US Commercial In Downward Spiral

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

U.S. commercial property in a downward spiral

By Charles V. Bagli

Monday, January 5, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read Story

Finding Success In Leasing

Happy new year, everyone.

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

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

By Michael Braga

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The really big fish

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Futuristic growth

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

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

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

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

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

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

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

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

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

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

LINK

At Wa-Mu, EVERYTHING Was Approved

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

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

From the New York Times (registration required):

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here to read the rest of the article.

CRE Developers Looking for Bailout, Commercial Defaults to Triple

Looks like we're heading toward critical mass. I hate being the bearer of bad news again, but there isn't much positive news out there to report. As the Sarasota Herald article stated, seems like we're in for a bumpy 2009. I expect to see a lot of property hit the market in the next 13 months at prices once unthinkable.

US developers seek aid from government

By Bloomberg News | December 23, 2008

NEW YORK - The biggest property developers in the United States are asking to be included in the federal government's efforts to jump-start commercial lending, said Jeff DeBoer, president of the Washington-based Real Estate Roundtable.

The help could come through a new $200 billion loan program established to aid the market for car loans, student loans, and credit-card debt, or through a separate pool that would allow property owners to refinance mortgages, DeBoer said. The group represents property owners, developers, lenders, and management companies.

About $270 billion of mortgages on shopping malls, apartment complexes, and office buildings must be refinanced in 2009, according to Barclays estimates. Commercial loan defaults will accelerate as banks and insurance companies rein in lending to manage their balance sheets and as the market for commercial mortgage-backed securities stays shut, Fitch Ratings said in a Nov. 17 report.

"They are trying to alert members of Congress and the public to a very serious problem that is coming," DeBoer said of the developers. "Until the credit markets function again, this could be a serious problem."

Commercial mortgages are usually written for a period of five to 10 years with the expectation they will then be refinanced, DeBoer said. That can't happen currently because banks are reluctant to lend.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve has agreed to lend to some holders of securities backed by "newly and recently originated" loans. The loans include those for education, cars, and credit cards.

The Fed intends to have TALF running by February and has said it may expand it to commercial mortgages.

Mitchell Hersh, chief executive of Mack-Cali Realty Corp., declined to comment. A spokeswoman for Richard Clark, CEO of Brookfield Properties Corp., Lower Manhattan's largest landlord, said Clark was unavailable.

Commercial property prices fell 2.4 percent in October, Moody's said in a report yesterday. The Moody's/REAL commercial property price index, which tracks prices nationwide for offices, stores, warehouses, and apartments based on repeat sales, is now 11.5 percent below its October 2007 peak, according to the report.

US commercial properties at risk of default could triple if rental income from office, retail, and apartment buildings drops even 5 percent, according to research by real estate analysts at New York-based Reis Inc.

LINK

A Not So Happy 2009? Yep.

I made the local paper today with an article predicting the year ahead. For perspective, I did fairly well in 2008 but, like a lot of other folks in my business down here, many of us are concerned about the prospects for the year ahead. I don't know if I agree with a 50% drop in values over the year, but I can see some significant price cuts in BOTH lease rates and square-footage selling prices.

From the Sarasota Herald Tribune:

Unhappy new year for commercial Analysts say this real estate sector faces the biggest challenges in '09

By Michael Braga

Published: Monday, December 22, 2008 at 1:00 a.m.

The commercial real estate market has suffered this year as total sales and lease rates of everything from shopping centers to car dealerships have fallen.

But if you think things were bad this year, just wait until 2009.

"The next meltdown we are going to see is in commercial," said Gordon Hester, a Siesta hard-money lender whose customers include both commercial and residential developers. "The value of commercial real estate will probably drop 50 to 60 percent."

Investors began pouring money into commercial real estate in 2006, just after the residential real estate market peaked. Like residential investors, these commercial players abandoned the notion that properties need to kick off enough revenue to cover carrying costs, Hester said.

Instead, they banked on the bet that real estate could be purchased for one price and sold for a much higher price in a relatively short period.

"Now investors are only willing to pay based in returns," Hester said. "For that to shake out, values have to drop."

Unfortunately, the end of the "appreciation model" in commercial real estate coincides with one of the worst economic downturns since the 1930s.

Unemployment is up, consumer confidence and spending is down, and owners of shopping centers, hotels and office buildings are already feeling the pinch.

"After the Christmas season, we are going to see a ton of retailers and restaurants file for bankruptcy or go out of business," said Jack McCabe, a Deerfield Beach-based real estate consultant. "Obviously this will affect shopping centers and strip centers and the office market."

Sales dropping

The deterioration of the commercial real estate sector already is showing up in declining sales.

Only 89 properties in Sarasota County changed hands in 2008 for a total of $131.3 million, a 47.5 percent drop in sales volume from the 109 properties that sold for $250.3 million in 2007.

Office buildings saw the largest drop in dollar terms, followed by hotels and shopping centers.

"The whole thing is being driven by two things: the credit situation, which is nowhere at the moment, and investor confidence," said Stan Rutstein, a commercial agent with Re/Max in Bradenton.

Rutstein pointed to the fact that Nate Benderson, Nathan Forbes and the Taubman Cos. recently announced they were postponing construction of the new University Town Center Mall.

"If developers like Benderson, Forbes and Taubman, who are national scope, are being cautious -- if they don't want to take a risk -- then smaller players are not going to take a risk, either," Rutstein said. "Two-thousand nine is going to be a very challenging year."

Rutstein said that the only way commercial properties are going to move is if sellers come down hard on price. For example, a client who was offered $1.6 million from a bank for an acre near Wal-Mart in 2006, might only get $600,000 for that same property today.

"But there aren't any takers because banks are out of the market," Rutstein said.

The same downward trend is also affecting lease rates for both office and retail space, said Anthony Migliore, a commercial agent with Coldwell Banker in Sarasota.

"Landlords and owners are getting very reasonable," Migliore said. "There was one case in which the owners of an office building in Lakewood Ranch gave one year free rent to the Juvenile Diabetes Research Foundation in return for signing a long-term lease."

Of course, that is an extreme example, Migliore said. But it illustrates the kind of lengths landlords are willing to go to get space rented.

"They may not be able to sell the space, but at least they can get it leased and ride out the storm," Migliore said.

Vacancies on the rise

"If you are a shopping center owner and you evict someone this year, you're crazy," said George Huhn, a Venice-based commercial real estate agent. "Vacancies are going to go through the roof, and everyone will be competing for tenants."

A lot of landlords are opting to carry mom and pop retailers through the bad times with rent abatements, renegotiations of leases and forbearance agreements, Huhn said.

"They're just looking to keep the guy in business, because something is always better than nothing," Huhn said.

Retail sales in Sarasota County were down by nearly $70 million, or 11 percent, in September compared with the same month a year earlier, and that was before the financial crisis really took hold. So it is no wonder that retailers and landlords alike are struggling.

But as in the residential market where foreclosures have led to amazing deals for savvy investors, the collapse of the commercial real estate sector will provide ample opportunities for investors looking for deals.

"Banks already have commercial property available that they have foreclosed on," Rutstein said.

"A good amount of it is dirt that has plummeted in value."

For investors like Michael Averbuch, commercial land represents a once-in-a-lifetime opportunity.

"The biggest game in town is commercial land," Averbuch said. "Banks in Southwest Florida are nothing more than walking corpses. They are sitting on land and developer loans -- most of which are in default, and lot of that land will hit the market this year.

"The stuff is so distressed, that it can't get more distressed."

Anyone Care To Guess What THIS Will Do To Big Box Retail?

As much as I love technology, and I really love technology, I was frozen in my tracks after seeing this little gem of an application. Information is power, that's for sure.

Consider this: you're shopping for a television in a big box store. Let's say you find a 42" LCD that you love. The price is $1,499 in the store + sales tax. You whip out your Android-powered phone (i.e., Android = Google powered, it's available now at T-Mobile), scan the barcode of the product right there in the store and, within seconds, a list of online retailers shows up with the same product for $400 or $500 less with free shipping. Next to this is a button that says "Order Now?" What do you do? If it's me, I would order it from the online retailer without thinking twice and walk out of the store I was in. This is terrific and it is here NOW.



What struck me was the specter of what this kind of thing could do to brick and mortar retail. If physical stores cannot compete with this (and they cannot in my opinion), what will become of them? There are always people who will need things immediately (computer cables, DVDs, blank CDs, etc.), but when it comes to high margin stuff like televisions, digital cameras, and computers, life is about to become even tougher for retailers. Saving 30% and sometimes 50% by shopping online is pretty significant. Yes, buying products online has pretty much always been less expensive, but now a person can just point their phone at the product and have the information in seconds.

With the Apple iPhone and Amazon.com, all you need to do is take a photo of the product. They've gotten that smart. Pay attention to the video below at 1:17. Just take a photo of something like a TV and it will figure it out for you.



Will the world end up with fewer retailers and more fulfillment centers eventually? Time will tell and I would reason to guess we are headed in that direction. Not everyone uses this technology...yet. All it takes is a modest amount of consumers to stop buying high margin items from big box stores. Most of these stores are in trouble as it stands already and this could be the tipping point. I speak from a bit of experience as I was in the music business for over a decade and watched profits erode as MP3s and file sharing cut out the need for distributors. That's another subject, but that experience is still pretty fresh.

Upsale Sarasota Mall Delayed

This is not all the surprising to most of us in the business. Most retailers are reeling at the moment and the situation is expected to worsen before it gets better. From the Sarasota Herald Tribune.

Upscale mall will be late

By Toni Whitt
STAFF WRITER

Published: Sunday, December 7, 2008 at 1:00 a.m.
Last Modified: Sunday, December 7, 2008 at 12:11 a.m.

SARASOTA - Construction of the new University Town Center Mall featuring Neiman Marcus, Nordstrom and Macy's has been put on hold until the economy turns around.

The move is not surprising given that all of the anchor retailers are suffering from the downturn. Neiman Marcus saw same-store sales drop 14.5 percent in the last quarter. The retailer saw another 11.9 percent decline for the month of November.

Neiman Marcus, which is set to webcast its quarterly report on Wednesday, may have urged the developers to stall the mall project until the economy gets better.

"We're hoping it's a short delay," said Mark Chait, director of Florida leasing for Benderson Development Co., LLC, one of the three partners in the project. He said construction will begin as soon as "economic and retail conditions improve."

It will take two years to build the mall once construction begins, he said.

That means the mall probably will not open before 2012, because most analysts do not believe the economy will turn around before the end of next year.

Nathan Forbes, managing partner of The Forbes Co., would not comment on the retailers on Saturday, but said he plans to issue a formal statement on the construction delay and mall leases later this week.

The other two announced anchors for the mall have also been suffering under the country's economic crisis, with housing prices down, the jobless rate soaring and the credit market contracting. Nordstrom, Inc. saw a 12.1 percent decrease in same store sales in November. Year-to-date same-store sales have decreased 8.6 percent compared with the same period last year.

Macy's, Inc., the third anchor, saw a 13.3 percent decrease in November same-store sales and year-to-date same-store sales were down 4.8 percent. It has also experienced a precipitous drop in its stock price in the past year. It had been selling at around $30 a share a year ago and has since dropped to $8.61 as of last week.

The climate for malls is not good as retailers close stores, face bankruptcy and even shut down.

In a July report, the International Council of Shopping Centers predicted nearly 144,000 stores would close this year.

Mall developments are now facing foreclosure as occupancy rates decline and the delinquency rate on commercial-backed mortgage securities markets rise.

General Growth Properties, Inc., the country's second largest regional mall real estate investment trust, may have to sell the company under the weight of its debt.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

The timing is terrible for the University Town Center project, which had finally cleared the last of several hurdles last month, when the state gave the developers permission to pull permits and begin building.

In an October conference call with investors, the chief executive of Taubman Centers Inc., whose company holds a 25 percent interest in the project, said that if the partners did not find favorable financing for the project, the development group planned to "self-fund" construction of the 900,000-square-foot luxury mall, which he promised would be complete by November 2010.

But in the ensuing weeks, the economy has declined even further and sales the day after Thanksgiving -- known as Black Friday -- did not bring in the sales retailers had been hoping for.

The Associated Press contributed to this report.

LINK

Nearly 10% of all Mortgages Not Being Paid

Yep...

From Bloomberg:

By Kathleen M. Howley

Dec. 5 (Bloomberg) -- One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.

The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.

“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”

The U.S. economy has shed 1.91 million jobs this year, while falling home prices have made it difficult for people who can’t pay their mortgages to sell their property. Payrolls declined in each month of 2008 through November, the Labor Department said today in Washington.

New foreclosures fell to 1.07 percent from 1.08 percent in the second quarter as some states enacted laws to temporarily stop home repossessions and lenders increased efforts to modify the terms of loans, Brinkmann said.

Home Sales Sink

“Some servicers keep a loan in a delinquent state until they see customers carrying through on their agreements, and then they’ll switch it to performing,” Brinkmann said.

U.S. home sales and prices began to tumble in 2006 after a five-year boom, dragging the economy into a recession that began in December 2007, according to the National Bureau of Economic Research.

The median home price in the fourth quarter probably will be $190,300, down 19 percent from the record $226,800 in 2006’s second quarter, according to a Nov. 24 forecast by Fannie Mae, the world’s largest mortgage buyer.

Purchases of existing homes in October slid to an annual rate of 4.98 million, lower than forecast, the National Association of Realtors said in a Nov. 24 report. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Federal Reserve Chairman Ben S. Bernanke yesterday urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.

Bernanke’s Plans

The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.

Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will change the amount of the loan a lender must forgive and allow banks to extend the payback time of a mortgage.

There were 111.7 million occupied housing units in the U.S. in the third quarter, 68 percent used by owners and the remainder leased by renters, according to the Census Bureau. One in three U.S. homes has no mortgage, the bureau said.

The bankers’ report cites percentages without providing the number of mortgages. The U.S. had $11.3 trillion of outstanding home loans at the end of June, according to Federal Reserve data. Mortgage lending fell to $80.8 billion in the second quarter, down from $764 billion a year earlier, the Fed said.

The Mortgage Bankers report is based on a survey of 45.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: December 5, 2008 13:58 EST

What Happens When a 1031 Intermediary Goes Out of Business?

It becomes a HUGE mess. The IRS does NOT care because, once your time is up, you will either have to close or pay cap gains. From CoStar:

Another Blow to Faltering 1031 Real Estate Industry
At Least 450 Real Estate Deals Caught in Limbo Following LandAmerica 1031 Exchange Bankruptcy Filing
Already stung by cases alleging massive embezzlements and a string of failures of 1031 exchange accommodators, now comes another major blow to the business of tax-free real estate exchanges. LandAmerica 1031 Exchange Services Company Inc., one of the stalwarts of the business and one that many investors turned to for stability has run out of money, closed up shop and filed for bankruptcy court protection.

LandAmerica Financial Group Inc., Fortune magazine’s number one Most Admired Company in the mortgage services industry in 2007, shut down operations of its LandAmerica 1031 Exchange Services. In addition, the parent company is being forced to sell its primary title insurance subsidiaries: Commonwealth Land Title Insurance Co.; and Lawyers Title Insurance Corp.

The string of actions was touched off Friday Nov. 21 when Fidelity National Financial Inc., parent company of Chicago Title, cancelled a deal to buy LandAmerica Financial.

The following Monday, LandAmerica 1031 Exchange Services quit accepting new customers and terminated its operations.

That same day, the Nebraska Department of Insurance filed petitions for rehabilitation for Commonwealth and Lawyers Title under the Nebraska Insurance Code. That move likely would have meant turning over controlling of LandAmerica's title companies to Fidelity.

So two days later, LandAmerica Financial came to news terms on the sale of its title companies to Fidelity National, a deal that did not include LandAmerica 1031 Exchange Services. Thus the exchange accommodator and LandAmerica Financial the parent filed for bankruptcy to help facilitate the sale of the title businesses. The filing was made under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia in Richmond, VA.

LandAmerica 1031 Exchange estimated that its assets and liabilities were between $100 million and $500 billion. LandAmerica Financial estimated both at more than $1 billion.

Separate from the title insurance drama, it appeared LandAmerica 1031 Exchange Services was experiencing problems of its own.

In a typical 1031 exchange, an exchanger sells its real estate investment and then has 45 days from the date of sale of the property to identify a like kind replacement property and it has 180 days from the date of the sale to close on the purchase of that replacement property without suffering any tax consequence.

The money from the sale of the first property is held in escrow by an exchange accommodator and released for the purchase of the replacement property. LandAmerica 1031 was one such firm.

While it held those funds, LandAmerica was investing a portion of them in auction rate securities -- in this case in investment grade securities rated A or stronger, including auction rate securities backed by federally guaranteed student loans.

Despite their investment grade ratings, LandAmerica 1031 got caught up in the troubles for such securities when the market for them froze earlier this year.

Its inability to sell or borrow against these securities precipitated its decision to terminate operations, the company said in a letter to customers.

"We understand that this situation is detrimental to you, and we can only assure you that we have taken every reasonable step possible to avoid the problem, including pursuing numerous liquidity options to no avail," LandAmerica's letter to customers said.

Customers are finding out just how detrimental it is after the filing of Chapter 11.

In a real estate alert to its clients, the law firm of DLA Piper in Atlanta, GA, wrote, "For taxpayers who have exchange funds at LandAmerica 1031 Exchange, the automatic stay imposed by the Bankruptcy Court in connection with the Chapter 11 filing will require Court approval of the release of any funds. Accordingly, it is highly unlikely that those funds will be immediately available, and they may not be available in time for the scheduled exchange closings, if any."

"In addition to negatively affecting the contractual obligations of those taxpayers to close on the purchase of identified replacement properties, the unavailability of exchange funds may disqualify the transaction from favorable Section 1031 tax treatment or have other adverse tax consequences," DLA Piper wrote.

According to bankruptcy filings made by LandAmerica 1031, there are approximately 450 taxpayers with pending exchange transactions.

There have been at least two lawsuits filed on behalf of such clients on an emergency basis seeking the release of those funds in time to complete pending transactions.

"I am deeply disappointed over the need to file for bankruptcy protection for the LandAmerica holding company and the 1031 company," said Theodore L. Chandler, Jr., chairman and CEO of LandAmerica Financial. "However, this sale of our principal domestic title operations to Fidelity National in this coordinated Chapter 11 filing and Nebraska rehabilitation action offers our stakeholders the best result available in this brutal real estate, credit and capital market environment."