Circuit City to Liquidate All Stores

I don't think they ever recovered from the whole DIVX failure. In any event, lousy return policies, questionable "salespeople" and junk warranties pretty much did them in. Look for lots of vacant big boxes on a corner near you.

Bankrupt Circuit City Stores Inc., the nation's second-biggest consumer electronics retailer, said Friday it failed to find a buyer and will liquidate its 567 U.S. stores. The closures could send another 30,000 people into the ranks of the unemployed.

"This is the only possible path for our company," James A. Marcum, acting chief executive, said in a statement. "We are extremely disappointed by this outcome."

The company had been seeking a buyer or a deal to refinance its debt, but the hobbled credit market and consumer worries proved insurmountable.

The liquidation of Circuit City is the latest fallout from the worst holiday shopping season in four decases. People have slashed their spending since the financial meltdown in September as they worry about their job security and declining retirement funds.

Other recent casualties include KB Toys, which filed for bankruptcy in December and is liquidating stores. Department store chains Goody's Family Clothing and Gottschalks Inc. both filed for bankruptcy this week—Goody's plans to liquidate, while Gottschalks hopes to reorganize.

Industry experts expect more bad news in the coming months as spending likely will deteriorate further.

Circuit City said in court papers it has appointed Great American Group LLC, Hudson Capital Partners LLC, SB Capital Group LLC and Tiger Capital Group LLC as liquidators.

"Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders," Marcum said.

Shareholders are likely to receive nothing, as is typical in bankruptcy cases. It was unclear what would happen to the company's 765 retail stores and dealer outlets in Canada.

"Very, very sad," said Alan L. Wurtzel, the son of company founder Samuel S. Wurtzel, and the chief executive from 1972 to 1986, board chairman from 1986 to 1994 and vice chairman until 2001. "I feel particularly badly for the people are employed or until recently were employed."

Wurtzel has previously said Circuit City didn't take the threat of rival Best Buy Co. seriously enough and, at some points, were too focused on making a profit in the short term instead of building long-term value.

Circuit City filed for Chapter 11 bankruptcy protection in November as vendors started to restrict the flow of merchandise ahead of the busy holiday shopping season.

It had been exploring strategic alternatives since May, when it opened its books to Blockbuster Inc. The Dallas-based movie-rental chain made a takeover bid of more than $1 billion with plans to create a 9,300-store chain to sell electronic gadgets and rent movies and games. Blockbuster withdrew the bid in July because of market conditions.

Circuit City, which said it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31, said in its initial filings that it planned to emerge from court protection in the first half of this year.

Under court protection, Circuit City has broken 150 leases at locations where it no longer operates stores. The company already closed 155 stores in the U.S. in November and December.

U.S. Bankruptcy Judge Kevin Huennekens had given the company permission to liquidate if a buyout was not achieved. The company still needs final approval of a liquidation from the court.

The liquidation is the latest big blow to the nation's malls, which have suffered from a rise in vacancies as a slew of chains from Mervyns LLC to Linens 'N Things have liquidated. But analysts say that the demise of Circuit City, whose stores range in size from 20,000 to 25,000 square feet, will hurt the fortunes of mall operators even more.

"It will bring to market a glut of big box spaces across the country," said John Bemis, head of Jones Lang LaSalle Inc.'s retail leasing team. "It will have one of the largest impacts on big box real estate across the country."

LINK

South Florida Condo Developer Tarragon Files Chapter 11 Bankruptcy

The latest domino to fall. Tarragon was apparently caught up in the current perfect storm of bad timing, falling sales, lack of available credit and a sharp drop off in the housing sector.

Tarragon Corp. is the latest homebuilder to be hit by the housing crisis.

The company and 19 of its subsidiaries filed for Chapter 11 bankruptcy reorganization in New Jersey federal court on Monday.

Tarragon has developed four condominium projects in Jacksonville that include Bishop’s Court at Windsor Parke, Cobblestone at Eagle Harbor, Mirabella and Montreux at Deerwood Lake, none of which are sold out, according to the company’s Web site. Tarragon also owns four apartment communities, including Club at Danforth, River City Landing, Vintage at Plantation Bay and Woodcreek at Regency.

The estimated number of creditors is between 5,001 and 10,000. Assets have been estimated at about $841 million and liabilities at about $1.035 billion, court records show.

The three largest unsecured creditors are listed as New York-based Taberna Capital Management ($125.9 million), New Jersey-based AJD Construction Co. ($2.9 million) and Fort Lauderdale-based Omni Boys North Ltd. ($1.03 million).

Tarragon CEO William S. Friedman did not return a phone call for comment.

The firm has been an active developer of multifamily housing for rent and sale in Florida, Texas, Tennessee and the Northeast.

The bad news for Tarragon stockholders: The company said it does not expect there will be any distribution to equity holders in conjunction with the bankruptcy cases. Shares (NASDAQ: TARR) dropped from a dime to a nickel on the news.

The filing shouldn’t come as a surprise to anyone who has followed the recent fortunes of the firm, which included steady losses – more than $105 million for the first nine months of the year – bargain sales of assets, shareholders suits, deposit forfeiture on land deals, compliance trouble with NASDAQ, margin calls on the stock of the chairman and his wife, and the company’s inability to secure long-term financing.

Tarragon said it had a commitment for debtor-in-possession financing from an affiliate of ARKO Holdings, an Israeli public company, and said the bankruptcy filing shouldn’t have any day-to-day effect on Tarragon’s property management subsidiary, or on the operation of its rental apartment properties.

Friedman said in a release that, based on discussions with unsecured note holders and the support of ARKO, he expects to structure a consensual plan with the creditors to preserve the value of its property management and development platforms, and maximize any return to creditors.

The Tarragon board is being advised by Lazard, and Friedman said in the company news release that the board did not rule out additional asset sales and “all available alternatives.”

Story Link

CRE Loans An Increasing Worry

Very good analysis from CoStar on distressed loans. Sadly, this will be the epicenter of the commercial meltdown in 2009.

CRE LOAN DISTRESS LEVELS ESCALATING RAPIDLY

The distressed loan situation in commercial real estate is taking a striking turn for the worse, according to a CoStar Group analysis of December loan information on more than 83,000 loans in commercial mortgage backed securities.

The level of distressed loans in the CMBS universe was at historically low, and unsustainable levels, in 2008 - less than 1% of outstanding loans. That compares favorably to the level of commercial real estate distress in bank and thrifts where distressed properties made up about 2.32% of their nonresidential portfolios as of Sept. 30.

However, that level of safety in the CMBS universe looks like it could be eroding rapidly.



The amount of loans placed in special servicing - generally an indication of a delinquency or failure to pay off a mature loan - rose dramatically in the fourth quarter - from about $400 million per month in September to more than $1.6 billion in November.


And that trend is likely to continue in the near term as the number of loans identified by CMBS servicers as having potential credit issues more than doubled from about $3.5 billion per month to about $7.5 billion in November.

In preparation for its first market outlook presented last week, CoStar also undertook its first-ever analysis of delinquent and distressed properties in the CMBS market, examining loans with a total value of more than $700 billion.

CoStar identified nearly 1,200 commercial real estate loans that were either delinquent in loan repayments or had reached maturity without pay off of the loan. The principal and interest outstanding on those loans as of mid December totaled nearly $8.2 billion. (Editor’s Note: We identify and detail, the 10 largest of those delinquent/specially serviced loans at the end of this story.)

CoStar also compiled a list of nearly 6,100 additional loans that servicers for those securities have flagged as having potential credit concerns. The current scheduled ending balance of those loans totaled $57.8 billion.

In addition, CoStar identified more than 160 properties that had been repossessed by various CMBS trusts. The properties had a loan value at the time they were taken over of more than $1 billion. Based on the properties most recent valuations, the bondholders were likely to take a loss of more than $300 million. (Editor’s Note: We will identify and detail, the 20 largest of those REO loans in next week’s Watch List column.)

Where CoStar was expecting the number of currently delinquent loans to be in the states with the most commercial real estate, e.g. New York, California, Illinois, Texas, New Jersey, that turned out not necessarily to be the case. The number of delinquent commercial real estate loans appears to closely parallel areas of the country that have suffered most from the crisis in the housing market. In addition, the number of delinquent commercial real estate loans was also high in the industrialized Midwest states:

State, No. of Delinquent CMBS Loans
Texas, 171
Florida, 126
Michigan, 83
California, 81
Georgia, 71
Ohio, 71
New York, 70
Nevada, 42
Arizona, 39
Illinois, 34

Moving forward, however, it appears likely that the number of delinquent loans could start to increase in the population centers. The number of loans that CMBS servicers have placed on their watch lists as having potential credit issues is highest in the following states:

State, Number of Potential Problem Loans
Texas, 890
California, 741
New York, 445
Florida, 432
Ohio, 269
Michigan, 247
Georgia, 219
Arizona, 212
Illinois, 180
Pennsylvania, 180

Looking at delinquencies by property type, it is also apparent that this is a housing-led recession. Most commercial real estate delinquencies are showing up first in multifamily loans and then loans on retail properties as falling housing values have cut into consumer spending.


Going forward, retail properties continue to show potential credit concern but trouble also appears to be brewing in the office sector as well.

CoStar Group’s analysis is in line with Wall Street’s outlook for growth in CMBS delinquencies, which is for a nearly 300% increase in the number of commercial real estate loans that will become delinquent in 2009.

Fitch Ratings' CMBS loan delinquency index rose to 0.64% in November 2008. It projects that delinquencies will continue to rise, reaching approximately 2% by year-end 2009.

Moody's Investors Service's CMBS loan delinquency index rose to 0.75% in November 2008. It projects that delinquencies will continue to rise, reaching its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level as the market begins to form a bottom in 2010 and 2011.

STORY LINK (with bigger charts)

NYC Office Tenants Re-Negotiate Leases

Happening here as well. I can name two or three credit tenants who've asked for - and received - significant rent reductions since Thanksgiving. Read on...

NYC office tenants re-Negotiate leases
Jan 13, 2009 - CRE News

Manhattan office tenants are increasingly opting for short-term leases, which some landlords are accommodating because of the current weak market conditions. For example, Time Equities Inc. is offering small blocks of space at 125 Maiden Lane in at leases running from six months to a one year. It plans a similar strategy for its building at 131 W. 33rd St.

Short-term tenancy can hurt building values because lenders and potential buyers like to see buildings with stable long-term rent rolls. The practice hurts tenants by preventing them from locking in current market rents for the future when rental rates may increase.

CRE Direct

Comm Markets Won't Bottom Out Until 2010

ULA predicts what most of us already know: 2009 is going to be a pretty lousy year in commercial real estate. What will emerge, however, will be a much more disciplined banking and lending environment.

Read on:

Commercial Real Estate Market to Hit Bottom Next Year, Urban Land Institute
by Peter L. Mosca

No matter the market, capitalizing on industry knowledge has always been a major ingredient to overall business success. For builders looking to better understand the real estate market, they should take note of a new report by the Urban Land Institute. According to the "Emerging Trends in Real Estate® 2009" report, released by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP, real estate industry experts expect financial and real estate markets in the United States to bottom in 2009 and then flounder for much of 2010, with ongoing drops in property values, more foreclosures and delinquencies, and a limping economy that will continue to crimp property cash flows,

"Commercial real estate faces its worst year since the wrenching 1991-1992 industry depression," conclude industry experts interviewed for the report, which projects losses of 15 percent to 20 percent in real estate values from the mid-2007 peak. "Only when property financing gets restructured will pricing recorrect so we can find the floor; and this transition could wipe out companies and people," said one respondent interviewed for the report.

In general, interviewees believe that financial institutions will continue to be pressured into moving bad loans off balance sheets, using auctions to speed up the process. Investors will be discouraged until the "bloodletting' is over, states the report. When that occurs, cash and low-leverage buyers will be "king;" surviving banks will impose strict lending guidelines; commercial mortgage-backed securities will revive, but in a more regulated form; and opportunity funds will need new investment models.

"The industry is facing multiple disconnects," said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. "Many property owners are drowning in debt, lenders are not lending, and for many (industry professionals), property income flows are declining. There is an unprecedented avoidance of risk. Only when financing gets restructured will pricing reconcile, giving the industry a point from which to start digging out of this hole."

"The cyclical real estate markets always comes back, and they will this time too, but not anytime soon," said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers. "Commercial real estate was the last to leave the party, will feel the pain in 2009, and may be the last to recover. In the meantime, smart investors are going to hunker down and manage through these tough times. We expect to see patient, disciplined, long-term investors rewarded, and return to a back to basics approach to property management, underwriting and deal structure."

Distress in the housing market is benefiting the apartment market, which the report lists as the number-one "buy." Moderate-income apartments in core urban markets near mass transit offer the best buy, a trend that carried over from the previous year.

The report acknowledges that commercial markets will recover more quickly than most housing markets, and homebuilders may have to sell land tracts for "cents on the dollar" or face foreclosure on their holdings, adding to the already high rate of mortgage defaults and foreclosures.

One silver lining: Interviewees agreed that eventually, savvy investors will be able to cash in on the inevitable recovery, which some see occurring as early as 2010. "Money will be made on riding markets back to recovery and releasing properties, not on…financing structures," finds the report.

Before a rebound, Emerging Trends says the following needs to happen:

* Private real estate markets need to correct - lenders must force distressed owners to become motivated sellers.

* Debt capital needs to flow - lenders will need to learn to deal in a more stringent regulatory landscape. The commercial mortgage-backed securities (CMBS) market must "reformulate."  Regulators need to restore confidence in the securities market. The government will insert itself into overseeing mortgage securitization markets. Systemic overhaul promises more measured debt flow.

* The economy needs to improve. Falling demand for space won't affect real estate markets severely until 2009.

The Report also offered these tips for what to do in 2009:

* Recap distressed borrowers - invest in maturity defaults, construction loans/bridge loans, or take mezzanine positions and equity stakes in properties.

* Focus on global pathway markets - 24-hour coastal cities.

* Staff up asset managers, leasing pros and workout specialists. Separate good assets from bad.

* Retrench on development and reorient to mixed-use and infill. Higher-density residential with retail will gain favor in next round of building.  Go green - cutting energy expenses is likely to be a priority.

* Buy or hold multi-family; hold office; hold hotels; buy residential building lots, but be prepared to hold.

* Purchase distressed condos in urban areas near transit.

Lastly, the Report listed a number of markets to watch in 2009. Here's a look at the Report's Top 5 Markets:

* Seattle boasts its "corporate giants," but the market braces for rising downtown office vacancies; now at 10 percent. Tepid job growth will flatten rental rates. Housing demand drops and prices will slip, but stay above national averages. Interviewees rate the market a strong "buy" for apartments, and the "number-one buy" among industrials is the Puget Sound ports.

* San Francisco offers a Pacific gateway and a high quality of life with a well-diversified economy. The city ranks first for development and homebuilding, and is a leading "buy" city for apartments and office. Even though housing prices are expected to decline, foreclosures should remain in check, the report notes.

* Washington is the "ultimate hold market when the economy struggles." Downtown office vacancies should remain below 10 percent, and apartments lease "no matter what." The above-average employment outlook offers promise for the retail sector, the report says. Still, office vacancies continue to soar in northern Virginia, and further declines in condominium and home prices can be expected.

* New York takes a beating with the Wall Street "implosion" creating job losses and office vacancies. Hotels should continue to draw tourists with the weak dollar. Retail frenzy ends, but the wealthy keep Madison Avenue boutiques alive. With the condo/coop market at a "crest," developers "should worry about flagging buyer demand," the report notes.

* Los Angeles downtown benefits from condo/apartment projects. "It's almost impossible to lose money on apartment investments if you have a five- or 10-year investment horizon," notes one respondent. Hotels benefit from global pathway location. One downside -- homebuilders in San Bernardino and Riverside continue to grapple with the housing collapse.

Rounding out the top ten markets to watch:

* Houston. Stays relatively strong as long as energy stays hot. It makes the top ten for the first time since 1995. Office vacancies drop to 10 percent, "a good buy opportunity," but apartments soften. Cheap land results in cheap housing, and prices have not gone up dramatically.

* Boston. Job outlook is more favorable than most cities, with office space "tight" in the Financial District and the Back Bay area. New "harborside hotels threaten older product."

* Denver. The state capital has a major federal government presence, which should buffer job losses. Steady population growth and broadening diversification of the industry keeps the housing market stable. Mass transit should pay future dividends.

* Dallas. Compares favorably to other "hot-growth" markets. Although office vacancies downtown are 20 percent or higher, apartments do well and developers keep building single-family homes.

* Chicago. Apartments do well, but condos weaken as speculators leave the market. Office vacancies are in the low teens, and O'Hare International Airport keeps industrial space in the "global pathway."

While most of the findings in the ULI Report were unfavorable, there were 'silver linings' mentioned. For builders looking to seek competitive advantages, possessing the best knowledge available about the industry should help the process lead to greater success.

LINK

Miami Commercial Market to Come Unglued

Miami commercial has dodged the bullets...until now. Be aware this isn't just the press looking for blood, even seasoned commercial brokers are predicting a meltdown. Read on.

Real estate market in Miami finally succumbing to economy

By J.W. ELPHINSTONE
THE ASSOCIATED PRESS

Published: Sunday, January 11, 2009 at 1:00 a.m.
Last Modified: Saturday, January 10, 2009 at 11:55 p.m.

MIAMI - Despite record foreclosures, despite double-digit home price declines, and despite scary job losses, Miami's commercial real estate market has rolled with the punches -- until now.

"We're in a better place than where people thought we would be because of the collapse in the residential market," said Stephen Nostrand, an executive vice president at Colliers Abood Wood Fay. "It's true, it's horrible, but it could be a lot worse.

The fear now is that it soon will be.

Industry watchers expect the national recession, new supply of offices and shopping centers and a crippled housing market to finally hit the city's property rents and vacancies this year.

Retail shops will suffer the most. Even though the retail vacancy rate in the greater South Florida area hovered around 5 percent, which is lower than the national average of about 7.5 percent, it is expected to climb steadily this year.

The few retailers entering the market like Kohl's and Ikea will be offset by many other small and mid-size stores closing shop. Job losses this year in Miami are expected to total 15,300, according to CBRE Torto Wheaton Research. That will curb consumer spending, while the national recession will hurt tourism.

"Anecdotally, every week there are more leasing signs up and more dark store fronts," said Nostrand.

Last month, Whole Foods pulled out of its commitment at Met 2, a retail, office and a hotel complex in downtown Miami. The grocer would have been the first supermarket downtown.

"That's huge. Definitely trauma and sign of the times," said Jonathan Kingsley, managing director of Grubb & Ellis Co.'s South Florida office.

Met 2 is one of three new office projects under construction in downtown, and they are a source of concern for many office landlords. Together with the Brickell Financial Center and 1450 Brickell, the trio will add about 2 million square feet of space to the downtown market. That's about 20 percent of the total current market.

And only 10 percent of that office space has been leased, said Scott Strickland, senior vice president at Jones Lang LaSalle. If more of that space is not leased before the projects are completed it could drive the vacancy rate for top-quality downtown offices to 15 percent from 8.6 percent, he estimates.

"Even in a good market, you would be cautious of putting up that much inventory at one time," Kingsley said.

Although the three buildings are not set to be completed until 2010, tenants already are smelling the blood in the water. With years left on their leases, tenants are going in early for renewal talks to wring the best deals out of their landlords. Others are waiting until the last day to take advantage of renewal options to make landlords sweat. Tenants are getting a month's free rent, building improvements and lower rental rates.

Some are negotiating so-called "out clauses" into their contracts in case they have to downsize. An out clause allows a tenant to give back a certain amount of space during a set period of time without penalty.

Big time tenants in the market, like Merrill Lynch, Bank of America, Citigroup and Wachovia, might just need an out. They have announced layoffs nationwide that could affect Miami.

"It's a whole new world for landlords negotiating leases with tenants," Nostrand said. "Today, everything is on the table."

In the last two years, rents in the downtown market rose through the $40 per square foot rent threshold for the first time. But Kingsley said rents for top-notch offices will likely fall about 20 to 25 percent in the next two years, mostly because of the excess space from new offices.

The industrial market, meanwhile, should fare better. Rents are expected to slip some in 2009, but not drastically, according to a Grubb & Ellis report. There has been little overbuilding in the sector and vacancy rates, now at about 8 percent, will creep up to about 9 percent by year end.

Large leases over 50,000 square feet are nearly nonexistent. Landlords are seeing smaller users, those occupying 15,000 to 50,000 square feet, cut back. Many of them are housing related businesses -- flooring, roofing or plumbing suppliers -- that have left the market altogether as the housing market crashed.

Housing here is nerve-wracking. Prices have fallen more than 38 percent from the peak in December 2006. Flippers who cannot sell the 15 or so condos they bought as investments are renting them out at below-market rents.

All this bodes well for the Miami renter, but not for the landlord. Vacancy is expected to rise to over 5 percent this year from 4.4 percent at the end of last year, and rents should fall about 1.8 percent to $1,066.28 a unit, according to CBRE Torto Wheaton Research.

CoStar's First-Ever Vacancy Prediction Report: Tough Year Ahead

From CoStar this morning. Courtesy of CoStar:

This Year, Pain To Replace Gain

Nary a Bright Spot in CoStar Group’s First-Ever State of the Market/Industry Outlook

The pain felt throughout the U.S. housing market over the past two years is going to catch up with commercial real estate in 2009 when the country will begin to see spikes in office vacancy rates climbing as much as 300 to 400 basis points with many markets expected to experience severe negative net absorption.

That was the assessment of Andrew Florance, founder and CEO of CoStar Group Inc., as presented in the company’s first-ever 2009 State of the Office Market review and outlook delivered this afternoon from its Bethesda, MD, headquarters and webcast to CoStar clients across the country.

Florance’s presentation laid out the economics and fundamentals detailing the impact of the financial meltdown on commercial real estate, finding little upside to report with all indicators projecting continued:

• Constraint in the credit markets,


• Dearth of investment and construction activity,


• Corporate space contraction, and


• Falling property values.

The outlook is now for the current recession to take a higher toll, for a longer time, on commercial real estate than did the dot.com bubble burst of 2001-2002.

Rather than try to reproduce the entire presentation or beat the dead horse that is the economy, here is recap of just some of the highlights.

Contraction

Unlike in previous recessions in which the commercial real estate industry participated in its own demise through gross overbuilding, the current downturn was precipitated by an unparalleled run up in housing values and the subsequent burst of that bubble. Housing values continue to fall precipitously.

Overlaying commercial office values with housing values, Florance showed that, while commercial values also experienced a rapid ascent, those values peaked at substantially lower levels than the housing peak. Also based on historical norms, it appears housing values still have a ways to fall, while commercial office space values have already returned to much closer what are their norms.

That doesn’t mean that office values could hold at the level because clearly the market dynamics are working against them. The S&P 500 Index is down 40% from its highest levels and lower than what is has been in five years. The index is important to commercial real estate because without increasing stock prices, corporations will be less likely to expand. The lack of expansion is major drag on office space absorption, Florance said.

In addition to stock price declines, initial public stock offerings that fuel the growth of newer firms have dried up completely this year.

Corporate borrowing outside of federal government-assisted bailouts also has fallen to record lows - less than $25 billion/month in the most recent quarter compared to more than $400 billion just 18 months ago.

The commercial mortgage backed securities (CMBS) markets also dried up completely in the fourth quarter and thus banks - were they even making loans - have nowhere to market or sell those loans to the secondary markets to make room to do more lending.

The employment picture is also dismal. The U.S. economy already lost more jobs (1.9 million) in 2008 than during the dot.com bubble burst in 2001-2002. Economy.com is forecasting as many as 3.1 million job losses in 2009.

Inventory Buildup

One small bright spot to current commercial real estate conditions is that there was very little surge of new supply leading up the recessionary environment starting in December 2007. Commercial office space is entering the downcycle from a position of relative strength. Nor is CoStar forecasting much additional in the way of new supply coming onto the market through 2012.

However, the office supply inventory is going to increase. In fact, the supply of available and vacant office space is beginning to increase as there is currently virtually no absorption of excess space occurring. Vacancy rates have begun to tick up as projects already under construction are being completed.

Combining the forecasts for job losses in 2009 and a dwindling supply of newly delivered space, CoStar is predicting that U.S. office vacancy rates could climb from a base of 11.1% at the start of last year to 15.1% in 2010.

Some U.S. markets will be hit harder than others but all are projected to grow to double-digit vacancy rates in 2009 and 2010. CoStar is projecting that the Phoenix and Detroit vacancy rates could exceed 20%.

Job losses are also projected to be heavy in South Florida, the New York Tri-State area and San Francisco and those markets will likely see fairly steep increases in their vacancy rates over the next two years.

There won’t be any clarity to when the markets can return to normal until the peaks in vacancies and the valleys in prices and rents hit top and bottom. In the two previous recessionary periods of early 1990s and 2001, office inventors did not return to the market until it was clear that the deterioration in conditions had stopped. And right now, the volume of investment activity is at or near its historical norms. So while the outlook for 2009 is grim, it is likely that the market for office building investments will remain flat through 2009.

"The market needs to establish a new bottom before a recovery can take hold," Florance cautioned. "The sooner we reach it, the better off we'll be. If property values need to fall to X, it's better to get there in 18 months not five years."

Faced with the grim outlook for 2009, a member of the audience asked Florance if he would advise the broker to give up his real estate practice and work on his golf game for the next 12 months. "Where do you golf?" Florance responded half jokingly before addressing the issue.

"We adjust. As we've all seen the industry do in past down cycles, we focus on leasing rather than sales and on property management rather than on new development. And we become advisors. Your clients are going to need your expert advice."

More Distressed Properties

Frequent readers of CoStar news are probably familiar with our coverage of distressed properties and delinquent loans. In preparation for its first market outlook, CoStar also undertook its first-ever complete analysis of delinquent and distressed properties in the CMBS market.

CoStar identified nearly 1,200 commercial real estate loans that were either delinquent in loan repayments or had reached maturity without pay off of the loan. The principal and interest outstanding on those loans as of mid December totaled nearly $8.2 billion.

CoStar also compiled a list of nearly 6,100 additional loans that servicers for the various securities have flagged as having potential credit concerns. The current scheduled ending balance of those loans totaled $57.8 billion.

In addition, CoStar identified more than 160 properties that had been repossessed by various CMBS trusts. The properties had a loan value at the time they were taken over of more than $1 billion. Based on the properties most recent valuations, the bondholders were likely to take a loss of more than $300 million.

Go Green

Not wishing to end on a dour note, CoStar’s Florance concluded the U.S. portion of the forecast with a look at so-called green properties, which continue to enjoy a premium in the marketplace in terms of higher occupancy levels, rental rates and sale prices compared with "non-green" peer buildings.

Currently in the U.S. only 1 in 15,000 properties are LEED or Energy Star certified. In fact, a new federal mandate that is set to go into effect in 2010 is that federal agencies will have to occupy green certified offices. According to Florance, the total federal requirement for green space outstrips the total available supply of green-certified buildings.

In analysis of 9.8 billion square feet of office inventory in CoStar’s database, CoStar found that the national occupancy rate of green-certified buildings was 300 to 588 basis points higher than non-certified buildings and commanded rents that were anywhere from $3 to $18 more per square foot per year than the average rent. Green buildings also sold at prices that were up to 64% than the average.

US Commercial In Downward Spiral

From the International Herald Tribune this morning. See bottom of the post for direct link.

U.S. commercial property in a downward spiral

By Charles V. Bagli

Monday, January 5, 2009

NEW YORK: Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression."

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages in the coming year. The persistent chill in lending from banks to the credit markets will make that difficult - even for borrowers who are current on their payments - setting the stage for loan defaults.

The prospect bodes poorly for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. "Each one by itself is not significant," he said, "but the cumulative effect will put tremendous stress on the financial sector."

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the U.S. government. Big banks - like Bank of America, JPMorgan Chase and Morgan Stanley - each hold tens of billions of dollars in commercial real estate bonds, which were sliced and diced into securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. Over the past decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. Their weighting in commercial real estate has nearly doubled in the past six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the past two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due. Many commercial property owners will face a dilemma similar to that of today's homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, California, a center of the subprime mortgage crisis, and New York, where the now-shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses.

"The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between two and five percentage points by mid-2009," said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and purchasing office space.

Effective rents, which have already started to fall, are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts. That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of five, seven or 10 years, and refinance the big principal payments necessary when the loans come due.

Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.

Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.

The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. DeBoer, the group's leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.

Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, DeBoer said.

Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on his payments and can make an equity payment to compensate for the decline in the building's value.

Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to Real Capital Analytics.

New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties. Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income.

"Many of those buildings are basically underwater," said Goade of CresaPartners. "The price they paid was too high to begin with. There's no way anyone would lend that kind of money today."

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Finding Success In Leasing

Happy new year, everyone.

In the local paper again today. 2009 will be a tepid year in my opinion. I do believe companies, even those on an expansion path, will take more of a wait and see approach this year. With rents coming way, way down, this also may present a never-before-seen opportunity to get positioned for growth once things start turning around. When will that be? I wouldn't expect much recovery until 2010 or possibly 2011.

Surviving a tough year in real estate
With commercial sales hurting, some agents found success in leases

By Michael Braga

Published: Monday, January 5, 2009 at 1:00 a.m.

There is no denying that 2008 was an extremely tough year for commercial real estate agents and that 2009 is shaping up to be even tougher.

Sales of commercial warehouses, office buildings, shopping centers and vacant land was down markedly from a year earlier and most agents were forced to turn their attention to leasing space rather than selling it in order to survive.

"We've got 17 people here and all they all do is commercial," said Joe Hembree, who owns Hembree & Associates in Sarasota. "With sales low, they're doing a lot of leasing."

But even leasing space was difficult in 2008, Hembree and others in the commercial real estate business say.

"It's been brutal," said Michael Polk, a Punta Gorda appraiser who leases space in office buildings he owns. "I've been here 20 years and this is the worst market I've ever seen."

The commercial market improves as you drive north, Polk said.

"It's not as bad in Sarasota as in Port Charlotte because there is not that much of an oversupply," he said. "But it gets much worse as you move south. Lee County is even worse than Charlotte County."

That said, there are still commercial agents in the region who have had success in getting space filled, and the kinds of companies they are attracting says a lot about which businesses are holding their own and which are falling apart.

"We did a lease for a home health agency that is expanding," said Diane Lawson, an agent with Abbey Realty in Sarasota. "Health care is one of the industries that is still looking."

Renee Richardson Kling, an agent with Richardson Kleiber Walter in Sarasota, said she has been helping several health, nutrition and fitness companies find space in easy-to-access strip malls throughout the area. One company in particular is geared toward working mothers.

"When you're in a down economy people want to better themselves," Kling said. "They might not be able to control everything around them -- the economy and world events -- but they can control themselves. When things turn around, they're in shape, they're feeling good and they're ready to go."

At the opposite end of the spectrum are companies that benefit from the misfortune of others.

Chad Maxwell, an agent with Century21 in Port Charlotte, recently found space in Punta Gorda for a real estate attorney who is now specializing in bankruptcy law. Anthony Migliore, an agent with Coldwell Banker in Sarasota, landed a pawn shop for space next to the Rumba Lounge on US 301 in Sarasota.

"Businesses like pawn shops -- and I would hazard to guess liquor stores -- are doing pretty well in this economy," Migliore said. "But there is no escaping the fact that there are more and more vacancies out there."

The really big fish

In addition to finding space for a pawn shop, Migliore also handled his share of really big leasing deals during the past few months.

He helped Peek Traffic, a Bradenton maker of traffic control devices, move out of a 50,000-square-foot building and into a slightly larger building nearby.

"Their old building was 50 percent office and they needed more manufacturing space," Migliore said. "Rather than reconfigure, they decided to move across the street."

The deal worked out well for the owner of the building that Peek moved into -- a downsizing manufacturing company that makes gripper elevators and palletizers for the printing industry.

Migliore found 10,000 square feet of space for that company and 1,100 square feet of office space for Berlin Packaging, a Chicago-based company that makes stylish glass, metal and plastic containers for everything from perfume to shampoo.

Few Realtors in the region, however, saw more success over the past few months than Roberta Kolton.

The daughter of a longtime Michael Saunders agent, Bob Kolton, Roberta leased 90,000 square feet of industrial space to three companies during the past three months. Two-thirds of that leased space was in the 500,000-square-foot manufacturing plant that Wellcraft Marine vacated earlier this year.

One of the companies that took 40,000 square feet was Windproof Homes, an Ohio housing panel manufacturer that moved its headquarters to Sarasota. The company's Web site shows that Windproof specializes in making panels that are bug-proof and can withstand winds of 150 miles per hour.

"The current demand for affordable housing with a green mindset has made these panels almost a necessity for the builder of this day and time," the company's Web site states.

Another company to move into 22,000 square feet at the old Wellcraft operation was Legend Custom Yachts, a Sarasota yacht builder that specializes in high performance sport fishing boats.

"They were in 18,000 square feet. So they upsized," Kolton said.

What attracted both companies to the site were the extremely low monthly rents -- only $3.75 per square foot with taxes and insurance included, Kolton said.

The third company that Kolton landed was Horner Xpress Manasota, a pool cleaning supply company that took 17,000 square feet off U.S. 301 in southern Manatee County.

"The need for pool cleaning in Florida is not something that will go away," Kolton said.

Futuristic growth

Jeffrey Button, an agent with the Kleiber Group in Sarasota, also landed a whopper when he found 25,000 square feet of space for Structural Preservation Systems, a Hanover, Md.-based company that builds, repairs, protects, strengthens and reinforces concrete, masonry and other building materials.

Button said that Structural Preservation should be in a good position to take advantage of the infrastructure-related spending when Barack Obama becomes president. The company already has a contract with a power plant in Crystal River.

Structural Preservation boasts on its Web site that it has "completed more than 14,000 repair projects; 26,000 post-tensioning projects; and 10,000 chimney, stack and silo projects through the efforts of more than 2,300 people working together from operating centers across the United States."

Meanwhile at the Port Manatee Commerce Center, Button's brother, Kevin Button, said that Seabridge Freight, a Jacksonville-based company that runs a barge service from Brownsville, Texas, to Port Manatee, has rented 2,800 square feet at his company's site.

"They bring containers into Port Manatee," said Button, operations manager for the warehouse complex. "Right now it's a 10-day service, but they are planning to step that up to a four-day service."

Button added that the barges will not return to Brownsville empty. They will carry concrete poles made in Bartow that will be used for a wind farm in Texas.

With the full backing of Manatee County, Port Manatee is an exciting place to be right now, Button said.

Button added that the economy may be in a down cycle now, but that will not last forever.

"You got to give Port Manatee credit," he said. "They are using this opportunity to set us up for growth in the future."