Commercial Real Estate Update

WASHINGTON (MarketWatch) -- Commercial real estate markets should weaken in the months ahead, according to reports released Wednesday by trade groups representing realtors and architects.
The commercial real estate leading index fell 0.7% in the first quarter, the third straight decline, the National Association of Realtors said. The index is 0.8% below the level of a year ago, the first negative year-over-year showing in five years. The index is based on 13 separate indicators, including industrial production, REIT prices and returns, job growth, income growth, business sales and durable-goods shipments.
Meanwhile, the American Institute of Architects reported its architectural billing index rose to 45.5 in April from the historic low of 39.7 in March, with scores below 50 indicating declining billings. The AIA index leads nonresidential construction spending by six to nine months.
An index tracking new inquiries rose to 53.9 from a record low 48.
"This uptick shows that the slowdown is beginning to moderate," said AIA chief economist Kermit Baker. Most regions don't have an oversupply of buildings, providing "hope that this weak patch may be relatively short-lived," he said.
'This uptick shows that the slowdown is beginning to moderate.'
— Kermit Baker, AIA
Private investment in nonresidential structures is likely to subtract between a third and a half percentage point from gross domestic product over the next two or three quarters, said Lawrence Yun, chief economist for the NAR, the real estate trade association.
In the first quarter, business investment in structures subtracted 0.2 percentage point from GDP, but that figure is likely to be revised higher in next week's updated estimate.
Yun said it's "no surprise" that the commercial sector could weaken because of tight credit and the weak economy.
Two weeks ago, the Federal Reserve said 78% of banks in its quarterly survey had tightened lending standards for commercial real estate loans, and 52% reported weaker demand for such loans.
In a separate survey of attitudes, realtors who specialize in office and industrial properties said they anticipate a much lower level of business activity in the coming quarters.
On Monday, Moody's Investors Service said commercial real estate prices fell 2.3% in March, the steepest one-month decline in at least eight years. Retail property prices were down 5.7% from their peak last year.
Rex Nutting is Washington bureau chief of MarketWatch.

US commercial property price fall most since 2000-index

NEW YORK, May 19 (Reuters) - Retail properties are leading a drop in U.S. commercial real estate prices, which in March posted their steepest one-month decline since at least 2000, Moody's Investors Service said on Monday.
Moody's said prices of retail properties have dropped 5.7 percent from their peak in 2007, compared with declines of 3.4 percent for apartment buildings and 2.3 percent for industrial real estate, respectively. Office property prices are down 2 percent from their peak, according to quarterly data.
On a monthly basis, commercial property prices fell 2.3 percent in March, the most since Moody's began collecting the data in 2000. Values were 2.6 percent below their October 2007 level, but still up 0.9 percent from a year ago, Moody's said, citing its commercial property price index.
Slowing U.S. economic growth and the ailing housing market have begun to take their toll on retailers.
Lowe's Cos Inc (LOW.N: Quote, Profile, Research), the second-largest home improvement chain, said on Monday its first-quarter profit declined by 18 percent and cut its sales growth forecast for 2008. Home goods retailer Linens 'n Things earlier this month filed for bankruptcy and announced plans to shutter 120 stores.
The impact of a slowing economy and forecasts of a 20 percent drop in commercial property prices from their peak by Moody's and JPMorgan Chase & Co in the first quarter led to steep price drops on securities backed by commercial real estate. However, prices on commercial mortgage-backed securities have since climbed amid expectations the selling overstated the losses that would occur.
According to property derivatives traders, average commercial property prices are set to fall by 8 to 9 percent in the next 12 months and by double that over two years. The nascent over-the-counter market follows the appraisals-based NCREIF property index, which is calculated by the National Council of Real Estate Investment Fiduciaries and is a benchmark used by U.S. pension funds.
Fitch Ratings said delinquencies on CMBS rose slightly, to 0.35 percent in April from 0.33 percent in March. Fitch said it was most concerned with retail and hotel properties even though delinquencies in those sectors decreased marginally.
At least four gaming companies with big hotels, including MGM Mirage Inc (MGM.N: Quote, Profile, Research) and Las Vegas Sands Corp (LVS.N: Quote, Profile, Research), have recently reported eroding quarterly earnings. (Reporting by Al Yoon in New York and William Kemble-Diaz in London; Editing by Dan Grebler)

Banks Writeoffs

Subprime Losses Top $379 Billion on Balance-Sheet Marks: Table
By Yalman Onaran
May 19 (Bloomberg) -- The following table shows the $379 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 100 of the world's biggest banks and securities firms.
The writedown column now includes asset-value reductions that some banks list on their balance sheets rather than booking the losses against earnings. Regulatory filings show $35 billion of such balance-sheet writedowns at 20 banks.
All the charges stem from the collapse of the U.S. subprime- mortgage market. The figures, from company statements and filings, also reflect some credit losses or writedowns of mortgage assets that aren't subprime, as well as charges taken on leveraged-loan commitments.
All numbers are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate losses. Firm Writedown Credit Loss Total
Citigroup 37.3 5.6 42.9
UBS 38.2 38.2
Merrill Lynch 37 37
HSBC 6.9 12.6 19.5
IKB Deutsche 16 16
Royal Bank of Scotland 15.2 15.2
Bank of America 9.2 5.7 14.9
Morgan Stanley 12.6 12.6
JPMorgan Chase 5.5 4.2 9.7
Credit Suisse 9.5 9.5
Washington Mutual 1.1 8 9.1
Credit Agricole 8.3 8.3
Deutsche Bank 7.7 7.7
Wachovia 4.6 2.4 7
HBOS 6.9 6.9
Bayerische Landesbank 6.7 6.7
Fortis 6.6 6.6
Societe Generale 6.3 6.3
Mizuho Financial Group 6.2 6.2
ING Groep 6 6
Barclays 5.2 5.2
WestLB 4.8 4.8
Canadian Imperial (CIBC) 4.2 4.2
LB Baden-Wuerttemberg 4 4
E*Trade 2.5 0.9 3.4
Dresdner 3.4 3.4
Natixis 3.4 3.4
Wells Fargo 0.6 2.7 3.3
Lehman Brothers 3.3 3.3
Bear Stearns 3.2 3.2
National City 0.5 2.6 3.1
Goldman Sachs 3 3
BNP Paribas 2.1 0.6 2.7
Lloyds TSB 2.7 2.7
Nomura Holdings 2.5 2.5
HSH Nordbank 2.5 2.5
ABN Amro 2.4 2.4
Bank of China 2 2
Commerzbank 1.9 1.9
Royal Bank of Canada 1.7 1.7
UniCredit 1.6 1.6
DZ Bank 1.5 1.5
Alliance & Leicester 1.4 1.4
Dexia 1.1 0.2 1.3
Caisse d'Epargne 1.2 1.2
Hypo Real Estate 1 1
Gulf International 1 1
European banks not 9.2 9.2
listed above (a)
Asian banks not 7.5 0.3 7.8
listed above (b)
North American banks 3 1.1 4.1
not listed above (c)
____ _____ _____
TOTALS* 332.3 46.9 (d) 379.2
* Totals reflect figures before rounding. Some company names have
been abbreviated for space.
(a) European banks whose losses are less than $1 billion each are in this group: Allied Irish Banks, Bradford & Bingley, Aareal Bank, Deutsche Postbank, Standard Chartered, Northern Rock, NordLB, Rabobank, HVB Group, Sachsen LB, Intesa Sanpaolo, Landesbank Hessen-Thueringen, SEB AB, Erste Bank, DnB NOR, Anglo Irish, KBC Group, LB Berlin, NIBC Holding.
(b) Asian banks with writedowns of less than $1 billion: Mitsubishi UFJ, Shinsei, Sumitomo Trust, Aozora Bank, DBS Group, Australia & New Zealand Banking Group, Abu Dhabi Commercial, Bank Hapoalim, Arab Banking Corp., Fubon Financial, Industrial & Commercial Bank of China, Citic International, BOC Hong Kong, Bank of East Asia, China Construction Bank, Sumitomo Mitsui, ICICI Bank, State Bank of India, United Overseas, Wing Lung.
(c) North American banks included in this group: Bank of Montreal, National Bank of Canada, Bank of Nova Scotia, BB&T Corp., PNC Financial Services Group, SunTrust Banks, South Financial Group, Sovereign Bancorp, First Horizon.
(d) The difference between writedown and credit loss: Investment banks and the investment-banking units of financial conglomerates mark their assets to market values, whether they're loans, securities or collateralized debt obligations, and label that a ``writedown'' when values decline. Commercial banks take charge- offs on loans that have defaulted and increase reserves for loans they expect to go bad, which they label ``credit losses.'' Commercial banks can have writedowns on holdings of bonds or CDOs as well.

CAP PATES TICK UP


By Catherine Curan
The softening commercial property market contains a small silver lining for investors: Returns on investment are on the rise. Cap rates for Manhattan office properties, the annual rental income from a building divided by its purchase price, plummeted dramatically over the last six years as the market recovered from the aftermath of Sept. 11 and the economy boomed. Investors were willing to buy commercial property with skimpy returns — such as the record 2006 Istithmar purchase of 1.2 million square feet of Class A office space at 280 Park Avenue for $1.2 billion at a 3.6 percent cap rate. That was partly done on expectations that new owners could rapidly squeeze out greater income thanks to skyrocketing office rents. The credit crunch and economic slowdown are significantly lowering purchase prices for Manhattan office properties, while rents have so far stayed mostly flat. These factors are contributing to a climate of rising cap rates. Cap rates increased by 50 basis points in the second half of 2007, according to investment sales brokers and market analysts, and rates are likely to rise another 50 to 100 basis points this year. Average cap rates for Manhattan office properties ticked up slightly to 5.52 percent in the first quarter, after falling fairly steadily from 9.33 percent in early 2003, according to PriceWaterhouseCoopers Korpacz Real Estate Investor Survey. "There is no question that cap rates are higher across the board," said Dan Fasulo, managing director at Real Capital Analytics. "The market is not discriminating by property type or market. Everybody is up." Cap rates are also becoming more important, particularly for smaller deals, where margins have an even greater role in the success of a deal. That's partly because with today's credit crunch, investors have trouble getting loans based mainly on bullish rent growth projections. A deal could have had a cap of 3.5 percent in the past and debt at 6 percent and still would have gotten done. Now, however, cap rates have become more of an upfront test of a deal's viability. "In the past, a cap rate might have been an end-of-line reality check thing: 'I've got through all of this and ended up with this cap; can I live with this? If the market hears I paid 2.5 cap, will everyone laugh at me?'" said Nat Rockett, managing director at Jones Lang LaSalle. "People today are much more cap-rate oriented, much more focused on positive leverage from the get-go." While cap rates will rise, the absence of major office sales leaves a dearth of numbers to crunch to figure out where cap rates are and how much they are increasing. In mid-April, investment sales brokers and analysts were focused on the Equity Office buildings troubled magnate Harry Macklowe had for sale and what price they would fetch, since the disposition of major assets he bought last year in a highly leveraged deal would provide a new bellwether for cap rates. "We will be able to tell as soon as the Macklowe sales happen," said Robert Von Ancken, an appraiser and executive managing director with Grubb & Ellis. Despite the uncertainty, there are a few deals analysts point to as examples of the uptick in cap rates. One is the Milk Studios building at 450 West 15th Street. That sold for $160 million late last year at a 5 percent cap. When it hit the market earlier in 2007, the property was expected to sell for $200 million, which would have been a 4 percent cap rate. Another example is SL Green's $1.575 billion buy of 390 Greenwich Street last December from Citigroup, which had a cap rate of 6.3 percent. Fasulo estimated that prior to the credit crunch, this deal would have missed a 6 percent cap rate. Rising cap rates are part of an overall climate that favors cash-rich investors such as pension funds or foreign buyers. Not only are they now able to do deals, because they don't need to take on substantial debt, but higher cap rates mean the transactions generate a higher return. Sellers, though, are resisting the upward march of cap rates. "It's a silver lining for buyers, sure, but now there's a dearth of transactions because sellers don't want to hear it yet," said Craig Evans, senior managing director at Colliers. Cap rates typically rise in a recession. How far they will rise depends on how intense and prolonged the current economic downturn proves. For now, analysts expect cap rates to plateau before hitting historical levels of 7 to 9 percent. "While cap rates are certainly a little higher than they were at the top of the market, I really don't see a future environment where cap rates return to levels of the 1990s, which is significantly higher than now," said Fasulo.