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    Thursday, March 17, 2011

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    Monday, September 29, 2008

    Commercial Real Estate Update

    Commercial-Property Players Find Their Pressures Growing
    As Crisis Spreads, Market Seizes Up; Capital Preservation
    For the commercial-real-estate players that were in hot water before the capital-markets crisis of the past two weeks, the temperature is rising.

    Retail giant Centro Properties Group, New York developer Macklowe Properties, office-building investor Broadway Real Estate Partners LLC and others are now facing an even rougher ride in the wake of Lehman Brothers Holdings Inc.'s bankruptcy, the collapse of American International Group Inc. and the buyout of Merrill Lynch & Co. by Bank of America Corp.

    After these and other market crises, cash-flow projections for properties are being scaled back in anticipation of a greater economic slowdown. The sales market -- long considered the last hope of many distressed players -- has virtually ground to a halt.

    Even creditors that were willing to make real-estate loans before the upheaval are pulling back, having witnessed the spectacle of some of the biggest names in finance and banking vanishing in a period of days.

    "In this kind of environment you are not looking to put capital to work," says Lisa Pendergast, managing director of RBS Greenwich Capital. "Most banks and brokerages are in capital-preservation mode."

    The demise of Lehman and other events are pushing buyers out of the market or emboldening them to demand lower prices. For example, shopping-center giant Centro Properties Group, which faces a Sept. 30 deadline to pay off $2.3 billion in debt, had a pending deal to sell 29 U.S. properties to DRA Advisors for $714 million. The deal collapsed last week after Centro refused DRA's request for a price cut.

    Getty ImagesTo be sure, commercial real estate so far has fared better than residential properties. Many office buildings, shopping centers, warehouses and other income-producing properties are generating enough cash to pay their debt, and their default rates remain low.

    Nevertheless, values have fallen because of the credit crisis and economic uncertainty, which is in particular creating headaches for investors who bought at the top of the market with short-term debt. Financial institutions holding mortgages backed by commercial real estate have suffered tens of billions of dollars in losses and face more.

    In the long run, liquidity might be restored to the market by the government's proposed $700 billion financial-bailout plan, which partly involves buying troubled commercial-real-estate debt. But many institutions may be reluctant to accept the government's price if steep discounts are required because the underlying real estate may still be performing well.

    The help also will take time to reach owners who are under stress from high debt loads. "This will absolutely help commercial real estate," says David Lichtenstein of the Lightstone Group, which accumulated billions of dollars in real estate near the top of the market. But, he says, "I don't think fixing a few Wall Street banks will fix a grass-roots issue we have here. We are going through a huge devaluation."

    At the same time, the benefit from the government bailout will be partly offset by the conversions of investment banks Goldman Sachs Group Inc. and Morgan Stanley into more risk- and leverage-averse commercial banks.

    "We are very capital-intensive and require a lot of debt to keep our businesses running," says Jeff Blau, president of Related Cos., a New York developer.

    In the near term, commercial-real-estate markets have been particularly devastated by the bankruptcy of Lehman Brothers. The firm owned more than $32 billion of debt and equity assets -- running from land in California to apartment buildings in Boston -- that will now be liquidated, putting downward pressure on prices.

    Complicating things further, Lehman pledged many of its real-estate assets as collateral on loans for desperately needed cash in the days before it collapsed. For example, Swedbank AB, a Swedish bank, was left holding 70 commercial loans valued at $1.35 billion, which were backed by properties including partially built developments. It is unclear if Swedbank will fund the balances to keep construction going.

    The financial crisis of the past few weeks also has hurt the economic outlook for many properties, particularly office buildings in New York and other financial centers.

    In a worst-case scenario, in the New York region, vacancy will hit 19% by 2011 and values will scale back over 13% through 2009, according to a projection scheduled to be released Wednesday by Property & Portfolio Research Inc.

    Harry Macklowe
    Epitomizing the current troubles: Macklowe Properties' Harry Macklowe appeared to have appeased most of his creditors and salvaged some of his empire earlier this year when he sold his prize General Motors building and other office towers. But now he is facing new troubles. His office development at 510 Madison Ave. has leased only one floor amid Manhattan's bleak leasing market. Meantime, creditors have launched a foreclosure against another one of Mr. Macklowe's projects, a mixed-use development at the site of the old Drake Hotel. Mr. Macklowe has been struggling for months to find a partner, but his prospects are even worse now.

    In another closely watched situation, U.S. mall owner General Growth Properties Inc. faces the task of refinancing and paring its $27 billion debt load, of which nearly $19 billion is due by the end of 2011. The Chicago-based company said earlier this week that it has broadened its efforts to raise capital to include a big capital infusion, a merger and more property sales than it initially targeted.

    Still, the company's task is "materially more difficult than it appeared previously," Green Street Investors analyst Jim Sullivan said.

    Broadway Partners, a closely held real-estate fund manager, has made progress in recent months toward stabilizing its portfolio. Broadway faces a $750 million loan expiration in January that it used to acquire $7 billion of office skyscrapers at the top of the market in 2007, including Boston's signature John Hancock Tower. Broadway has sold two towers to raise money, but several more remain in contract and could run into trouble now that market turbulence has increased. The sale of One Sansome Street, a tower in San Francisco, was expected to sell over the summer to a Korean investment fund, but the deal has yet to close.

    "It's the absolutely wrong time to be a seller," says Gary Mozer of George Smith Partners, a brokerage in Los Angeles.

    Richard Coppola, managing director of commercial-mortgage investments for TIAA-CREF, the largest U.S. retirement system, predicts lending costs will rise. "We want to make sure that we're compensated for the risk we take on over the long term," he says.
    Chris' comments: It now appears that the contagion in the residential real estate market has spread. Commercial Real Estate is now under stress and who knows how deeply the problems will run? stay tuned.

    Friday, August 22, 2008

    Commercial Real Estate Update

    Some Fear Commercial Property Loans Will Be Next Stage in Downturn

    Published: August 21, 2008
    As the value of home mortgages crumbles by the day, Wall Street has hoped that commercial real estate loans would stay clear of the storm.
    The Riverton Apartments, a 12-building complex in Harlem, said that it might default on a $225 million mortgage payment.

    A default by the complex, the rent-regulated Riverton Apartments, a 12-building residential development constructed after World War II, would be New York’s largest in the current housing crisis. For Wall Street banks, which hold about $100 billion of commercial mortgage-backed securities, the prospect has fanned new worries that a deterioration of the overall commercial property market could prompt more write-downs in the coming quarter, on top of losses already expected from their distressed mortgage securities holdings.

    “The fear is the next shoe to drop may be commercial real estate,” said Jeffrey Harte, a banking analyst at Sandler O’Neil. “When consumer credit goes south, commercial will follow.”

    At the end of the second quarter, Deutsche Bank held $25.1 billion worth of commercial loans. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion.

    Lehman Brothers, which has the largest exposure to this type of security, is shopping about $40 billion worth of commercial real estate assets, as well as its entire commercial real estate business. A large part of its portfolio is a high-risk loan known as bridge equity made with Archstone, a metropolitan apartment developer, and most of the rest are floating-rate loans, which are riskier, according to a person who reviewed the offering.

    Banks are scrambling to dispose of these loans, typically made to hotels, office developers and retail strips, before problems arrive.

    Broader real estate indexes are already showing signs of trouble. Moody’s/REAL Commercial Property Price Index has dropped nearly 12 percent since its peak last October. A more conservative index by the National Council of Real Estate Investment Fiduciaries shows growth slowing to one-half of a percent in the second quarter, from upward of 4 percent a quarter.

    Loans made for commercial real estate are typically among the safest, because a building can be used as collateral and big property developers generate income from the investment, raising the likelihood they will repay their loans.

    But cracks began to emerge late last year, when Morgan Stanley reported write-downs of $400 million in commercial mortgage losses. In the first quarter, Wachovia, which had transformed itself into a leading lender in the nation’s commercial real estate market, said it would take write-downs of more than $1 billion for commercial loans for the second half of 2007. Investors had already begun balking at buying securities backed by these bonds, so banks like Wachovia were stuck with loans of diminished value.

    Around the same time, the New York developer Harry Macklowe was forced to sell seven office buildings he had bought in Midtown Manhattan, as well as the General Motors Building, after he was unable to refinance the loan with his lender, Deutsche Bank.

    Now, the prospect of an immense default on a commercial residential property in New York — which has not suffered as much as troubled markets like Florida — has lent new momentum to concerns over the stability of commercial real estate loans.

    As Harlem grew into an increasingly attractive neighborhood at the height of the housing market, bankers assumed that Riverton’s owners could quickly convert many of its roughly 1,230 units from lower-priced rentals to apartments priced closer to the higher market average. That would generate a richer income stream, allowing the companies to pay off high mortgage bills.

    It was the kind of optimistic assumption that ran rampant in the residential housing market, but one that remained less common for commercial real estate loans.

    On Monday, Fitch Ratings issued a negative watch on part of the Riverton Apartments trust, saying developers had made only scant progress toward their goal. Rockpoint Group and Stellar Management — the developers that own Riverton — did not comment.

    Before the credit squeeze, financial companies bundled commercial mortgages into securities in much the same way they packaged home loans and private equity debt. Riverton’s mortgage was one of the last ones to be wrapped into a commercial mortgage-backed security in the spring of 2007; it was then cut up and sold as bonds.

    A recent report by Lehman Brothers showed that aggressive underwriting is what probably has brought Riverton to the brink of default, not a fundamental deterioration in the overall market. But that report noted that there are other commercial properties that received similar optimistic underwriting, known as a pro forma loan.

    Comments: Although this is a COMMERCIAL RESIDENTIAL story, it does lead one to wonder what element of the Real Estate market will start to crumble next. Will this spill over into Commercial Office and Industrial? Stay tuned.

    Wednesday, August 13, 2008

    Commercial Property Market Update

    By JESSICA HOLZER August 13, 2008

    WASHINGTON -- Real-estate executives' outlook for the commercial-real-estate market has deteriorated as hopes dim for improvement during the next year, according to a Real Estate Roundtable survey.
    More than 80 out of 100 senior industry executives asked said the general market has worsened during the last 12 months.
    The share of executives expecting the market to bounce back even slightly in the coming year dropped to 53% in July from 63% in April.
    Respondents cited the credit squeeze and the weakening economy as the chief culprits hurting the commercial-real-estate market. Nearly 90% of respondents predicted that commercial-real-estate prices will drop or stay flat during the next 12 months.
    "Even though loan delinquencies to the sector are very low, the ongoing lack of credit for real estate has led to weaker property values and has stalled transactions," Roundtable President and CEO Jeffrey D. DeBoer said.
    More than 80% of the executives surveyed said the availability of credit was "much worse" than it was a year earlier, although roughly two-thirds expect the debt market to improve during the coming year.
    Respondents were more optimistic about the equity market, with roughly half judging the availability of equity financing as "somewhat worse" than a year ago.
    However, more than half surveyed said that overall conditions in the real-estate market would be "somewhat better" over the next year.
    The survey was conducted during the third week of July.

    Chris' comments: Industry insiders seem to be telling us that the market has stalled but not so severely that a major recession is in the works. Rents/revenue seem to be holding up and even though CAP Rates are increasing, this in itself is not a bad development. According to insiders, it appears that a period of sluggishness over the next 12 months is in the offing. Not great but not too bad considering the residential market environment and asset price declines.

    Wednesday, July 23, 2008

    July Commercial Real Estate Update

    Expect near-record office vacancy rates in 2009, says Grubb & Ellis Detroit has highest vacancy rate of any major U.S. city, New York the lowest

    July 21, 2008
    Office vacancy rates are headed up and by the end of 2009 may be close to an all-time high. Cutbacks in key industries such as information technology, finance and professional services have led to more than a quarter-million layoffs during the first half of 2008, which has emptied an estimated 38 million square feet of office space.The result? According to a report issued today by commercial real estate advisory firm Grubb & Ellis, the percentage of U.S. offices that are empty could hit 17% by the end of next year.That’s a startling figure, and not far off the numbers seen in the prior two recessionary cycles. The vacancy rate hit 17.9% in the first quarter of 2004; during the third quarter of 1991, it topped 18.0%. As of June, the national office vacancy rate stood at 14%, marking the second consecutive quarter the rate has increased by .5%. Detroit has been hit hardest, with a whopping 22.6% office vacancy rate. Conversely, New York City had the lowest vacancy rate among major U.S. cities, at 5.6%. According to the report, office rental rates are also under pressure. While average asking rental rates for Class A and Class B office space edged higher in the second quarter—Class A up to $36.15 a square foot and Class B up to $27.89—Grubb & Ellis expects rates to remain flat over the next few quarters.Over the last year, only eight markets saw Class A rates decline, but during the second quarter, 22 of the 59 markets surveyed posted lower Class A rental rates, indicating a definite downward trend.Another sign of office market weakness: The amount of space offered for sublease increased for the fourth consecutive quarter. Sublease space has risen 18% since mid-2007, to 86 million square feet. As office vacancies increase into next year, some owners of real estate assets may experience hardships.“Rising vacancies and softening rental rates are expected to result in some forced asset sales by investors, particularly those who purchased recently with the ‘aid’ of floating-rate debt and overly optimistic pro formas,” the report warned, suggesting that institutional investors with large cash balances will scoop up bargain properties as they appear.

    Chris' comments: Look out! We may now be on the verge of the "dam breaking". Commercial Real Estate has so far been able to dodge the hardship that residential real estate has encountered. BUT, this may not be the case for long!

    Wednesday, July 9, 2008

    July commercial Real Estate Update

    Commercial Real Estate Easing in Economic Slowdown
    Paul Partyka, Editor , American Coin-Op
    Published 07/07/2008 - 9:01 a.m. CT

    Foreign buyers are focused on retail strip centers in Southern California, Chicago, the Northeast and the Southeast, according to NAR. (Photo:
    Paul Partyka, Editor
    WASHINGTON — Are you looking for a new laundry? Commercial real estate vacancies are trending up modestly, while investment has dropped sharply in the wake of the credit crunch, according to the National Association of Realtors (NAR). “Although the supply-demand fundamentals are broadly favorable in most commercial real estate markets, vacancy rates are rising modestly and rent gains are slowing,” says Lawrence Yun, NAR chief economist. “Slow economic growth is lowering the demand for commercial space, mostly in the office and industrial sectors.”Tight credit availability has significantly slowed the volume of commercial real estate transactions, says Patricia Nooney, chair of the Realtors commercial alliance committee.Vacancy rates in the retail sector will probably edge up to 9.3% in the fourth quarter from 9.2% in the fourth quarter of 2007. Average retail rent is expected to rise 1.3% in 2008, compared with a 2.9% gain last year. Retail transaction volume during the first four months of 2008 totaled $7.5 billion, significantly below the $27.7 billion in the same period last year. Strip center transaction volume is down 77% from a year ago.

    Investment in commercial real estate during the first four months of 2008 was $48.2 billion, down 69.5% from $157.8 billion during the same period in 2007 when the credit markets were functioning normally (those totals do not include transactions valued at less than $5 million or investments in the hospitality sector), NAR reports.

    Chris' comments: It looks to me like we are going to see a continuing series of reports just like this one as all types of real estate in the U.S. take their medicine from the over-leveraging that has occurred in just about every segment of the U.S. economy. The solution is one that has to evolve over time. Until bank balance sheets recover to historic levels of normalcy and the consumer begins to do the same, the psychology of the market will remain negative, reinforcing the obvious caution that has enveloped economic activity and causing this "correction" to continue it's deliberate pace.