Sunday, June 28, 2009

Bloomberg on The Coming Pain

Recent clip from Bloomberg TV and an interview with Price Waterhouse's Susan Smith regarding what the coming months will have in store.



And on a lighter note...(maybe not?)

Office Tenants in Driver's Seat

Office Tenants Now in the Driver's Seat
Jun 26, 2009
By: Dees Stribling, Contributing Editor

Even before the financial meltdown last fall, most U.S. office markets were going noticeably soft. In particular, vacancies were rising as businesses downsized, reorganized or otherwise felt skittish about committing to any new use of office space. Now that the worst recession in at least a generation is under way, what was once only a worrisome trend for U.S. office landlords is full-blown reality.

Few dispute that current conditions in almost every office market could be called a “tenants' market.” Tenants have the edge now, provided they themselves aren't beaten up so badly by the economy that they can't take advantage of that fact.

Though each major metro market has its own distinct features, the overall numbers are telling. According to Reis Inc., the overall U.S. office vacancy rate climbed to 15.2 percent by the end of the first quarter of 2009, compared to 14.5 percent at year's end 2008 and 12.8 percent during 1Q08. Office-space users vacated nearly 25 million square feet during 1Q09, moving in tandem with the spike in the U.S. unemployment rate during that period. People go, then the space goes, and people are still going.

Moreover, since commercial real estate tends to be a lagging indicator, even if the economy starts to grow again later this year--something of a tall assumption--office landlords might not feel the benefit for quite a while longer than that.

In some ways, this office downturn is like previous ones, Bill Lichwala, president and CEO of Plante Moran Cresa told CPN. “Financially solid tenants are now able to negotiate with a lot of strength,” he said. “At first, landlords resisted lowering rents, and offered more concessions, because lower rents affect the building valuation a lot more.”

But now rents are going down. According to Reis, office rents were an average of 3.2 percent lower in the first quarter of 2009 than a year earlier.

“Landlords simply can't compete anymore without competing on rents,” said Lichwala, whose Southfield, Mich.-based firm specializes in tenant rep. “They can only offer so much in the way of incentives, and that's reached its limit.”

Lichwala pointed out that in one way, however, this office market isn't like previous slumps in space usage. “Previously, landlords needed to be sure that a tenant was creditworthy before a deal would be inked,” he said. “That's normal due diligence, and it hasn't changed. But now tenants need to be as sure of the solvency of the landlords as much as the other way around. It isn't any good to negotiate a sweet concession package if the landlord goes into receivership and can't afford it.”

LINK

Thursday, June 25, 2009

Pricing Headed Downward...Tell Me Something I Don't Already Know

One thing is 100% certain to me: in the staring contest between buyers/tenants & sellers/landlords, sellers/landlords are going to be the ones blinking first. In what is akin to a Mexican standoff, the vast rift between buyers and seller expectations continue, at least for now.

But time is such a great equalizer, isn't it?

-A

Pricing Skid Suggests Sellers Capitulating to Buyers
Jun 22, 2009 - CRE News

In a sign that sellers are capitulating to buyers' demands, commercial property pricing dropped 8.6 percent in April, according to the Moody's/Real Commercial Property Price Indices, or CPPI.

The April drop is the largest recorded this investment cycle by the all-property component of CPPI, a collaboration of Moody's Investors Service and Real Estate Analytics that tracks repeat sales of properties.

The index stood at 135.31 in April and is 29.5 percent below the peak reached in October 2007, before sales activity began feeling the brunt of the credit-markets dislocation that started in late-summer 2007.

April's drop "suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," which include demands for lower prices, Moody's said in its analysis of the CCPI. The index's second steepest monthly drop this cycle was by 5.5 percent in January.

Moody's further said that financially-distressed sellers became much more prominent in April. It noted that the volume of repeat sales made at prices resulting in losses to sellers was greater than the volume made at financial gains for the first month ever in its recording history.

In a rare bit of market optimism, Moody's speculated, "Large price declines may act as a catalyst to cause the bid-ask gap (between buyers and sellers) to narrow, which in turn may lead to an increasing number of transactions." April's 67 repeat sales, as recorded by the CPPI, compares to 82 in March.

If distressed sellers continue to be more prominent, it could set the stage for future pricing declines.

For the year ended in April, the all-property CPPI component dropped 25.3 percent, with declines across all property types, led by the office sector, which saw a 28.8 percent drop. Multifamily, retail and industrial were down 18.5 percent, 16.1 percent and 12.3 percent, respectively.

Every property sector saw price declines in every geographic region tracked by the CPP. Office prices fell most - 27.2 percent - in the East, followed by a 25 percent drop in the South and 22.2 percent drop in Southern California.

Declines in retail ranged from 7.3 percent in the West to 23.3 percent in the South.

The multifamily sector saw a 21.1 percent drop in the South. That region includes Florida, which saw a 22.5 percent decline. The East was the best-performing multifamily region with an 11.8 percent decline during the year ended April.

Industrial property declines ranged from 28.8 percent in the South to 7.3 percent in the West.

Thursday, June 18, 2009

Long, Hot Summer

CoStar recently polled some real estate experts and their findings are less than encouraging for the COMRE market. In fact, some of this is downright scary, depressing stuff. Below is an excerpt, follow the link below to read the entire article.

Despite Promising Signs, Many Wary that Recession's Knockout Punch Could Still Come
Commercial Real Estate Industry Says Recovery is Not Around the Corner

By Mark Heschmeyer
June 17, 2009
The End Is Near (for This Recession).

So read some of the economic placards that have been trotted out in policy statements these days with catchphrases such as 'Sustainable Recovery.' 'Recession Is Coming To An End.' 'Policy Actions Having an Effect.' 'Seeing Green Shoots of Growth.' and 'The Crisis Has Stabilized.' Many pointed to the more than 2,000-point climb in the Dow Industrial Average over the last three months as proof that federal stimulus measures appeared to be having an effect in rousing the slumping economy.

Just this week, chief economists from JPMorgan Chase & Co., Wells Fargo & Co., PNC Financial Services Group, Morgan Stanley and others said they expect the economy to "recover from its deep slump by late summer." The group that makes up the Economic Advisory Committee of the American Bankers said they expect the nation's gross domestic product (GDP) to increase 0.5% in the July-September quarter -- this after falling a projected 1.8% in the April-June period.

snip...

No Consumer, No Recovery

The bottom has not been reached in retail. Vacancies in the Whittier area are increasing and rents are still headed downward.
David Johnson, Partner at Johnson, O'Neill & Associates Inc. in Downey, CA

An alternative opinion to a quick 1.5- to 2-year recovery touted by many groups is that there can be no recovery because of the decline in consumer spending due to an individual's perceived loss on their net worth based on their home value.
Brian H. Strout, Acquisition Manager at Sciens Real Estate Management in Greenville, SC

The long and short of it is that so far, this seems like a recovery without the consumer. And I just don't think that in an economy driven 70% to 80% by the consumer, that a consumer-less recovery is possible. The credit card default rates are another telltale sign of mounting problems. Americans are running out of spending power from every angle (home equity, personal credit and now, income loss from job losses). And we haven't even seen the bubble start to burst in commercial.
Tony O'Neill, Broker at Voit Commercial Brokerage in San Diego, CA

I represent Healthy Fast Food Inc. They have a new branded concept they are opening up across the country called U-Swirl Frozen Yogurt. From a tenant point of view, HFFI along with my other clients are still very concerned about consumer spending, unemployment, consumer confidence, foreclosures, and the economy as a whole. If we have hit the bottom, then it is our view that we are going to stay there and bounce for quite a long time. U Swirl is only doing screaming deals. The kind where the landlord is screaming, not the tenant.
Ron Opfer, CCIM, Broker with Coldwell Banker Premier Realty in Henderson, NV

My assessment is that the economy will pick up starting fourth quarter of 2009 but the employment situation will only start to increase during first quarter of 2010. I think the worst of the commercial real estate market is still yet to come. Commercial markets will be in recession through mid next year.
KC Sanjay, Senior Economic and Real Estate Analytics at Guaranty Bank in Dallas, TX
Property Fundamentals Weak and Getting Weaker

I don't think the end is anywhere in site for a commercial real estate bottom. The CMBS market has yet to even start clearing the defaults. when these sales really start, they will dwarf the RTC volume. What these properties will sell for in a market without leverage is anybody's guess. My feeling is that the 25% percent down of years gone by will remain the same, although in the future, that will be the whole price! Just when things may hit bottom in a year or two, we will most probably be faced with hyper inflation, which is at best a forced savings account for performing assets, but at worst an additional huge stress for non-performing real estate. What will a half empty office building be worth in a declining market when prime is 14%? It is a scary thought.
Andrew J. Segal, President of Boxer Property in Houston, TX

I do not believe the end of the recession is in sight yet. The new 90-day moratorium on residential foreclosures commencing just [this week] will only exasperate a more severe response of the residential markets' attempt for correction upon expiration of the 90-day moratorium. The commercial real estate correction has only just begun and it will be a painful and significant correction. I believe 2009 will prove to be the worst single year of the last 50 years. Keep in mind; every office job loss represents a minimum of 250 rentable square feet, which goes idle and far more in other property types. When you do the math - it's staggering. Now factor in deleveraging the CRE universe, increased cap rates likely to settle in the 9% - 11% range based on stabilized income, increased cost of capital, high vacancy/availability rates, additional unemployment each month including continued historical layoff's post-bottom with a beginning recovery and the lack of debt and equity needed to help a correction along. . . what do you have? Answer = we have the "perfect CRE storm" and much restructuring to accomplish with no end in sight soon.
Richard A. Hawthorne, Principal of Hawthorne Cos. in Santa Monica, CA

The capital and debt markets for real estate remain dysfunctional. Moreover, there remains a large gap between the expectations of sellers and buyers. This means that virtually no arm's length commercial real estate sales are taking place. The small numbers of sales transactions that are reported mostly have been distressed sellers or workouts and do not establish an "arm's length" price or even a trading market. Until properties trade freely and with frequency, investors will remain reluctant to bid on acquisitions from fear of "catching a falling knife".
Louis J. Rogers, CEO of Rogers Realty Advisors LLC in Glen Allen, VA

Read the entire article here

Monday, June 8, 2009

Get Sarasota Commercial Foreclosure Listings on Twitter

Go to http://twitter.com/srqcom if you're interested in updates on Sarasota and Bradenton commercial foreclosure properties I'm taking over, new listings, price reductions, etc. I will post my foreclosure assignments on Twitter first even if I do not yet have a price from the bank. Everything is going to go here first. This is a lot easier than calling everyone who shows interest in these things, there just isn't enough time. Email is a little too formal for that. I also plan on broadcasting closed sales and leases here - something I will not do via email.

Anyway, go here to sign up and follow me.

What is Twitter?
Twitter is a free social networking and micro-blogging service that enables its users to send and read other users' updates known as tweets. Tweets are text-based posts of up to 140 characters, displayed on the user's profile page and delivered to other users who have subscribed to them (known as followers). Senders can restrict delivery to those in their circle of friends or, by default, allow anybody to access them. Users can send and receive tweets via the Twitter website, Short Message Service (SMS) or external applications. The service is free to use over the Internet, but using SMS may incur phone service provider fees.

Sunday, June 7, 2009

Tenants In Control Locally

Pretty accurate, I must say. I did a 7k sf industrial deal recently in the $2.xx/ft range. This was a gross lease, too. Not much under construction, either.

Tenant’s market set to continue in Sarasota

Karen Temmen, Colliers Arnold

Tenants today have the opportunity to lease space with owner concessions and rates never seen in the Sarasota market before. Landlords are doing whatever it takes to keep tenants in place to provide the flow of rental income.

While some tenants are renewing short-term, some of those signing for longer periods have made unheard-of deals that have allowed them to position their companies for future needs. Many tenants are “reaching out” to their landlords to renegotiate current terms. Incentives have included one or more of the following: lower rates, free rent, moving allowances, additional tenant improvement dollars, or buyouts of existing lease terms.

The Sarasota/Bradenton/Manatee local unemployment rate rose to 10.8% in February and will likely continue to rise, which will put additional pressure on landlords to retain and attract new tenants. Comparatively, the Tampa Bay MSA unemployment rate is 10.2%, with a 9.4% Florida rate and a national unemployment rate of 8.9%.

Colliers Arnold projects vacancy rates to continue to rise, exerting downward pressure on lease rates. New construction has slowed significantly and will continue to diminish through 2009. Some building owners are now advertising lease rates as “negotiable,” and as a result many brokers feel asking rate averages may not be a clear snapshot of true market conditions. Landlords continue to remain aggressive in terms of attracting new tenants. However, negotiations are now taking longer and deal cycles have slowed. The current tenant’s market will likely continue into 2010.

Office

The first quarter 2009 overall vacancy rate for the Sarasota/Manatee office market measured 11.9%. This was relatively unchanged from the 12% rate from Q4 2008. However, the year-ago rate of for Q1 2008 was 8.3%. Class A vacancy was 16.6% for Q1 2009.

Net absorption for the first quarter totaled 80,240sf. The overall direct asking rate average was $21.60 psf, nearly unchanged from Q4 2008. However, the year-ago rate for Q1 2008 was $22.39 psf. The Class A asking average direct rate measured $25.19 psf for Q1 2009.

Three new office buildings were completed in the first quarter that totaled 58,938sf. 91% of this new supply was pre-leased or pre-sold before completion. No office buildings are currently under construction.

Industrial

The first quarter 2009 overall vacancy rate was 8.5% for the Sarasota/Manatee industrial/flex market. This was relatively unchanged from the 8.2% rate from Q4 2008. However, the year-ago rate of for Q1 2008 was 5.6%. Net absorption for the first quarter totaled 31,033sf.

The industrial direct asking rate average was $6.43 psf, nearly unchanged from Q4 2008. The flex building direct average asking rate was $9.64, down significantly from $10.56 for Q4 2008.

Two new industrial buildings were completed in the first quarter which totaled 140,767. 100% was pre-leased or pre-sold. The largest was the 123,367sf FedEx ground facility at 3015 Buckeye Road. No industrial or flex buildings are currently under construction.

Benderson Buys Back Properties at Discount

Mostly of interest because these two companies are fairly big players in the local market here. DDR has a project near my home that has managed to go empty very slowly. I mentioned the woes of this particular mall last August in this very blog. Click here for the original article.

Benderson Development Co. is buying back eight local shopping plazas, plus three more in other parts of New York, from Developers Diversified Realty Corp.
Charles Lewis/Buffalo News

Updated: 06/07/09 07:31 AM
Benderson buys back local plazas at a discount
Firm pays 30% lessfor properties it soldfive years ago
By Jonathan D. Epstein NEWS BUSINESS REPORTER

Benderson Development Co., Buffalo’s biggest homegrown retail landlord, is pulling off a major financial coup, buying back 11 shopping mall properties in upstate New York for significantly less than it sold them for just five years ago.

The commercial developer has signed contracts to buy eight malls or shopping plazas in Western New York, and three in other parts of the state, from Developers Diversified Realty Corp., a publicly traded real estate investment trust based outside Cleveland, according to sources familiar with the deal.

That will return more than 3 million square feet to Benderson’s local portfolio. Sources said the purchase price was between $160 and $175 million.

The plazas are among the same properties that Benderson had first sold to DDR in March 2004. That deal, worth $2.3 billion, involved a total of 110 properties, 52 of which were in the Buffalo Niagara region.

Since then, however, the real estate market has turned soft, slumping retail sales have driven up vacancy levels at shopping plazas as stores have closed, and the credit crunch that hit last fall has further squeezed property owners.

“It’s good that the ownership is going in the direction that it is,” said Michael C. Clark, director of retail tenant services at CB Richard Ellis in Buffalo. “There’s going to be a lot of markets in other parts of the country where they have portfolios for sale by different REITs and they don’t have someone like Benderson to step up.

“We’re pretty fortunate in terms of the market, in regard to that. How much better can you get than the folks that developed them and are intimately familiar with them and live and breathe here? They certainly know what they’re doing,” Clark said.

The average price five years ago was $21 million, versus an average of about $15 million for the current deal — a discount of almost 30 percent.

“They’re buying them back for something like 70 cents on the dollar from what they sold it,” said Greg Klauk, president of Buffalo appraisal firm KLW Group.

“Nobody ever expects the prices to drop that quickly,” said William J. Kimball, managing director and principal in the Syracuse office of Integra Realty Resources, the nation’s No. 1 commercial real estate property valuation and consulting firm.

Benderson must still complete its “due diligence” on the properties, but that’s likely to be pretty short, since Benderson is familiar with the properties.

“It’s a very positive thing that they want to continue with these assets,” Kimball said. “They’re going to be the ones to make them work.”

Benderson and DDR officials declined to comment, citing confidentiality. However, DDR spokeswoman Betsy Keck noted that the company has already announced that “we are in active negotiations to sell shopping centers.” DDR has already sold more than $67 million in assets through the first quarter, she added, and has $175 million in assets under contract.

“It is our policy not to comment on potential asset sales before they close,” Keck said in an emailed statement.

The eight Western New York properties being acquired are:

• Boulevard Consumer Square in Amherst, with 700,810 square feet.

• Eastgate Plaza in Clarence, with 520,876 square feet.

• Marshall’s Plaza in Buffalo, with 82,196 square feet.

• Sheridan/Delaware Plaza in Tonawanda, with 188,200 square feet.

• Sheridan-Harlem Plaza in Amherst, with 58,413 square feet.

• Tops Market in Hamburg, with 84,000 square feet.

• Transit Commons in Amherst, with 114,177 square feet.

• Transit Wehrle Retail Center in Lancaster, with 112,949 square feet.

“Benderson is very savvy,” Kimball said. “They’ve done similar type deals where they’ve purchased properties that have been underperforming and done wonderful things for them.”

The sale of the shopping plazas has been the subject of speculation during the past two weeks, including at an International Council of Shopping Centers conference in Las Vegas last month. Local brokers reported hearing discounts of as much as 40 percent or more on the price Benderson was paying, versus what DDR paid in 2004.

That reflects the significantly changed circumstances confronting real estate developers and owners, especially those with shopping centers, like both DDR and Benderson.

Retailers have been struggling to maintain sales and post profits, as consumers pulled back sharply on spending in the last year. Many stores have filed for bankruptcy protection, and big names like Circuit City have even gone out of business.

As a result, landlords like DDR have struggled to maintain their rental income and the values of their own properties have fallen along with the broader commercial real estate market. “There’s a lot of REITs that aren’t in the position they were 12 or even 24 months ago,” Clark said.

DDR owns and manages 720 properties with 153 million square feet of space in 45 states, Puerto Rico, Brazil, Russia and Canada, including what it got from Benderson.

The company has already been whittling down the original Benderson portfolio, selling an 85 percent interest in 14 properties in April 2004 to a joint-venture trust with Australia’s Macquarie Bank, a major real estate investor worldwide.

It also sold a 90 percent interest in 13 shopping centers — including four Tops Market plazas in Western New York — in October 2004 to Prudential Real Estate Investors. And it sold another four Western New York shopping centers anchored by Tops to New York investors in January 2007.

Finally, as the market started to turn down last year, it sought to sell two bundles of properties with 1.5 million square feet of space, including Office Depot Plaza in Tonawanda, Sheridan- Harlem Plaza in Amherst and Regal Cinemas in Niagara Falls.

But the company was hampered last fall and early this year by the freezing of the capital markets, which constrained its cash flow and ability to make payments on its debt. It lost $179.6 million in the fourth quarter before rebounding for an $87.4 million profit in the first quarter of 2009. And its cash fell by $20 million last year, raising questions about its ability to pay its debts.

In February, it agreed to sell 30 million common shares and issue warrants to buy another 10 million shares to Germany’s Otto family, which owns or controls major European and North American shopping center firms, plus the Crate & Barrel chain. That makes the family DDR’s largest shareholder.

The company also got a commitment from the family for a $60 million, five-year fixed-rate secured mortgage, and got $125 million in new debt financing.

“All of these transactions are important steps in lowering our leverage and improving our liquidity, and we continue to work diligently on additional initiatives,” DDR CEO Scott Wolstein said.

Still, its stock has been hammered in the past two years, falling 98 percent from a height of $67.07 in February 2007 to a low of $1.34 on March 3, 2009. The shares closed at $5.60 on Friday.

Hence the need for property sales, even at big discounts. “They need some liquidity and in order to sell something in today’s market, this is the price,” Kimball said. “There really is a dearth of activity. This isn’t a time when you’d want to sell.”

For its part, Benderson, founded in 1950 by Nathan Benderson, is one of the nation’s top retail developers with more than 250 properties and 25 million square feet of commercial space in 35 states, and another 4.5 million square feet under development. It also owns and develops office buildings, industrial parks, residential communities, and self-storage facilities, and owns the Delta Sonic car wash company and its Buffalo Lodging Associates hotel division.

Originally based in Buffalo, the privately owned company moved its headquarters to University Park, Fla., in early 2004, but is still a major player in Western New York, with a regional office and 52 properties.

But it also has properties throughout New England, New Jersey, Pennsylvania and Ohio, as well as one in St. Louis. And it has 21 properties in 13 cities in Florida, especially in Bradenton and University Park — areas that have seen significant drops in property values.

Thursday, June 4, 2009

Commercial REITS Back On The Move

Recharged REITs

Peter Slatin, 06.03.09, 06:00 PM EDT
Forbes Magazine dated June 22, 2009

Excitement has returned to the market in anticipation of the bargains to be found in distressed commercial buildings.

When it comes to investor interest, the resilience of real estate never ceases to amaze me. Despite the recent devastating downturn in demand for space, real estate investment trusts are coming back with a vengeance. There have been $10 billion in new equity offerings this year, mostly since March. According to research firm SNL Financial, the median price gain for REITs that sold equity was 35% from Mar. 31 through May 26. SNL's Equity REIT index, representing all U.S. publicly traded REITs, has gained 28%. This rebound comes after a devastating two years in which REIT shares lost 75% of their value.

What you are seeing is more than a turnaround in investor attitudes and a need by issuers to deleverage their balance sheets. Many REITs intend to finance the purchase of distressed commercial real estate at bargain prices. My firm, Real Capital Analytics, has more than $90 billion of commercial property listed as "troubled" in its database.

Among the REITs raising equity capital: mall giant Simon Properties, mall and office building owner Vornado and shopping center landlord Kimco. Joining them are smaller companies like Acadia Realty Trust ( AKR - news - people ), Digital and Kite Realty. All these companies are sending a message that they intend to be players in the newly reshaped realty market. The public entities, interestingly, are having a field day at a time when private equity partnerships are hard-pressed to raise new capital.

You are witnessing another phenomenon at work. The REIT world is beginning a Darwinian bifurcation into companies that will, and companies that won't, make the transition from an old-style business model rife with opacity, cowboy swagger and good-old-boy networks into a transparent and more efficient business platform. For real estate investors the new reality will be no less hard-knuckled or even ruthless than it has been for decades. For many years real estate has been a shadowy business. It's often been difficult to understand just where the money comes from or where and how it is spent. Public vehicles, while still capable of cloaking a lot of activity, are inherently more accessible and visible than private investment funds.

Before you charge headlong back into REITs be aware that the business is not yet out of the woods. The global recession is real and commercial; office and residential REITs will continue to feel pain. The average REIT will see a small shrinkage this year in earnings, as measured by adjusted funds from operations (net income plus depreciation, minus maintenance-level capital expenditures).

Two REITs that recently tapped capital markets that I favor are shopping center REIT Regency Centers (34, REG) and industrial property owner AMB Property (17, AMB). Both have smart management, high-quality properties and strong balance sheets. They are now clearly ahead of their peers. Regency is priced at 13 times likely adjusted FFO for 2009. AMB also goes for 13 times likely adjusted FFO.

Link

Banks Troubled CRE Assets Double to $34 Billion

Rising Nonperforming CRE Loans, Foreclosures Dull Otherwise Good Quarter for Nation's Banks

By Mark Heschmeyer
June 3, 2009
The amount of troubled loans on income producing commercial real estate property is rising rapidly at the nation's bank and thrift institutions. The total is now more than double what it was a year ago with the bulk of the increase coming in the first quarter of this year.

The nation's FDIC-insured banks reported carrying $22.3 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $4.3 billion in multifamily loans. That is up from $15.7 billion and $3 billion respectively from three months ago - increases of more than 40% in both cases.

The nation's FDIC-insured thrifts reported carrying $2 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $842 million in multifamily loans. That is up from $1.5 billion and $591 million respectively from three months ago - increases of more than 33% and 42% respectively.

In addition to those nonperforming assets, U.S. banks were carrying $3.3 billion in foreclosed office, industrial and retail properties on their books and $1.3 billion in foreclosed apartment properties. Thrifts carried $327 million and $142 million respectively.

The FDIC (Federal Deposit Insurance Corp.) also noted that other asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion of a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.

"Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance," said FDIC Chairman Sheila C. Bair. "Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and noninterest revenue is up at larger banks, particularly trading revenues. Realized gains on securities and other assets improved, too. But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment."

The commercial real estate numbers blighted what otherwise was a positive quarter for commercial banks and savings institutions that rebounded from losing money in the fourth quarter of last year. Banks and thrifts reported net income of $7.6 billion in the first quarter of 2009, a decline of $11.7 billion (60.8%) from the $19.3 billion that the industry earned in the first quarter of 2008.

Higher loan-loss provisions, increased goodwill write-downs, and reduced income from securitization activities all contributed to the year-over-year earnings decline. Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.

In fact, the FDIC's list of problem institutions continued to grow during the quarter from 252 to 305 institutions, and the total assets of problem institutions increased from $159 billion to $220 billion.

The number of problem thrifts was 31, up from 26 in the previous quarter.

The number of FDIC-insured commercial banks and savings institutions reporting financial results declined from 8,305 to 8,246 in the first quarter. Mergers absorbed 50 institutions, while 21 insured institutions failed.

This is the largest number of failed institutions in a quarter since the fourth quarter of 1992. Thirteen new charters were added in the first quarter, the fewest since the first quarter of 1994.

"The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern," Chairman Bair noted. "Banks are making good efforts to deal with the challenges they're facing, but today's report says that we're not out of the woods yet."

"As I see it, we're now in the cleanup phase for the banking industry," Bair added. "It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers."

Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, an increase of $23.7 billion (63.6%) over the first quarter of 2008.

The U.S. thrift industry rebounded too in the first quarter of 2009, but still reported losses of $47 million. That is still their best performance since September 2007, the Office of Thrift Supervision (OTS) reported.

"We are seeing encouraging signs in the performance of the thrift industry," said Acting Director John E. Bowman. "Although it's too early to say we've hit bottom or that the industry's troubles are behind us, fundamentals such as solid capital, strong levels of loan loss reserves and improving operating income give the industry a solid platform for the future."

During the quarter, 74% of thrifts were profitable, up from 65% in the fourth quarter of 2008. The improved profitability reflected lower loan-loss provisions of $5.8 billion in the quarter, down from $9.3 billion in the previous quarter. Although loan loss provisions declined, they remained elevated and were the fifth highest on record.

Tuesday, June 2, 2009

Car Dealership Vacancies

What's to become of all this space?

Car Dealership Closings Could Hurt Commercial Real Estate Values With Excess Space Supply (6/2)

Jun 2, 2009 12:01 PM, By Elaine Misonzhnik

As the U.S.'s auto manufacturers continue to restructure and cut costs, car dealership closings are spiking and generating a glut of excess space that might have a prolonged negative impact on the commercial real estate market, investment sales brokers say. There isn't nearly enough demand from other car brands to occupy all the dealerships about to be shed by Detroit's Big Three, and the skyrocketing vacancies in almost every sector of commercial real estate make it unlikely that most sites will be redeveloped in the near future. Rather, brokers expect that dealerships in the best locations in urban markets will be snatched up relatively quickly, while the vast majority of sites will languish and sit empty on highways around the country for several years.

"Not until the market rebounds significantly" will all of the space left by auto dealerships be absorbed, says Geoffrey Millerd, executive director in the capital markets group of global brokerage firm Cushman & Wakefield. "A very small percentage will be taken in the near future and then there will be a big bulk that will sit on the market for quite a while."

Properties on high traffic intersections in major urban markets, including New York, Chicago, Los Angeles and Seattle, might get the most interest. For example, real estate services firm Colliers International recently received five offers within three weeks for a dealership site in South Florida, all of them close to the asking price. But markets that experienced run-ups in housing values and excess commercial real estate development, such as Phoenix, Salt Lake City, Reno, Houston and Atlanta, might have a tough time, adds Mitchell.

The U.S. auto industry has been talking about dealership closures for some months, but the recent bankruptcies of Chrylser LLC and General Motors Corp. have significantly increased the number of expected closings. In February, the National Automobile Dealers Association (NADA), a trade organization representing car and truck dealers, forecasted that net closings of car dealerships would reach 900 this year. (The group expected 1,100 closings and 200 openings.) The industry began the year with 20,453 dealerships—down from 22,250 dealerships in 2000 and 30,800 in 1970—the earliest year for which data is available.

Already, 522 dealerships have closed in 2009. Now, both Chrysler and General Motors are looking to aggressively trim their dealer base even further. General Motors, which filed for bankruptcy protection earlier this week, previously planned to close 1,200 sites by 2012, but has raised that number to 2,775, opting to cut its dealership fleet down to 3,600 from the 6,375 sites it operated at the end of last year. Meanwhile, Chrysler LLC, which filed for bankruptcy protection in early May, plans to close 789 dealerships, trimming its base to 2,392 dealerships. Ford Motors Corp.—the healthiest of the Big Three—operated 3,787 dealerships at the beginning of the year. It too plans to shutter dealerships, but has not disclosed a number. That means that by the time the U.S. auto industry completes is restructuring, it will have shed anywhere from 30 percent to 40 percent of all existing dealerships, notes Owen G. Cone, senior director with the cars group of Colliers International.

Approximately 25 percent to 30 percent of the dealership sites about to hit the market will likely be taken over by other car brands, estimates James Mitchell, director of the national automotive group with Marcus & Millichap Real Estate Services, an Encino, Calif.-based real estate brokerage firm. The rest of the sites, however, face an uncertain future. In the past, car dealerships were considered attractive acquisitions by developers of strip centers, small office buildings and hotels as many boast good frontage, are in high traffic locations on major thoroughfares and sit on parcels that have already been graded and require minimal site work. (Read story here.)

However, auto dealerships also provide developers with challenges. Auto dealerships are inefficient uses of space with vast parking lots and small buildings. For other commercial real estate uses, the sites can support much larger buildings or be chopped up into smaller sites. But in the current climate, developers might be able to find other commercial sites that require less work and time to turnaround and that don't need to be rezoned. A big box retailer can take over a former Circuit City location quickly, while redeveloping a former dealership could require up to two years to secure the necessary re-zoning and then additional time to demolish the existing building and replace it with a better suited one, says Millerd.

In the retail sector in particular, a recent spate of bankruptcies involving big box tenants including Circuit City and Linens ‘n Things has left plenty of options for those wishing to expand without spending a fortune on construction. (Check the Traffic Court blog for the latest information on store closures.) In the first quarter of 2009, the national vacancy rate for retail properties reached 9.0 percent, vs. a vacancy rate of 5.4 percent for auto dealership sites, according to data from Marcus & Millichap. And it's not as if the retail sector is clamoring for more space to come online with many chains slowing on expansion plans. As it is, more than 90 million square feet of retail space will come online in 2009. That's down from the market's peak, but still represents a big chunk of development.

Aside from retail, in recent months, some trade schools and medical clinic operators have been looking at auto dealership locations, according to Cheryl Bloodworth, vice president of transaction services in the Newport Beach, Calif.-based office of brokerage firm Grubb & Ellis. But the amount of interest has been modest. "You have a classic game of musical chairs, except that this time there are too many chairs," Bloodworth says.

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