Volume of CMBS Delinquent Loans Climbs

We're not anywhere near out of the woods yet but it seems all these assets we anticipated to come to market are finally doing so (or are at least well on their way). There is a lot of money sloshing around out there, and buyers eager for aggressively priced (read: discounted) prime bank assets. Once we can get these assets on the market and into the hands of people who will capitalize upon them, I think we'll all be better off. For me this is some of the best opportunity I've seen since I started selling commercial real estate. Bring it on!

Volume of CMBS Delinquent Loans Climbs to $47.8B in February
Mar 29, 2010 - CRE News

Another $1.9 billion of CMBS loans became delinquent in February, bringing the total volume of delinquent loans to $47.8 billion, or 6% of the total universe tracked by Realpoint.

That compares with a rate of 5.76% a month earlier. If you exclude agency loans and those that are less than a year old, the delinquency rate in February was 6.32%.

Delinquencies will continue to increase. That's indicated by the $76.13 billion of loans that are in the hands of special servicers. While not all of those are delinquent, they're all at high risk of becoming late. Realpoint classifies loans as being delinquent when they're more than 30-days late.

To that end, Realpoint has updated its projection for delinquencies and now expects them to hit as high as 12% of the CMBS universe by the end of the year under a heavily stressed scenario. It expects delinquencies to be between 8% and 9% by mid-year. The $3 billion of financing on Manhattan's Stuyvesant Town/Peter Cooper Village apartment complex was not deemed delinquent as of the end of February, but did not make its March payment. So next month's delinquent-loan tally will be bolstered by at least $3 billion.

In a change from recent months, the Horsham, PA, rating agency saw a decline in the volume of loans classified as 30-days late. In February, $6.8 billion of loans were in that bucket, down from $7.7 billion a month earlier. The 60-day bucket also saw a decline, although not as pronounced, to $4.7 billion from $4.8 billion.

All other delinquency categories saw an increase in volume, with the 90-day bucket growing the most, to $25.9 billion from $23.8 billion. Many loans sit in that category for substantial periods of time as their workout or foreclosure strategies are ironed out. An example is the $4.1 billion of debt on the Extended Stay Hotels chain. It became delinquent last November, so its more than 90-days late. And it will stay that way as the hotel company gets recapitalized.

The delinquency rate for securitized hotel loans was 10.2% last month, up from 9.5% in January. Apartment loans have a 7.04% delinquency rate, up from 7%, and retail loans a 5.4% rate, unchanged from a month ago. The office delinquency rate, which has remained lower than that for the other major sectors, punched through the 4% market in February, to 4.2%, from 3.7% in January.

A total of $461.8 million of loans were liquidated during February, marking the third straight month during which more than $300 million were eliminated. Of the total, $222.2 million were resolved with little loss. Most of those were refinanced after their maturity date.

The best example of that was the $165 million of debt on 63 Madison Ave., a 797,377-square-foot office building in the midtown south area of Manhattan. The loan had matured in January.

A $105 million piece of the debt was securitized through COMM, 2005-LNP5, and the remainder through GE Commercial Mortgage Corp., 2005-C1. The loan was refinanced after its maturity date with a $150 million mortgage from Bank of China. The remaining $15 million was raised by the building's owner, George Comfort & Sons, by tapping a $15 million letter of credit that a tenant at the building used to guarantee its lease.

That resolution resulted in a loss of 1% to the deals that owned the matured debt.

Meanwhile, 44 loans with a balance of $239.6 million were resolved with losses that averaged 64.7% of their balance.

The largest of those had a $42.5 million balance and was backed by 1650 Arch St., a 553,349-sf office building in downtown Philadelphia that is owned by Behringer Harvard. The Dallas investment manager bought the loan, which was securitized through Credit Suisse First Boston Mortgage Securities Corp., 2002-CKS4, at a discount to its face value. The loan's resolution resulted in a loss of $9.5 million to the CKS4 deal.

So Long, 2009.

What a year you were.

Business was very much like a roller coaster this past year, with most my deals occurring during the summer and within the past two months (Nov-Dec). Overall I would rate 2009 as not too bad. 95% of my sales came from leasing. Nearly 100% of my leasing deals were taking people out of high rent situations and repositioning them into lower rent opportunities.

I have more bank-owned inventory than I did last year and I am only expecting that to increase. I am also expecting those waiting in the wings for distressed assets to finally start showing up, probably in the mid to latter part of 2010.

Where's the bottom? Who knows. And no one is likely to know until things start turning around. I believe (and have always believed) Florida's geography will help it emerge a little sooner than other distressed areas. If you're looking for a sign, keep an eye on GDP and employment figures.

So here's a toast to the year that was: 2009. Don't let the door hit you in the ass on the way out.

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

More Bad News

Yeah, yeah...we know, we know.

Sweet! Drive-by Video Makes the GCBR

The video about industrial vacancy made the Gulf Coast Business Review last week. It's been busy, so I apologize for neglecting to post this when it came out.

The article appeared in the "Coffee Talk" section and was entitled "A Depressing Drive Around Town."

Hopefully people found the video informative and useful. I know many of my clients have been appreciative of the information

In case you haven't seen it...CLICK HERE.

Local Jobless Rate Hits New High at 11.7%

In another blow to the local economy, we're teetering close to 12% unemployment. Although it seems as if jobless claims nationally have slowed, I'm wondering if that's just a temporary thing. I know quite a few people struggling or laid off - for some, this couldn't come at a worse time.

For us in commercial real estate, that means fewer people able to spend which means stores and businesses will close. This results in more vacancies and more trouble for landlords who may need to meet cashflow requirements...not a good scenario at all.

Region's jobless rate hits 11.7 percent

By Kevin McQuaid

Published: Friday, July 17, 2009 at 10:34 a.m.
Last Modified: Friday, July 17, 2009 at 10:34 a.m.

Unemployment jumped higher during June in Southwest Florida in June, with Charlotte County hitting nearly 12 percent and Manatee and Sarasota counties not far behind.

Just short of 1 million employable Floridians do not have a job.

There were 44,355 people out of work collectively in the three counties, for a regional unemployment rate of about 11.7 percent, according to data released Friday by the Florida Agency for Workforce Innovation.

Hardest hit was Charlotte County, which saw its unemployment rate climb to 11.9 percent in June from 11.4 percent in May.

Manatee County had a jobless rate of 11.8 percent, up from 11.2 percent the previous month.

Sarasota County’s unemployment rate was 11.4 percent, up 10.9 percent in May.

Meanwhile, Florida’s unemployment rate crept up to 10.6 percent in June to stay at the highest level since 1975.

The rate was 0.3 percentage points higher than the revised May unemployment rate and is 4.6 percent age points higher than June 2008.

That means about 970,000 employable Floridians don’t have jobs.

Florida’s unemployment rate is 1.1 percent higher than the national rate of 9.5 percent.

Mega-Project The Subject of Various Lawsuits

From the Herald Tribune...

Partners in Proscenium project suing for millions

By KEVIN L. MCQUAID

Published: Wednesday, July 1, 2009 at 1:00 a.m.
Last Modified: Tuesday, June 30, 2009 at 7:38 p.m.

SARASOTA - Two former partners in the Proscenium are suing developer Zeb Portanova for defaulting on a deal to pay them nearly $5 million -- the largest unpaid debt to date tied to the stalled downtown real estate project.

With the default -- compounded by promised financing that Portanova and representatives now acknowledge may never occur -- husband and wife Gary Moyer and Karen Cook contend Portanova also owes them an additional $11 million. That money is supposed to be paid in monthly installments beginning in December.

"We expect him to pay us," Moyer said Tuesday. "It's not an if, an and or a maybe. He's put us in a position where we now are unable to adhere to commitments we've made."

Moyer and Cook, partners in Lion's Gate Development Group Inc., face a pair of foreclosure lawsuits totaling $1.27 million, for unpaid loans on their Lakewood Ranch Country Club home and on a commercial space at the San Marco Plaza, in Lakewood Ranch, which Lion's Gate developed.

The pair's lawsuit, filed Monday in Sarasota County circuit court, marks the latest legal action swirling around Portanova and Proscenium, a nearly $1 billion, Waldorf-Astoria-anchored real estate development that has stalled amid a lack of financing.

In April, Cadence Bank N.A. filed a $3 million foreclosure suit against Portanova and the Proscenium, and a security company is seeking roughly $35,000 for lack of payment.

The lawsuit by Moyer and Cook also represents the largest in a series of mounting bills that Portanova has failed to pay and might be personally liable for.

More than a dozen contractors, real estate consultants, attorneys and other professionals are owed an estimated $3 million related to the Proscenium, designed as an 18-story tower with offices, retail and restaurants and an 800-seat theater.

Neither Portanova nor his attorney, William Schlotthauer at Sarasota's Williams Parker law firm, returned calls or e-mails for comment.

Despite the legal woes, Portanova continues to try and line up financing with a pair of Atlanta partners -- Nancy Edwards and Kim King -- whose lack of real estate finance experience and embellished pasts were highlighted in a Herald-Tribune story in May.

At the time, Portanova maintained that both Edwards and King were credible financiers capable of generating the money needed to acquire land for Proscenium.

Portanova provided King and her Greencastle Asset Management with $1 million last year, in exchange for securing $100 million in financing, court documents show.

But with no financing in place despite numerous promises, Portanova travelled to Atlanta earlier this month to meet with King.

"Ms. King is still optimistic that funding will occur but provided no specific date," Schlotthauer wrote to Moyer's attorney last week. "We have repeatedly heard this story from Ms. King so we do not have much confidence at this point. The partners are currently reviewing their options as it relates to the Funding Agreement with" Greencastle.

Schlotthauer said Portanova is now seeking other financing sources as well.

Portanova, meanwhile, also continues to negotiate with Anglo-Irish Bank to acquire the former Sarasota Quay property at 401 N. Tamiami Trail.

Sources with knowledge of the deal said Portanova faces a Sept. 1 deadline to complete the estimated $40 million transaction to buy the 15-acre site.

Moyer and Cook's lawsuit could impinge on those plans, though. Anglo-Irish officials have declined comment on the negotiations.

At the heart of Moyer and Cook's lawsuit is a November 2008 agreement in which Portanova bought out Moyer's 45.5 percent interest in the Proscenium, which Moyer had conceived four years earlier.

The agreement calls for Portanova to pay the pair $4.92 million by March 30 of this year.

Only $80,000 of the amount has been paid, the lawsuit states.

Additionally, the agreement states the Proscenium would pay Moyer $32 million from project income "before distribution of any profits to the members of the Proscenium Development or their affiliates."

Since its signing, the agreement has remained unfulfilled and been extended twice, most recently on May 30, court records show.

Moyer is owed more than $10 million on July 22, the documents state.

"We've put three years of our life into this, it's like a child we've given birth to," Moyer said of the Proscenium. "All the progress that was made, and the tenants arranged, to see that go by the wayside is so disheartening."

LINK

Bloomberg on The Coming Pain

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



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

Office Tenants in Driver's Seat

Office Tenants Now in the Driver's Seat

Jun 26, 2009
By: Dees Stribling, Contributing Editor

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

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

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

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

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

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

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

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

LINK

Long, Hot Summer

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

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

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

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

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

snip...

No Consumer, No Recovery

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

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

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

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

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

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

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

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

Read the entire article here

Benderson Buys Back Properties at Discount

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The eight Western New York properties being acquired are:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

Reuters: Values of Institutionally-Bought Commercial Property Post Decline

Note that this is for institutional investors only. Here we go:

By Ilaina Jonas

NEW YORK (Reuters) - U.S. commercial property prices by institutional investors posted their greatest quarterly fall in 22 years, according to an index developed by the Massachusetts Institute of Technology Center for Real Estate.

The transaction-based index, which MIT developed in 1984, fell 10.6 percent in the fourth quarter, surpassing the record fall of 9 percent seen in the fourth quarter 1987.

The index tracks the prices that institutions such as pension funds pay or receive when buying or selling commercial properties like shopping malls, apartment complexes and office towers.

"It now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," Professor David Geltner, director of research at the Center for Real Estate, said in a statement.

The index fell a record 15 percent in 2008, and easily surpassed the 9 percent decline seen in 1991 and the 10 percent drop in 1992.

That period marked one of the most severe recessions in commercial real estate recession and was the result of the savings and loan debacle and U.S. tax code changes in 1986.

The current downturn in commercial property is the result of the credit crisis, which has cut off debt financing for sales. The U.S. recession has also dealt a blow to commercial real estate returns, as business tenants cut staff and office needs, cut hotel demand, or close stores.

The index declined a total of 27 percent from 1987 through 1992, with most of the decline occurring in 1991 and 1992.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

The MIT Center for Real Estate also compiles indexes that gauge movements on the demand side and the supply side of the market that it tracks.

The demand-side index, which tracks prices potential buyers are willing to pay, has fallen for the past six quarters, and is down 23 percent for the year and 31 percent since its mid-2007 peak.

LINK

Circuit City ripples go beyond vacancies, layoffs

Very good dissertation on the ripple effect Circuit City closings will have throughout the nation. The article is actually incorrect...the company, DJM, who is handling the subletting of the existing Circuit City sites claims over 27-million square feet of "project" encompassing over 600 locations. Click here for info on that.

Link below for the entire article. From MSNBC.

Circuit City ripples go beyond vacancies, layoffs
Pain to be felt by mall owners, suppliers, local businesses, even newspapers
The Associated Press
updated 4:57 p.m. ET, Wed., Feb. 4, 2009

Circuit City will finally flicker out when its last 567 stores close this year, but the bankruptcy of the nation's second-largest electronics retailer will ripple across the U.S. economy for years.

In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.

Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.

Circuit City is bigger than any other retailer that has gone under in the current recession. The job outlook for its workers is worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors are likely to go unpaid.

"The situation today is so different than" during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. "It wasn't the whole economy. Here, we've got a worldwide recession."

Other big retail bankruptcies, like Macy's in 1992 and Kmart's in 2002, ended in reorganizations or buyouts rather than liquidation.

Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn't work out a sale or secure new financing, and on Jan. 16 announced it would close for good.

The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors who supply the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

That's hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first ever quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.

Smaller businesses also got burned. Freelance photographer Scott Brown had worked for Circuit City's corporate office in Richmond, Va., for two years, shooting photos of people and products for the company's advertisements. The account grew to represent a quarter of his business.

The 41-year-old delivered his last project just four days before the company filed for Chapter 11. At the time, Circuit City owed him nearly $30,000. Brown listed himself as a creditor with the courts and hired an attorney. But the lawyer advised him he would probably never get paid.

"It was huge," Brown said of the loss. "It added to the stress of the daily business like you wouldn't believe."

The vacant stores leave a huge hole for shopping center owners to plug. The 18.71 million square feet of space is like the Raymond James Stadium in Tampa, Fla., where the Super Bowl was played — multiplied by 11.

Finding new tenants is increasingly difficult, as chains like Linens 'N Things, Mervyns and Steve & Barry's also go out of business. Other companies such as Starbucks and Ann Taylor are retrenching from an era of swift expansion.

Making matters more difficult is the size of most Circuit City stores, which range from nearly 17,000 square feet in Steubenville, Ohio, to more than 66,000 square feet in El Paso, Texas. Very few retail tenants require such large spaces, said Green Street Advisors analyst Nick Vedder.

"The anchors are really one of the most important pieces of the center," Vedder said. "They bring in the traffic, they are the lifeblood that (other) tenants rely on to bring customers to the stores."

Read rest of the story...

Circuit City to Liquidate All Stores

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LINK

South Florida Condo Developer Tarragon Files Chapter 11 Bankruptcy

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

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

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

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

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

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

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

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

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

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

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

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

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

Story Link

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

Wave of Retail Bankruptcies and Closings On The way

From Bloomberg. 73,000 stores may close after the new year and before June of 2009 according to ICSC. Expect a lot more vacancy. Read on.

Holiday Sales Drop to Force Bankruptcies, Closings

By Heather Burke

Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the ICSC said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers that will report December results on Jan. 8.

Women’s Clothing, Electronics

Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.

Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.

Store Closings

The ICSC predicts, using U.S. Bureau of Labor Statistics data, that 148,000 stores will shut down in 2008. That would be the largest number since 151,000 closings in 2001, during the last recession, according to ICSC Chief Economist Michael Niemira. The total number of retail establishments will decline by about 3 percent this year, also taking into account locations that were opened, he said. The U.S. had 1.11 million retail locations in 2002.

Another 73,000 locations may shut their doors in the first part of 2009, Niemira said.

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009.

The Standard & Poor’s 500 Retailing Index has shed 34 percent this year, with only two of its 27 companies rising.

The index doesn’t include Wal-Mart, the world’s largest retailer, which fell 24 cents to $55.11 at 4:02 p.m. in New York Stock Exchange composite trading. Wal-Mart shares have gained 18 percent this year.

Discount Advantage

“If you’re going to be in retail right now, the discount space is where you want to be,” Patrick McKeever, a senior equity analyst at MKM Partners LLC, said today in a Bloomberg Television interview.

Discounts of 70 percent or more by Macy’s, AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Retailers’ pricing models are being challenged by consumers, according to Richard Hastings, consumer strategist at Global Hunter Securities LLC of Newport Beach, California.

“The whole pricing system is becoming an old-fashioned bazaar,” Hastings said today in a telephone interview. “They’re going into the stores and they’re looking at the stuff and they’re saying ‘You know what? I know that that price is way too high,’ and they have figured out that the signage doesn’t mean that much.”

Retail bankruptcies may help the industry in the long run, according to Flickinger.

“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net.
Last Updated: December 29, 2008 16:17 EST

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