America Bargain Basement For Foreign Investors

The weak dollar has turned cities like New York into a honey pot for foreign property investors. Watch BBC's report here.

Manhattan Office Rents Fall

It's the first fall in three years. According to Bloomberg:

Manhattan office rents fell 2.2 percent in the second quarter, the first decline in the most expensive U.S. office market since 2005, according to real estate broker Studley Inc.

The decline was 4.4 percent for Class A office space, according to a preliminary second-quarter New York market report by Studley, which represents tenants. The broker blamed a ``malaise'' among Wall Street securities firms, which hadn't previously stopped the rise in rents, in a report by Steven Coutts, Studley's senior vice president for national research services. The full report will be released next week.

Warren Buffett Sees Opportunities In Subprime Mortgages

According to an interview with Reuters:

"We have bought some subprime paper in the open market, as people have wanted to sell portfolios," Buffett said of the investments Clayton Homes has made to date. Other investments are possible, he added.

CMBS Are "Cheap"

Is the worst almost over? One bond manager thinks so. From Bloomberg:

CMBS are ``cheap,'' Naruki Nakamura, portfolio manager at Fischer Francis in Tokyo, said in an interview. The bonds yield 2.7 percentage points more than U.S. Treasuries, compared with 80 basis points a year ago, according to Merrill Lynch & Co.'s CMBS Fixed Rate Index. The spread reached 4.64 points in March, the widest since 1998 when the index started.

``The subprime problem has started to settle down and we are now in a situation where the system will not break up,'' Nakamura, who helps manage the equivalent of $2.5 billion of bonds, said June 24. ``We are planning to go overweight on CMBS as we're confident the market will not unwind again.

Are You Investing In REITs?

Here are five winning REITs.

Private Investors Active Within The $1M-$10M Retail Sector

From CoStar:

While total volume of retail sales transactions hit $9.72 billion in first quarter 2008 (according to a recent query of CoStar COMPS for qualified retail and shopping center sales transactions closed during the quarter that are greater than $1 million), that volume is down more than 50% over first quarter 2007. When looking at the number of transactions closed, however, the affect isn't as drastic -- 2,329 retail sales closed during first quarter 2008, compared to 2,819 in first quarter 2007, a decrease of only 17 percent. Why is this change so drastically less than the change in total volume?

The answer is found in the price range of those closed sales transactions. The number of retail property sales closing during first quarter 2008, in the range of $1 million to $10 million, were down only 14% in comparison to first quarter 2007 -- compare this to the number of sales in the $10 million to $25 million range being down 36%, and sales greater than $25 million being down 68% over the same period.

Debt Investment Made In DC

Savanna Real Estate Fund, a New York City-based real estate investment and development fund just bought a $157.7 million C-Note on the senior mortgage of a 1.4 million sf Class A office portfolio located in Rosslyn,VA, a close-in suburb of Washington DC. According to CoStar:

"We purchased a note representing 50% to 67% 'post credit crunch' loan-to-value backed by the terrific sponsorship of Monday Properties." said Nicholas Bienstock, managing partner with Savanna. "This deal produces equity-like returns for our investors, with substantially less risk."

Emerging Markets Now In The US

An interesting take:

"Instead of talking about emerging markets in Asia, now emerging markets could be in the U.S.," said Yu Lai Boon, chief investment officer of Dubai World, a state-owned investment firm. "As investors in the Middle East, we're seriously looking at the U.S. and European markets right now as the beginning of investment for the next golden era."

Equity Capital Still On The Sideline

From NREI:

Real estate equity capital remains voluminous but the lack of debt financing, a mismatch between capital and available product, and desire to see a proven market bottom are contributing to dramatically lower transaction volumes in 2008. That was the message from a panel of experts assembled to discuss the state of commercial real estate equity capital markets in an event hosted by the Real Estate Investment Advisory Council. Still, the panel members expect the market to begin improving as these factors inevitably turn around, possibly in 2009

.

CMBS Sales May Fall To 12-Year Low

From Bloomberg:

Commercial-mortgage backed securities offerings dropped to $12.2 billion in the first half of the year, from about $137 billion in the same period of 2007, according to JPMorgan Chase & Co. Analysts at the firm, Moody's Investors Service and Royal Bank of Scotland Group Plc cut their forecasts. JPMorgan predicts sales will fall to $20 billion this year from the record $237 billion in 2007 and the lowest since 1996.

The decline shows the Federal Reserve's seven interest-rate cuts since September had limited success in reviving the market for securities derived from real estate assets after the collapse of subprime mortgage-related bonds. Banks and financial firms, reeling from $400 billion in writedowns and credit losses, are also less willing to make new loans.

Raffaello Follieri's Clinton Connection

This morning it was widely reported that Raffaello Follieri, actress Anne Hathaway's ex was arrested on charges that he posed as a representative of the Vatican to swindle investors in real estate deals that sought to buy and redevelop Roman Catholic Church property. Fascinating! What I find particularly interesting in the story is Follieri's connection to Bill Clinton. According to The New York Times:

Mr. Follieri, who came to the United States from Italy in 2003, quickly cut a wide swath. Attractive and charming, he rapidly moved into the world of billionaires and political figures. His entree was helped when he met and befriended Douglas Band, a top aide to Bill Clinton who brought Mr. Follieri into contact with the former president and Mr. Burkle.

Mr. Follieri received an onstage thanks from Mr. Clinton after pledging $50 million to the Clinton Global Initiative. The money has not been paid.

For those of you who have read this Vanity Fair article, you will recognize several familiar names. Douglas Band is Bill Clinton's personal aid, aka the "Butt Boy", and Ron Burkle is "the California supermarket billionaire and investor who is Clinton’s bachelor buddy, fund-raiser, and business partner"

Small world.

Foreclosure Rage

Source: Calculated Risk

The REIT Pay Story

Source: WSJ

The Chinese Are Coming,

The Chinese are coming!

Expect More REIT IPOs In The Next Two To Five Years

From Investment News:

Market experts are bracing for a possible wave of initial public offerings to hit the real estate world in the next two to five years as many speculate that private-equity firms may use IPOs as exit visas.

Such firms have been on a tear over the past five years, snapping up commercial properties and taking private a record number of real estate investment trusts. And observers speculate that many of these firms may opt to do IPOs to exit the transaction at the end of the five- to seven-year investment window, especially if the credit markets remain in turmoil.

The Office Market With The Lowest Vacancy Rate In The World

You guessed right again. It's CALGARY. With oil at almost $140 a barrel, the City with 1.1 million population is enjoying the strongest growth in 25 years; it's office vacancy rate is just around 3%.





Related posts:
The Second Most Expensive Office Market in North America
Calgary Is Still a Boom Town, Just a Smaller Boom

Distressed Debt Investors Still Searching For The Bottom

The prices of highly rated subprime-backed mortgage securities have declined about 40% since the credit crunch started last summer, but distressed investors are still wary of getting in the market. From WSJ:

So far, though, the going has been tough. Some funds have had trouble attracting investors, limiting their impact on the $1.3 trillion market. With house prices still falling and mortgage defaults rising, putting a value on mortgage securities remains a tricky endeavor. Beleaguered banks keep dumping more securities, potentially making cheap assets even cheaper and precipitating losses for the brave few who chose to get in early.

"If somebody can pick the right spot there and can hold out long enough, there is definitely money to be made," says Karen Weaver, global head of securitization research at Deutsche Bank AG. But "there is so much concern about further supply out there...that people are just wary of buying anything."

Time To Buy Land?

It might be if you have the stomach for it. Money quote:

Indeed, as many seasoned investors know, waiting for land to appreciate can be, well, like watching grass grow. But the value can also shoot up like a weed almost overnight, providing some hefty returns.

Banning Drive-thrus

This kind of bylaw would never get passed in America.

REIT Managers Seek New Sources of Investment Capital

From Pensions & Investments:

An increasing number of REIT managers are setting their sights on the defined contribution plan market in the hunt for new sources of investment capital.

The growing use of target-date and other pre-mixed funds in 401(k) plans is the major reason real estate investment trusts — both domestic and, increasingly, global — are grabbing DC business.

Some real estate investment managers are teaming up with mutual fund companies or record keepers for inclusion in stand-alone investment options or asset-allocation fund series. A few investment managers are combining direct real estate investment with REITs in their defined contribution plan offerings.

Lenders Become Decorators

Wall Street banks' significant exposure to commercial real estate has turned some into decorators.

Section 8 May Soon Be Endangered

Weekend Roundup

CBRE Report: It's a Wait and See Game for Buyers, Sellers. ("CPN")

Biding time, REIT investors wait for market to rebound. So far, the slump is comparable to '97-'99 slide, but some see a weak 2009 too. ("Pension & Investments")

Global REIT Shares are Set to Recover, LaSalle Investment Says. ("Bloomberg")

NAR Report Details Impact of Credit Crisis on Commercial RE. ("CPN")

Industry Weighs In On JLL/Staubach Marriage. Future of Tenant Rep Firms Debated as Rivals Elbow for Post-Merger Advantage. ("CoStar")

A Tale of One City, Two Troubled Banks. Charlotte Frets Over Status As Southern Hub Amid Woes At Wachovia, Bank of America. ("WSJ")

Health REITs Provide Bright Spot. Baby Boomers Fuel Demand for Projects; Oversupply Risks Great. ("WSJ")

Will ‘Staycations’ Bolster Midwest Hotel Market? ("NREI")

Apartment Customization Goes Beyond Choosing Colors. What Manhattan Buyers See Is Not Necessarily All They Get. ("NYSun")

Why Staubach Retail Was Left Out of JLL Merger. JLL Retail President/CEO Greg Maloney and Staubach Retail President Clay Smith Tell CoStar Advisor Their Views on the Subject. ("CoStar")

Philadelphia's 1,500-Foot Tower May Cost $1 Billion. ("Bloomberg")

Company Hired to Test Concrete Faces Scrutiny. Manhattan prosecutors are investigating whether the leading concrete testing company in the New York area failed to do some tests and falsified others. ("NYT")

High-Performance Design: The Tim For Change Is Here. Rising Energy Costs, “Green” Push, Prompt Owners, Developers to Reduce Usage. ("REBusinessOnline")

Immigrants Turn to Farm Work Amid Building Bust. Growers Regain A Source of Labor; Wage Gap Narrows. ("WSJ")

Moody's Says Commercial Property Prices Fell 2.8% in April From a Year Earlier

Specifically, according to this:

Industrial properties fell 3 percent, retail properties fell 1.2 percent and office building prices rose 1.8 percent, the report said.

Overall, commercial real estates prices declined 3 percent in April from March.

Recourse Loans "Returning"?

This article in the journal yesterday claims that "after a decade of easy lending, the dreaded personal guarantee is making a comeback in the real-estate industry". Are recourse loans truly "returning"? I would argue that they never left; non recourse loans were not the norm even"during the recent sales frenzy for commercial properties". True, CMBS loans are non recourse, but these loans represented about 35% of the debt market, and majority of the CMBS loans are long-term mortgages for stabilized properties. On the other hand, construction loans and other short term loans that stay on banks' balance sheet are typically partial recourse or 100% recourse. Yes, non recourse construction and term loans have been available in recent years, but most of these loans were made to highly reputable developers for projects located in strong markets like NYC, DC.

Data Center Engineers In Demand

I have posted here before about the strong demand in the data center sector, and that as a result, technology REITs will likely outperform other REITs. This article in the New York Times today focuses on mechanical engineers who design and run computer data centers:

Today, data center experts are no longer taken for granted. The torrid growth in data centers to keep pace with the demands of Internet-era computing, their immense need for electricity and their inefficient use of that energy pose environmental, energy and economic challenges, experts say.

That means people with the skills to design, build and run a data center that does not endanger the power grid are suddenly in demand. Their status is growing, as are their salaries — climbing more than 20 percent in the last two years into six figures for experienced engineers.

And there is no letup in the demand for data centers:

Digital Realty Trust, a data center landlord with more than 70 facilities, says that customer demand for new space is running 50 percent ahead of its capacity to build and equip data centers for the next two years. “We’re building the railroads of the future, and we can’t keep up,” said Chris J. Crosby, a senior vice president at Digital Realty.

NYC's New Building Codes

They are to take affect on July 1.

Weekend Roundup

Real estate funds rebuilding. ("ChicagoTribune")

Staubach's Draw Play ("Slatin Report")

Squeezing Big-Box Retailing Into Small City Spaces. ("NYT")

Credit Crunch Turns NYC Condos Into Rentals ("New York Sun")

Toronto Office Vacancies Headed For Historic Bottom ("TheStar")

Scraping the Sky, and Then Some. ("NYT")

Are Equity REITs Positioned to Ride Out the Liquidity Crunch? ("REIT.com")

REIT Week Attendees Expect Tough Times Ahead. ("Retail Traffic")

U.S. Health Care REITs Primed for Good Long-Term Health ("REIT.com")

Industry Experts Foresee Rising Tide of Sovereign Wealth Fund Investing. ("REIT.com")

Retail REITs Weigh in on Industry Trends at REIT WEEK. ("CoStar")

Building Pressure on Construction

Are You Buying Farmland?

TIAA is, $340 million of it, so are other college endowments, pension funds and real estate fund managers. According to Bloomberg:

Farmland is having its biggest revival in almost 30 years as demand for corn and soybeans from Asia and the ethanol industry drive commodity prices to record highs. From Iowa to South Dakota to Wyoming, gains in rural land prices have ranged from 78 percent to more than 200 percent, according to farmers and data from Farm Credit Services of America in Omaha, Nebraska.

Farm values probably will rise at an annual rate of 6 percent to 10 percent in the next five years, said Murray Wise, the chief executive officer of Westchester Group Inc., a Champaign, Illinois-based manager of $550 million of global farm tracts.

Related post:
Farmland Prices Reach Unprecedented Heights

Harry Macklowe Steps Down, Son Takes Over

This was expected. From Bloomberg:

William Macklowe was named chairman and chief executive officer of closely held Macklowe Properties Inc., taking the reins of the New York real estate company from his father.

Harry Macklowe, the 70-year-old founder of the company, was named chairman emeritus, Macklowe Properties said today in a statement. The changes come after the Macklowes sold the General Motors Building this week.

Related post:
Harry Macklowe May Step Aside

High Gas Prices May Impact Outlet Centers Performance

Outlet centers have performed well over the past few years and typically out-perform in a slow economy due to its discount stores with lower prices. Some economists are now arguing that the current high gas prices may play a big role in the performance of the outlet centers. From Portfolio.com:

"It's going to be a challenging environment for the outlets," said Sam Chandan, chief economist of real estate research firm Reis. "It's not going to follow the same logic in terms of them being more competitively priced. The transportation cost is greater."

"Because people are feeling their wallets pinched by filling up at the pump, now they feel like they have less money to go out and spend, and ... it's going to cost them more to get there," said Suzanne Mulvee, senior real estate economist, at research firm Property & Portfolio Research.

Related post:
Retail developers Turn Attention to Canada

Buy Technology & Health Care REITs

While Goldman Sachs believes worst has yet to come for US REITs, if you do want to invest, buy technology and health care REITs as demand is still solid in both sectors. From MarketBeat blog:

Pushing the commercial technology and health care real estate investment trusts higher will be maintained levels of demand, while the other commercial names fall on concerns that tight credit markets and a faltering economy will put pressure on REITs who survive on office space, retail and hospitality demand.

“We started look at REITs simply for yield, but now we really like technology and health care. If you house doctors’ practices, or offsite medical facilities like x-ray or ambulatory care, demand isn’t going to fall,” said Walter Prendergast, portfolio manager for Paradigm Capital Management Growth Advisors.

Related posts:
Demand Outpacing Supply In The Data Center Sector
Myths About Investment Risks In Senior Living
Health Care REITs Offer Solid Return

Beige Book

The Beige Book is out. Here is an excerpt on commercial real estate:

Commercial real estate conditions varied in April and May, with some Districts reporting that activity had softened. Leasing activity eased in Boston, New York, Philadelphia, Richmond, and San Francisco. Minneapolis, however, reported that market activity was up modestly, while activity was mixed across the St. Louis District. Vacancy rates edged higher in Boston, Kansas City, and San Francisco, as well as in pockets of the Richmond and St. Louis Districts. Absorption was negative in Boston and in Minneapolis for both office and manufacturing space. Overall rents were on the rise in New York, but were stable or beginning to slip in Boston, Philadelphia, Richmond, and Kansas City. Sales trended downward according to the New York, Philadelphia, and Kansas City Districts.

Reports on nonresidential construction activity were mixed. Contacts from Chicago and Minneapolis saw slight increases in activity. Philadelphia, Cleveland, Richmond, Atlanta, and Dallas, however, reported easing or weak levels of construction. A number of Districts--Cleveland, Richmond, Chicago, and Dallas--reported that obtaining financing remained difficult for some projects.

Retail Developers Turn Attention to Canada

Canada only has a handful of outlet malls at the moment; that's about to change:

Long before the soaring loonie gave new meaning to cross-border shopping, American factory outlet malls were a prized destination for Canadians eager for bargains on a wide selection of brand names.

But the tables could be turning. Faced with a weakening economy and a saturated market for this kind of shopping centre in the United States, there's a new focus on Canada, which now has just a handful of outlet malls.........

Read more here......

Commercial Realty Check

Watch CNBC's Diana Olick discuss the state of the current commercial real estate market with Harvey Green, of Marcus Millcap Real Estate and Daniel McNulty, of DTZ Rockwood here.

Chrysler Building For Sale

The New York Post is reporting that Abu Dhabi Investment Council is buying a 75% stake in the Chrysler building:

Sources say the super-rich Abu Dhabi Investment Council is negotiating an $800 million deal for a 75 percent stake in the Art Deco treasure that has defined the Midtown skyline since 1930.

The Chrysler assets would be purchased from TMW - the German arm of an Atlanta-based investment fund that's been eager to cash out of its Chrysler stake.

Read more here....

Deutsche Bank Sells Three Macklowe Buildings At a Discount

From WSJ:

Deutche Bank is cutting deals to sell three of the seven skyscrapers it took back from New York developer Harry Macklowe in transactions that reflect a 20% to 30% decline from what he paid last year at the top of the market, according to three people familiar with the matter.

Shorenstein Properties has signed a deal to buy a 93% stake in Park Avenue Tower and 850 Third Avenue for about $930 million. Meantime, another of the skyscrapers, 1301 Sixth Avenue, will likely be bought by Paramount Group Inc., for about $1.45 billion, those familiar with the deal said.

Related posts:
Macklowe's Other Seven Buildings Are For Sale
Macklowe On Track To Extend Deutche Bank Loan

Wednesday Links

Rocky Road. Real Estate Portfolio Magazine looks at what's next for the CMBS market? ("Real Estate Portfolio")

CMSA Study Finds CMBS Market Turning Around. ("CPN")

CMBS Gets a Stress Test. ("NREI")

Subprime Index Is Overstating Losses, BIS Says. ("WSJ")

Zuckerman Takes Manhattan. Boston Properties Assumes Some Risk With GM Building. ("WSJ")

Worker Deaths at Las Vegas Site Spur Safety Debate. ("WSJ")

Institutions Struggle with Denominator Effect. ("NREI")

A Real-Estate Ace's Outlook. Ernst & Young's Reiss Offers Views on What Is Looming, As She Nears Her Retirement. ("WSJ")

Cautious Optimism. Despite market worries, investors still can find reasons to do deals. ("CIRE")

Real Estate's Stealth Recovery. ("Forbes")

A Flexible Stay for a Hotel Franchisee. ("NYT")

Retail Roller Coaster. Investors hang on for what might be a wild ride this year.("CIRE")

RREEF Research: A Perspective on Residential Land Investment. ("IREI")

Hedging Inflation with REITs. ("Real Estate Portfolio")

"Put" It Back

For commercial real estate companies, defaulting on the loan may be the fiscally responsible thing to do. From Financial Week:

Though a controversial move, and one that could trigger significant long-term penalties, some real estate experts said they think there is actually some value in the decision.

Rather than sell at a loss, some real estate investment trusts (REITs) and other borrowers are opting to turn their assets over to lenders when the associated mortgage is “non-recourse” -- meaning the lender cannot seek repayment by going after anything else the borrowing parties may own.

“I think we would have to assume that in this environment that’s definitely something we could see happening,” Lisa Sarajian, Standard & Poor’s managing director of structured finance, said recently at the National Association of Real Estate Investment Trusts annual Investor Forum in New York.

But for commercial real estate companies, defaulting may actually be the fiscally responsible thing to do for their own investors and shareholders, as they cut away the infected wing for the benefit of the whole.

Chinese Home Buyers Learn to Borrow

Eliot Spitzer Wants To Invest In Distressed Real Estate Too

According to this, former New York governor Eliot Spitzer is considering using labor union money to start a vulture fund that would buy distressed real estate around the country. Get in line, Mr. Spitzer.

Lehman's Two Big Real Estate Investments

Both were made at the top of the market. From WSJ:

Lehman joined with Tishman Speyer Properties last year to pay $22 billion for real-estate investment trust Archstone-Smith in the largest apartment-building deal ever. And in a series of projects, it teamed up with Irvine, Calif.-based land developer SunCal Cos. to develop and sell thousands of house lots to builders across Southern California. Some $1.6 billion worth of assets from those deals remain on Lehman's books.

In both cases, Lehman dove into already heated markets, overpaid for the properties and, the firm says, has taken big markdowns. On Lehman's conference call discussing its second-quarter loss and its $6 billion capital raising, the bank's finance chief, Erin Callan, said the firm had taken a "significant" write-down on its Archstone investment and the loss on its SunCal properties was "similar to other large transactions that have occurred in relevant markets." She wouldn't give the size of the write-downs.

Nontraditional Buyers Are The Most Active In The Market

Here is an example.

Buy One, Get One Free

Source: The Big Picture.

Green Loans

Some lenders are discovering a growth area in construction loans and mortgages for sustainable commercial real estate:

“There’s absolutely an interest nationwide in green-building oriented lending,” says Marc Heisterkamp, manager of corporate investment real estate at the U.S. Green Building Council. “About a year ago, the investment community really started to embrace green building, both new and existing operations. With that came increased demand on insurance, finance, and appraisers to understand the unique nature of these projects and to see if they do have a financial benefit.”

Most institutions that offer standard loan terms favoring green building are community banks, Heisterkamp says. San Francisco-based New Resource Bank, for example, offers qualifying green projects a generous loan-to-value ratio of perhaps 80% and a slightly better interest rate than it offers for conventional projects. “We provide projects that meet green leadership levels with lower interest rates and fees,” says Peter Liu, president of New Resource Bank. “This truly makes a difference to developers who build green.”

Larger institutions, on the other hand, are more likely to treat green projects the same as conventional loan applications while taking into consideration any boost to net income connected with energy savings or other green features, Heisterkamp says. “They aren’t necessarily following a separate financing track,” he explains, “but if green building enhances the financial viability of the project, their models can and should capture that benefit and possibly result in better financial terms for the borrower.”

Credit Crunches Wall Street Executives

So Ken Thompson is out, check out the number of Wall Street executives who have left since the credit crunch. Who's next? Maybe this guy?

The Crane Issue

This seems to happen too frequently in recent months. While some are calling for a "comprehensive review" of construction regulations, the Manhattan district attorney’s office has opened a criminal investigation into the incident.

Construction Loans Dry Up

From Financial Week:

The economic slowdown, coupled with the credit crunch, helped stifle growth in construction loans during the first quarter. It also pushed delinquencies in the sector to dangerous levels.

New and existing loans grew a scant 0.4%, the slowest rate of growth since the first quarter of 2002.

Meanwhile, the rate of loan delinquencies has doubled in the past six months. The monetary value of that delinquent debt has nearly quadrupled in the past year, according to Foresight Analytics, a provider of real estate market consulting services.