. Market is obviously a part of that. People are looking at the marketplace and specific markets to see how they are doing. They are also looking at the property itself. What type of income is it producing, what"s the quality of the tenants, what type of leases do they have? How are the leases set up, are they staggered, what the net operating income is, and are the cap rates going up so that the property could justify and carry the mortgage rates?