Real estate market includes the best and worst of times

Richmond commercial real estate in 2002 could be the subject of "A Tale of Two Brokers."

Admittedly, the book would be exceedingly boring, but the first chapter could start with "It was the best of times; it was the worst of times."

On one hand, investment sales brokers found the market to be frothy and awash with capital. In an annual report summarizing the investment sales market, Grubb & Ellis/Harrison and Bates indicated: "Demand was strong, particularly for properties considered recession proof or with stable income streams."

On the other hand, leasing brokers found the market to be remarkably bad. "The Richmond office market experienced sharply increasing vacancy rates during 2002" is the first line in a different section in the same Grubb & Ellis report.

Rates at 40-year lows

A subplot to the tale is the commercial mortgage business. According to the Barron's/John B. Levy & Co. National Mortgage Survey, the worst of times never showed up in 2002. Interest rates were at their lowest level in 40 years and ended the year ranging from 5 percent to 5.75 percent for 5- and 10-year mortgages.

As if that weren't enough, investment-grade commercial mortgage-backed securities (known as CMBS) were the best-performing sector of the Lehman Brothers' Aggregate Return Index in 2002, returning 15.45 percent. Low rates and strong performance make borrowers and lenders happy.

But, everyone is still concerned about real estate fundamentals. Well, fundamentals, schmundamentals. Last year was the year of the real-estate investor on the debt and equity levels. Real-estate investment trusts continued to perform well. The Morgan Stanley REIT Index reported a return of 3.64 percent, handily beating the Standard & Poor's 500 index return of -22.1 percent.

At this time last year, everyone spoke of real estate as a lagging indicator and wondered how long the sector could hold up.

Few delinquencies

Today real estate continues to perform. Most lenders are looking closely at loan delinquencies and expecting some sort of negative effect because of the sluggish economy.

Data compiled by Trepp LLC shows that delinquencies represented 1.66 percent of fixed-rate conduit loans. (Conduits provide commercial real-estate loans and sell them as CMBS.) By comparison, the delinquency rate was 1.49 percent on Jan. 1, 2002.

In addition, the American Council of Life Insurers came out with results for the period ended Sept. 30, 2002, which indicated that commercial real-estate loans originated by life insurance companies had a delinquency rate of only 0.31 percent.

To be sure, some markets have a lot to be concerned with. For example, in comparing Richmond's office market to our neighbors to the north, we should feel pretty good.

Vacancies at Tysons Corner

According to CoStar Group, based in Bethesda, Md., in September 2000, the office market for Class A and Class B office space in Tysons Corner had average rents of $29.42 a square foot and a vacancy rate of 5.50 percent, including sublease space. (Class A is prime office space while Class B usually is older office space.) Today, the market has average rents of $24.37 per square foot and a vacancy rate of 20.05 percent.

According to Grubb & Ellis/Harrison and Bates, in September 2000, the market for office space in Richmond's suburbs had average rents of $17.39 for Class A space and $14.48 per square foot for Class B space, with an overall vacancy rate of 7 percent. Today, the market has average rents of $17.60 and $14.51 per square foot, respectively, an overall vacancy rate of 16 percent.

The high vacancy rate is somewhat uncomfortable, but Richmond is holding its own.