A Wall Street investment bank pulled its financing in the eleventh hour on Santa Monica-based Kennedy-Wilson's planned purchase of a Los Angeles office building, according to Nick Kanieff, president of the firm's commercial property division. The bank later returned, saying it would offer funding if Kennedy-Wilson would put in more equity--$7 million instead of $1 million--and pay a higher interest rate. But those terms put the high-rise out of reach, Kanieff says, explaining that it would have been impossible for him to make a decent return on the project, and so he bowed out.
Nationwide, deals have been falling apart, brokers say, as lenders either refuse to make loans or try to renegotiate them under more stringent terms. And so many would-be sellers who had hoped to cash in at what they thought was the peak of the market are finding they're out of luck.
"I've lost a few deals, and right now I'm trying to get one or two back together," says Richard Plummer of brokerage Cushman & Wakefield in Los Angeles. "These are very challenging times."
Some real estate investors, unwilling to play by tougher lending rules, have decided to sit tight for a while, waiting to see if such big investment banks as Nomura Holdings America, Lehman Bros. and Credit Suisse First Boston might begin making more commercial mortgage loans next year.
According to Eric Hamermesh, a vice president with Credit Suisse First Boston in Los Angeles, most conduit lenders are trying to figure out how they can make this securitized lending profitable again.
The only investors still actively looking to buy commercial real estate, analysts say, are firms with other sources of capital, such as insurance firms and pension funds, or the kinds of wealthy individuals who make up Rubin Pachulski.
"Cash is king," Rubin says. "We are using that as an opportunity buy properties [left by] people that did get caught and couldn't close."
Increasingly, he says, there are more bargains to be had, as the tight lending environment has narrowed the number of buyers in the market.
Across the country, buildings are selling for anywhere from 5% to 15% less than sellers were originally asking, according to market observers. And here in Southern California, prices are just starting to inch down and should fall further in the next couple of months, brokers say.
Rubin says he thinks the current credit environment may force investors to consider buildings for their cash flow rather than for their potential. In other words, he says, lenders won't extend credit on the theory that a bigger fool will come along to buy the property later.
Indeed, most people--even those buying and building real estate--think the current lending crackdown will be healthy for the market, discouraging foolish investment and unnecessary development, which in turn keeps occupancy and rents higher for landlords of existing properties.
"It's the markets at their best, correcting themselves when there is an overabundance of capital in the marketplace," Kanieff says.