Haunted Houses

(via The Big Picture)

Happy Halloween!

In The Know: Has Halloween Become Overcommercialized?

Investment Advisors Need Advice

The “huge knowledge gap” of how to deal with troubled commercial real estate has prompted some industry veterans who have been through downturns to start their own consulting firm.

The Best and Worst Places to Invest in Commercial Real Estate

In the coming year if you can get financing.

Fed Cuts Federal Funds Rate 50 bps to 1 Percent.

Here is the statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Schwarzman Warned Investors Not to Expect an Immediate Rebound in Prices

At a venture capital summit in Quebec City today, Blackstone Group's Chairman Stephen Schwarzman warned commercial real-estate investors not to expect an immediate rebound in prices:

``Real estate now is suffering because there is no liquidity on a global basis for companies,'' he said. ``That liquidity will come back but it will come back relatively slowly.''

State of Commercial Real Estate

Watch Mort Zuckerman of Boston Properties discuss the state of the commercial real estate market here.




Barry Gosin, Newmark Knight Frank CEO and Daniel Tishman, Tishman Corp. CEO looks at the current real estate market. Watch is here.

Weekend Roundup

Financial Meltdown Pressuring Real Estate Funds ("CoStar")

Facts andMyths about the Financial Crisis of 2008 ("MinneapolisFed")

CRE Prices Falling Back to 2006 Levels ("CoStar")

This Space for Rent -- to Advertisers, if Not Retail Tenants ("WSJ")

A Condo Rare as Diamonds ("Globe and Mail")

Subprime meltdown culprits ("Los Angeles Times")

Why the Government Will Have a Hard Time Being a Foreclosure White Knight ("Freakonomincs")

Dollar Bill On Floor Sends Wall Street Into Frenzy ("The Onion")

Forecast Projects Rough Waters Ahead for Hotel Industry ("NREI")

Health care REITs offer prescription for stress in current market ("Investment News")

High-dividend REITs offer haven for nervous money ("Investment News")

An "Obama Contingency Clause"

A condo developer in NY is offering an "Obama Contingency Clause" in all sales contracts signed between now and Election Day:

If Obama wins, the contract goes through, but if John McCain prevails, buyers can back out — and presumably move to Canada — "with no questions asked."

Stock Market Astrology

Follow the lunar calender:

Panic lows have historically occurred on day 27/28 of the 7th lunar cycle, which are this Sunday and Monday. The panics of 1857/1907/1929/1987/1997 all marked their lows on these days in October!”

Related link:
The Financial Meltdown: It Was In the Stars ("Radar")

The Smoking I.M.

Below is an instant-message conversation between two S&P employees in the firm’s structured product division:

Official 1: By the way, that deal is ridiculous

Official 2: I know, right. The model definitely doesn’t capture half the risk.

Official 1: We should not be rating it

Official 2: We rate every deal. It could be structured by cows and we would rate it

Official 1: There is a lot of risk associated with it. I personally don’t feel comfy signing off as a committee member.

Fitch, Standard & Poor’s and Moody’s are testifying on Capitol Hill today.

Understanding the Financial Crisis

(Source: The Big Picture)

Commercial Real Estate Market to Hit Bottom in 2009

From Market Watch:

Real estate industry investors and professionals expect financial and real estate markets in the United States to bottom in 2009 and flounder for much of 2010, with ongoing drops in property values, more foreclosures and delinquencies, and a limping economy that will continue to crimp property cash flows, according to the Emerging Trends in Real Estate(r) 2009 report, released today by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP.

The Impact of Lehman's Bankruptcy on Developers

Real estate projects financed by Lehman are all frozen as a result of the Lehman bankruptcy. From The Daily Beast:

There are two types of deals that are stuck: residential conversions where Lehman was the lender and the developers now find themselves with half-demolished buildings without access to financing to finish them; and a slew of office towers where Lehman was a part owner and had agreed to fund tenant improvements and broker commissions. In those cases, landlords are fretting that without the funds to complete their obligations, tenants might balk and walk away from their leasing deals, exacerbating an already tough real estate market.

"Owning a Parking Space in New York City Is Like Owning an Oil Well"

While home prices have not done falling yet, investments in residential parking spaces are offering excellent returns these days. From International Herald Tribune:

While real estate in much of the world's developed countries is struggling, the sale or long-term rental of residential parking spaces is generally doing just fine.

"New properties constructed in central city areas can come with limited parking spaces - there is, therefore, plenty of demand," said Thomas Postilio, vice president of Core Group Marketing in New York.

For developers in New York, parking is the best use of extra space because in some areas it actually can command about the same price per square meter as living space, which costs much more to develop.

With the boom in development during the past few years, parking spaces in the city have often been destroyed in the construction process, Postilio added. "Parking spaces are now an endangered species," and waiting lists for are growing.

The Brokers With Hands on Their Faces

Blog.

No Financial Crisis in Canada

The Washington Post looks at how tight regulations and strict lending practices have helped Canada remain relatively insulated from the current financial crisis:

Canadian banks have not gone shaky like their American counterparts, economists and other experts said. There is no subprime mortgage or home foreclosure mess. And while the United States fears a prolonged recession, Canadians have remained relatively sanguine, convinced that they are in a good position to weather the economic tsunami from the south.

The main reason for optimism here is the banking system. Experts here note that Canadian banks are more tightly regulated, more liquid and less highly leveraged. Instead of being highflying investment banks, they tend to operate in a more traditional manner, with large numbers of loyal depositors and a more solid base of capital.

Another difference is that in Canada, mortgage interest is not tax-deductible, making it harder to buy a house. As a result, Canada did not have as strong a construction surge as the United States did during the boom years, and thus does not now have a big oversupply.

Related post:
Why Canada Has The Strongest Banking System on The Planet

Life After Lehman: One Banker's Story

The Recent Financial Upheavals

The Freakonomics blog explains what has happened in the financial sector in the last few days, why it happened, and what it means for everyday people.

REITs Not Hot Last Week

Weekend Roundup

Panel: Credit Crunch to Continue into Next Year ("CPN")

RCA: Troubling Times Ahead for Property Markets ("CPN")

READY TO SWOOP? Industry Braces For New Era of Vulture Opportunity ("CoStar")

Market Participants Assess Distressed Debt Opportunities ("NREI")

Analyst decries REITs sell-off ("Investment News")

Despite Rescue Bailout, Institutions Wait on the Sidelines ("NREI")

GE's 'Honey Pot' Properties Turn Sour ("WSJ")

What is a Credit Tenant? ("Trend Czar")

End of the Office Party Is Coming ("WSJ")

Office Markets Remain Stable in a Turbulent Economy ("CoStar")

Retail Figures Slump: How Will This Affect Retail REITs? ("Seeking Alpha")

No Sign of a Meltdown in Third Quarter Retail Real Estate Trends ("CoStar")

Although Terms Have Changed, Debt Markets Remain Open to Retail REITs ("NREI")

Quote of The Day

"I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America." Andrew Lahde, Lahde Capital Management

Housing Starts Drop is Good For The Economy

This morning I saw this article on Bloomberg:

U.S. stock futures fell, indicating the Standard & Poor's 500 Index may trim its biggest weekly gain since 2003, after a bigger-than-forecast decrease in housing starts added to evidence the economy is in a recession.

Yes, a decrease in housing starts is bad news for home builders these days, but for the housing market to bottom out and recover, the supply side needs slow down. Therefore housing starts drop is actually good news for the economy!

Commercial Real Estate Outlook

Watch Philip Blumberg, CEO of Blumberg Capital Partners and CNBC's Diana Olick discuss the outlook of commercial real estate here.




Richard LeFrak, president of LeFrak Organization discusses what's happening with commercial real estate right now here.

How Barclays Might Tackle The Credit Crunch

See here for top 10 credit crunch jokes to have you laughing all the way to the bank.

Stop The Fannie and Freddie Blame Game

Are you watching the debate? I want politicians to stop blaming Fannie Mae and Freddie Mac for the subprime mess. They are not the sole originators for subprime loans. Not even close. Fannie and Freddie are not two of the worst companies in the world. Moody's and S&P are! They are the ones that rated all those mortgage bonds. They have zero credibility.

Commercial Real Estate Financing

Goes from bad to worse.

Beige Book: Commercial Real Estate Slowing

From the Beige Book:

Residential real estate and construction activity weakened or remained low in all Districts. Housing activity was reported to have moved lower in Boston, New York, Philadelphia, Chicago, St. Louis, Minneapolis, Dallas, andSan Francisco. While still slow, residential markets showed some signs of stabilizing in Cleveland, Atlanta, and Kansas City. Several Districts noted continuing downward pricepressures and an increasing supply of homes for sale due to rising foreclosures. However, the inventory of unsold homes was reported to have declined in areas of the Boston and Atlanta Districts as well as in Philadelphia and Cleveland. Tighter credit conditions were cited as a limiting factor for demand in several Districts. Most Districts reported commercial real estate and construction activity had slowed, with New York, San Francisco and Dallas noting the sharpest declines. In contrast, Cleveland and St. Louis indicated steady activity. Increases in vacancy rates or sublease space were noted in Chicago, Boston, New York, Atlanta, and San Francisco. Several Districts reported project delays and cancellations due to tighter credit conditions and increased economic uncertainty.

Quote of The Day

“Now opportunity funds are becoming asset managers, nursing the problems in their existing portfolios,” Douglas Shorenstein, chairman and CEO of Shorenstein Properties LLC.

How REITs Did Last Week

Weekend Roundup: Where Do We Go From Here

Where Do We Go From Here? ("Thoughts from the Frontline")

'If we get through the next few weeks...' ("MIT News")

Hotel REITs Seek to Conserve Capital to Ride Out Downturn ("WSJ")

Real Estate Close-Up: New York ("Portfolio.com")

U.S. May Help Private Funds To Purchase Troubled Assets ("WSJ")

Constructive Destruction: Demolition Goes Green ("NREI")

Globalization and Global Trends in Green Real Estate Investment ("IREI")

Steve Forbes Interviews Mort Zuckerman ("Forbes")

REIT Asset Gains Do an About-face ("Investment News")

REIT REDUX? Fears of a ‘Prolonged’ Commercial Real Estate Slump Prompt Memories of 2001 ("CoStar")

Stretched Thin: The Rising Impact of Housing Expenses on America's Owners and Renters ("Center For Housing Policy")

GE Tightens Lending Standard

Specifically, GE Real Estate wants to reduce its absolute size:

GE is curtailing the kinds of loans it writes, ``capping off'' real estate and consumer areas as it shores up liquidity to cushion against seizing capital markets, Sherin said. GE plans to shrink its real estate unit below $80 billion in assets next year from $89 billion in this year's third quarter.

``At GE Real Estate, we just aren't underwriting any new equity and have very, very limited debt originations,'' Sherin, 49, who has been CFO since 1999 and also is a vice chairman, said in the interview. ``The absolute size, we're going to bring down over next 15 months.''

Related link:
GE Under Siege ("Fortune")

Our Choice: Recession or Depression

The world's biggest bear NYU professor Nouriel Roubini calls for radical actions to prevent a systemic financial meltdown from occurring.

Why Canada Has The Stongest Banking System on The Planet

The World Economic Forum just released a survey rating global banking systems, and Canada has come out on top. The Canadian banks have always been more risk averse than US banks and the conservative lending standards have paid off. Just look at their current underwriting guideline for condo projects:

Lenders now want to see 70 per cent of condo units presold before providing funding, for example, up from about 60 per cent when the credit markets were looser. The amount banks are willing to lend compared with a property's value has also dropped after the collapse of the market for commercial mortgage-backed securities, which was once a major source of funding.

70% presale vs 60% during looser credit conditions! I remember in US a couple of years ago, condo projects were being financed with no presale at all.

The Billion Dollar Question

"What will replace the dead commercial mortgage-backed securities market that had been financing transactions the past several years?" Pensions & Investments.

How Are REITs Faring?

Greg Sukenik, senior REIT analyst for Zacks Equity Research tackles the question.

Where's My Government?

Weekend Roundup: World On The Edge

Whatever happens in Congress, the crisis is now global; that means governments must work together ("Economist")

Office Space Is Emptying Out ("WSJ")

A Cure for Condo Glut? ("NYT")

CFO, dividend out at besieged General Growth ("Financial Week")

Manhattan real estate: Pricey but headed for a fall ("CNNMoney")

Business as Usual ("NYT")

Makeover Empire State Building ("NYT")

Canadian pension funds on European property spree ("Financial Post")

Is real estate the silver lining? ("Property Funds World")

Deutsche Eyes Distressed Real Estate ("TheStreet.com")

Deutsche Bank Overtakes Morgan Stanley in Japan CMBS Market ("Bloomberg")

Infrastructure Goes Global ("Institutional Real Estate")

Better With Age. Why Senior Housing Continues to Climb. ("REBusinessOnline")

Brooklyn Developer Wants to Sell Sarah Palin a Condo

Instead of Russia, she will be able to see Manhattan!

Related link:
Make-Believe Maverick ("Rollingstone")

It's A Realty World

Watch Apollo Real Estate Advisors founder William Mack discuss credit crunch's effect on commercial real estate here.

Commercial Real Estate Faces "Reckoning"?

According to this Bloomberg article, Newport, California based real estate research firm Green Street Advisers believes U.S. commercial real estate will face "reckoning" in the coming years. Specifically, they said:

U.S. commercial real estate owners will face rising delinquencies and defaults resulting from the lending bubble of 2005 to 2007 and the turmoil could last longer than the housing slump, Green Street Advisors Inc. said.

Pretty strong language. While I agree that loose lending standards prior to the credit crunch will affect commercial real estate values, one can not compare the housing slump directly with the slowing commercial real estate market. First and foremost, the commercial real estate market does no have a supply issue. There might be some over-building in hotels and retail properties, but the overall market is not over-supplied like the residential market.

Commercial real estate also has vastly different underwriting standards, and properties generate cash flow to cover debt service. Green Street makes one interesting observation about CMBS loans originated from 2005 to 2007:

the interest reserves put in place as a cushion for one to three years for properties that weren't generating enough cash will expire and those properties probably won't see the rents that borrowers expected because of the weakening economy.

``If, after the reserves are used up, a property is still not generating adequate cash flow to service debt, the shortfall will prompt some borrowers to walk away,''

I would love to know the percentage of CMBS loans originated in the last three years that were on properties that did not generate enough cash flow and required interest reserve. My limited understanding of the CMBS loan is that the underlying real estate should be stabilized properties that generate cash flow to cover debt service. If the property is not stabilized, the borrower wouldn't be able to get a CMBS loan and would need to get a term loan from a bank, a structured debt or portfolio loan provider. Maybe that changed in the last three years, and I'd like to know how wide-spread a problem this is.

Thursday Links: What's Next?

Next: The Mother Of All Bank Runs? ("Forbes")

Sub-prime Litigation: It’s Only Just Begun ("Compliance Week")

Shifting Economic Sands Challenge Construction Spending ("NREI")

SWFs Expected To Increase CRE Spending ("CoStar")

Equity REITS trounce markets ("Investment News")

Tishman's $5.4 Billion NYC Apartment Purchase Hits Obstacles ("Bloomberg")

Where Manhattan Real Estate Sales Are Slowing ("Forbes")

Shake-up in financials hits firms with big NYC real estate holdings ("Investment News")

Selling Well: 'Outlet' REITs ("WSJ")

Lodging Demand Shrinking Through 2009 ("GlobeSt.com")

Transparency in Seniors Housing Still a Work in Progress ("NREI")

GE To Reduce Real Estate Holdings by $10 Billion

More commercial real estate will come to the market soon. In addition to Lehman, AIG, and Merrill, GE Real Estate plans to reduce its real estate holdings by $10 billion next year. From CoStar:

"One thing that's obviously been in investor minds is the size of our commercial real estate portfolio," said Keith Sherin, CFO of General Electric. "We have a fantastic real estate portfolio. It's very high-quality. The delinquencies in the book are 0.27% of assets, so it's performing very well. But the size is something investors have expressed concern about and for us it's around $90 billion today. We're going to take that down to below $80 billion in 2009 and we're going to continue to remix the business."

It's Easy to Point Fingers

Someone has to take the fall. The Journal has this piece on Mark Walsh, head of Lehman's real estate group. Nice to see some balanced reporting:

Mr. Walsh's defenders point out that for years his real-estate group reaped huge profits and no one could have predicted how quickly the market reversed direction.

"He made a lot of money for a lot of people, including people at Lehman," says David Levinson, chief executive of L&L Holding Co., a developer that did several deals with Mr. Walsh. "It was just one of these things that when the unexpected happened, he was on the firing line."

Related link:
Lehman Casts Shadow on Commercial Market ("WSJ")

Developers Complain About Credit Crisis

Some serious lobbying for the bailout plan has started. From today's Times:

“Any continued impediment to the credit markets is awful for the national economy, but it’s more awful for New York,” said Richard Lefrak, patriarch of a fourth-generation real estate family that owns office buildings and apartment houses in New York and New Jersey.

“This is the company town for money,” he said. “If there’s no liquidity in the system, it exacerbates the problems. It’s going to have a serious effect on the local economy and real estate values.”

Related link:
Wall Street Tumult Casts Pall on Manhattan Real Estate ("NYT")
Businesses Pressure Congress on Bailout Plan ("WSJ")