Weekend Roundup

A Wish List for Commercial Real Estate ("NYT")

CRE Clarifies Its Fed Request ("GlobeSt")

Loans on Distressed Properties Become a Burden and an Opportunity ("NYT")

Commercial-Mortgage Bonds Lead Improving Debt Markets ("Bloomberg")

CMBS Delinquencies Speeding Up: Fitch ("CPN")

Doing Right by REITs ("Barron's")

REIT Moves Rub Executives Wrong Way ("WSJ")

Stephane Fitch On Real Estate Investment Trusts ("Forbes")

A Father, a Son, and a Short-Lived Presidential Pardon ("NYT")

Downturn Ends Building Boom in New York ("NYT")

The State of Commercial Real Estate

Report: Nation’s Wealthy Cruelly Deprived Of True Meaning Of Christmas

Report: Nation�s Wealthy Cruelly Deprived Of True Meaning Of Christmas

2008 Year in Review

Where is God When You Need Him?

From WSJ:

During this holiday season of hard times, not even houses of God have been spared. Some lenders believe more churches than ever have fallen behind on loans or defaulted this year. Some churches, and at least one company that specialized in church lending, have filed for bankruptcy. Church giving is down as much as 15% in some places, pastors and lenders report.

The financial problems are crimping a church building boom that began in the 1990s, when megachurches multiplied, turning many houses of worship into suburban social centers complete with bookstores, gyms and coffee bars. Lenders say mortgage applications are down, while some commercial lenders no longer see churches as a safe investment.

Quote of The Day

“If you can survive 2009 without selling, you'll be in better shape,” Jacques Gordon, global strategist at LaSalle Investment Management.

2009 will not be a good year for sellers, and this is just more bad news for many struggling newpaper companies trying to sell their buildings to raise capital.

Timothy Geithner's January To-do List

Via Slate:

1. Find new house in D.C.
2. Fix unholy mess that is Wall Street.
3. Ditto for Securities and Exchange Commission.
4. Restore faith in global finance system.
5. Housing?

CRE Developers Want a Bailout Too

You know this is coming, the lobbying has started. According to WSJ:

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing.

As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only.

Related:
Deutsche Bank Commercial Real Estate Outlook: Q4 2008

What is Inflation?

One of my favorite blogs Smashing Telly posted this 10-minute depression-era documentary that explains the wonders of inflation. It's hilarious and worth a watch.

Weekend Roundup

Why Wall Street Always Blows It ("The Atlantic")

The World's Largest Hedge Fund is a Fraud ("WSJ")

White House Philosophy Stoked Mortgage Bonfire ("NYT")

The Beauty of Property Bubbles ("Economist")

The Giant Pool of Money ("This American Life")

Who Bought What When? ("Slatin Report")

Wanted: Troubled Assets to Resolve ("NREI")

Transforming Foreclosed Properties into Community Assets ("Furman Center")

Nothing On the Drawing Board: Architect Index Drops to All-Time Low ("CoStar")

It Was Fun Till the Money Ran Out ("NYT")

Newest Center Partner Offers First 100% Green REIT ("MIT")

More Developers Abandon Hotel Projects ("NREI")

The Dead Mall Problem ("CNNMoney")

2009 will be a "year of opportunity" in retail real estate ("Property Funds World")

New York Realty Check

New York Times metropolitan reporter Christine Haughney and Michael Stoler, real estate commentator for 1010 WINS, host of the "Stoler Report" and "Building New York" on CUNY TV, and director at Madison Realty Capital, look at the fall-out from the Madoff scandal for the New York commercial real estate market.



Related post:
Madoff's Real Estate Victims

(Hat tip: TRD)

GGP is Stupid Investment of the Week

Chuck Jaffe from Market Watch thinks General Growth Properties has too much debt to overcome and investors should take the losses and exit the stock:

There just aren't enough positives here, and this stock -- like so many others in a similarly beaten-down state -- comes with no guarantees for a rebound. But unlike a solid company where the share price has been beaten into a bargain, GGP is one of those companies where the beating doesn't appear to be over, and investors will find that they are better off recognizing long-term losses and hitting the exits before things go from very bad to much worse.

Merry Christmas and Happy Holidays!

(Source: Developments)

Madoff's Real Estate Victims

From developers, investors to brokers, the NYC real estate industry insiders are shaken by the Madoff scandal, and some believe projects might be put on hold:

Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans.

There are widespread concerns that some developers will have trouble completing projects currently under construction. Edward Blumenfeld, who runs Blumenfeld Development Group, had invested heavily with Mr. Madoff and considered him a friend. Gary Lewi, a spokesman for Mr. Blumenfeld, said he still planned to complete a shopping complex in East Harlem that is to include a Target and a Costco, as well as several other projects where construction is “in the ground.”

Related link:
Madoff Misled SEC in '06, Got Off ("WSJ")

Real Capital Analytics Paints Gloomy Picture for CRE

In the last few posts, I focused on the delinquency rates for CMBS debt. A more relevant point that needs to be made is that some non-CMBS debt have much higher delinquency rates than CMBS mortgages. A lot has been written in the MSM about the securitization market, but CMBS debt probably only account for 1/3 of the entire commercial real estate debt market, and some of the balance sheet debt originated by banks and other private lenders are far more riskier. Most of these loans are 3-yr interest only term loans, and many were originated between 2006-2007, a period when underwriting was extremely aggressive. Real Capital Analytics' database includes non-CMBS debt and their analysis is more comprehensive:

Real Capital Analytics, has compiled data showing that at least $107 billion worth of income-producing property — including hotels, offices, apartment complexes and warehouses — is already in distress or is headed in that direction.

Standing on the precipice of distress are more than 3,700 properties, valued at $80.9billion, Real Capital Analytics said. This category includes $40 billion worth of properties whose owners are suffering financially. It also covers $26 billion worth of buildings with loans maturing next year, when credit is expected to remain tight and borrowers will probably be unable to refinance their properties unless they accept much more onerous terms. They could be forced to reach deep into their own pockets to hold onto properties that have declined significantly in value.

They also see a big drop in values:

Based on a small volume of sales, prices have dropped by as much as 15 percent. But Mr. White said he expected values to decline by 25 to 30 percent when owners who have been holding out are actually forced to sell. When Goldman Sachs predicted a decline of that magnitude earlier this year, Mr. White said he became angry. “I thought that was alarmist,” he said. “I said, ‘No way.’ But guess what? I’m in that camp right now.”

Fed Funds Rate Target Range 0 to 0.25%

From FRB:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. 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 further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

Homes of The Financial Bailout Stars

Find out which homes belong to Paulson and Bernanke here and here.

Weekend Roundup

A Year of Tumult for REITs ("NYT")

U.S. Equity REITs Susceptible to Downgrades in 2009 ("NREI")

Bad Year for Health Care REITS ("Developments")

It Can't Get Much Worse ("Pension&Investments")

Rising Wave? $1.35B SoCal Office Portfolio Default Unlikely to Be Last ("CoStar")

For Modern Urban Growth, Don't Forget the Ballpark and River Walk ("Knowledge@Wharton")

HUD Pick Foresaw Subprime Crisis in '04 ("The Crypt")

Feds to Build Secret Site in Diplomatic Building ("TheRealDeal")

Public Housing and Public Schools: How Do Students Living in NYC Public Housing Fare in School? ("FumanCenter")

Growth Hope for Real Estate Derivatives ("National Post")

Room to Rent. Bath Nearby ("NYT")

Now it's a landlord's market ("TheStar")

Renegotiating at closing time ("TheRealDeal")

The Mall Pall: Have America's Biggest Shopping Centers Lost Their Allure? ("Knowledge@Wharton")

Industry Settles in for Long Haul at ICSC New York Show ("Retail Traffic")

Between Dismal Economic Indicators and Forecasts, Retail Facing Bleak Picture in 2009 ("CoStar")

Hospitality Going Green ("IREI")

And lastly, I love stories like this: The Fed Who Blew the Whistle. ("Newsweek")

CBRE CEO Seeing Some Bright Spots in Real Estate

Sterling Equities Has Investments Managed by Bernard Madoff

Sterling Equities, the New York based commercial real estate investment firm apparently has accounts managed by Bernard Madoff, the wall street broker accused of a $50 billion "giant Ponzi scheme". According to Bloomberg:

Sterling Equities Inc., the investment firm led by New York Mets baseball team owner Fred Wilpon, said it has accounts at Bernard L. Madoff Investment Securities LLC, and is “shocked” by its founder’s alleged confession to fraud.

“Among our various investments, we have accounts managed by Madoff Securities,” Sterling Equities said in a statement today. “We are shocked by recent events and, like all investors, will continue to monitor the situation.”

Why Jamie Dimon is the Best CEO

If you didn't see Jamie Dimon's interview on CNBC today, here is a summary from 24-7 Wall St. It was an excellent interview. Jamie Dimond just has this amazing ability to communicate bad news effectively and at the same time still instills confidence. He also has a history of not overpaying for acquisitions, unlike another well known CEO.

CMBS Deliquency Continued

In my previous post, I asked if anyone had stats on interest only CMBS loans and the percentage of loans that mature in the near term. Well, REIT Wrecks does:

According to JP Morgan, of the more than $600 billion of outstanding CMBS fixed-rate debt, only $16 billion is scheduled to mature in 2008 and $19 billion in 2009 (for a total of $35 billion). Scheduled maturities of fixed-rate CMBS debt reach peaks of $98 billion in 2015, $128 billion in 2016 and $127 billion in 2017. 65% to 85% of those loans are interest-only for the entire or partial term. As for the near future, 80% of the loans maturing in 2008 and 2009 have been amortizing over the full term, significantly bettering the odds that these loans can be refinanced.

As for Mike Kirby from Green Street Advisor, I'm not sure if he is in the business of selling fear or if he's in the commercial real estate business at all, but some of the things he has said just simply don't make sense to me. For instance, he believes that a commercial real estate correction will be worse than the one in the early 1990s and could last longer than the housing slump. Now I wasn't in the business in the early 90s, but based on my read of the history, a major difference between the early 90s and now is on the supply side. The commercial real estate market is just not over-built like the early 90's or the residential market. Calculated Risk, someone who witnessed the early 90s, and one of the biggest bears, said it best:

Some areas of non-residential investment have been overbuilt, and I've forecast significant declines for investment in offices, malls, and lodging. But those looking for a collapse in CRE investment comparable to the current residential investment bust are wrong.

Kirby also says his company estimates that commercial-property values are down 25% from their peak in 2007. Again, I would like to see some stats on that, maybe from CoStar or Real Capital Analytics. 25% is a big number, how many transactions is that based on? And in what markets? With so few transactions since last August, I doubt anyone knows what true values are these days.

What You Can Buy With $1.30

According to Deal Journal:

On Wednesday, Banque Nomura France, a unit of Japan’s Nomura Holdings, bought Lehman’s French investment-banking assets for €1. That’s right. For $1.30. That for a business that has equity capital of $43.6 million, according to Bloomberg estimates.

More on Mortgage Deliquency Rates

From Financial Week:

Between the second and third quarters, the 30-plus day delinquency rate on loans held in commercial mortgage-backed securities rose 10 basis points, to 0.63%, according to the third-quarter Commercial/Multifamily Delinquency Report from MBA. Year-end CMBS delinquency rates over the past 10 years averaged 0.97%.

The 60-plus day delinquency rate on loans held in life company portfolios increased three basis points, to 0.06%. That translates to 36 delinquent loans with a combined unpaid principal balance of less than $144 million, out of 35,135 commercial/multifamily loans in life insurance portfolios with $253 billion combined unpaid principal balance.

The 60-plus day delinquency rate on multifamily loans held or insured by Fannie Mae rose five basis points, to 0.16%, but the 60-plus day delinquency rate on multifamily loans held or insured by Freddie Mac fell two basis points, to 0.01%.

The 90-plus day delinquency rate on loans held by Federal Deposit Insurance Corp.-insured banks and thrifts rose 20 basis points, to 1.38%. That equates to $18 billion in delinquent loans of the total $1.2 trillion held of commercial/multifamily mortgages at FDIC-insured banks and thrifts.

Combined, commercial banks and thrifts, commercial-backed securities, life insurance companies, Fannie Mae and Freddie Mac hold 80% of commercial/multifamily mortgage debt outstanding.

CMBS Delinquency Concerns

Mike Kirby, the analyst from Green Street Advisors, is probably one of the most bearish analysts I've read about on commercial estate. He believes that U.S. commercial real estate will face "reckoning" in the coming years, and that a commercial correction will be worse than the one in the early 1990s. Mr. Kirby is quoted again in this Times article commenting on the current low 0.63 delinquency rate for CMBS loans:

And analysts say the low default rate is deceptive. For one thing, as banks competed for business during the heady period from 2005 to 2007, most of the loans they wrote were interest-only, at least initially, so monthly payments were artificially low for the first few years, said Mike Kirby, a principal in Green Street Advisors, a research company.

Delinquencies are expected to accelerate next year. And many more delinquencies and defaults are expected in 2010, when five-year interest-only loans issued in 2005 begin to mature and borrowers are unable to refinance them because credit is scarce and property values have declined instead of risen.

“Defaults on mortgages are a trickle right now, but the pace will pick up over the next year, more than I would have thought in October,” Mr. Kirby said. “It’s coming, and it can’t be avoided. There’s going to be a lot of it, and it’s going to be bad.”

I have no doubt that delinquency rates will go up; but a couple of things Mr. Kirby said puzzled me. He cited that most of the CMBS loans originated between 2005-2007 were interest-only, presumably floating-rate loans. How much is most of the loans? 90%? 95%? I find that hard to believe. Does anyone have any stats on that?

The article also says more delinquencies and defaults are expected in 2010 because that's when five-year interest-only loans issued in 2005 mature. What percentage of the CMBS loans originated in 2005 have five-year terms? I would assume most loans originated in 2005 mature in 2015 because CMBS loans typically are 10-year deals. And five-year IO CMBS loans? Again, I just find that hard to believe.

Lightstone Group Could Transfer Hotel Chain to Lenders

I have posted about New York based Lightstone Group's credit worries before. Back in May, the founder David Lichtenstein didn't seem to be that concerned:

“When you’re in 45 markets, you take it on the chin here and there,” he said in an interview Monday in his relatively modest Park Avenue office. “If I can keep our losses at 1, 2 or 3 percent, I think that’s wonderful in this economy.”

The economy has deteriorated. According to WSJ:

Lightstone Group LLC, Lakewood, N.J., bought Extended Stay from Blackstone Group LP for $8 billion in April 2007. The deal was highly leveraged, hastening Extended Stay's troubles. The chain has no major debt expirations due soon. But Extended Stay's cash flow is crashing, as business activity across the country contracts. That is putting fewer people in its 684 U.S. and Canadian hotels, used by corporate travelers on long assignments. Extended Stay has 13,000 employees. It is too soon to say if a takeover by lenders would result in layoffs or hotel closings, according to people familiar with the matter.

As conditions deteriorate, Extended Stay has been forced into discussions with its lenders, and people involved in the talks say a transfer of ownership could come within a month or two. Extended Stay has recently hired Lazard Ltd. as financial adviser and New York law firm Weil Gotshal & Manges as bankruptcy counsel.

One wrinkle in negotiations is that Extended Stay isn't likely to file for bankruptcy protection, because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein. A more likely path is for Mr. Lichtenstein to turn Extended Stay directly over to lenders or to swap enough equity for debt to give bondholders control of the company.

The Fall of General Growth Properties

The Journal profiles the Bucksbaum family, founder of the giant mall owner General Growth Properties. I haven't followed the GGP story closely, but still I'm shocked at how fast the company has fallen. Two things in the article caught my attention:

General Growth's ratio of its debt as a percentage of its asset value has soared to 83%, compared to 63% for mall owner Macerich Co., 54% for Simon Property and 48% for Taubman Centers, according to Green Street Advisors.

Most of the borrowing was backed through mortgages rather than more traditional corporate borrowings.

84% leverage? For a REIT? And instead of replying on corporate lines of credit, like most REITs do, GGP's borrowing was through mortgages, presumably a lot of CMBS debt? This is unbelievable. How could the former CFO and company management let this happen?

Related posts:
Lenders Have Upper Hand
General Growth Looking for Partners

Weekend Roundup

RREEF Research's Newest Economic Forecast Map for the US and Canada December 2008 ("IREI")

Debt Watchdogs: Tamed or Caught Napping? ("NYT")

Whitehall Funds Lose Their Luster ("WSJ")

With Banks Pulling Back, Many Developers Forced to Reach into Own Pockets ("TheRealDeal")

A Real Options Analysis of a Vertically Expandable Real Estate Development ("MIT")

Construction Outlook ("The Ground Floor")

Delinquencies Tick Up On Construction Loans ("NREI")

Studies Suggest More Gains for Green Building in 2009 ("CoStar")

REITs Battered Down to Eye-catching Levels ("GlobeandMail")

Fears Grow for REITs with High Debt Levels ("InvestmentNews")

Small Hotel Sales Remain Strong ("GlobeSt.com")

A Window on Hotel CMBS: Columbia Sussex ("Seeking Alpha")

The Luck of Gluck. In high-profile case, near-default of Riverton may not burn developer ("TheRealDeal")

The First Mall Ever Built

Southdale Shopping Center in Minneapolis, MN


Related link:
Shopping Mall History

Joseph Cayre is Happy That He Didn't Buy the GM Building

The Real Deal interviews Joseph Cayre, founder and principal of real estate investment firm Midtown Equities:

You were a bidder for the General Motors Building at 767 Fifth Avenue. Are you happy that you didn’t win it? [Mort Zuckerman’s Boston Properties acquired the building for a record $2.8 billion in June.]

I’m delighted. I was as high as the selling price and then I backed out. I just didn’t like the returns. I like to make money on all my deals. I think that [in the General Motors deal] initially you’d lose your arm.

Related post:
Who Is Joseph Cayre?

4.5% Mortgages or 30% Home Price Cut?

I choose the latter. The Journal is reporting that Treasury is considering a plan to reduce 30-yr mortgage rates to 4.5% for new purchases. This is absurd. It is just another perfect example of the lobbying efforts by the home builders and realtor association to boost housing demand. The plan doesn't address the main issue of the housing bust, which is that the home prices are still way too high in certain markets. Until housing prices come down to levels that are affordable based on personal income, the housing crisis will not go away.

The recommendation made by the Center For Economic and Policy Research makes much more sense:

The best way to stabilize house prices in these bubble markets is to deflate the bubbles. This can be accomplished by having the government-sponsored enterprises (GSEs – Fannie Mae, Freddie Mac, and Ginnie Mae) refuse to buy mortgages in markets where house prices continue to be out of line with rents. Since the rest of the secondary market has collapsed, if the GSEs refused to buy mortgages in these markets, it would quickly force issuers to curtail loans. This should lead house
prices to adjust rapidly to their trend level.

In addition, by diverting mortgage loans to non-bubble markets, the GSEs should help to support the housing market in these areas and prevent a downward spiral. A rapid adjustment in house prices should also allow homeowners to more quickly recognize their actual financial situation.

Link: The Key to Stabilizing House Prices: Bring Them Down

Which One Is It?

Banker of the Year or World's Worst Banker?

Beige Book: Commercial Real Estate Markets Weakened Broadly

From the December 3rd Beige Book:

Residential real estate continued at a slow pace nationwide. Sales were down in most Districts, but mixed activity was noted in the Boston, Atlanta and Minneapolis Districts. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas noted decreases in housing prices. Inventories of unsold homes remained high in the New York, Atlanta, Kansas City and San Francisco Districts, but declined in Chicago and Minneapolis. Philadelphia, Richmond, Chicago and Kansas City reported relatively stronger demand for lower- and middle-priced “starter homes.”

Commercial real estate markets weakened broadly. Vacancy rates rose in Boston, New York, Richmond, Chicago, Kansas City and San Francisco, but were mixed across markets in the St. Louis District. Leasing activity was down in almost all Districts. Rents fell in the Boston, New York and Kansas City Districts. Despite reductions in construction materials costs, commercial building activity declined in many Districts with tighter credit conditions as a factor.

Brokers Become Shrinks

We all need some hand-holding:

“The landlords, the owners, the developers, whether they have one building or millions of square feet, they are in need of constant hand-holding and assurances,” said Faith Hope Consolo, chairwoman of the retail leasing and sales division at Prudential Douglas Elliman. “Now, to hear from a landlord five times a day is not unusual. The same landlord. And asking the same questions over and over. If they ask you the same question at 9, they ask it again at 11:30.”

“The phone is ringing off the hook,” concurred Robert Freedman, executive chairman of Williams Real Estate, a First Service Company (formerly known as GVA Williams), as another horn indeed ring-ringed in the background at his office.

“We’re fielding more kinds of calls and more kinds of inquiries than are really occasioned by this kind of economy,” he said. “It’s unnerved a lot of people.”

New York Daily News "Stole" the Empire State Building

It took only 90 minutes!.

Anatomy of a Meltdown

Ben Bernanke and the financial crisis.