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.

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.

Read the rest here

No Movement in Commercial, Report Says

Commercial real estate still frozen, upcoming report says

By Arleen Jacobius
May 15, 2009, 9:55 AM ET

The gale-force winds that have struck U.S. real estate could shake loose some bargains within the next year or two, but investors and money managers shouldn’t crawl out of the root cellar just yet.

Commercial real estate loans are tough to come by, with lenders reluctant to offer debt for transactions worth more than $50 million, according to a soon-to-be-released study by ING Clarion Real Estate. Lenders are requiring a lot more cash in the loan-to-value ratios (the comparison of the size of the mortgage to the value of the deal). The ratio has dropped to 50% to 60% in March from 70% to 90% in 2006, according to ING Clarion Research & Investment Strategy, ING Clarion’s research unit.

The cost of debt in commercial real estate loans in the U.S. also has increased, to 7.5% in March from 5.5% in 2006. This means that the return investors need to earn also has gone up, to 10% from 8%, ING Clarion’s research showed.

This combination — more cash required and a higher cost of debt — is devastating for commercial real estate investors because most investment hinges on the availability of affordable debt, the survey noted. The average transaction cap rate for all properties worth more than $5 million in the fourth quarter rose to 7.2%, according to data from Real Capital Analytics cited in the ING Clarion report. By March, the cap rate — which measures how fast an investment will return capital — was up to 8.5%, the ING Clarion study indicated.

ING Clarion anticipates that cap rates for core properties — the most stable but lower-return set of real estate investments — will stay in the range of 7.5% to 8.5% for the next 18 to 24 months.
Prices down but deals not up

“It’s a very serious crisis,” said David J. Lynn, managing director at ING Clarion Real Estate, New York. “There is a perfect storm and real estate fundamentals (such as rent and demand) will continue to decline.”

All of these factors are causing prices to decline but transactions have not yet picked up. Buyers and sellers have not had a meeting of the minds on value, mainly because the market adjustments and the exceedingly low number of transactions are making it almost impossible to price a property, Mr. Lynn explained.

Properties are producing less income because owners are cutting deals on rents to retain tenants, one of the strategies ING Clarion considers a top priority for real estate owners for the near term. The Catch-22 of this strategy is that it’s adding to the bid/ask spread standoff between potential buyers and sellers of commercial real estate.

Also adding to that standoff is that most investment managers aren’t all that eager to sell properties in their portfolios at loss.

“Many of these guys have low-cost debt” that will not have to be refinanced for another few years, Mr. Lynn said. This means the cost of keeping the properties in their portfolios is relatively low.

“They are content to hold,” he said.

Defaults on commercial loans are projected to grow to 5% to 6% during the next 18 to 24 months. Right now, mortgage defaults are 2%, Mr. Lynn said. Defaults on commercial mortgage-backed securities are growing too, but most of those securities won’t start coming due until sometime later this year. When default rates rise more, investors will be able to get equitylike returns for senior debt. Buying cheap debt on property could be a good way to end up owning the real estate.

In the coming 18 to 24 months, investors will be able to buy loans at a discount, he said. But not yet.

“It’s a different horror movie than in the early 1990s,” Mr. Lynn said. “It happened really quickly (then). There were huge opportunities and it was all for sale. Now there will be huge opportunities, but a lot of people are holding on.”

Link

22 Deals in One Month

No, that is not a typo. My month has been, well, let's just say it's been pretty encouraging. The tally consists of 3 leases (in excess of 11,000SF, retail and office only) and 19 closed commercial sales. Several of these were the purchase of non-contiguous foreclosed lots, an office building, etc. I am closing out the month of April with a small retail lease that was completed yesterday morning.

As far as I can tell right now, buyers are still able to obtain financing. I personally witnessed this occur several deals. I've also seen some banks behave as if they actually want to lend but make the process so arduous that it's all but impossible to get a loan. I would just prefer if these folks fessed up and not wasted everyone's time. It's going to be a while before I'll feel comfortable recommending them again.

Most of the leasing I've been involved with consists of new start-up business taking advantage of the current rental climate and companies shuffling to similar chunks of space where the rent is cheaper. I don't blame many of them as retail and office rents are down as much as 50%-60% in many places. The Sarasota vacancy report was released earlier in the week and the numbers are not good. Lots of negative absorption out there. I expect this to continue throughout the summer and am hopeful things will turn around in the fall.\

No, that is not a typo. My month has been, well, let's just say it's been pretty encouraging. The tally consists of 3 leases (in excess of 11,000SF, retail and office only) and 19 closed commercial sales. Several of these were the purchase of non-contiguous foreclosed lots, an office building, etc. I am closing out the month of April with a small retail lease that was completed yesterday morning.

As far as I can tell right now, buyers are still able to obtain financing. I saw this on several deals. I've also seen some banks behave as if they actually want to lend but make the process so arduous that it's all but impossible to get a loan. I would just prefer if these folks fessed up and not wasted everyone's time. It's going to be a while before I'll feel comfortable recommending them again.

Most of the leasing I've been involved with consists of new start-up business taking advantage of the current rental climate and companies shuffling to similar chunks of space where the rent is cheaper. I don't blame many of them as retail and office rents are down as much as 50%-60% in many places. The Sarasota vacancy report was released earlier in the week and the numbers are not good. Lots of negative absorption out there. I expect this to continue throughout the summer and am hopeful things will turn around in the fall.

I'm often asked why some properties are moving and others are not. There are a variety of factors in play here, but the most significant is pricing. If landlords and sellers aren't eager to make deals happen, there's no real point in even listing a property for sale at all. Yes, there is a lot of pain - and sometimes anger - involved in coming to terms with what your property may be worth. The problem is, it's only worth what someone will pay. As agents, we do not set the prices, the market does. And the market is changing on a daily basis. If you're a landlord, it's best to bring some some cash in than none at all. If you have a premium location you'll certainly be able to obtain marginally better rents.

Media's Effect on Spending

Not necessarily a post about commercial real estate per se, but I find it interesting how heavily the media plays into general economic fear. No doubt we are facing some strong economic headwinds, but one really needs to question how much worse the constant flow of instant information makes things. Interesting read. See link below for the rest of the article. From The Washington Post.

Frugality fuels recession's vicious cycle
Even those whose jobs are safe are spending less, which holds down growth
By Michael S. Rosenwald
The Washington Post
updated 4:57 a.m. ET, Thurs., April 16, 2009

WASHINGTON - Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don't fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending.

So, too, has Bob Scanlon, a Brookeville executive with the Transportation Security Administration. He feels his job is secure. But recently he decided to lop $50 a month off his family's cable bill. When they dine at their favorite restaurant, they go on half-price Tuesdays.

The frugality of the Kimberlins and Scanlons and millions of other Americans who still have their good jobs feed back on the economy, holding down growth and encouraging other worried workers to trim their spending — causing the whole vicious cycle to run another lap.

"It really can become and does become a self-fulfilling prophecy," Denise Kimberlin said.

Psychological traps
Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality. Underscoring the crucial role that consumer psychology will play in turning around the economy, President Obama and Federal Reserve Chairman Ben S. Bernanke have both been on the hustings this week sounding notes of optimism.

"Traditional economics assumes that we are all rational, that we approach these things very rationally, take in all the information, and then weight it and make a decision," said Thomas Gilovich, a Cornell psychologist and co-director of the university's Center for Behavioral Economics and Decision Research. "To a behavioral economist that seems clearly untrue."

Denise Kimberlin said she began cutting back after the holidays, when at family gatherings and work parties she heard stories of people losing their jobs and people saving money around the edges. The stories made her wonder, "What if?"

These perceptions are reinforced by the blare of the news media. When network news anchors Brian Williams and Charlie Gibson lead their broadcasts with bleak news about the economy and consumers clamming up, people who don't necessarily need to cut back decide to anyway.

In August, the three major TV network newscasts spent a total of 85 minutes covering economic news, according to the Tyndall Report, which monitors newscast content. In September, when the banking crisis began and layoffs spiked, the coverage totaled 403 minutes. In the same month, Gallup's polling shows upper-income consumers dropped their total daily spending to about $160, from a high of $185 in May.

By last month, after what must feel like an eternity of stories about creative ways strapped people are saving money, they had cut back further — to $101 day.

Click here for the rest of the story.

Local Retail Vacancies Soar

Space is tough to lease these days, no question about that. Here's an article which appeared this morning in the Sarasota Herald Tribune.

U.S. 41: DOWNTURN DRIVE
Tough times for Tamiami Trail businesses

By Lauren Mayk

Published: Sunday, March 29, 2009 at 1:00 a.m.

This is the first of four stories about how the recession is changing the way local businesses buy, sell and survive.

The economy has changed the Trail.

There are fewer dinners out, smaller staffs and weakened sales. At one beauty salon in North Port, there is even a post office.

When customers started stretching out the time between haircuts and color appointments, Stella Derby went after a contract with the U.S. Postal Service. She now takes mail and sells stamps in the front of her Modern Beauty salon on Tamiami Trail. Signs point patrons to separate entrances for the salon and post office. The idea was to increase exposure for the 30-year-old salon, and nine months later, it seems to be working.

"Every week I get a couple, two, three new clients," Derby said.

Her strategy is one among many that business owners along Tamiami Trail are cobbling together in the midst of a painful downturn that has given some of them the choice between creativity or closure. Traffic along the Trail drives the pulse of commerce and consumerism in Southwest Florida, and it has slowed to a crawl.

There are the obvious indicators: shuttered restaurants, liquidating big boxes and "out of business" signs, but there is also pain inside the businesses still open -- even some that have cars in the parking lot and sales on their books.

Owners are discounting heavily, taking double-digit sales hits and worrying about what comes after the tourist season.

"The whole idea of season is to build up a little bit of cash, and that's not going to happen," said Simon Mendez of Simon's Quality Used Furniture. "You think it's bad right now with people closing down? Wait for summer."

Last year, consumers spent $2 billion less in Southwest Florida than they did in 2007, data from the Florida Department of Revenue shows, with gross sales down 10 percent in Sarasota County, 10.2 percent in Charlotte County and 4.1 percent in Manatee.

For December, the most recent month available in detail, regional sales were down 9.9 percent. The drop-off was about 10.2 percent in Sarasota and Manatee and 7.7 percent in Charlotte County.

Figures for more recent months are not out, but Trail business owners will tell you that despite the tourist season, the (non)spending trend has continued. "This was the worst January I ever had," said Craig Cook, who has owned Amber's Jewel Box in North Port for 11 years. His January sales were off 60 percent.

The Herald-Tribune interviewed more than 50 business owners, employees, real estate professionals and business experts about life along the Trail these days.

There are bright spots and there is determination to evolve with the economy, but there is also an overwhelming feeling of tough times along Southwest Florida's commercial heart.

Vanishing customers

Kamlesh Kadiwar saw sales at his combination gas station, convenience store and deli at Tamiami Trail and River Road in south Venice start to nosedive in April 2007.

Countywide, the decline took a few more months to show up at gas stations, state data show, happening about the time gas was topping $3 in spring and summer 2007.

Sales at Myakka River Trading Co. dropped 25 percent from 2006 to 2007, then sank another 50 percent from 2007 to now.

Kadiwar's business also lost another bigger transaction. "We were under contract for sale for a while and when the recession hit, they backed out," he said.

The station and store, advertising a "1/2 lb. of our famous chicken wings" for $3.79, used to see a steady stream of construction workers, but Kadiwar figures traffic is down from 700 people a day to 300.

The staff has been halved. Kadiwar employs just three others, taking evening shifts himself.

Another challenge is looming, a requirement that stations change their tanks from stainless steel to double-walled fiberglass this year. Kadiwar says the switch would cost $275,000. "We're not going to be doing it. We're going to stop selling gas unless the situation changes," he said.

Stations like Kadiwar's in Sarasota County saw a 41.5 percent drop in sales in November compared with a year ago.

More broadly, the trend was negative that month in about 70 percent of the roughly 80 categories used by the state to break out sales for the county. Many dropped more than 20 percent, including automotive dealers at 32 percent and boat dealers at 52.8 percent.

Sales of household appliances took a 51.7 percent dive, while home furniture, furnishings and equipment -- tied closely to movement in real estate -- were down 20.15 percent. The bright spot was that some furniture retailers report a boost from customers who have just bought homes in the area. With home prices down, buyers have extra money to decorate.

On the other hand, some custom furnishings are ending up back on the sales floor after customers (who only paid for part of the total cost as a downpayment) fail to pick them up.

Traditional retail categories that depend on discretionary income continued to fall, with restaurants and bars showing pullbacks of 3.8 percent and 15.6 percent, respectively, and apparel and accessory stores down by 12.5 percent.

The numbers did spike for some areas in December, including spending on used merchandise (up 3 percent), transportation (up 42.1 percent) and utilities (up 14.8 percent).

While the state can paint a pretty vivid picture of how different industries and retail segments are faring, there are some surprises and some unknowns about what is behind the numbers.

They do not, for example, take into consideration what sales are doing to profit margins, nor do they reflect the evolution of businesses that have downsized by cutting jobs and expenses to stay healthy even while taking in less revenue.

Beauty salons, barber shops and personal appearance services come off looking quite popular in December, with a 31.7 percent year-over-year leap.

But anecdotal evidence suggests consumers are letting their hair grow a little longer, trying home perms and limiting their beauty budgets.

For Audrey's Towne Stylists salon in North Port, some customers just did not make it at all this year. "A lot of people haven't come down from the North," owner Audrey Fred said. "I've gotten a lot of calls and letters saying they can't afford it."

On a February day, Fred and an employee sat in the shop alone, no customers in the rose-colored salon chairs along the wall. Fred, who had run the operation since 1983, said that day that she would like to find a buyer who would let her stay on part-time.

Soon after, the shop closed and a "For Rent" sign showed up on the window.

Empty spaces

At Rico's, a pizza place on the North Trail near the Ringling Museum, business is down at least 20 percent and the staff has shrunk by more than half -- but those are not the only business hits Salvatore Dentici is taking these days.

In addition to a small string of Rico's restaurants, Dentici and his brothers own commercial space, with 11 units around the Rico's spot on North Trail.

"We were fully rented two years ago," Dentici said, peering out. "Now we have ... five."

That real estate once housed a mortgage company, a real estate agency and a Mexican store. "A lot of people just walked," Dentici said.

Vacancies along the Trail are striking, with clusters of leasing signs and closed-up shops punctuating large stretches of commercial space.

The Glengarry Shoppes, home to Barnes & Noble and a Best Buy, used to be flanked by two restaurants: Village Inn and Steak & Ale. Both have closed; one has been knocked down.

On a stretch of the Trail just north of Clark Road, an empty restaurant building is sandwiched between two vacant structures. Others only recently emptied, including a doomed Circuit City.

"There's probably more vacancies than I've ever seen, and it's going to take a long time to fill them," said Barry Seidel, whose name is a common sight on real estate signs along the road.

But Seidel is seeing some hope for the simple reason that his phone is ringing. It started with calls from outside the 941 area code, then from locals.

The glut of office and warehouse space tends to be the most difficult to move.

Tough as it is to lease, Seidel says sales are a bigger challenge.

Bill Clampitt has gotten a lot of interest in buying a property originally built as a Wendy's on the Trail, though a deal recently fell through. He is offering "owner financing" as an appeal to potential buyers concerned about the credit market.

Knights Inn owner Arvind Patel hoped to sell his hotel on the North Trail, but let a listing expire, figuring the market is too soft. Though he is no longer actively seeking a buyer, the listing can still be found online.

"If somebody brings in $4.4 million, they can have it," he said.

Landlords and Tenants Alike More In Favor of Short-Term Leases

From the NYT. Pretty similar to what is going on locally. Link to full article below.

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

Tina Fineberg for The New York Times

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. Some prominent landlords have begun playing up the availability of short-term leases in their buildings.

For example, Paramount Group is advertising two-year leases at 1633 Broadway, between 50th and 51st Streets. And the Kushner Companies sent promotional materials to brokers advertising one- and two-year leases for finished offices in 666 Fifth Avenue, a prime office tower that spans the entire blockfront of Fifth Avenue between 52nd and 53rd Streets.

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.

Mr. Hoffman is the leasing agent for some office towers in Manhattan whose landlords have recently signed short-term renewals with existing tenants. “There were tenants with one foot out the door, who were leaving spaces that required large capital improvements,” Mr. Hoffman said. “We decided it was more cost-effective to keep them in place.”

In recent months, he has negotiated five short-term lease renewals at 360 Lexington Avenue, a 24-story, 262,000-square-foot office tower on the northwest corner of 40th Street. Three of these renewals were for two years, and two were for one year.

Brokers say that smaller tenants tend to favor short-term leases now, while large office tenants still prefer the stability of long-term leases. For example, the short-term leases that Mr. Hoffman negotiated at 360 Lexington Avenue ranged in size from 2,500 square feet to 7,300 square feet. The tenants included a law firm, a technology firm, a small financial firm and two missions to the United Nations, which is nearby.

The building is owned by AEW Capital Management, a real estate company based in Boston, which bought it for $129 million in August. “We did not forecast higher rents when we bought the building, because the Bear Stearns building was nearby, and we knew there would be a shakeout in the financial sector,” said Jeff Furber, the chief executive of AEW Capital Management, which is a subsidiary of Natixis Global Asset Management, a French investment firm. Indeed, he said, “we liked the building because it didn’t have a lot of financial firms in it.”

Mr. Furber said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”

Matthew Astrachan, an executive vice president at Cushman & Wakefield, who represents both office tenants and landlords, said that the Manhattan office market had recently become a “tenants’ market,” meaning tenants now have the upper hand in negotiations with landlords.

The vacancy rate for the entire Manhattan office market as of the end of February had risen above 9 percent. But vacancy rates are even higher in the most expensive top-notch buildings, known in the industry’s jargon as Class A office space. The vacancy rate for Class A buildings in Midtown Manhattan has climbed to 10.6 percent, according to Cushman & Wakefield.

Mr. Astrachan said that in times like these, tenants can often negotiate with landlords for concessions — like long periods of free rent and capital improvement allowances — if they are signing 5- to 10-year leases.

But tenants signing leases of one or two years cannot negotiate as many perks. “They are slightly overpaying, in order to keep their flexibility,” he said.

Charlie Malet, the executive vice president in charge of national leasing for Shorenstein, a real estate company based in San Francisco, which owns several office buildings in Manhattan, said that short-term leases were attractive for both landlords and tenants now.

“Landlords don’t want to tie up space for what they perceive to be a low rent,” he said. “And if the tenants are a little uncertain about the long-term business environment, they don’t want to lock themselves into a 10-year deal.”

Mr. Malet said that Shorenstein recently signed a one-year lease renewal with Harbor View Advisors, an investment advisory firm, at 850 Third Avenue. Shorenstein bought this 39-story, 1.2 million-square-foot office tower last summer. The price tag was around $325 million, according to Real Capital Analytics, a New York research firm that tracks sales of office buildings.

Ken Perry, the chief investment officer and director of asset management for the Swig Company, a real estate concern in San Francisco, said the company had recently signed about half a dozen short-term leases at 1411 Broadway, one of several office towers it owns in Manhattan. Swig has had a 50 percent stake in this building since it was built in 1970, and is currently a co-owner with the Blackstone Group.

“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” Mr. Perry said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

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Commercial Real Estate "Black Hole"

Thought it was relevant. Seems the worst is yet to materialize. I'm a glass half-empty kind of guy, so this is no real surprise. From an agent perspective, I find myself pushing back on more listings these days as owners can't/won't keep up with the dramatically changing landscape with regard to property. Apollo Management owns the brand I work for (Coldwell Banker Commercial).

Banks warned on commercial property ‘black hole’

VIEW THE VIDEO HERE

By Henny Sender in New York

Published: March 19 2009 21:06 | Last updated: March 19 2009 21:06

A “black hole” in the US commercial property market is set to put further pressure on troubled banks, the head of leading private equity firm Apollo Management has warned.

Leon Black, founder of the firm, said the extra costs of cleaning up the US banking industry could total as much as $2,000bn, putting further strain on the economy. He said the woes of the commercial property had not yet been reflected fully on bank balance sheets.

“You have the black hole of commercial real estate and that hasn’t happened yet,” said Mr Black in a wide-ranging interview on FT.com.

“There you are sitting with $4 trillion of debt and you know not all of it’s bad but a lot of it is diminished and that really hasn’t yet been addressed.”

He warned it would be 12 to 18 months before there are lasting signs of US economic recovery.

Apollo, a firm established in 1990 that combines buy-out activity with investing in the debt of troubled companies, is in better shape than many of its competitors. It has at least $13bn to invest at a time when it is almost impossible to raise new money.

Largely because the banks are not providing financing and the capital markets are not open, Mr Black conceded that “conventional private equity right now doesn’t exist ... Conventional buy-outs are really not on the table right now”.

Mr Black warned in February that traditional buy-outs were “essentially dead for the time being” and claimed “the big public-to-privates are gone the way of the dodo”.

During the boom years, which ended abruptly in 2007, Mr Black took advantage of cheap and flexible debt to buy companies, pay his investors dividends and then sell these acquisitions as he did with Intelsat.

Now, as some of the companies he owns, such as Harrah’s Entertainment, have been hard hit by the recession, he is spending much of his time reducing their debt burdens.

“The name of the game is survival, it is too live to play another day,” said the veteran of now defunct Drexel Burnham Lambert, which pioneered the business of raising debt for less creditworthy firms.

While many private equity firms are looking at investing in debt of troubled firms – an area that Apollo has long been involved with – Mr Black is exploring the market for non-performing loans in Europe.

Copyright The Financial Times Limited 2009

Vacancy Report (2/1/09)

The Sarasota EDC numbers are in (as of 2/1) and they are as follows:

Downtown: 11.06%
University Parkway Area (includes Lakewood Ranch): 17.96%
I-75 Fruitville S to Clark: 21.32%
Venice: 22.03%
North Port: 35.13% (!!)
Suburban & South Trail: 26.65%

Area Average: 17.82%

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