Thursday, September 25, 2008

The Upward Pressure on Cap Rates

As things slow and credit becomes harder and harder to obtain, there's no doubt that buyers are in the driver's seat and will probably remain there for quite some time. As commercial property continues to experience depreciation, investors are demanding better cap rates. Not rocket science, obviously. I don't see this changing for the foreseeable future. From CRED..read on.

With sales activity throttled, property investors expect capitalization rates for the transactions that do close to significantly increase through early next year.

All property types will experience cap-rate gains over the next six months, exceeding the gains of the past year, according to the investors who participated in the latest PricewaterhouseCoopers Korpacz Real Estate Investor Survey. The survey polls REITs, pension funds, mortgage bankers, developers, insurers and other institutional investors.

Regional malls, with a current average cap rate of 6.78%, will see the biggest gain at 47.5 basis points, or 7% of its current base, and suburban office, with a 7.34% average, will see an increase of 44 bp, or 6% of its base. Since last year's third quarter, the suburban office rate increased just 10 bp, while the regional mall rate dropped 8 bp.

The cap rates of all other sectors are expected to increase by 5% each over the next six months.

Office cap rates are expected to increase in all 24 markets covered by the Korpacz study. But in six markets, the expected increase is less that the cap rate gains that occurred over the past year.

The office market with the biggest projected cap-rate gain is Houston, whose 7.27% average is expected to increase 79 bp over the next six months. Its average dropped 45 bp over the past year.

The Manhattan office market's average cap rate, which grew 18 bp to 5.7% over the past year, is expected to increase another 33 bp in the next six months.

While investors surveyed predicted cap-rate gains, they also said their confidence in a near-term recovery of real estate markets is diminishing. The survey's general consensus is that buyers and sellers will remain on the sidelines until credit-markets turmoil subsides.

They also expressed a strong sense that in the coming months, sellers will emerge with properties that are backed by maturing loans and are unable to find new financing. That could be significant since the head of CMBS research at JPMorgan recently noted that the emergence of such forced sellers may be a key factor in helping commercial-property prices fully adjust.

The Korpacz survey respondents also expressed a general sense that the investment slowdown induced by the credit crunch is lasting longer than most expected. "Our six-month recovery projection has been derailed by complete complexity and doubt," said one person surveyed.

The slowing economy and its potential to weaken demand for commercial space is further dragging down investor confidence. "Even all-cash buyers are hesitant about buying because no one is sure about near-term demand," said one respondent.

Copyright © 2008 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.

Wednesday, September 24, 2008

Alt-A Loan Resets Continuing Through 2011

Take a look at the chart below. Taken on its face value alone, we are certainly not out of the woods with regard to mortgage resets.


Fitch Ratings on Tuesday released a wide-ranging look at option ARMs that paints a decidedly negative picture for the mortgage markets over the next 36 months. In fact, the picture is a downright scary one: the bottom line is that most outstanding neg-am mortgages won’t get out of 2011 alive, thanks to forced recasts.

Fitch analysts said they now expect roughly $29 billion in option ARMs to recast to higher monthly payments by the end of 2009, and an additional $67 billion to recast in 2010; of this, approximately $53 billion is attributed to early recasts.

“Though recent declines in the 12-month Treasury average rates have mitigated some risks, the majority of option ARM borrowers have elected to make the monthly minimum payment over the past 24 months,” Fitch said in the report. “As a result, a large number of these loans, especially those with 40-year amortization and 110% principal caps are expected to reach their recasts before the end of the five-year mark.”

Continue Reading...

Commercial Deals Seizing Up, Values Coming Down

Commercial properties still cashflowing for the most part, but owners and investors are scaling back expectations. This is helping deals collapse and we should expect to see more of the same for the rest of the year. From WSJ.

Commercial-Property Players Find Their Pressures Growing
As Crisis Spreads, Market Seizes Up; Capital Preservation
By ALEX FRANGOS

For the commercial-real-estate players that were in hot water before the capital-markets crisis of the past two weeks, the temperature is rising.

Retail giant Centro Properties Group, New York developer Macklowe Properties, office-building investor Broadway Real Estate Partners LLC and others are now facing an even rougher ride in the wake of Lehman Brothers Holdings Inc.'s bankruptcy, the collapse of American International Group Inc. and the buyout of Merrill Lynch & Co. by Bank of America Corp.

After these and other market crises, cash-flow projections for properties are being scaled back in anticipation of a greater economic slowdown. The sales market -- long considered the last hope of many distressed players -- has virtually ground to a halt.

Even creditors that were willing to make real-estate loans before the upheaval are pulling back, having witnessed the spectacle of some of the biggest names in finance and banking vanishing in a period of days.

"In this kind of environment you are not looking to put capital to work," says Lisa Pendergast, managing director of RBS Greenwich Capital. "Most banks and brokerages are in capital-preservation mode."

The demise of Lehman and other events are pushing buyers out of the market or emboldening them to demand lower prices. For example, shopping-center giant Centro Properties Group, which faces a Sept. 30 deadline to pay off $2.3 billion in debt, had a pending deal to sell 29 U.S. properties to DRA Advisors for $714 million. The deal collapsed last week after Centro refused DRA's request for a price cut.

To be sure, commercial real estate so far has fared better than residential properties. Many office buildings, shopping centers, warehouses and other income-producing properties are generating enough cash to pay their debt, and their default rates remain low.

Continue Reading...

Friday, September 19, 2008

PricewaterhouseCoopers: Credit Crisis Halts Deals

For every positive article, there's a negative. From MarketWatch.

Commercial break
Credit crunch, economic turmoil halts commercial real estate deals: report

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- Commercial real estate deals are, for the most part, on hold these days as buyers and sellers wait for the credit crunch to ease and the economy to rebound, according to a report released Thursday by PricewaterhouseCoopers.

Financing problems are keeping some deals stalled, but other would-be buyers just aren't willing to take a chance on properties as the country deals with increased job losses and problems on Wall Street, according to the firm's quarterly Korpacz Real Estate Investor Survey. They're questioning tenant demand in the near term for just about every type of property, from office space to retail, as workers lose their jobs and consumers tighten their purse strings.

"Few investors expect problems in the financial markets to ease any time soon and even fewer expect debt availability and lending practices to return to where they were prior to the credit crunch," said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers, in a news release. "Uncertainty has stalled investments and dramatically reduced sales and leasing activity."

The roller-coaster ride that the markets have been on this week is only making matters worse, said Susan Smith, editor-in-chief of the survey and a director in the PricewaterhouseCoopers real estate sector services group.
"This just adds to more growing concern, more hits on confidence, more uncertainty on how long it's going to take to clean everything up," Smith said in a phone interview. "You're not going to see properties trade until investors are confident that the worst is over."

In the face of uncertainty, those who have commercial property now will likely hold on to what they have and ride out the correction, she said. Some investors are expecting an increase in distressed sales involving assets with nonperforming loans or discouraged owners in the coming months -- something that investors with capital on their hands may view as buying opportunities.

According to the report, the average overall capitalization rate showed a year-over-year uptick in an increasing number of markets. Higher cap rates typically mean lower values. Survey participants said they expected cap rates in each surveyed market to increase in the next six months.

That said, while the short-term out look is bleak, the long-term picture for commercial real estate is much brighter, Smith said.

Continue Reading...

Commercial Real Estate Problems are Behind Us, Say Experts

Experts speaking at this year's Commercial Real Estate Market Forecast had some interesting observations, not least of which is that the worst of the commercial real estate turmoil is several years behind us already. Interestingly, some believe the residential condo market will not be fully corrected for another twelve years or so. Yes, twelve years.

On the subject of commercial land, I believe things will pick up as soon as lenders get a little more motivated to provide construction loans for projects. First, however, we need some of the inventory to go away and that seems to be happening...slowly. From the Tampa Bay Business Journal.

By Margaret Cashill

Speakers at the 2009 Commercial Real Estate Market Forecast believe local executives are displaying cautious optimism, but said the greatest difficulties in the commercial real estate market are several years behind us.

The Tampa Bay Business Journal hosted the luncheon Thursday afternoon at the A La Carte Event Pavilion in Tampa, in partnership with the National Association of Industrial and Office Properties.

After an introduction from Bridgette Mill, president and publisher, the event featured five commentaries on the topics of investments, land, retail, industrial and office with Dallas Whitaker of Greystone Equity LLC and TBBJ Staff Writer Janet Leiser serving as moderators.

Steve Ekovich, first VP and regional manager of Marcus & Millichap Real Estate Investment Services, spoke of a “recalibration market” following the transition of recent years. He predicted that the inexpensive cost of doing business would benefit local retail, multifamily and office markets.

Bill Eshenbaugh of Eshenbaugh Land Company echoed Ekovich’s sentiment of a recovering market in his discussion of land. Recounting his travels to Pennsylvania, he mentioned a “groundhog” effect in the homeowner’s market following a three-year downturn.

He also predicted that for the condominium market, the cycle would not correct itself until 2020, based on past upturns in 1986 and 1972.

Pat Duffy, president of Colliers Arnold, addressed the subject of retail. Retailers are “cautiously optimistic,” he said. The rising cost of oil has decreased people’s disposable income, which decreases demand for shopping centers.

In speaking about industrial real estate, Ray Sandelli, senior managing director of CB Richard Ellis, said retailers are trying to move closer to populations. For the region, he believes activity will remain slow, flexibility in tenant renewals will increase and distribution centers will gravitate closer to customers.

Larry Richey, senior managing director of Cushman & Wakefield of Florida, Inc., commented on the state of the office market. Since Tampa Bay has lost 16,000 jobs in the last year, the first six months have seen more than 833,000 square feet of negative absorption in the market, he said. The cost to do business in Tampa is reasonable, however, and Richey predicted the cost of living will go down, and leave tenants with more options.

Richey also emphasized that the negative impact of the storm seasons in 2004 and 2005 is fading. The fact that the Bay area has a competitive cost has always helped the region, he said, and is beginning to help again.

Continue Reading...

Wednesday, September 17, 2008

Paul Volcker et al: Resurrect RTC. V 2.0.

Probably one of the more sane things that's been proposed amidst the recent turmoil. Paul Volcker and some pretty heavy hitters chiming in on the idea. From the WSJ. Article continues with link below.

Resurrect the Resolution Trust Corp.
By NICHOLAS F. BRADY, EUGENE A. LUDWIG and PAUL A. VOLCKER

We are in the midst of the worst financial turmoil since the Great Depression. Absent bold action, matters could well get worse.

Neither the markets nor the ordinary diet of regulatory orders, bank examinations, rating downgrades and investigations can do the job. Extraordinary emergency actions by the Federal Reserve and the Treasury to date, while necessary, are also insufficient to resolve the crisis.

Fannie Mae and Freddie Mac, the giants in the mortgage market, are overextended and now under new government protection. They are not in sufficiently robust shape to meet all the market's needs.

The fact is that the financial system needs basic, long-term reform, but right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.

Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.

There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.

Continue Reading...

100% Financing? In Miami? In This Market?

Apparently the answer is "yes", of course with some exceptions. Read on...
BY DOUGLAS HANKS AND ELAINE WALKER
dhanks@MiamiHerald.com

A day after one of the country's biggest investment banks collapsed, Graham Cos. CEO Stuart Wyllie readied for a conference call with lenders over his request for 100 percent financing of a new 270-unit residential building.

He wasn't worried.

''There's still money to borrow,'' Wyllie said, adding he expects to get three or four offers to loan the full $35 million needed to build the new Lakehouse Apartments complex in Miami Lakes. Banks are ``meeting with us and returning our phone calls.''

Wyllie admits he's far less confident than a year ago. But his prediction of a chummy chat with a lender reflects an overlooked element to the current credit crisis: Deals continue to get done, even in one of the nation's most stigmatized real estate markets.

''Credit's difficult now compared to two years ago -- that goes without saying,'' said David Dabby, a real estate analyst in Coral Gables with a number of banks as clients. ``But if a project has good economic characteristics to it, credit is available.''

GRIM CIRCUMSTANCES

This week's demise of Lehman Brothers shocked Wall Street and reinforced the grim circumstances gripping South Florida's economy. The New York investment bank backed a number of large local projects, and its demise sparked predictions of even more pullback by lenders.

But local developers and bank consultants viewed the Lehman collapse as just another eddy in an already roiled real estate industry, where many players are scrambling to survive but some continue to expand.

The planned Village at Gulfstream Park has turned to the city of Hallandale Beach for help building its $1 billion retail and residential complex. Developer Forest City Enterprises has asked the city for financial incentives to pay for infrastructure or to help subsidize retailers' rent.

''This is a unique time economically,'' said Will Voegele, vice president of development for Forest City.

Scott Sime, head of the Miami-Dade office for commercial brokerage CB Richard Ellis, said he's seeing brisk activity in the ''distressed'' sector -- that is, banks and developers trying to unload failed or struggling projects. Among would-be buyers: large investment funds eager to scoop up large blocks of condominiums for pennies on the dollar.

Continue Reading...

Lehman Bankruptcy Puts Pressure On Apartment Investors

Cali, NY and DC investors likely to feel the pinch, pressure to sell and some value deterioration as Archstone assets start getting unloaded. They have a pretty large presence in the South Florida market as well; Lehman backed $226.5 million for construction of Donald Trump’s condo tower in Hollywood, $47 million for the new Canyon Ranch Miami Beach resort, and was part of the private consortium that infused $565 million into the Fontainebleau in Miami Beach. What happens from here is anyone's guess. From WSJ.

After Lehman, Banks Jettison
Commercial-Property Debt
By LINGLING WEI and MICHAEL CORKERY

The bankruptcy of Lehman Brothers Holdings Inc. is adding pressure on banks and other financial institutions to sell off their holdings of commercial real-estate debt, as they try to stay out ahead of the Wall Street firm's expected liquidation of its $30 billion portfolio.

The likely rush to sell is driving down the already battered market, forcing financial firms to take additional losses mated $150 billion worth of commercial real-estate debt on their books as the once relatively resilient pocket of the property sector now comes under heavy fire.

"As a result of Lehman's bankruptcy, other financial institutions will feel more pressure to sell assets at deeper discounts sought by investors," said Spencer Garfield, a managing director of Hudson Realty Capital, a New York-based real-estate fund manager.

Goldman Sachs Group Inc. on Tuesday said it had reduced its portfolio of commercial mortgages and securities by about $2 billion to $14.7 billion as of the end of its third quarter, which ended Aug. 29, taking a $325 million loss.

"It sure doesn't feel like the real-estate markets are improving anytime soon, and we will reduce that class going forward even if we think they are good assets," said Goldman Sachs Chief Financial Officer David Viniar. "Those assets are marked where they can be sold."

Lehman's collapse was the most dramatic sign so far that the financial crisis sparked by residential real estate is spilling over into office buildings, strip malls, hotels and other commercial real estate. The firm was one of the most aggressive lenders on Wall Street, making whole loans, bridge loans and packaging debt into commercial mortgage-backed securities, or CMBS.

About $4.3 billion of Lehman's $30 billion portfolio consists of securities. The prospect of that getting liquidated sparked the latest selloff in the CMBS market, as evidenced by widening spreads between the benchmark U.S. Treasury notes and the CMBX, a credit-market index that tracks the value of the bonds.

Apartment-building investors also are likely to feel significant pressure to sell as Lehman unloads its debt and equity pieces of the $22 billion purchase of Archstone, the large multifamily company with buildings concentrated in Washington, D.C., California and New York City. For months, Archstone had tried to sell assets to reduce debt, but met mixed success. It resisted for months lowering its prices, even as buyers balked. It has sold some complexes but not as many as it hoped, according to a person familiar with Archstone.

Prices are now likely to soften. In markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, said Jeffrey Spector, a real-estate analyst at UBS. "Every day that goes by there will be more pressure on pricing."

For most of this year, commercial real-estate debt has held up better than housing-related debt. Commercial property values haven't deteriorated as much as homes, thanks to the still-healthy cash flows of most properties, lack of overbuilding and low default rates.

Delinquencies have been mounting in loans tied to construction and land development, a major commercial real-estate category. At the nation's largest construction lender, Bank of America Corp., about half of its $13 billion home-builder portfolio are loans that "we are watching and paying special attention to, because there could be structural deficiency or a market deficiency," said Gene Godbold, president of Bank of America's commercial real-estate banking, in an interview.

Mr. Godbold emphasized that the bank has adequate capital to offset possible losses from its home-builder portfolio.

Continue Reading...

Commercial Construction Costs Rise

A press release from New York-based Turner Construction shows a nearly 2 percent increase in the cost of commercial construction from Q2 of this year and over 6 percent since Q3 last year! From the Tampa Bay Business Journal:

Third quarter commercial building costs rose 1.77 percent over the second quarter and nearly 6.5 percent over the third quarter of last year, according to Turner Construction's Building Cost Index.

The index, which projects domestic commercial building construction costs, found that construction costs are rising faster than the Consumer Price Index.

The increase is due in large part to price hikes for steel, non-ferrous metals, petroleum-based products and energy.

Wage and benefit adjustments also are generally higher than a year ago, “reflecting the continuing strong demand on the skilled labor workforce,” said Karl F. Almstead, the Turner vice president responsible for Turner’s Building Cost Index.

However, increasing trade contractor competition in many market areas is offsetting some of the material and labor increases, the report found.

Turner has prepared the construction cost forecast for more than 80 years.

See the article...

Tuesday, September 16, 2008

Fed Leaves Interest Rates Unchanged

Good deal. The Fed stared down the market and the market blinked. My earlier blog post reckoned rates would increase. Glad to see the news today.

Fed Keeps Rate at 2%, Rebuffing Call for Reduction

By Scott Lanman and Craig Torres

Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for an immediate cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.

The Fed did signal it will consider a reduction in the future by acknowledging in its statement that strains in financial markets are increasing. The central bank also said that employment is weakening and export growth is slowing, and dropped a reference to elevated inflation expectations.

``Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters,'' the Federal Open Market Committee said after meeting in Washington.

Chairman Ben S. Bernanke is trying to draw a line between interest rates, which will be set based on its assessment of the broader economy, and emergency operations designed to combat financial turmoil. Less than 48 hours before today's decision, the Fed expanded its lending to securities firms in the wake of Lehman's failure, including accepting equities as collateral for the first time.

Stocks initially fell after today's decision, then rallied after a report that the central bank is considering a loan to American International Group Inc. That would be a shift from yesterday, when officials were inclined against providing funds.

Monday, September 15, 2008

Lehman Failure May Hurt Commercial Real Estate Market

Second bottom coming? Interesting theory. Read the rest at Earth Times (link below).
By Ilaina JonasNEW YORK (Reuters) - A bankruptcy by Lehman Brothers may prompt the sale of its $32.6 billion of commercial real estate investments, and that just may be the jolt the U.S. property market needs to get sales started again, some real estate executives said.But the elusive bottom that buyers and sellers have been waiting for could be short-lived and be followed by an even greater fall in prices until new lenders step in to fill the void left by the retreat of large banks from the market."There's a whole group of people looking to be vultures to pick Lehman's bones," said Jay Rollins, president of Denver-based JCR Capital, a boutique commercial real estate capital provider."The other half of the story is what's left of the financial infrastructure that's going to be in place to do transactions," he said.Lehman Brothers was teetering on the verge of bankruptcy early on Monday after Britain's Barclays Plc withdrew from talks to take over part of Lehman.As of August 31, Lehman held $32.6 billion in commercial real estate loans and equity. Most experts expect that under U.S. bankruptcy procedures, the investments will be sold slowly and not unloaded onto the market in one fell swoop."Once it goes into bankruptcy, there will be a lot of people with their hands all over the place," said Barry Gosin, CEO of real estate services company Newmark Knight Frank."It becomes a much more cumbersome process."But the sale of so many real estate investments may help set values of similar assets and break the standoff between potential buyers and sellers."I think it could very well be the moment when the spreads are wide enough for the money players to come in and say, 'OKnow the returns are good enough for us to go in and invest,"' Gosin said.

Continue Reading...

Sunday, September 14, 2008

Slow News Day: Palin / Clinton Spoof :)

Tina Fey nails Sarah Palin. Spooky how much she looks and sounds like her. Very funny.

Friday, September 12, 2008

WaMu Going Down Next?

I heard this from a very good banking source a few weeks back. Everyone's been watching the situation unravel over the past week. WaMu claims to be very well-capitalized, but the future is very uncertain for this bank IMO.

Moody's cuts WaMu's credit rating to below investment grade
By Simon Kennedy
Last update: 3:45 a.m. EDT Sept. 12, 2008
LONDON (MarketWatch) -- Moody's Investor Service downgraded Washington Mutual Inc.'s credit rating to below investment grade late Thursday, citing WaMu's reduced financial flexibility, deteriorating asset quality and expected franchise erosion. The rating agency cut the group's senior unsecured rating to below investment grade at Ba2 from Baa3. It also reduced the long-term deposit and issuer ratings of the banking unit to Baa3 from Baa2, though this rating remains investment grade. Moody's added the outlook for the ratings is negative. In a response, Washington Mutual said it believes the decision to cut its ratings to below investment grade "is inconsistent with the company's current financial position." The firm added Moody's action appears to reflect the uncertainty in the market, rather than a thorough evaluation of its business.

Thursday, September 11, 2008

Investors Confident About Florida's Future

Angel or vulture? You decide. It's certainly not a bad time to have cash, although I'm fairly certain commercial still has some room to drop. It sure ain't over. From MarketWatch.

Kitson & Partners and Their Investors Confident About Florida's Future
Capital partners commit $750 million for residential and retail acquisitions

PALM BEACH GARDENS, Fla., Sept 10, 2008 /PRNewswire via COMTEX/ -- A leading institutional investor is demonstrating confidence in the long-term prospects for Florida's real estate market. Chicago-based real estate private equity investor Evergreen Real Estate Partners and its backers have committed $750 million to Palm Beach Gardens-based developer Kitson & Partners to pursue additional residential and commercial real estate development projects in Florida.

Named 2007 Developer of the Year by Real Estate Finance & Investment for its work on the Babcock Ranch project in Southwest Florida, Kitson & Partners has an established track record of conscientious master planning and development throughout the State of Florida. Kitson & Partners has acquired in excess of $900 million of residential and commercial assets within Florida over the past two years. The capital commitment puts Kitson & Partners in a strong position to close additional deals as the opportunities present themselves.

"In a tight credit market, land owners are looking for certainty," Syd Kitson, CEO of Kitson & Partners, explained. "If our company makes an offer, we can close the deal with the seller. We have the financial strength to finish what we start."

Kitson said the firm is targeting high quality locations throughout the State of Florida including raw land, entitled land and improved or semi- improved land for residential development. The company is currently developing 21,270 acres in Florida which will include 25,770 residential units. Kitson & Partners is also actively seeking to grow its retail property portfolio by acquiring stabilized and value-added shopping centers as well as considering joint venture development opportunities. Kitson & Partners currently owns and operates eleven shopping centers around the state.

SOURCE Kitson & Partners

Continue Reading...

Economic Malaise Spreading to Leasing Market

Uh oh, looks like malaise is spreading to the lease markets as well. Personally I've had a good leasing year with little in the way of slowdown, but there may be other reasons for that. From my experience, however, I'm seeing landlords push for shorter term leases for a myriad of reasons (mostly an uncertain future), and this is borne out in the following CoStar article.
Facing Slower Lease-ups, Commercial Real Estate Brokers Envision Free Rent and Other Perks From Builders to Lure Office and Industrial Tenants

Call it the "deer in the headlights" effect. Caught in the glare of bad economic news, mixed-signals about the direction of the economy and an imminent change in administrations, many business tenants are opting to stay in a holding pattern and renew leases in their current locations rather than incur the expense and risk of moving. While that’s helping keep rents and occupancies fairly stable in most markets, brokers and analysts warn that developers may take a hit to their bottom lines in the next two years as absorption continues to flatten or decline in many U.S. markets.

At most risk are developers delivering new projects. With tenants now opting to renew their leases rather than expand or move, developers may need to cut rents, beef up concession packages and generally accept lower yields to fill buildings that started construction a year or two ago during better times, several commercial brokers told CoStar Advisor.

"Tenants don’t know what’s going on [in the economy]; they’re saying, ‘we don’t want to bite off a 10-year lease deal, let’s wait until things turn around,'" said John Dettleff, senior vice president with Grubb & Ellis in Vienna, VA. "They’re signing short-term leases because they don’t know if it’s the bottom of the cycle or still going down. And that’s too bad for developers, because [their pro formas] only make sense if they’re doing 7- to 10-year deals."

Developers with new buildings in many markets have already repriced rental rates and offered healthy tenant improvement allowances, free rent, construction management and other inducements to compel reluctant tenants to move, Dettleff said. But many are finding it difficult to overcome the inertia induced by the uncertain business climate.

"It’s very costly for industrial tenants to move equipment. And for a technology company or a mid-size government contractor, a 10-year lease may cramp their ability to sell the company, which eliminates a big exit strategy."

Developers are experiencing longer lease-up times than they expected when they launched projects two years ago, agreed Tom Capocefalo, managing director for tenant representation firm Studley’s South Florida office market. With three buildings totaling about 1.8 million square feet slated for delivery in Miami's CBD in mid-2010, owners and landlords are trying to generate some leasing momentum by providing very attractive leasing terms to initial tenants.

"I would suspect that the overall concessions they’re offering to induce tenants are probably greater than they envisioned in their pro formas," Capocefalo said. "As their leases expire, tenants will at least entertain the idea of a move. But at the end of the day over the next 18 to 24 months, they’ll remain a bit more conservative in their growth expectations; they'll stay put and attempt to secure more favorable renewals by measuring and leveraging against other office developments."

Continue Reading...

Wednesday, September 10, 2008

Losses Spreading To Commercial Loans, Says BoA

Bank of America Says Losses Shift to Commercial Loans (Update1)

By David Mildenberg

Sept. 10 (Bloomberg) -- Bank of America Corp., the biggest U.S. consumer bank, said credit weakness is spreading to commercial borrowers from residential customers and loan losses probably will deepen in the third quarter.

Home builders unable to repay their loans are contributing to deterioration among commercial borrowers, said Brian Moynihan, head of the global corporate and investment banking unit, at a New York conference today. More than half the Charlotte, North Carolina-based bank's $13.4 billion in loans to builders are considered troubled, 19 percent are not paying interest and losses are likely to mount, Moynihan said.

Bank of America's commercial loans were $335 billion as of June 30, and a home-builder portfolio that accounts for less than 4 percent ``won't create major pain for us, but it's going up,'' he said. ``It's not pretty.''

The company is able to charge higher rates on its loans as businesses seek to borrow from companies with strong capital positions, Moynihan said. The investment banking unit will have a ``choppy'' quarter as turmoil in the credit markets delays companies from raising capital or making acquisitions, he said.

Bank of America fell 52 cents, or 1.6 percent, to $32 at 1:22 p.m. in New York Stock Exchange composite trading, and had declined 21 percent this year through yesterday.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: September 10, 2008 13:23 EDT

Tuesday, September 9, 2008

Buffett on the Fannie Mae, Freddie Mac Takeover

Just in case you missed it, here's The Oracle of Omaha on FBN discussing his take on the bailout. Parts 1 and 2.



Mall Glut to Clog Market for Years

Looks like the glut of mall space will be cause for landlord headaches for a while. This will probably play into the whole TIC scenario in the near future as quite a few TICs are heavily invested into these kinds of properties. From the Wall Street Journal.

Mall Glut to Clog Market for Years
Scarce Shoppers,
Lack of Tenants
Ding Developers
By KRIS HUDSON and ANN ZIMMERMAN

Shopping-mall owners have struggled this year with a darkening economy, slowing consumer spending and store closings by retailers. But they face another problem that may persist long after the economy bounces back: a decade of overbuilding.

Developers have built one billion square feet of retail space in the 54 largest U.S. markets since the start of 2000, 25% more than what they built during the same period of the 1990s, according to Property & Portfolio Research Inc. of Boston. U.S. retail space now amounts to 38 square feet for every person in those 54 markets, up from 29 square feet in 1983, the firm says.

Consider a six-mile stretch of highway north of Dallas, where three developers are racing to finish four huge shopping centers with a combined three million square feet of space. Not only will they compete with each other, but there are three existing malls within a 10-mile radius.

"There just aren't enough tenants to go around for three projects," concedes Gar Herring, president of shopping center developer MGHerring Group of Dallas, which is building the largest of the centers.

Similar scenes are playing out across the country. DeBartolo Development indefinitely postponed construction of 700,000 square feet of retail space in Mesa, Ariz., due to weak demand. Green Street Advisors, a real-estate research firm, says 13 strip shopping centers under development have been canceled this year and 90 others have been delayed by the seven shopping-center developers it monitors.
[Mall Glut]

Of course, retail landlords struggle and store vacancies rise in every economic downturn. But this time, experts say, the overbuilding means that high occupancy rates at malls and strip centers may not return for years.

For retailers, the glut can have an upside: cheaper rents, shorter lease terms and fatter allowances from landlords for outfitting stores. This year, the rents in new lease signings are 10.4% lower on average than the asking price, down from the 9.3% discount of two years ago, says market researcher Reis Inc. of New York.

Shopping-center owners with a hefty focus on development, including Regency Centers Corp. of Jacksonville, Fla., and Weingarten Realty Investors of Houston, are compensating for the construction slowdown by trying to raise rents and sell older centers. Others, such as Kimco Realty Corp. of New Hyde Park, N.Y., have shifted much of their development abroad. Brian Smith, Regency's chief investment officer, said the real-estate investment trust has canceled some development projects, continued more cautiously with others and turned partly to upgrading existing centers. Regency's second-quarter profit was off 25%.

David Simon, chairman and chief executive of Simon Property Group Inc., the largest U.S. mall owner with 323 malls, sees "a decade of little new development" and a shakeout. "There were a lot of projects that shouldn't have been built" in recent years, he said.

Some big retailers are curtailing expansion and closing stores. For the first time since the 1990-91 recession, occupied retail space in major U.S. markets is expected to decline this year, falling by 1.2 million square feet, projects Property & Portfolio Research. Last year, occupied space grew nearly 61 million square feet, the firm says. Retailers that helped drive the building boom -- Wal-Mart Stores Inc., Home Depot Inc. and Starbucks Corp. among them -- have nearly saturated the U.S. Earlier this year, Home Depot said it would close 15 unprofitable stores and cancel 50 proposed ones, throttling back its store-growth ambitions to a meager 1.5% a year.

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Flippers Trying to Cancel Condo Contracts Get Smackdown

Although a personal opinion, but those who - out of sheer greed - agreed to purchase these units should be forced to close on them. I can't say I have any sympathy for these folks. As if the pool actually being "Olympic-sized" is going to help your flip sell any faster in this market. Not. Much ado about nothing. If I buy a stock and it goes down, that's life. How folks think they should be insulated from the ups and downs of the economy is really amazing. Good to see the courts tossing out many of these cases. You make your bed....

From the Wall Street Journal
Condo Buyers In Florida Seek To Exit Deals But Courts' Rulings Suggest Many Investors May Be Stuck; Defining 'Olympic Style' Pools
By MARKUS BALSER

With Florida awash in tens of thousands of empty or unfinished condominiums, many investors there are turning to the courts in an effort to cancel their contracts and recoup their deposits.

So far, they haven't had much luck.

Condo buyers in hard-hit markets across the country have been scouring their contracts for loopholes and flaws that would allow them to back out. Investors in Florida, where many were looking to flip their condos for a quick profit in a rising market, have been particularly aggressive in using the courts. And that's no surprise, given that the condo market there is one of the worst in the country, with average condo prices down 22% since the market peaked in 2005, according to the Florida Association of Realtors -- and they're still falling.

Yet a series of recent legal decisions in the Florida courts indicate that it won't be as easy as buyers might hope to get out of these deals. The bottom line: Unless it's a bona fide contract dispute, an investor's chances of winning appear to be slim.

Last month, the U.S. District Court in Miami dismissed two dozen federal lawsuits in which buyers said they were misled by an advertising brochure promising an "Olympic style" swimming pool at Opera Tower, a high-rise condo building near downtown Miami.

Plaintiffs could not reasonably rely on the drawings or advertisements, Judge Patricia Seitz ruled. The contract clearly stated the pool was L-shaped and 2,530 square feet -- smaller than Olympic size, she wrote. The developers claimed that "Olympic style" didn't refer to the pool's size but to the fact that it would have lanes.

The decision was a big loss for consumer rights, says Miami Beach attorney Kent Harrison Robbins, who filed the lawsuits against Opera Tower. "It gives developers wide-ranging room to promise whatever they want, as long as they change it in the written contract," he says. "Honest developers will be outcompeted by dishonest ones." Mr. Robbins says he plans to appeal the decision to the 11th U.S. Circuit Court of Appeals in Atlanta.

Real-estate lawyers nationally are closely monitoring the Florida lawsuits, expecting a wave of similar claims across the country as more condominium projects are completed. "The market in Florida is two years ahead of other parts of the U.S., like California or the Sunbelt states, in both the heavy downturn in prices and the lawsuits following it," says attorney Robert M. Chasnow, a partner with Holland & Knight in Washington.

During the housing boom, Florida -- like some other areas noted for tourism and retirement living -- attracted hordes of speculators. By some estimates, more than half of all the deposits for Miami condos were put down by people planning to flip them for a profit without living in them, says Jack McCabe, chief executive officer of McCabe Research & Consulting in Deerfield Beach, Fla.

A Four-Year Inventory

But developers built far more condos than demand could absorb. The glutted Miami market now has close to 50,000 units -- a record four years' worth of inventory -- for sale or under construction. The national condo market, by contrast, has a 12-month inventory, up from 4.7 months in 2005, according to the National Association of Realtors.

Faced with such sobering prospects, many buyers no longer want to close on their properties, as they risk steep losses when they try to sell. In some buildings, as many of 30% of condo buyers are turning to the courts in an effort to cancel their contracts. If unsuccessful, they have to either go ahead and close on a unit they no longer want or walk away and lose their deposits, which are typically between 10% and 20% of the purchase price.

In one closely watched case, Florida's Fourth District Court of Appeal sided in June with the developers over buyers who were seeking to recover a deposit in the Marina Grande, a two-tower, 26-floor complex that overlooks the Atlantic Ocean in Palm Beach County. The plaintiffs -- two individual investors who operated under the name D&T Properties -- cited a clause in state law that allows buyers to cancel over material changes in the project.

But the court affirmed that the plaintiffs, who paid a $99,000 deposit for a $495,000 condo, could not cancel their contract because of rising insurance and utility costs or for minimal increases in other costs. The court said an 18% increase in costs controlled by a developer is not "material," but did not set a standard as to what level of increase would meet that bar. Gary J. Nagel, the attorney for D&T Properties, called the decision "incorrect" and said the court failed to define what a "material" change would be.

In June, a Miami-Dade Circuit Court jury ruled against an investor named Alexandra Hiaeve, who claimed that she never received the condo documents from the owner she was buying a unit from at WCI Communities' One Bal Harbour.

The jury said Ms. Hiaeve couldn't prove that she never received the documents. The judge also ruled during the trial that Ms. Hiaeve had failed to establish that she had requested the condo documents in writing. Thus, the owner, Gedalia Fenster, was allowed to keep the $300,000 deposit.

A 'Ridiculous' Decision

Robert Zarco, the attorney representing Mr. Fenster, says that denying receipt of the documents is "very common in markets where people had been flipping and then the market turns and they want an excuse not to close." Ms. Hiaeve declined to comment, but her business partner, Yona Kogman, says the jury's decision was "ridiculous" and that Ms. Hiaeve hopes to appeal.

Developers are hailing these decisions. Tibor Hollo, chairman and president of Florida East Coast Realty, which is building Opera Tower, says the rulings indicate that people can't get out of their contracts for insignificant reasons. "Some just don't want to close in a bad market," he says.

But attorneys who represent condo buyers say many of the complaints of contract violations are legitimate -- and that the battle is not over yet. "We are going to see a number of cases where buyers are successful, primarily in areas where something substantial was altered in the project and those that were not delivered on time," says Jared H. Beck of Beck & Lee, a law firm in Miami. "The decisions represent just a tiny sliver of the universe of grounds for buyers' claims in the ongoing litigation war between buyers and developers."

Demanding a Refund

Dora and Umberto Arena, of Hollywood, Fla., are among the thousands of investors who are looking to the courts for relief. When the Arenas bought their deluxe $595,000 condo in Hallandale Beach, developers urged them to move quickly to put down their $120,000 deposit. The planned 283 units at the Ocean Marine Yacht Club in Hallandale Beach sold out in only three weeks when they were offered to the public three years ago.

"We saw this beautiful 48-slip marina in their brochures, and it sounded wonderful to have a place for a boat and to live in that brand new building," says Ms. Arena, 64.

Despite the name, the Ocean Marine Yacht Club has no marina, as the developer was unable to secure the necessary permits. "We were inundated with literature touting it as a marquee feature of the complex while the developer was failing to disclose it didn't have the necessary permits or approvals," Ms. Arena says.

The Arenas are suing the developer, Chicago-based Fifield Realty Corp, demanding refund of their deposit. Representatives of Fifield declined to comment directly on the pending litigation. In a written statement, the company said the litigation "may be based on people trying to get out of their contracts because of current market conditions, including changes in credit and mortgage terms."

Ironically, the growing number of lawsuits may actually make the problem worse. A high rate of units contested in court makes buyers nervous about closing and moving into a half-empty complex, which further depresses the market, says Mr. McCabe, of McCabe Research & Consulting. That, in turn, will give buyers more incentive to sue. "Just wait. We haven't started to see what we are going to see," Mr. McCabe says.

Article is here...

AGC Economist: Construction Costs to Keep Rising

Oil is down. The number of construction projects are also down. Material costs are up, however, negating any potential savings on building. So says AGC's Ken Simpson in a recent CoStar interview:

Kenneth Simonson joined the Associated General Contractors of America as chief economist in 2001 when commercial markets were feeling the sting of the last recession. The AGC is largest and oldest national construction trade association in the United States, representing more than 33,000 firms, including 7,500 of America’s leading general contractors, and more than 12,500 specialty contracting firms.

Simonson publishes DataDIGest, a weekly snapshot of economic and development industry statistics drawn from Census figures and other data sources. He has gradually amassed a network of contractors, purchasers and suppliers who supply information on price changes that help make his survey of materials cost one of the standards in the industry.

In July, total U.S. construction dropped a larger-than-expected 0.6% as home building fell to a seven-year low, according to the latest Commerce Department data released Monday. Nonresidential construction spending, however, continued growing in July despite the weak economy and housing slump,

"In 2007, we had a remarkable year," Simonson said. "The Census Bureau reports that 15 of the 16 nonresidential categories were up over last year -- the only exception being religious structures, which are most closely tied to residential development.

"Year-to-date figures comparing the first seven months of 2008 and 2007 show how broad-based the nonresidential strength is," Simonson said. "Total nonresidential spending through July was 14% ahead of the year-ago total."

Materials costs, however, and cutting into developers' margins, and much of the spending is on big projects that started development a year or two ago, Simonson said. We caught up with the economist to elaborate on the trends he’s seeing in construction material prices.

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Monday, September 8, 2008

Distress soon could hit U.S. commercial property

If the news hasn't been bad enough, here' some more, this time from Reuters.

By Ilaina Jonas - Analysis

NEW YORK (Reuters) - U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market.

Since the market's peak in 2007, the availability of debt -- the lifeblood of commercial real estate -- has dried up and choked off sales. Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a massive write-down of all commercial real estate loans. But the clock looks to be running down.

"We're going to see a whole lot more trouble going forward," Peter Steier, vice president of Inland Mortgage Capital Corp said.

Steier was speaking at the Distressed Commercial Real Estate Summit East last week, where about 200 investors, lenders and buyers gathered in hopes of finding ways to capitalize on the commercial real estate corpses that are likely to come as foreclosures, sick banks and distressed loans spread.

From their peak last year, office prices in the second quarter were down 11.2 percent; retail prices fell 4 percent; and warehouse and distribution center prices were off 6.7 percent, according to real estate research firm Reis Inc. Apartment prices were down 13.8 percent from their peak in late 2005.

Sales are expected to fall 66 percent this year from $467 billion to an estimated $159 billion because debt, especially securitized debt in the form of commercial mortgage-backed securities (CMBS), is either unavailable or prices are too high and terms too strict for borrowers, Reis said.

So far, many of the distressed commercial properties and loans have appeared in Arizona, Las Vegas and Florida, as well as in Atlanta -- and already-troubled Louisiana, Michigan and Ohio.

"One of our biggest problem areas is pretty much the state of Ohio," said Kevin Donahue, senior vice president Midland Loan Services Inc, a CMBS special servicer which steps in when a loan is showing imminent signs of trouble. "If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland."

Many of the defaults and foreclosures have been directly related to the collapse of the housing market. Undeveloped land sells for about 10 cents on the dollar, and finished condominiums sell for up to 90 cents on the dollar, said Michael Lessor, managing director of loan sales advisor Eastdil Securities.

But many expect loans on better-quality buildings, especially shopping centers, to start running into trouble, as borrowers find they cannot refinance their maturing loans and are forced to sell or else default.

Many problems loans were issued, pooled and securitized in 2006 and the first part of 2007. The loans assumed rents and commercial real estate prices would continue to rise. Many of them were heavily leveraged 3- or 5-year interest-only, floating rate loans coming due in 2009-2010.

"Any loan made in the last couple of years that was based on an improving story is having issues," said David Iannarone, managing director with loans servicer CWCapital Asset Management LLC. "The story has not improved."

Still, many borrowers remain reluctant to sell, hoping the market will improve before their loans mature. But they may be forced to sell at lower prices or face default on balloon payments.

Lehman Brothers said about $167 billion of fixed-rate CMBS loans are expected to come due from now through the end of 2012. Although defaults will rise, Lehman said a more likely outcome will be more extensions, leaving bondholders to take the hit on their returns.

BANKS JOIN IN

A flood of performing or nonperforming commercial real estate loans may hit the market as the U.S. Federal Deposit Insurance Corp pressures institutions to sell loans and shore up capital.

"The banks want to sell; the question is, can they sell them?" asked David Dorros, managing director of CB Richard Ellis Group Inc National Loan Sales Advisory Group.

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Friday, September 5, 2008

9% of Mortgages Delinquent or in Forclosure, Says MBA

Chew on that for a second. Jay Brinkmann of the Mortgage Banker's Associations said that nearly 9 out of 100 mortgages are either in default or in the foreclosure process. That is an alarming number. Florida and California make up nearly 40% of that number.

From Marketwatch:

By Amy Hoak

CHICAGO (MarketWatch) -- The rate of mortgages entering foreclosure hit another record high in the second quarter, as did the percentage of loans somewhere in the foreclosure process, the Mortgage Bankers Association reported on Friday.
The delinquency rate, a measure of mortgages with at least one overdue payment but aren't in foreclosure, also was the highest ever recorded in the 39-year history of the MBA's quarterly survey.

States hit hard by the foreclosure crisis continue to drive the national numbers, said Jay Brinkmann, MBA's chief economist and senior vice president for research and economics. Increases in foreclosures seen in California and Florida overshadow improvements seen in states including Texas, Massachusetts and Maryland, he said.
Only eight states -- Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio -- had rates of foreclosure starts that were above the national average, Brinkmann said in a telephone interview. That "is an indicator that this is not equally distributed across the country," he said.

California and Florida alone accounted for 39% of all of the foreclosures started nationally during the second quarter. Together, the two states made up 73% of the increase in foreclosures between the first and second quarters, according to the MBA.
"The worst states are getting worse," Brinkmann said, noting that overbuilding occurred in California and Florida, and their numbers will continue to drive the national ones. Those states, he added, also are the two with the most mortgage loans outstanding.

Brinkmann said he hasn't investigated why states like Massachusetts, for example, showed marked improvement. But what's happening there might indicate how markets without massive overbuilding problems might recover in the months ahead, he said.

A look at the numbers

Altogether, more than 9% of mortgage loans are either delinquent or somewhere in the foreclosure process, Brinkmann said.

The percentage of loans that went into foreclosure in the second quarter was 1.08%, up from 1.01% in the first quarter and 0.59% a year ago. Meanwhile, 2.75% of loans in the survey were somewhere in the foreclosure process, up from 2.47% last quarter and 1.4% in the second quarter of 2007.

The delinquency rate was 6.41% of all loans outstanding, according to the survey. The rate was 6.35% in the first quarter, and 5.12% a year ago.

But Brinkmann pointed out that the overall delinquency rate was driven by loans that were 90 days or more past due -- and by those that were in California and Florida. The 30-day delinquency rate was below levels seen in 2002, he said.

The delinquency breakdown supports the argument that the foreclosures are being driven by housing fundamentals as opposed to economic issues such as job losses, he said. Drops in home prices seem to be driving the transition between a loan that is delinquent and one that goes into the foreclosure process.

The survey covers 45 million loans on one- to four- unit residential properties, representing between 80 to 85% of all first-lien residential mortgage loans outstanding in the country. Loans in the survey were reported by about 120 lenders.
Certain loan types also are driving rates, Brinkmann said.

"Subprime ARM loans accounted for 36% of all foreclosures started and prime ARMs, which include option ARMs, represented 23%," he said in a news release. "However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans," he added.

In future quarters, foreclosure start numbers will probably be increasingly dominated by problems with prime ARMs, he said. That's due partly to the difficultly some borrowers are having with prime, option ARMs.

Where's the bottom?

Many wonder when foreclosures will hit a bottom, but Brinkmann called the idea of a national bottom "meaningless."

"Real estate markets are local, and some markets are already improving," he said.

"For example, even Michigan, one of the worst hit markets in the country, has now gone three quarters with little to no increase in its rate of foreclosures. Likewise, Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom.

"Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states," Brinkmann said. End of Story

Amy Hoak is a MarketWatch reporter based in Chicago.

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Can a Bad Condo Conversion Kill You?

This story in the Tampa Bay Business Journal was primarily about the sale (at a $15-million loss no less) of a failed condo conversion project. What struck me is that people are blaming this lousy deal for killing the guy who bought it in the first place.

Tampa Bay Business Journal - by Janet Leiser Staff Writer

TAMPA — Village Oaks at Tampa, an apartment complex unsuccessfully converted to condominiums, has sold for $21.2 million — nearly $14.8 million less than a Boca Raton developer paid at the peak of the market nearly three years ago.

LaSalle Bank filed a foreclosure lawsuit against Tampa Oaks 52 LLC in April, two months after the death of the entity’s principal, Elie Berdugo.

In late August, court-appointed receiver Radco Management LLC sold 215 units in the complex to Mid-America Apartment Communities Inc. for about $98,837 a unit.

Mid-America, a Memphis, Tenn.-based real estate investment trust that owns and manages apartments, paid $11.2 million less than what Tampa Oaks 52 owed its lenders, including LaSalle.

“There was just a lot of over exuberance in the market a couple of years ago, and I think we’re seeing the result of that now,” said Jim Bobbitt, senior VP of capital markets at CB Richard Ellis Inc.

Still a good deal

Despite the difference in sale prices, Norman Radow, CEO of Radco, said the borrowers received more than expected from the sale.

Opus South Corp. and Florida Southeast Development Inc. built Village Oaks near Fletcher Avenue and Interstate 75. It was new and unoccupied in December 2005 when Berdugo paid $153,846 a unit — then a record unit price in east Tampa.

During 2007, Berdugo sold 19 condos for an average of $215,000, bringing in about $4 million, said Byron Moger, senior director for the capital markets group at Cushman & Wakefield of Florida.

Some buyers paid as much as $259,900 for units that include garages, records show. There were no sales this year.

While Berdugo clearly overpaid for the complex, Mid-America paid a fair price, said Moger, who brokered the deal. Moger contends the complex sold for less because of the 19 individually owned condos, which will create higher operating costs and more operational headaches for Mid-America.

“There are a whole host of issues with renters and owners occupying the same community,” Moger said.

One of the questions is whether Mid-America will try to buy the condos for what is owed, which is above market value, or wait for the units to go into foreclosure and pay less. Some are already in foreclosure.

In the meantime, Mid-America must operate the condominium association.

If all of the 234 units at Village Oaks were rentals, Moger said it would have likely sold for as much as $125,000 a unit, or $29.2 million.

CBRE’s Bobbitt agrees “fractured condos” sell for less.

Stress blamed for death

Last February in the midst of the condominium decline, Berdugo was visiting his homeland of Israel when he unexpectedly died of a heart attack at 55. The South Florida Business Journal reported the businessman had suffered high blood pressure compounded by stress from troubled commercial real estate investments.

Berdugo founded EB Developers in 1993. The company owned thousands of acres in South and Central Florida, as well as a landmark hotel site in Manhattan. It built luxury homes and garden-style condos, and, in recent years lined up $1.5 billion in projects.

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Thursday, September 4, 2008

Worldwide Office Sales Hit Hard

Businessweek reporting worldwide office sales are being hit very hard. In the U.S. alone, sales are down nearly 70% as reported by Real Capital Analytics.

The Credit Squeeze Hits Global Properties
Developers of commercial properties from London to Tokyo are suffering as banks cut lending

First came the U.S. housing bust. Now comes the overseas aftershock. As the global financial system reels from the credit crunch, skyscraper projects have stalled in London, Tokyo developers have gone belly-up, and Indian office space can be had for fire-sale prices.

What do bad U.S. home loans have to do with office buildings halfway around the planet? Plenty. Global lenders, chastened by the subprime mess, are denying credit to many builders and demanding tougher terms on loans to buy or refinance commercial properties. And as those same lenders lay off thousands of workers, they need less office space—putting downward pressure on rents and spurring developers to rethink their plans. "It's impossible nowadays to keep financial crises in one area," says Minoru Mori, chief executive of Japan's Mori Building, which just cut the ribbon on the 101-story Shanghai World Financial Center, China's tallest skyscraper. He ought to know: Lehman Brothers (LEH) recently scrapped plans to move into the building, and Morgan Stanley said it would rent only four floors instead of eight.

Dealmaking has slowed sharply. The value of commercial real estate transactions worldwide in the first six months of this year was only $306 billion, about half the level of the same period in 2007, research group Real Capital Analytics estimates. "It's hard to sugarcoat what's going on," says Dan Fasulo, Real Capital's managing director of research. "The environment is the most difficult it has been in some time."
BRITISH BLIGHT

London may be suffering the most. As costs for commercial real estate financing in the British capital have soared, only 3 of 19 major office projects announced since 2004 have gone ahead as planned. Developer British Land is delaying construction of a 47-story skyscraper popularly known as the Cheese Grater (owing to its triangular profile). Overall, purchase prices for British commercial property are down 20% from mid-2007 and could fall 15% more in the coming year, says Kelvin Davidson, an economist at London consultancy Capital Economics. "The market won't pick up before 2011."

That might be too late to help Metrovacesa. The Spanish property group spent $3.7 billion in 2007 for the London headquarters of bank HSBC (HBC), Europe's biggest-ever real estate deal. HSBC agreed to remain in the building and extended Metrovacesa a $1.5 billion short-term loan, to be repaid this fall after the Spanish group lined up long-term financing. But analysts reckon the building has since lost at least 25% of its value, and Metrovacesa hasn't yet secured new funding. The company says it's confident it can work out an agreement.

Subprime isn't the only source of trouble. In Japan, banks fared relatively well in the wake of the U.S. mess. But a flagging economy and weak consumer confidence have clobbered smaller developers. Nine publicly traded real estate and construction groups have filed for bankruptcy this year, including Sohken Homes, which sought protection from creditors on Aug. 26. That, in turn, provoked profit warnings by banks that lent to the companies.

In contrast to past real estate downturns, overbuilding isn't a big problem. Vacancy rates remain low in many markets, so rents are stable. "People learned from the 1980s," when loose lending led to massive investment, says David J. Siopack, co-manager of the Schwab Global Real Estate Fund (SWAIX), which has $190 million in assets. This time, he says, "there was a little more discipline."

Overexuberant development has been confined largely to fast-growing markets, particularly China and India. In the Chinese cities of Chongqing and Zhengzhou, more than 30% of existing space is vacant after a building binge two years back, and an additional 4.8 million square feet of space is due for delivery this year in the two cities, according to Jones Lang LaSalle. In India, inflation, high interest rates, and stock market turmoil have taken a toll, with rents off by as much as 40%, says Pranay Vakil, chairman of Knight Frank India, a property consultant. The U.S. slowdown, meanwhile, has dampened demand for "cubicle developments" used by outsourcing shops. "Most IT companies said, 'No more expansion,' " Vakil says.

So far damage to lenders has been limited. But banks in Ireland and the Netherlands might be forced to take writedowns, and investment funds targeting Western European property could be in trouble. The outlook is even grimmer in Spain, where real estate prices have been in free fall. Martinsa-Fadesa, a major property company, filed for bankruptcy in July, and another big developer, Colonial, is struggling with $14 billion in distressed debt.

For all the bad news, the situation creates opportunities for those with cash. Pension funds and sovereign wealth funds "still have money to invest," says Tim Jowett, an analyst at Swiss bank UBS (UBS). But developers may have to wait awhile. Those conservative investors won't likely put money into the market now, Jowett says, if they think that "in 6 months or 12 months prices might go lower."

Top Five Ways To FAIL as a Commercial Real Estate Investor

Great little article. I'll cut to the chase, but obviously the writer (Rob Powells, a real estate coach and fellow blogger) is being a little sarcastic here. Simple lessons.

From Bigger Pockets:

So….here they are….Top Five Ways To Fail As A Commercial Real Estate Investor In The Coming Economic Storm (why only five? Well…because there are about a hundred ways to fail…who will read that?)

1. Be over-leveraged

Make sure that you are mortgage to the hilt on all your assets. This is a surefire way to make you scramble and panic as you come to the realization that you are upside down and if you sell…you will sell at a significant loss…. Even better….if you have any equity in your assets….leverage that too and buy more highly leveraged real estate.

2. Rely on your own inexperience

Ignore your mentor’s advice…or better yet, do not get a mentor. Mentors have a lot of advice based on experience. If you want to make sure you fail. Don’t get a mentor….and if you already paid for one…make sure you ignore his/her advice. Don’t fall into the trap of being a student. Your intelligence based on your inexperience is the best way to fail with flying colors.

3. Be Cheap

Make sure and do not spend the cash for a great real estate attorney or an asset protection attorney. This is a must if you plan to fail well. If your spouse or “partner” is giving you hell about getting an attorney….buy a book “Legal Advice for Dummies” or better yet…sign up for pre-paid legal. This way…you will still fail…but not fail fast. Also…make sure you do your own taxes and bookkeeping. CPAs and bookkeepers are for successful people….

4. Be a Lone Ranger

If you hate to “network”…then failure is at your doorstep. Make sure you are a loner and if you hate people….this is even better. By no means should you build “wealth lifelines” with those that can help you succeed. “Success breeds success” so say away from building relationships. Of all the ways to fail…this, by far, is the most successful way to shoot yourself in the foot.

5. Don’t sell

This is a great time to be greedy and hold out for your asking price. Just because values are plummeting does not mean you should give in to lowering your price even though your are getting your return on your investment if you sell. Most successful real estate investors are moving (or have moved) to a liquid (cash) position (getting ready to take advantage of plummeting values). By no means should you sell anything you have. Any equity you have will soon disappear and this my friends will help you owe more on your assets than what your assets are worth. Most experts ( Robert Prechter, John Williams, Nouriel Roubinii, and Harry S. Dent) are ranting about how property values are going to go down the toilet. Imagine selling your property today and buying it back at 40 - 60 cents on the dollar? If they are right….then make sure you stay greedy. The way to do this is to get emotionally tied to your properties…then your assets will be much more difficult to sell.

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The Counterintuitive Commercial Real Estate Market

CFO Magazine/CFO.com is reporting that many companies are not seeing the fall in rents translate into bottom-line savings. Great story. Courtesy of CFO.com.

Falling real estate prices don't automatically produce a traditional buyer's market.
Marie Leone - CFO.com | US

Unexpectedly, the current downward drift in commercial real estate prices isn't translating directly into cheaper rents for corporations. Faced with the sudden uptick in inflation, landlords are finding ways to collect more money from lessees.

To be sure, the Moody's/REAL Commercial Property Index reported a 9.6 percent decrease in prices in June, compared with the same period last year, and a decrease of 11.8 percent from the October 2007 peak. The report, which was released in August, measures the change in transaction prices for commercial real estate assets based on the repeat sales of the same assets at different points and time.

The June index is the fourth consecutive month of negative returns, and shows a negative return over a two-year period. And while the 10 largest cities in each property type — industrial, office, and retail — are performing better than the national average, the aggregate numbers continue to drop. For instance, nationally the price of industrial space declined 9.3 percent from the previous quarter, and 7.8 percent from a year earlier. The price of office space sunk too, by 5.9 percent since the second quarter, and 7.8 since 2007. Meanwhile, retail space declined 4.6 percent from the previous quarter, and 7.7 percent over the past year.

On the leasing side, a similar trend is playing out. The commercial real-estate market is showing signs of "negative absorption," says Marisa Manley, president of Commercial Tenant Real Estate Representation, a New York City-based broker that advises corporate tenants. That means that more space is becoming available than is being leased or bought. As a result, the law of supply and demand is helping to cut rental rates and creating incentives for building owners to offer tenants additional concessions.

But that doesn't always translate into lower rents. Indeed, landlords are tightening up lease structures, and there's an escalation in the number of clauses finding their way into contracts. In fact, come renewal time, landlords will be working to extract as much as they can from tenants in terms of passing along rising operating costs. Meanwhile, CFOs and corporate real estate managers will be looking for their opportunity to lock-in better long, and short-term deals.

In the recent past, when inflation was in check, landlords became comfortable with billing tenants a simple fixed increase to cover building operating expenses. Landlords preferred to avoid billing tenants directly for operating expenses because it was costly and time consuming to itemize and disclose all the charges to the tenants, says Manley.

Now, however, as the economy moves toward an inflationary environment, tenants can expect landlords to seek more aggressive formulas to recover costs rather than a simple fixed rent increase. Corporate managers should expect to see new leases that include variable rent increases based on such external metrics, as the consumer price index which reflects the national inflation rate, or the porters' wage increase, which is a local union contract staple that raises the pay scale of building maintenance workers.

Such increases can raise rent by nearly 20 percent, posits Manley. The hikes are a mechanism for landlords to preserve their return now, and will act as a profit center in the future when inflation wanes, she adds. That's what what happened in the 1970s and early 1980s.

If they sense tenants will reject variable costs in their lease agreement, some landlords will boost the fixed cost above the standard 3.5 percent annual hike and justify it by offering a more attractive amenities package. For example, Marshall Cohen, a partner in the real estate law firm Cohen & Perfetto, notes that he and his partners are seeing proposals that offer glass walls on buildings, sheetrock ceilings that replace drop ceilings, and upgraded carpeting—all included in a higher rent.

For spaces that have to be built out, landlords will try to distinguish themselves as owners of premium properties by luring tenants with little things such as upgraded hardware and lighting packages or by extending the free-rent periods beyond the first few months, says Louis Perfetto, the managing partner at Cohen & Perfetto.

Further, tenants should ask landlords whether current property taxes of the building are being abated by a tax-incentive plan. Many tax incentives fade or disappear entirely in the later years of the program. The issue may be blurred further if a tenant signs up for a 20-year lease at the tail-end of a program. That means, says Cohen, that the additional taxes due when the tax break runs out could come as a shock — and an unbudgeted one — to a CFO. After all, contracts usually pass tax hikes through to tenants.

Still, new trends are emerging that may change the leasing dynamic. Manley identifies two significant ones: tenants are choosing real estate sites outside of traditional city or industrial centers and are exhibiting a preference for so-called green buildings. Regarding the first trend, Manley points out that many companies no longer feel compelled to do business in traditional business districts. For instance, advertisers don't believe they have to cluster on Madison Avenue in New York—or even in New York at all.

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Bloomberg: Troubled Miami Condo Sale Signals Real Estate Bottom?

Private equity in the game now. Looks like banks with troubled loans have some serious thinking to do. From Bloomberg.com.
Florida Real Estate Bottom Signaled by Sale of Distressed Condo

By Bob Ivry

Sept. 4 (Bloomberg) -- Sales of distressed Miami properties have begun, signaling a bottom for south Florida's real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.

The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, ``broke the logjam'' for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.

Regional and community lenders are starting to market properties in Miami, where the median condo price in July fell 19 percent from a year earlier, according to the Florida Association of Realtors in Orlando. Banks that were reluctant to take real estate-related writedowns may be forced by regulators to sell homes that sit empty and mortgage notes that aren't being paid, said Jack McCabe, founder of McCabe Research & Consulting LLC in Deerfield Beach, Florida.

``There's a purging going on,'' McCabe said. ``It's my belief that the vulture buyers would form the bottom of the real estate market, and we're almost there. That bottom may last for three years as foreclosure sales go on.''

McCabe estimates that at least $30 billion has been earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy, he said.

Non-Performing Loans

Wachovia Corp., based in Charlotte, North Carolina, and Birmingham, Alabama-based Regions Financial Corp. have sold real estate loans that were non-performing, or stopped paying, McCabe said.

At BankUnited Financial Corp., Florida's largest bank, non- performing real estate loans jumped to 8.3 percent in the second quarter from 1.5 percent in the third quarter of 2007, according to a filing with the U.S. Securities and Exchange Commission.

Regulators told the Coral Gables, Florida-based bank it may lose its ``well-capitalized'' designation unless it attracts at least $400 million, the company said last week.

``Banks may be reluctant to make a deal because they want to preserve cash,'' said Kenneth Thomas, an independent bank consultant and economist in Miami. ``If they don't make the deal they don't have to write down their capital.''

BankUnited spokeswoman Melissa Gracey declined to comment.

Fifteen percent of the real estate loans written by closely held, Miami-based Ocean Bank weren't being paid in the second quarter of 2008, compared with 2.4 percent a year earlier, according to the bank's filings with the Federal Deposit Insurance Corp.

Selling Bad Loans

Ocean Bank started selling bad loans and foreclosed properties in the last three months of 2007, according to spokesman Ray Casas.

``We took a very hard look at our portfolio and, as appropriate, sold notes and foreclosed properties,'' Casas said. ``The bank has been very aggressive in doing that.''

Bad real estate loans increased five-fold at BankAtlantic Bancorp Inc., based in Fort Lauderdale, Florida, according to the bank's FDIC filings. In the second quarter, 1.5 percent of the loans weren't paying, compared with 0.3 percent in the second quarter of 2007.

Calls seeking comment from BankAtlantic were not returned.

``Banks are at the point where they have to take a hit,'' said Michael Klinger, managing member of Saber Real Estate Advisors LLC in Aventura, Florida, a developer and opportunity fund. ``A lot of them were avoiding the problem because they don't know what to do with the real estate and they don't want to admit and deal with their problems. They figured time would make things better.''

Banks have begun circulating lists of real estate loans for sale, Klinger said.

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Wednesday, September 3, 2008

TICs Not So Hot Anymore?

Live Fast, Die Hard, as they say. Courtesy of CRE News.
By Jeff Mordock, Commercial Real Estate Direct Staff Writer

Some industry players are starting to fret that the tenant-in-common market has fallen out of favor with investors.

In the second quarter of 2008, sponsors of TIC groups recorded $353 million of investment activity, according to Omni Brokerage, a Salt Lake City sponsor of such vehicles. That's a 20 percent drop from the $443 million of activity recorded in the first quarter and a nearly 50 percent drop from the $700 million a year ago. It's also the third straight quarter that TIC activity has dropped by at least 20 percent.

So far this year, TIC investment activity has totaled $796 million, down from $1.6 billion a year earlier.

TIC investments exploded earlier this decade in lock-step with the residential housing market. Legislation was passed in 2002 to facilitate the spike in deals.

As investors sold second homes into a frothy market for profit, increasing numbers sought to shelter their gains through tax-deferred transactions. By pooling their capital with that of others, they were able to pursue large commercial properties with the promise of larger returns.

Orchestrating such investments are TIC sponsors, whose numbers grew to 80 at the market's peak in 2005-2006 and has since shrunk to 64. Only 21 of them completed deals during the first half. And of those, only nine completed more than one deal.

The housing crunch has forced many investors to hold their properties, nearly shutting the spigot of capital that was being funneled to TIC sponsors. So sponsors aren't doing deals and some are said to even be struggling to meet their payrolls.

"It's a terrible time to be a TIC sponsor right now," said Lee Travis, acquisition director of Ellison Equities, a Los Angeles sponsor. "Regulatory scrutiny is increasing, costs are doubling and debt and equity is impossible to find."

This year's $796 million of TIC activity accounts for less than 1 percent of the $85 billion of total investment activity, according to Real Capital Analytics.

That's a sharp contrast to the market's heyday. In 2006, TIC sponsors raised a record $4 billion of capital, plowing that into $8 billion of investments. And last year, they raised $3 billion, turning that into $7.5 billion of investments.

It's not known how much equity has been raised so far this year, but most industry watchers expect that for the full year, capital raises will total substantially less than last year's $3 billion and could even be less than $2 billion.

"If things don't improve, the whole industry is going to have to face serious questions," says Wesley Dodds, a partner with Dodds, Belmont and Hawkins, a Philadelphia law firm that specializes in TIC transactions.

Read the rest of the story at CRE News