Weekend Roundup

Boarder War. Geithner vs Summers. Inside the Treasury Department's Turf War("The New Republic")

The Credit Crunch According to Soros ("FT")

A Cure for the Real-Estate Blues ("Barron's")

REITs in U.S. Consider Paying Dividends in Stock to Save Cash ("Bloomberg")

Real Estate Funds To Buy Now ("Forbes")

Zuckerman Loss Makes Sam Zell Master of Real Estate ("Bloomberg")

A Month Free? Rents Are Falling Fast in NYC ("NYT")

For San Francisco Landlord, Bell Tolls on a Debt-Heavy Plan ("WSJ")

In Challenging Hotel Sector, Some See Opportunities for Growth ("CPN")

More Hotels at Risk of Not Meeting Debt Obligations ("NREI")

Do Recent Deals Signal An Investment Sales Thaw? ("Retail Traffic")

Room to Grow ("Retail Traffic")

U.S. Retail Property Market Bracing for a Long Year in 2009 ("CoStar")

Boycott CNBC, Just Turn It Off

Howard Lindzon continues to rant against CNBC:

What PISSES me off as an older cynic is why we can’t stop the bleeding where it could be stopped. You clean things up at major points of distribution - major points of noise. We have started wars around the world to stop major points of drug, terrorist and weapon distribution, yet we allow CNBC to survive and thrive serving financial terrorism, right in New York. The loudest, most broken funnel of noise and misinformation is CNBC. I quit CNBC finally, but it’s obvious that both smart and dumb people continue to watch for a variety of reasons.

I happen to agree with Howard. When I watch CNBC, I usually turn the sound off. Aside from the pundits, the anchors are the worst and the most misinformed. They call themselves journalists, yet they constantly inject their own opinions. Here is an example.

Inland/Macquarie Shopping Center Deal

A reader emailed about Inland Real Estate's acquisition of the 30 shopping centers from Australian REIT Macquarie CountryWide Trust. Unfortunately I don't know the details of the deal except for this from Macquarie's press release:

Macquarie CountryWide Trust (ASX:MCW) today announced it has entered into contracts with Inland Real Estate Acquisitions Inc., for the sale of the equity and debt interests of 30 US shopping centre assets for approximately US$427 million (A$646 million). The sale includes all but five of the assets that were part of the first two Regency joint ventures established with the Trust - the dissolution of both were announced earlier this week. The proceeds from the sale will be used to reduce debt and position the Trust to meet its refinancing obligations in the second half of 2009.

The transaction is structured in two phases. The first phase, which has closed, includes seven unencumbered properties. The second phase involves the sale of equity and debt interests of the remaining 23 assets and is subject to satisfactory completion of the purchaser’s due diligence and property-level loan assumption processes. Due diligence is scheduled to be completed in February and the ensuing loan assumption process by the end of March 2009.

The portfolio sale price is considered appropriate in the current challenging capital and debt environment. The sale represents a discount of 12% to the original cost base of the assets.

CoStar has some details on the first phase. If you have any additional info. on the deal such as cap rates, sales PSF, etc, please feel free to leave a comment.

Asshat of The Month: CNBC

So true! via Howard Lindzon

Long Fed Statement

From FRB:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to 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 the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

Sale Lease-back, or Not

It's always interesting to see how some companies choose to be owners while others option to be tenants. Intuitively, you would think non-real estate companies shouldn't own real estate, it's not their core business. But some still want to own, like the Canadian Blackberry manufacturer Research in Motion:

An executive with Westmount Realty Capital LLC says Research in Motion's buy late last week of the 460,297-square-foot Riverside Commons is bucking current real estate trends. Most companies these days are moving toward a sale-leaseback arrangement rather than the other way around.

Of course, it helps when the company has no debt and billions of cash sitting on the balance sheet. On the other hand, in a tough economy, more and more companies don't have a choice but to sell their real estate holdings to raise capital, like the New York Times:

The New York Times Company is in advanced negotiations to sell a substantial portion of its 52-story headquarters building on Eighth Avenue in Midtown Manhattan to W. P. Carey & Company, an investment and management firm that specializes in so-called sale-leaseback transactions, the newspaper company confirmed on Thursday.

But investors prefer to stay away from these cash hungry companies:

as the economy has worsened, an increasing number of corporations — especially those whose bond ratings are less than investment grade — are clamoring to divest themselves of their real estate through sale-leasebacks. “The companies interested in doing it are the ones that people want to stay away from,” said Randy Blankstein, the president of Boulder Net Lease Funds, a company in Northbrook, Ill., that invests in buildings with single tenants. “A lot are being offered, but few are being executed.”

NY Housing Blogs Strive to Reinvent Themselves

The New York Times looks at how the recession and the housing downturn are affecting residential real estate blogs:

with the recession in full swing and the housing market waning, what will these blogs write about now? It’s not entertaining to skewer a market where property values are falling and scores of people are losing their homes to foreclosure.

The guiding lights behind these blogs say that they are evolving, becoming more serious and focusing on the nuts-and-bolts details of the market. True Gotham, for instance, is writing about how long transactions are taking. Others are becoming more general sites for neighborhood news. Curbed’s tip line once passed on information from a reader who said that there was a truck in the neighborhood giving out free meat.

For some blogs, the real estate slowdown has led to a leveling off in readership. But all of the bloggers say they are confident their services are not only in demand, but will be increasingly valuable as the market gets trickier.

Deals That Ken Lewis Made

BofA CEO Ken Lewis has a history of overpaying for acquisitions. Here is a list of the biggest deals Ken Lewis completed during his tenure, courtesy of Deal Journal. Below are the last five:

1. 09/08, Merrill Lynch
2. 01/08, Countrywide Financial
3. 04/07, Lasalle Bank
4. 11/06, US Trust
5. 06/05, MBNA

It may take sometime, but eventually, mistakes will catch up with you.

I Want Some Tarp

via Calculated Risk

Modern Resources for The Wall Street Trader

Via The Big Picture

Moody's Ranks Pittsburgh Best CRE Market in the Nation

This is why Moody's has zero credibility:

Honolulu’s commercial real estate market is among the top five in the nation, according to a new report.

The area’s commercial real estate market ranked fourth among major metropolitan areas in the country in the fourth quarter of last year, according to a recent report from credit rating agency Moody’s Investors Service.

The report, which focused on the office, apartment and hospitality markets, gave Honolulu an overall average score of 72 out of 100 based on vacancy rates and other factors.

Pittsburgh ranked first in the report, scoring a 77 out of 100. Oklahoma City, 74, San Francisco, 74, Honolulu, 72, and Los Angeles, 68, rounded out the top five markets.

Riverside, Calif., 36, Jacksonville, 33, Trenton, N.J., 33, Detroit, 26, and Phoenix, 24, were the lowest scoring markets.

Weekend Roundup

Commercial Real Estate Exposure Catches Banks in Economic Downdraft ("CoStar")

Mortgage-Securities Defaults Rise ("WSJ")

Brokerages Retool the Rainmakers ("NREI")

Where the Deals Are: Real Estate in Emerging Markets ("Knowledge@Wharton")

U.S. Office Market Sees Erosion in Occupancy, Absorption in '08 ("CoStar")

For Tight Times, Office Space on Flexible Terms ("NYT")

Luxury Slide Could Spur Closings, Consolidation ("Retail Traffic")

Retail Real Estate Pros Have to Get Creative ("Bizjournals")

Conditions Remain Cloudy for Apartments ("NREI")

The Deal from Hell

Congress Debates Adding Elaborate Dance To Obama's Inauguration Ceremony

Congress Debates Adding Elaborate Dance To Obama's Inauguration Ceremony

Weekend Roundup

Global Investors Maintain Cautious Stance as Deleveraging Process Continues, says C.P. Eaton ("Property Funds World")

Jones Lang LaSalle's Colin Dyer: Quality Assets at Prices 'Perhaps Available Only Once in a Generation' ("Knowledge@Wharton")

CRE Loan Distress Levels Escalating Rapidly ("CoStar")

Boscov's Problems Spook CMBS Market ("WSJ")

Banks Gird for Commercial Property Collapse ("Financial Week")

Fannie Mae's Last Stand ("Portfolio.com")

The Oracle of Doom. How is Wall Street like the Titanic? ("Forbes")

Real Estate Developer Trammell Crow Dead at 94 ("MSNBC")

Wall Street Layoff Storm Also Soaks Office Landlords ("NYT")

This Market for Office Real Estate Is Strong ("NYT")

Apartments Try to Stay Afloat ("WSJ")

As Retail Sales Dip, So Do Rents ("Retail Traffic")

You Know Retail Real Estate is in Trouble

When you see proposals like this come out.

CRE Developers Not a Credible Threat

Dear John Thain wrote an excellent piece arguing against a bailout for commercial real estate developers. Go read the whole thing. I especially like the conclusion:

Developers are using big numbers to scare people into putting money up to backstop the riskiest of their highly-levered projects.

Related post:
The Judith Miller Effect

Why It's Better to Rent Than to Buy

Felix Salmon explains here and here. Pretty convincing to me.

BofA Negotiating More Aid with Government

Why should we be surprised? BofA is the new Citi. According to WSJ:

The U.S. government is close to committing billions in additional aid to Bank of America Corp. as the nation's largest bank by assets tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation.

The discussion began in mid-December when Bank of America, already the recipient of $25 billion in federal rescue funds, told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

Related post:
Why Jamie Dimon is the Best CEO

Beige Book: Commercial Real Estate Deteriorating

From the Beige Book:

Residential real estate activity continued to weaken in nearly all Districts. Boston, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and Dallas reported that home sales were weak or had declined. San Francisco reported that despite some pickup in recent months, home sales continued to be quite slow in most parts of the District. In the New York District, the market for new homes continued to weaken in New Jersey, and the higher-priced housing markets nearest to New York City were characterized as especially weak. While the Minneapolis District reported that late December saw an up-tick in residential sale activity in the Minneapolis-St. Paul area, it was reportedly driven by foreclosures and short sales. Increased home sale cancellations were common in a few Districts. Contacts in the Dallas District reported that home sale cancellations remained prevalent, in some cases outpacing sales. Elevated cancellation rates and weak showroom traffic in the Chicago District led developers to remain cautious about expanding inventory levels, and some building contractors in the Cleveland District reported increased inventories because of take-backs from home sales that fell through. Boston, Philadelphia, Atlanta, Kansas City, and San Francisco reported that home prices continued to soften or fall. Median selling prices declined in and around New York City and were reported to have edged down in the Dallas District. Richmond, however, reported that home prices remained steady.

Reporting Districts generally saw a decrease in homebuilding. Atlanta reported that homebuilders continued to pull back on home construction. The Philadelphia and Chicago Districts noted that residential building continued its decline. Residential construction was down in the St. Louis District, remained weak in Cleveland, and was quiet in Minneapolis.

Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.

Reports about commercial construction activity also were downbeat. In the Philadelphia District, commercial construction activity continued to fall. Cleveland reported that construction backlogs have declined for some contractors. Commercial contractors in the Atlanta and Chicago Districts reported declines in building activity and noted that more projects were cancelled or postponed. In St. Louis, contacts in commercial and industrial construction predicted a challenging environment in early 2009. San Francisco reported that commercial construction activity was very limited. Construction-related manufacturing contacts in the Dallas District reported that demand from commercial construction is shrinking rapidly.

New York Real Estate Woes

Pamela Liebman, president and CEO of the Corcoran Group, and New York Times reporter Charles Bagli look at what’s next for residential and commercial real estate in New York.

2009 A Good Year for Shopping?

51 percent of the 1,129 private and institutional real estate investors participated in Marcus & Millichap's survey seem to think so:

"Investors are not expecting a whole lot of improvement in credit markets, but the thinking seems to be that with pricing adjustments in 2009, there will be more buying opportunities," Hessam Nadji (pictured), Marcus & Millichap managing director of research services, told CPN. "And financing, even though it's tight, is still available."

Pricing adjustments do not equal to fire sale. And according to this, foreign investors will be putting more money in US commercial real estate this year than they did last year.

Related link:
Beyond the Downturn: Opportunities Await Institutional Investors ("NREI")

Those Who Bet Against CRE

It's no wonder REITs were down 41% in 2008 and the CMBS market is pricing for a 30% default rate when you have investors like this betting against commercial real estate. Read the post yourself, some of the logic and conclusions are completely absurd. A small example:

A reasonable person would look at the data and conclude that banks probably decreased holdings in commercial mortgages as the securitization market dried up…by now, we all know that the people running the banks are neither reasonable or rational.

The irrational behavior is glaring, from Q1 2007 to Q3 2008 banks increased commercial loan holdings by 15% while the securitization market collapsed. It is now estimated that commercial banks hold 43% of the $3.4 trillion commercial mortgage loan market.

Ahh, I beg to differ. Why wouldn't banks' holdings in commercial mortgages go up? Shouldn't the logical conclusion be that when the securitization market dried up, the banks had to keep more mortgages on their balance sheet because the mortgages couldn't be refinanced/secutized via the capital market?

The same author also wrote this piece. An excerpt:

The nature of commercial real estate loans require REITS (and other borrowers) to finance for shorter periods of time (5-10 years) with a balloon payment often attached. Foresight Analytics and the Real Estate Roundtable estimate that between $160 -$400b needs to be refinanced in 2009. Typically, REITS could borrow money from their investment banker; the banker would package the loan into a CMBS and move to the next deal. Unfortunately, due to the credit crisis and rising delinquencies, the CMBS market has virtually shut down. Left unattended this could be the next WMD for the financial markets. As the economy weakens, REIT cash flows will suffer at the exact time that they need cash flows to support new debt.

There are at least three fundamental misconceptions in this paragraph, and one of them is about financing options for REITs. While some REITs ("GGP") tapped into the CMBS market, most REITs borrowing are from corporate lines of credit.

There goes another blog you don't need to read.

Weekend Roundup

Crossing the Divide. Investors ponder how to bridge the gap between fear and confidence. ("CIRE")

REIT Outlook '09: Survival of the Fittest (And Most Liquid) ("CoStar")

Real Estate Heading For a Rough Ride ("Investment News")

This Year, Pain To Replace Gain ("CoStar")

Commercial Property Loses Shelter ("WSJ")

Investors Awaiting Bargain-Basement Commercial Property ("Investor.com")

New Growth in Green Real Estate Funds? ("NREI")

Struggling Retailers Press Struggling Landlords on Rent ("WSJ")

iStar to Sell Drake Loan at Discount

Significant discount, that is. iStar is asking $160 million for its $224 million senior position on the Drake Hotel site owned by Harry Macklowe. But the bidders want more discount:

The approximately half-dozen bidders for the iStar note have been offering prices about 20 percent below the firm's approximately $160 million asking price, one of the sources said. The lowest offer was about $100 million.

Related post:
Macklowe May Lose Former Drake Hotel Site

Quote of The Day

"Anybody who was dependent on an execution strategy that involved taking rent-stabilized apartments, flipping them, converting them and getting a premium for a market level price is going to face challenges until the New York economy starts firming up," Manus Clancy, senior managing director at Trepp.

If you ask experienced real estate lawyers in New York, they will tell you that converting rent-controlled units to market units or condo units is extremely difficult, if not impossible, regardless of the economic environment. I don't understand how this significant execution risk was underwritten in these apartment deals.

CalPERS is Suffering

But is CalPERS the victim of bad timing or bad decision making?

Walmart Taking Over America

Despite its sales drop.

Safe As Houses

The Ascent of Money is an excellent six-part British documentary that examines the history between money, credit and banking. The documentary is narrated by historian and Harvard professor Niall Ferguson. Below is part 1 of episode 5, which looks at real estate. You can watch the rest of the episode and the entire series here.



(Hat tip: Smashing Telly)

" '09 Dismal For Commercial Real Estate"

Now the Post has this piece:

This year will be among the worst for the U.S. commercial real estate industry, as unemployment leads to a drop of as much as 30 percent in rents in some places and more office towers from Washington to Chicago and Los Angeles sit empty, according to several research reports from large commercial real estate service companies.

End of Wall Street: What Happened

The Judith Miller Effect

Aside from Collin Powell's address to the UN Security Council, my most vivid memory of the period prior to the Iraq invasion was the Judith Miller interview on CNN with Larry King. Judith Miller was the ex Times reporter who reported on whether Iraq had WMDs. I remember thinking at the time, wow, Judith Miller, a Pulitzer winning reporter from one of the most reputable newspapers, was saying that Iraq had WMDs, then there must be some truth to that. Of course, we found out later that what Judith Miller reported and said on CNN turned out to be untrue, and a lot was planted by the Administration to justify the war.

I bring up the Judith Miller Effect (on me) because of this Times article, which paints a gloomy picture of the commercial real estate sector and pretty much says CRE crash is spreading rapidly. I'm not going to dig into some of the questionable rationals like the Dirty Lawyer has done here. What I find interesting is some of the sources quoted in the article and the timing of it. To me, this is just another one of those articles planted by industry insiders and lobbyists, who have an interest in seeing the CRE sector getting a piece of the government bailout. To do so, a gloomy picture of the sector needs to be painted, the gloomier, the better. This is completely the opposite of what I saw when the housing bubble first started to burst in 2006, when industry pundits would get on CNBC and say there was no housing bubble and that real estate was local and everything was just fine. One of the sources quoted in the Times article, The Real Estate Round Table is a Washington, DC based industry lobbyist, who submitted this and this letter to Henry Paulson asking for government bail out and tax relief for commercial real estate. It's also no coincidence, that similar articles also appeared on AP, WSJ this past weekend, just after the Fed announced it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS).

How bad is the industry? Those working in the industry know and time will tell.

Weekend Roundup

2008 Year In Review: Working Through the Pain with Little Prospect of Gain ("CoStar")

Commercial Real Estate in for Tough 2009 ("AP")

As Vacant Office Space Grows, So Does Lenders’ Crisis ("NYT")

Real-Estate Markets Still Plumb for Bottom ("WSJ")

Risk Mismanagement ("NYT Magazine")

Industry Asks: Whither TARP in 2009? ("GlobeSt.com")

Office Demand Is Down, and So Are the Deals ("NYT")

As RevPAR Drops, Workouts to Rise ("GlobeSt.com")

Historic Greenbrier Under Cloud ("WSJ")

Industrial REITs Pull Back Overseas Growth ("GlobeSt.com")

Looking Back, Looking Forward ("Retail Traffic")

2009 - The Year of Survival for REITs

So who will be the survivors?

The survivors will be companies with lots of cash, small development pipelines and low debt loads. Those REITs could use the industry turmoil to expand by snapping up assets on the cheap. Some of their debt-laden competitors, on the other hand, could be goners if the credit freeze continues.

The Bailout Effect on Luxury Hotels

Not so great:

Less expensive hotels fared better than those on the high end. Struggling companies shied away from luxury hotels, particularly after American International Group Inc. endured intense criticism for spending $440,000 on a lavish retreat for its top-producing life insurance agents days after the U.S. government gave it a $85 billion bailout loan. The weeklong event was held at the St. Regis Resort in California and included spa treatments, banquets and golf outings.

"It's very bad press right now if your corporation is getting a government handout and you're staying at a luxury hotel," Scholes said.