FDIC To Dump Nearly $5-Billion in Distressed Assets

Mostly note sales...

FDIC Launching Nearly $5B of Asset Sales

Sep 4, 2009 - CRE News

The FDIC is expected to shortly bring to market a whopping $4.7 billion of mixed quality residential and commercial real estate loans that it assumed from some 20 failed banks.

The assets will be offered through what the agency and its contractors call structured offerings, in that investors will buy only an interest in each portfolio sold, while FDIC will keep the remainder. And the agency is expected to include elements of federal government's proposed public-private investment partnership, or PPIP program, in that it might offer seller financing.

The largest of the offerings will involve $2.7 billion of residential acquisition and development loans that will be marketed through Keefe, Bruyette & Woods, which has handled a number of previous FDIC loan sales.

The other portfolios will each involve roughly $1 billion. Deutsche Bank will offer a package of commercial mortgages, while a venture of Midland Loan Services and Pentalpha Capital Group will handle the sale of a portfolio of commercial acquisition and development loans.

Each of the advisers is said to be close to formally distributing sales announcements, with bid dates expected to be in mid- to late-October.

The agency has so far sold $4.9 billion of assets through six similar structured sales. But it did not offer seller financing for those. It sold stakes of 20 percent and 40 percent in each portfolio, with the interests having a face value of $1 billion. Their sale has generated total proceeds of $209.8 million, or 20.7 percent of the interest's face value.

Those proceeds compare with the 47.7 percent sales price for the $2.9 billion of loans the agency has sold through whole-loan offerings, or what it terms cash sales. Those offerins have been conducted by DebtX and First Financial Network.

Click here for a listing of FDIC's completed loan sales.

But the agency's proceeds in the structured offerings could increase over time.

It's clear that the agency is selling assets at or near the bottom of the market. And investors understand that the agency must sell, especially since banks continue to fail, swelling the FDIC's workload. So the prices at which assets from failed banks sell could be artificially deflated. By keeping a stake, it could theoretically benefit when market conditions and values improve.

Meanwhile, the agency earlier this week took offers for a stake in a $1.4 billion portfolio of residential mortgages taken from Franklin Bank of Houston. The offering, handled by RBS, was the first that adopted the government's Legacy Loan Program, through which the FDIC would provide generous financing to buyers.

Investors competing for the portfolio were asked to bid a price for a 20 percent stake, if they didn't require financing, or 50 percent, if they needed financing. Like in all of FDIC's structured offerings, the investors' stake would grow to 40 percent if certain performance thresholds were met.

The buzz is that the RBS portfolio attracted a high bid of 60 percent of face value. But that could be explained by the fact that 70 percent of the portfolio was comprised of performing mortgages.

LINK

Commercial Activity Predicted To Pick Up, Values Stagnant

Latest report from The CoStar group shows we're possibly headed toward some increase in transactional activity. I'm busier than I've been in over a year and have plenty of prospects and deals in the pipeline - so many at this point that I'm able to cherry pick. The upcoming plays WILL be in distressed assets. That doesn't look too positive for the private sellers out there as they'll have to compete with the flood of foreclosed assets being unloaded.

CRE Sales Will Pick Up, But Values Expected to Stay Flat Through '12
Jones Lang LaSalle Study Finds Banks Will Eventually Be Forced to Stop Delaying REO Foreclosures and Begin Taking Back the Keys of Distressed Assets

By Randyl Drummer
September 9, 2009
Credit markets for office, industrial, retail, hotel and multifamily property should see the effects of a gradual return of liquidity during the second half of 2009, Jones Lang LaSalle predicted in its U.S. Midyear Capital Markets Bulletin released last week.

In it, and in a separate report on global market performance issued this week, JLL noted that several trends are expected to help begin to restore capital markets over the next year, including the $33 billion in equity raised and $5 billion in debt issued through the first eight months of 2009 by global REITs. Also, with the world economy starting to recover, JLL noted foreign real estate investors are again circling select U.S. markets, and real estate companies are finally tapping into government programs such as the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). For the first time in what seems like ages, meanwhile, the gap in price expectations between buyers and sellers is starting to narrow in the third quarter, JLL executives said.

But while all that may sound great, "it is unlikely that any true debt liquidity will return to the market until mid-2010 at the earliest" with the recession and unemployment continuing to batter occupancies and drive down rents, cautioned Kenneth Rudy, president of Jones Lang LaSalle’s Capital Markets practice.

Still, that may be welcome news to investors battered by the dramatic decline in U.S. property sales and prices that occurred in the first half of 2009. According to CoStar data, the value of Class A office buildings declined by 57% in the first half of 2009 compared with prices paid at the peak of the market in 2007. Industrial and institutional-grade retail property sales declined even more sharply, falling 71% sand 86.5%, respectively, since their 2007 peaks.

By mid-2010, JLL predicts investor interest in U.S. markets will slowly begin to return. But transaction activity likely won't reach the dizzying levels of the 2005-07 market "for a generation or longer," Josh Gelormini, vice president of capital markets research, tells CoStar Advisor. And that may not be such a bad thing for players who manage to fight another day after surviving the current downturn, following an era in which cheap and easy credit and overzealous speculation led to the latest and worst commercial real estate price bubble.

"We're definitely still in early stages of the distressed asset game, working out the assets most likely to have been bought during the boom years, and it's going to take a while to work itself out," Gelormini said. "The fact that large investors around the world are starting to see attractive values and act on the opportunities will help speed the process some, but it will still take several quarters for sales activity to stabilize."

"Although we feel transaction volumes have very likely bottomed and will be turning upward the next quarter or two, values will still have some more downward pressure into next year before we see stabilization."

LINK TO REST OF ARTICLE

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

At Wa-Mu, EVERYTHING Was Approved

The stories are just starting to trickle out. Meth-snorting loan officers approving pretty much anything. Of particular interest locally because it mentions Bay area Wa-Mu locations, including Sarasota.

In 10 years there will be plenty of books written and plenty of perspective on exactly how insane the whole thing was.

From the New York Times (registration required):

The Reckoning
By Saying Yes, WaMu Built Empire on Shaky Loans
By PETER S. GOODMAN and GRETCHEN MORGENSON

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas.

Their accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders.

According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

Click here to read the rest of the article.

Can You At Least Get Out of the &$%#&*^ Car?

Yes, yes we know...so many listings, so little time. You're just a super important busy guy and all. I mean, who has time to get out of the fracking car to take a photo of $8-million listings anymore? At least crop out the mirror with some $2 software will ya? LOL.

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.”

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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.

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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.

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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.

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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.

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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.

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."

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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.

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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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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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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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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."