Monday, 21 January 2013

Commercial real estate hits five-year sales peak

Dollar volume of deals up 73% in 2012; 'new normal' may be in place

Sales of commercial properties in Northeast Ohio soared nearly 73% to $702 million in 2012, the highest level since such sales reached the stratospheric height of $1.3 billion in 2007 — the last year before the financial crisis struck and the nation entered the recession.

That's the finding of a survey of sales of income-generating commercial properties by Alec Pacella, a vice president of the NAI Daus real estate brokerage who has collected such data for years.

Last year's dollar volume of apartment, industrial, office and shopping center properties that sold at prices of more than $1 million was well ahead of the $405 million recorded in 2011, according to Mr. Pacella's report. The pace of sales in 2012 surpassed that of 2008, when dollar volume hit $696 million as the financial crisis struck that October and lending dried up almost overnight.

“This is the new normal, I guess,” Mr. Pacella said. “I don't know if we will ever get back to the 2007 sales figures. It was so frothy it bordered on an unhealthy situation.”

While the dollar volume of sales may be improving, their composition is “anything but normal because a lot of distressed sales produced that number,” Mr. Pacella said.

For example, the $14 million purchase of Parmatown Mall and Shopping Center by an affiliate of Phillips Edison Co. of Cincinnati was a court-approved disposition. The deal occurred after Parmatown's longtime owner — a partnership formed by RMS Investments, which is led by the Ratner, Miller and Shafran families behind Forest City Enterprises Inc. — put the 1-million-square-foot retail property into receivership.

Another high-profile sale was the purchase of 57 residential units at Avenue Tower, 1211 St. Clair Ave. in downtown Cleveland, for $6.8 million by an investor group. The sale to a partnership led by investors Tim Zaremba of Zaremba Management Co. in Fairview Park, construction contractor Tony Panzica and developer Fred Geis capped two years of bitter litigation among lenders, contractors and developer Nathan Zaremba. The project became largely a rental complex rather than a much-ballyhooed downtown condo venture.

In a dramatic sign of how activity surged, one deal — the sale of SouthPark Mall in Strongsville by Westfield Cos. to an affiliate of Boston-based Starwood Capital — exceeded the total volume of sales in 2009. As part of a portfolio purchase by Starwood, SouthPark traded for $262 million last June. By contrast, sales in 2009 totaled almost $191 million in 41 transactions, according to Mr. Pacella's report.

In an analysis of what types of properties traded, retail properties accounted for 59% of last year's sales by dollar volume. Apartments — the darling of investors due to surging occupancy as would-be homeowners remain renters — accounted for 16%.

Money returns to the market
Mr. Pacella is not alone in seeing the distressed-sale aspect of so many of the 2012 deals.

David Browning, managing director of the Cleveland office of the CBRE Group Inc. real estate brokerage, described many of the transactions as “funny” deals because they were sales by lenders or directed by lenders to work out problem loans rather than arms-length transactions.

However, Mr. Browning also sees an improving market behind the numbers.

“Last year we saw a return to a normalized rate of transactions on the sales side,” he said. “There clearly is a lot of capital coming into the real estate market again. There is still a skittishness and fragility to transactions that makes it difficult. However, everyone in our industry is happier than in 2009 and 2010.”

Mr. Pacella expects more of the same in the investment market in 2013.

“Liquidity continues to get better,” he said. “More buyers are coming out of the woodwork. There is more optimism. This year will be another step toward normalcy.”

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