Market forces

Market forces

Capital Region experts say buyers and sellers are coming to grips with new standards for lending and appraisals.

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Tom Delahaye, Principal, CST Land Developers
Jerry del Rio, Broker-owner, Jerry del Rio Real Estate
Ty Gose, Commercial sales and leasing, NAI/Latter & Blum
Joanie Netterville, President, Fidelity Bank
John Schneider, Partner, Vision City Development Group
Jonathan Walker, Commercial sales and leasing, Maestri-Murrell Real Estate

The Capital Region has fared better than many areas in the country during the economic downturn. Home prices have dropped only slightly, and foreclosures have remained low.

There are even some recent signs of activity in the retail and industrial sectors, with national companies showing interest in a market that has seen employment remain high and petrochemical companies expand in order to take advantage of low natural gas prices.

As the economy slowly recovers, buyers and sellers are dealing with new standards for lending and appraisals.

Against this backdrop, Business Report brought together six real estate and finance experts for their take on activity in the region. Jerry del Rio, a residential Realtor, started the discussion by sharing details about two recent sales of more than $1 million that she brokered.

Del Rio: I saw a headline that says, "Economic crisis rising in Baton Rouge," and I went, "Where?" The buyers are looking at it as more of an investment.

John Schneider: When you're getting 0.4% interest from banks, there's no other place to park your money.

Del Rio: It's young professionals who are buying.

Joanie Netterville: People are looking for property to buy, investment property.

Q: Is the same situation happening with commercial property?

Ty Gose: Buyers are definitely moving back into the market. The problem is, when you look at Baton Rouge overall, sellers don't know where to go after they sell. The only deals happening are distressed sales, when the seller needs the cash or is underwater. There are not a lot of deals, but there are a lot of buyers looking.

Netterville: These distressed sales—in some case, you've got someone who may have resources, but they don't have the tenants. Or the property is too leveraged up and they are upside down.

Gose: Vacant land—that's almost impossible to sell.

Netterville: Nobody can finance it.

Gose: And if nobody is going to finance it, you have to sit on it for a while.

Jonathan Walker: One of the things on the commercial side is the second- and third-generation shopping center, where people are seeing they can add value to the property. That's one of the reasons why you're not seeing so much ground-up development. It takes so much time and effort and money and employees to get a development started. It's much easier for someone who's got 1031 money or all cash to come in and get a good deal on a shopping center and add value, whether by managing it better or aggressively marketing to the right tenants.

Gose: Part of the problem with new construction I'm running into is the difference between the contract price of the property—what it's going to cost to build it—and the appraised value. Lenders aren't loaning the same amount that they used to. And then you have an appraisal that's 20% below what the deal's going to cost.

Walker: If they're interested, they're going to offer whatever they're going to offer. A $1.9 million property, someone offers $1 million. It used to be people would be shocked and say, "I'm not even responding to that."

Q: On the other hand, the biggest problem in the residential market is that sellers think they're still living in the days after Hurricane Katrina.

Del Rio: Very much so. I find my buyers want move-in condition. They can't see past the outdated kitchen. That's today's world. A lot of people used to be used to renovating. I would help them get a subcontractor, and we would renovate the house. Not anymore. Because the seller got it here at that price, if they renovate, it will be overvalued for the area.

Netterville: It's all tied to what the property will appraise for. If I'm doing $100,000 in improvements, will that prove out in my appraisal? Probably not, dollar for dollar.

Gose: Appraisers are in a tight spot. When prices are dropping, it's easy to appraise. When prices start to come back up, which is what I'm seeing now, they have to go off of the most recent sales. And there are all these little pockets of distressed sales.

Del Rio: Buyers are not speculating. Gone are the days when you used to buy a lot, pay for it, build your home and use that as the down payment. They won't even buy the lots anymore.

Schneider: Cash is king. There's no money from the banks to build a spec building that's not 100% leased out. You're not finding anyone who will lend for a spec commercial project. That's not going to happen for years.

Tom Delahaye: There are a number of different opportunities where we are sitting on cash, waiting for the right moment. People are calling us, asking, "What about this project? What about that project?"

Schneider: And your question is, "If it was so good, why aren't you moving on it?"

Q: Have developers adjusted to the rules of the game?

Schneider: You don't have that many development projects going on. The development group in town is not a large group. The players that are in it have projects that are dominating time and portfolio. You need to come in at a 50-50 loan-to-value ratio and have commitments that are pretty darn close to 90%.

Del Rio: That's close to what is happening in residential, too.

Schneider: I hear from the banks that the only deals they are looking at are owner-occupied.

Netterville: As small as we are, our preference is owner-occupied. If the right deal comes along, it doesn't have to be 50% loan-to-value ratio. If the owner has backing up room, we'll gladly do a 75% to 80% loan-to-value ratio. There's room to be flexible.

Schneider: If there's a significant seven-figure development, you may be able to get 60% to 70% loan-to-value, but you need a liquidity horse in the group. The term I hear is "liquid liquidity."

Gose: They want to know everything you own, where you make your money.

Schneider: It's tough. The retail market is a good example. Look at downtown. We're all crying out for mixed-use development downtown. We need four or five stores to come in at a time. The challenge is, no one wants to be the pioneer.

Del Rio: That's what I'm facing with residential developments. If I can get just one house started, I can make it.

Walker: Buyers or banks or retail, if they're growing at all, they're growing smarter. They're taking their time. In a lot of cases, they're not even growing, they're trying to make their existing portfolio stronger. Instead of opening stores, retailers might say, "Let's renovate stores in good markets and close stores in bad markets." That's a lot of what we see in retail. It's efficiency. Going forward, that's probably a good thing.

Netterville: There used to be the greater fool theory, because there were so many people out there and competition was so strong. That's not always good for the client. There aren't banks up and down the street killing each other to do these crazy deals.

Q: In your respective areas, what are some of the bright spots?

Del Rio: The upper-end market, $400,000-plus. That market was really dead for a long time. That's a good thing. People realize real estate is a safe investment. One thing facing us: Congress is proposing doing away with the mortgage interest deduction. That's very important, because if Congress does away with that, it will hurt residential. Sellers are getting a little more realistic, buyers are getting a little more realistic. The people who are out in the market are waiting for the perfect home at the right moment, and then they buy.

Schneider: The fortunate thing about East Baton Rouge Parish, is you don't have the dramatic peaks and valleys that happen elsewhere. Interest rates eventually are going to go up. People are going to need to make the decision to make a move, particularly in the residential area.

Delahaye: Multifamily remains strong. I think one of the reasons why is financing on single-family homes has tightened up so much. They're now requiring 20% down, so a lot of people who normally would have been in homes, it's forcing them back into multifamily.

Q: Is there any danger of being overbuilt for the future?

Delahaye: Because of Hurricane Katrina, there was a huge influx of multifamily units, so we reached the saturation points. There are a couple of places that could possibly have more units, but they reached the top.

Schneider: East Baton Rouge Parish has so much to be optimistic about. We didn't get hurt like other areas of the country did. The foundation has been laid, and I think the next five years will be a coalescing of really good things. We benefit from the [Baton Rouge Area] chamber doing a nice job, the state doing an excellent job. We still are the shopping hub for Livingston and Ascension. We may not be increasing our population by 50,000 people, but the surrounding parishes are.

Gose: But they're building retail to fit those needs in Livingston and Ascension. We got a nice population jump from Katrina. But didn't we get a decrease? To get the kind of growth people are talking about, you have to increase the population accordingly. Retailers want to see growth. If it's stagnant, it's a tough sell to get them to move into the market.

Walker: We take a survey every year of 130 local shopping centers. This year, the vacancy rate was 10%. The past two years, it was over 12%. There's some stabilization there. The growth that happens in Livingston and Ascension, it's not in unanchored strip centers. It will be, "I've got a tenant, let me do a build-to-suit for CC's Coffee House or Walmart." Post-Katrina, our retail vacancy rate was at 8% or 9%. I think 10% is a great vacancy rate to have, compared to other large markets that are at 20%.

Schneider: The greatest driver to stimulate retail development in Ascension and Livingston is gas prices. East Baton Rouge may have been the magnet, but when you're filling up and it costs you $60 to $70, well, you've got to have sympathy for the person filling up three times a week. So they're going to have to do retail in their area.

Gose: I'm seeing more companies move those markets because of the commute.

Del Rio: You're seeing more companies move back into town. I already had two clients move back in town, one from Walker, one from Prairieville.

Q: What do you see going on in Central and Zachary?

Gose: Central is getting a lot of looks from developers who see it as a growth corridor. The Central Thruway will be completed at the end of this year, and that's going to create a high-traffic location at Greenwell Springs Road. Restaurants and a lot of the service-type retailers are really looking hard at Central and Zachary. What you see in Central and Zachary is, you see a need, you see a driver.

Q: What about the huge corridor east of Zachary, connecting into New Roads, caused by the opening of the Audubon Bridge?

Schneider: I don't see it happening, because what long-term industry or businesses out there will drive residential development? I don't see that one catalyst. The bridge is fantastic, but you need an industry game-changer out there to make development happen.

Gose: I try to take people to West Feliciana Parish, and it all comes back to, "Show me the numbers, show me the demographics." In 2010, there were two residential permits pulled in West Feliciana Parish. Most of the grocers, the national fast-food places, want to see the numbers, and it's not there.

Del Rio: I'm sure it will be just like the Sunshine Bridge. Look what that did for Donaldsonville and that area. It will just take a while.

Gose: The bottom line is, there are people in Baton Rouge who want to do business. There is a great entrepreneurial spirit, there are investors with money looking to do things. I think there are national groups, franchises moving into the market who have previously not noticed Baton Rouge, which means new jobs. There's a lot of groups coming who are going to create construction jobs, create permanent jobs and keep things growing on that level. I think the growth potential is there, but it's being somewhat strangled by the infrastructure. The growth is there in spite of the infrastructure.

Q: Any parting thoughts or key takeaways?

Netterville: The good thing is that folks are managing their businesses, and we've gotten more efficient and more healthy. I'm seeing healthier financials because people have learned to be more lean and more efficient. That enables me to do more business.

Del Rio: We really had to fight the media, because the media was looking at real estate in a gloomy way, and we knew that really wasn't the way it was. We were selling homes and doing business in Baton Rouge. But everybody would pick up a paper and see what was going on nationwide. That's been our biggest obstacle for the past couple of years.

Delahaye: The change in the market has flushed out those who were looking to make a quick buck from GO Zone or other things. In the future, the ones who will be successful are the ones who held back and are careful in what they do.

Walker: People are going to become smarter in their business, be more efficient. When it comes to retail, retailers are going to expand where they feel the most comfortable. Across the board, whether you're a bank or a developer, that's the type of growth that will be moving forward. It's a good thing. It might have been forced, because of the recession. The qualified people we are working with now, and it's making our business more efficient.

Gose: Baton Rouge is a great place to live, work, play, to invest dollars. One thing we haven't discussed, we haven't talked about inflation at all. I don't care what the Fed says. You can look at every index, and it's coming. I think interest rates are going to follow. I don't think it's a bad thing, because real estate can be a hedge. But that's going to be a big factor.

Schneider: We really need to identify those three to five things that need to happen over the next five years. Because after five years or seven years from now, we won't be sitting here with 1% interest rates. Things that need to be done on a major scale, need to be done now. It will never be cheaper to do something tomorrow than to do it today. That is the message that needs to get across. We need to coalesce around that common vision.

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