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San Diego Daily Transcript

November 19, 2009

Panel: RE investors can benefit in tough times

By THOR KAMBAN BIBERMAN, The Daily Transcript

The real estate economy has not been pretty -- but while obstacles are huge, there may be opportunities for investors willing to take a chance, according to a panel.

The real estate industry's present and future, in San Diego and beyond, was the topic of an Urban land Institute San Diego/Tijuana District Council session at Marina Village on Tuesday.

During the session it was noted how hotels and hotel real estate investment trusts have been hammered, but as noted in a PricewaterhouseCoopers/ULI report, with hotel prices going through the floor, this could be an excellent time to buy them.

The report said while the hotel market declined early in the recession, the asset class will also lead the way to recovery in the commercial real estate sector.

For the moment, hotel owners and operators have been forced to drop their room rates as consumers stay closer to home and investors are still waiting for the bottom of the market.

"There's pretty much no demand for these properties right now," said Rich Kalvoda, a principal with the Real Estate Advisory Practice with PricewaterhouseCoopers.

The report said investors should be pleased to know that while hotels continued to increase this year, hotel construction will virtually shut down in 2010.

In theory at least, investors should then have a prized asset when the room rates can be brought back to more normal levels.

"Limited service hotels should hold rates better and suffer less occupancy erosion despite cannibalizing competition from upper-end properties," the report stated.

The report and speakers agreed that upscale properties would take longer to recover -- a condition threatening to sink some prominent hotel REITs around the country. A certain stigma may also be hurting the upscale hotels.

"Even if the luxury brand drops its rates, 'I don't want my CFO breathing down my neck for staying in such a ritzy place,'" according to a quote in the report.

"Hotels have been pummeled. Businesses and tourists have cut way back," Kalvoda said.

About 27 percent of respondents in the report said now is a good time to buy hotels, 56.3 percent said hold, and the rest said to sell.

The retail market has been just as ugly as retail REITS such as General Growth Properties (NYSE: GGP) have filed for Chapter 11 and retailers such as Mervyn's and Circuit City are no more.

Nancy Johnston, a managing partner with Epsteen Development, said she is encouraged by the fact that out of 48 big box stores in the San Diego region that emptied out since September of last year, 23 have been re-filled.

Kohl's and Best Buy are filling some of those spaces.

"Phoenix has 254 big box vacancies," Johnston said. "I don't think we'll see a lot more big box failures here with the exception of books."

While the PricewaterhouseCoopers report was less kind to San Diego than Johnston , it also speaks of opportunities.

"The housing swoon and homebuilding collapse knock local retail markets especially hard. But new homebuyers find great buys in neighborhoods that most couldn't touch three years ago and commercial investors expect similar opportunities to percolate in their neighborhoods by 2011 or 2012," the report stated, adding 2010 will be a time for would-be retail property sellers to hold onto their assets.

Johnston conceded that bad news for retail investors is at least half of the tenants today are asking for some form of rent reduction.

"You might have a center where 10 to 20 percent of tenants aren't paying rent, but tenants but landlords are keeping them in place until things improve," Johnston said, suggesting that this is often better than hurting other tenants by letting the space go dark. That could happen a lot.

"Retailers will continue to close weaker stores," Kalvoda warned.

The report said 28.6 percent of its respondents recommended buying retail in San Diego County , 57.1 percent said to hold and 14.3 percent said to sell.

"Overall transaction volume (for all commercial asset classes) has dropped something like 95 percent," said Alex Zikakis, Capstone Advisors president, "but you can still buy completed product."

Generally, the PricewaterhouseCoopers report states that pent-up demand will keep apartment vacancies low -- making these properties particularly attractive even in a downturn.

The good news for most apartments around the country, according to the report, is young people tend to rent.

The bad news for investors is as the cost of a down payment on a home comes close to a rent payment, people will leave apartments.

Another factor is when unemployment is high, people tend to double up or move back home with mom and dad.