Leading-Edge Law: How economic troubles in Europe are affecting U.S. real estate

The twists and turns of the Eurozone conflict have been whirling their way around the world for some time but are now reaching a crescendo that is hard to ignore in the investment world.

Evidence of how the crisis is beginning to affect real estate comes from several large European banking institutions that have sold or are reviewing the possibility of selling their U.S.-based commercial real estate investment and advisory businesses.

Earlier this year, Dutch-based ING Groep N.V. sold its ING Real Estate Investment Management to CBRE and also sold off Clarion Partners to management based here in the U.S. In the news release announcing the divestment, the CEO of ING indicated, among other things, that the sale allowed “further strengthening of our capital base.”

Word came earlier this month that Deutsche Bank is now conducting a strategic review of its global asset management division, which would include RREEF, an enormous U.S. real estate player with approximately $60 billion under management globally.

The strategic review is related to the need for Deutsche Bank to shed non-core assets to meet European Union guidelines for its capital base.

The uncertainty of the European debt crisis is showing how it may play out, and it doesn’t seem to be bringing more foreign bank dollars to the U.S. — quite the opposite.

The most obvious impact the uncertainty is playing on commercial real estate loans is how investors have continued to run to U.S. Treasuries as a safe haven, keeping Treasury yields stable and low. Since long-term commercial mortgages price off of the Treasury yield, pricing has remained remarkably consistent over the past month.

Commercial mortgage rates for five- and 10-year mortgages range from 3.75 to 5 percent, respectively, with higher leverage deals pricing to yield 5.75 percent or higher, according to the John B. Levy Co. National Mortgage Survey. These rates are mostly unmoved from the last month.

The only real change in pricing has come from an unlikely source: conduits.

Conduits are the groups that amass commercial loans and bundle them together to produce commercial mortgage-backed securities.

They were all the rage in 2007 because they offered the most loan proceeds at the lowest pricing. In 2011, they have been a less active player because their pricing is wider than other sources, such as life insurance companies or other portfolio lenders.

During the past 30 days, the conduits have actually had meaningful reductions in their pricing and now can provide 10-year capital at rates that range from 5.75 to 6 percent. This might be attractive to higher leverage borrowers or owners of hotel or retail properties who can’t find financing through less expensive lending sources.

While global markets continue to tremor and come unglued, the local market is seeing a number of signs of health.

The Richmond area is benefiting from local developers actively seeking opportunities that fill a need in the market.

Apartment activity remains strong, particularly for development and redevelopment downtown.

A recent CBRE multi-housing research report showed that 398 new apartment units were delivered downtown in 2011, the most of any submarket in the region. Amazingly, the same report shows the current vacancy rate at a startling low and healthy 2.5 percent.

Other new activity relates to build-to-suits for a growing area of the economy: health care.

Bon Secours recently opened its new St. Francis Watkins Centre, which will offer emergency care as well as diagnostic and imaging services and medical offices. Bon Secours also accounts for much of the space leased at the latest building under construction at Reynolds Crossing development in Henrico County, where it will occupy space along with Virginia Urology.