Even as a small spate of commercial real estate transactions closed in May, some beleaguered property owners appear to be making loan payments amid continued low interest rates ”“ though the threat of rate increases and a new tax on carried interest could spur additional deals.
In the past month, Urstadt Biddle Properties Inc. spent $22.5 million to snap up the New Milford Shopping Plaza on Route 7, whose tenants include Walmart Stores Inc. and Stop & Shop Supermarkets. CB Richard Ellis, a commercial brokerage company with a Stamford office, announced a quartet of small building sales in several towns, and Interstate Battery Systems purchased a portion of the former Bodine Manufacturing facility in Bridgeport.
Starwood Property Trust Inc. indicated that with interest rates likely to remain low through the November elections, many commercial real estate borrowers have been able to keep up on their payments, but hinted that could change heading into 2011 after the elections, and as more loans secured at the height of the last business cycle come due.
Still, while the volume of commercial property defaults rose in the first quarter, it was at the slowest pace since the fourth quarter of 2008, according to New York City-based Real Capital Analytics.
Greenwich-based Starwood Property has invested some $900 million in distressed property assets since its initial public offering of stock last August. The company reported a $6.2 million profit in the quarter ending March 31.
“Borrowers are hoping that increasing asset values will close the substantial gap between current value, future value and asset value necessary to refinance their obligations,” said Barry Sternlicht, CEO of Starwood Property, in a prepared statement. “We are being patient.”
Mitchell Hersh, the CEO of Mack Cali Realty Corp. which owns several office buildings in Fairfield County, said the complexity of existing debt on the books is also making it difficult to swing deals.
“It”™s almost incredulous what you see in terms of capital ”˜stack”™ issues ”“ the layers of financing that was done in connection with asset acquisitions in the ”™05 to ”™07 timeframe,” Hersh said in a conference call this month with investment analyst. “Super mezzanine positions, the equity and then of course the senior debt positions ”“ almost all (are) underwater.
“The caution that needs to be undertaken is ”¦ to be very clear in the intrinsic value; and if that can be established, then to work through the capital stack issues to try to have everybody understand that something is better than nothing,” Hersh added. “In these different markets, it”™s remarkable how buoyant the investment and pricing levels got in some of these areas ”“ and some of the potential pit rolls as a result.”
Real estate owners are wary of a potential new pitfall, as Congress considers whether to tax so-called carried interest on real estate sales at regular income tax rates, rather than as capital gains. Real estate groups oppose the change.
Greenwich-based Urstadt Biddle, among the largest owners of suburban shopping malls in the tristate area with some 50 properties totaling 4.4 million square feet of space, made its New Milford deal after having previously noted the reluctance of property owners to sell at reduced prices, but added that could be changing.
“We are encouraged by the volume of acquisitions we have completed so far in fiscal 2010,” said Wing Biddle, president of Urstadt Biddle, in a prepared statement. “We continue to pursue additional opportunities in our core marketplace.”
