Weekend Roundup

Moodys/REAL Commercial Property Price Index (CPPI) February Update ("MIT CRE")

Next Crisis: Commercial Real Estate ("Forbes")

TROUBLED ASSETS: CRE Investors May Soon Glimpse Opportunity Amid Hazy Market ("CoStar")

Loan Defaults Increase to 1.6% ("GlobeSt.com")

Credit Contraction Still in Early Stages ("CoStar")

Opportunity Funds Won’t Strike Until Second Half of 2009 ("NREI")

TOO HIGH A PRICE? Study Finds Energy Efficiency has Steep Cost for Developers ("CoStar")

Big Dividends, in a Dangerous Terrain ("NYT")

Stick with REITS ("Forbes")

Malls Race to Stay Relevant in Downturn ("WSJ")

Co-tenancy Clauses Push Shopping Center Owners Toward Bankruptcy ("NREI")

Simon Properties Is A Survivor ("Forbes")

Retail REITs Seek Out Value-Oriented Tenants ("GlobeSt.com")

Credit Crunch Forces Hotel Developers to Think Smaller ("CPN")

Nearly 50% of Apartment Landlords Lower Rents ("NREI")

Quote of The Day

"What's going on is horrible. I wouldn't gloat about making money from this, but this is a historic opportunity for distressed-asset investors." Steve Persky, Dalton Investments

Out of Financing

This is what happens when a developer runs out of financing. Not a pretty picture. From NPR's Planet Money:

This is a picture I took yesterday of the One Franklin development in the Downtown Crossing neighborhood of Boston. The empty space that you see is what used to be Filene's and Filene's Basement department stores. Filene's Basement is where the "running of the Brides" originated. One Franklin was intended to have luxury condos, retail and offices when it broke ground early last year.

The developer tore down the building, dug a hole in the ground and then ran out of financing for the project. The tragedy is that there were a lot of small businesses at street level that were evicted for the development and Filene's Basement was a great place for close-out suits and inexpensive socks and underwear--things that I think are needed now more than ever.

Proposed NY Rent Control Law Change Poses Risk for Apartment Deals

New York has some of the toughest rent control laws in the country. A proposed rent control law change will make execution even more difficult for landlords whose business plan is to convert rent stabilized units to market units. From Bloomberg:

Tishman Speyer Properties LP and BlackRock Realty’s $3 billion in loans used to buy Manhattan’s largest apartment complex may be downgraded by Fitch Ratings if the New York state legislature changes rent regulation laws.

A measure pending at the state capitol calls for delaying price increases on rent-stabilized apartments. That would hamper Tishman Speyer’s ability to pay investors who bought debt on the Stuyvesant Town-Peter Cooper Village complex, Fitch said.

Landlords can’t currently take an apartment out of the city’s rent-stabilization program until small annual rent increases push monthly rates higher than $2,000. The new legislation would raise the destabilization threshold to $2,700. Tishman bought Stuyvesant Town planning to convert its rent- stabilized apartments to market price.

Related post:
The World's Biggest Real Estate Deal

Accepting Reality

From Pensions & Investments:

Pension executives are coming to terms with the reality of a down real estate market, but their managers seem to be just starting to come out of denial.

Pension executives aren't waiting for their investment managers to come to terms with what they consider market realities. Many are writing down their portfolios by between 15% and 25% at least.

Headhunters, Please Give Timothy Geithner a Call

because he's working "by Himself". This is probably the most fun time to work at the Treasury.

Investors Concerned about GE's CRE Exposure

General Electric's stock traded below $9 today. It's hard to imagine, but since real estate is the dirty word these days, investors are apparently concerned with GE's finance arm GE Capital's exposure to commercial real estate:

On the asset side, a big source of jitters is GE Capital's $36.7 billion in commercial-real-estate investments. These are equity-type investments, the first to absorb any losses. As a result, most firms are currently applying big haircuts to this type of asset.

In its fourth quarter, Goldman Sachs Group, using mark-to-market accounting, took a 25% write-down, totaling $961 million, on its commercial-real-estate equity investments. GE Capital, which values its holdings using estimates of future cash flows rather than marking them to market, took $300 million of impairments last year, equivalent to less than 1% of the equity investments.

That is even more surprising given that GE has booked sizable unrealized losses on its book of securities backed by commercial real estate, which the company does mark to market. These bonds, senior to equity in the investments they fund, are written down by 23%. Admittedly, they are in different deals from GE's equity investments. But the huge divergence in the accounting hits understandably rings alarm bells with investors.

The Journal's writer for the article doesn't seem to be familiar with the mark-to-market accounting rules, and the concerns, I think, is a bit over-blown. GE Real Estate is probably one of the most conservative commercial real estate investors/lenders I know. While not regulated, its risk management is far more rigorous than any of the government regulated banks/investment banks. GE also doesn't rely on outside appraisal firms, and their internal valuation is usually conservative in comparison.

Then again, in this market, you just don't know. The shorts are betting that the GE stock will go down further.

"A Once-in-a-generation Bonanza"

You hear a lot of the fund managers(on CNBC) say this about the stock market. The market has fallen so much that they now offer a "once-in-a-generation" opportunity for long-term investors. To that I say if you bought stocks in 1997, you probably have lost money. S&P 500 closed at 743 today, the S&P low in 1997 was 737. Eleven years is a pretty long time.

Commercial real estate is not like the stock market, right? It's a long-term investment, and according to Jones Lang LaSalle's latest capital markets report, while 2009 outlook appears to be grim, "smart players who can bring plenty of cash to the table will be poised to reap a once-in-a-generation bonanza":

In the years to come, the report states, this year may “be most remembered for presenting some of the most attractive investment opportunities in living memory for astute investors who are very focused on quality assets in the market and armed with large amounts of equity at their disposal.” However, timing will be of the essence. Investors will need to be not just savvy but also nimble, since the window will stay open only briefly: “Once the yield ceiling is set, the crowd will inevitably follow.”

25 Most Valuable Blogs

according to 24/7 Wall Street.

Commercial Real Estate Auction To Rise

And that includes the famous John Hancock Tower in Boston, which is scheduled for auctioning on March 31. Broadway Partners could also be forced to auction off several office buildings in DC, including 1615 L Street. Eliot Spitzer's father is rumored to be interested in acquiring the property, which actually overlooks the Mayflower Hotel.

According to NYT:

Sales generated through auctions — including residential, commercial and agricultural properties — totaled $58.6 billion in 2008, up 38 percent from $42.3 billion in 2003, according to a recently released tally by the National Auctioneers Association, a trade group based in Overland Park, Kan.

Most of the recent activity and attention has focused on the residential sector, with an increasing number of homeowners being forced into foreclosure. But commercial auctions are expected to pick up this year as property owners and developers seek to raise cash to pay off loans or are forced into foreclosure themselves.

Weekend Roundup

Has the Time Come to Nationalize Struggling Banks? Yes, but Carefully ("Knowledge@Wharton")

'Nationalize' the Banks. Dr. Doom says a takeover and resale is the market-friendly solution ("WSJ")

Panics, Part One: The Crash of 1819 ("The Bing Blog")

The Great Property Writedown: Part II - Grinding Out Sausage ("CoStar")

Global Investment in CRE Down 59 Percent in 2008; Will Drop More in 2009 ("CPN")

To The Rescue: Real Estate Has More Questions Than Answers on Bailout ("CoStar")

Mezzanine Debt Loses Its Shine With Investors ("WSJ")

Lone Star Raising $20 Billion for Troubled Assets ("peHUB")

New Slump Reality: Taking Landlords to Task ("WSJ")

Industrial Loses Its Luster as Consumer Demand Wanes ("NREI")

Speaking Out Against the Disconnect Between Landlords and Tenants ("Retail Traffic")

Manhattan on Sale

What is The Credit Crisis?

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

(via)

Quote of The Day

“We’re not going to ever be nearly as aggressive as the lenders were a couple of years ago. Maybe it will be 10 years before that happens. And it may not happen again for even longer. The lending that was being done was ridiculous. When you look back at the deals and the projections that loans were being made on, you realize those deals shouldn't have been done.” Brian Ezratty, Eastern Consolidated.

Bank Solvency and The "Geithner Plan"

A very long post written by a former bank analyst and Treasury official in Australia. Go read the whole thing.

Fed Concerned about the CRE Sector

The Fed released the minutes of its January 27/28 meeting today. Here are some comments on commercial real estate:

The pace of commercial construction also had slowed. A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks’ commercial real estate loan portfolios. However, the commercial real estate sector had expanded more moderately during the recent expansion than during the expansion of the late 1980s, suggesting that the downturn in the current cycle could be milder than that seen in the early 1990s.

Good Bye, Dubai

(via Smashing Telly)

Blogosphere Exposed Stanford Before MSM

The big story today is the SEC raid of Texas financial firm Stanford Financial Group. The company's CEO, Texas billionaire Robert Allen Stanford is accused of conducting “a massive ongoing fraud” in the sale of about $8 billion of high-yielding CD held in the firm’s bank in Antigua.

The first time I read about suspicions of the Stanford Financial Group was actually last Tuesday on the Market Movers blog. Felix Salmon wrote about a report written by a financial analyst Alex Dalmady, who went public with his suspicions about Stanford. The story was slowly picked up by the MSM in the last few days. What's interesting to me is the timing of the SEC complaint today. Apparently the SEC has been investigating Stanford for months if not years. What took them so long? And what changed in the past week?

I also suspect there's a real estate connection to the company. The name sounds very familiar, and I just can't recall where I've come across them at the moment. In the meantime, go to the Market Movers blog to read more.

Weekend Roundup

How the Crash Will Reshape America ("The Atlantic")

Washington Hopes ‘Vulture’ Investors Will Buy Bad Assets ("NYT")

America's Economic Outlook ("IREI")

TALF Expansion Bodes Well for CMBS Market ("NREI")

Geithner’s Plan May Not Save Commercial Real Estate ("Bloomberg")

Survey: Lending Volume Could Plunge, Lenders Say ("NREI")

Job Losses Hit Commercial Real Estate--Hard ("CPN")

Gray and Wrinkles Look Better and Better ("Trend Czar")

The Great Property Writedown, Part I: Damned if You Do, Damned if You Don't ("CoStar")

Property Investors Now Looking for Bargains? ("CPN")

Frank Gehry’s Software Keeps Buildings on Budget ("NYT")

Grocery-Anchored Centers Maintain (Relative) Edge ("CPN")

Rents Can Wait – Sometimes ("GlobeSt.com")

Retail Sales Rise, But Outlook Remains Painful For Retail Landlords ("NREI")

Hotel Designs With Cinematic Flavor ("NYT")

Tax Provision in Stimulus Bill to Aid CRE Owners

The commercial real estate industry has always been quite successful at lobbying for tax incentives for the industry. Let's see if this provision makes it into the final bill:

The so-called cancellation of debt provision would postpone and stretch out the tax liability after commercial mortgages are reduced in loan workouts. This provision is important because owners are reluctant to cut their loans to lower levels in part because they often have to pay income tax on the amount of debt that is forgiven.

The provision allows owners who buy back their mortgages at reduced levels to pay the tax liability on the forgiven loan over five years instead of being hit with the burden all at once. The first tax payments would not be due until five years after the loan was restructured.

The measure would assist commercial real estate owners who took out loans against properties at the height of the market. In many cases, owners find those loans are worth less than the total estimated value of the property.

Buy a House, Get a Visa

A much better proposal than the stimulus plan:

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

Prologis Received Significant Interests in Its Portfolio

On Tuesday's earnings call, Prologis's CEO and CIO addressed a question about its North American portfolio that is being marketed right now:

Ted Antenucci

We started marketing that portfolio late in December 2008 and have received great activity. We have received over 80 offers at several different portfolios and we don’t intend to sell all of the assets that we have offers on, but the demand has been significant and interest almost high. Obviously certain markets, the pricing is all over the map. We expect to conclude a sale or some sales sometime in the end of the first quarter or early second quarter and no pricing is going to come up, so we expect to see pricing in the single digits and that’s where the competitive offers are right now.

Walt Rakowich

I’d like just to add to that, we’ve seen a broad range of buyers and we’ve seen people come in at $25 million to $50 million and then we seen other people come in at $200 million plus and so they are all over the map and frankly as Ted said we’ve been encouraged and at this point in time we’ll report back when we have more information to report back on.

Related link:
Its Go-Go Business Model Blown Up, ProLogis Scales Back ("WSJ")

Is Timmy in Trouble?

(via Big Picture)

Moody's downgrades $6.2B CMBS

From Market Watch:

Moody's Investors Service downgraded $6.2 billion of commercial mortgage-backed securities on Monday amid concerns that losses would grow from increased leverage, reduced reserves to pay debt and loan losses.

The move follows the ratings agency's announcement last week it would review the ratings of some $300 billion of bonds backed by commercial real-estate loans. More than a quarter of those securities are vulnerable to multiple-notch credit downgrades.

Real Estate Deal of The Century

It's fair to say, those who were close to the Blackstone/EOP, knew that some of the 16 buyers and lenders that ultimately bought or financed the EOP assets would lose money. From NYT:

The list of Equity Office buyers reads like a Who’s Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages.

In Los Angeles, the founder of Maguire Properties, one of the largest commercial landlords in Southern California, was forced to step down last year as the company struggled with crushing debt from buying 24 Equity Office buildings.

And in New York, the real estate mogul Harry B. Macklowe lost seven Equity Office towers he bought from Blackstone, along with much of his empire, after he was unable to refinance the $7 billion in short-term, high-interest debt he used to buy them.

Commercial Real Estate's Upside

The Departure of Going Private

One of my favorite blogs Going Private is at its end. Sad. Go read the last post "Dare Ye Inquire Concerning Such a Wretch?", which actually has something to do with the housing mess.

The World's Biggest Real Estate Deal

The New York Magazine takes a behind the scenes look at the largest real estate deal in American history - the $5.4 billion sale of MetLife's Stuyvesant Town residential complex to Tishman Speyer/Blackrock. It's a fascinating read that illustrates how a deal which seemed to make good sense at the time could turn sour so quickly in a short period of time. Tishman Speyer, a sophisticated real estate developer, who did many things right including selling $10 billion of real estate at the top of the market, is learning it the hard way that office building management skills don't necessary translate into being able to manage apartments effectively and that converting rent-controlled units to market units is one of the hardest things to do in New York. But like a true developer, Tishman only has $54 million equity in the deal and probably already got some of it back through management fees (assuming management fees are not deferred by the lender).

(hat tip: DealBook)

Bloggers Need Stimulus Too

Knowing and Making makes the argument for a stimulus plan for bloggers.

Battles Against Jargon

This is pretty amusing. Scottish fund manager Martin Currie Ltd is banning a list of words and phrases from client reports and trustee meetings (see below). My favorite is “space”–as in “competing in this space”. To honor the battles again Jargon, I've revised the tag line of my blog.

• “Bets”–Unnecessarily macho. Clients hate it. Use “positions” instead.
• “Going forward”–Almost always unnecessary. Remove it and improve it.
• “Backdrop”–Overused metaphor. Replace with “environment”.
• “On the back of …”–Ditto. Better alternatives are “following” or “after”.
• “Headwinds” and “tailwinds”–Ditto. Prefer “positive trends” or “negative trends”.
• “Perfect storm”–So overused it has quickly become a cliché. Alternative: “unprecedented circumstances”.
• “Foreigner”–A 1980s pop group. Common in Japan reports. Derogatory. Martin Currie prefers “international investors.”
• “Names”–As in “we invested in two new names.” Odd terminology. Use “stocks” or “companies” instead.
• “Track record”–Another over-used metaphor. Just “record” is fine.
• “Is primarily engaged in”–Cumbersome and unnecessary. “Does”, “manufactures”, “makes” and “sells” are all simpler and easier.
• “Musings”–Too lightweight. Martin Currie thinks or analyses, it doesn’t “muse.” Write “thoughts” instead.
• “Aggressively”–More muscle-flexing. Better options available, like “sharply”, “suddenly” or “with conviction.”
• “Space”–As in “competing in this space”. The final frontier of bad English. Use “part of the market” or “sector”.
• “Drawdown”–Trying to soften the blow with jargon. It means a loss or a fall.
• “Taking money off the table”–Another gambling analogy. Prefer “reducing risk” or “cutting exposure.”
• “Basis points/bps”–As in: “a 75 bps cut in rates.” Fine internally, but can confuse clients. Use “a 0.75% cut in rates” instead for clarity.

Moody’s to Review $302.6 Billion CMBS Debt

From Bloomberg:

Moody’s Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments.

The review encompasses 52 percent of outstanding U.S. commercial mortgage-backed debt ranked by Moody’s, the New York- based ratings company said today in a statement. The top ratings of so-called senior and mezzanine AAA bonds, which represent 72 percent of the securities being reviewed, probably won’t be affected, Moody’s said.

“Property values declined sharply in 2008, and we anticipate further declines over the next 12 to 24 months,” Moody’s analyst Nick Levidy said in the statement. “Delinquencies on CMBS loans are also on the rise, and we expect the pace to accelerate as macroeconomic pressures take a toll on property cash flows.”

The U.S. recession is crimping consumer spending and hurting business growth, making it harder for commercial property owners to make their payments. Ratings cuts can boost the capital needs of holders such as banks and insurers, and may force some investors to sell debt.

I just wish Moody's did a better job reviewing these debt before they were issued.

What is Good Credit?

A tough question to answer for office landlords these days.

Reading Comprehension

Maybe I have reading comprehension problems because I interpret Casey Mulligan's piece a little differently than some of the other bloggers.

Casey Mulligan is an economist. Economists always go back to the basics and look at demand and supply. They put up their fancy graphs, but they don't speak the language of cap rates, underwriting assumptions, IRR, etc. Mulligan's piece is not a comprehensive analysis of the commercial real estate sector. His main point, to me, seems to be that commercial real estate is different than the residential sector, and "barring a significant further decline in business activity", will not suffer the same crisis.

We can discuss what caused the deterioration in the commercial real estate sector and how much worse things would get, but one thing I flat out reject is the misguided notion that commercial real estate is comparable to the housing sector, and "shares the housing sector’s ailments." It's actually an insult to those working in the commercial estate industry, who did not start the mess that's destroying the economy. Developers always say lenders don't understand real estate, I say people in the residential sector are clueless about the commercial real estate industry and have no business making general statements about CRE.

Condo Loans May Bring Down Corus Bank

From WSJ:

The bank that funded a big part of the condominium boom is considering selling all or part of itself as rising defaults force it to seek capital.

Corus Bankshares Inc., a symbol of the exuberance for glass-and-steel condo towers from Miami to Los Angeles, reported a $260.7 million quarterly loss late Friday and said that more than one-third of its $4.1 billion in outstanding loans were nonperforming. Amid what it called a "precipitous decline" in property values, the Chicago lender also warned that banking regulators may soon strip Corus of its standing as a well-capitalized bank and impose higher cash requirements.

With $8.4 billion in assets as of Dec. 31, Corus ranks as one of the biggest banks to flirt with failure this recession. The bank has been in regulators' cross hairs for months because its once-diversified lending unit, Corus Bank, bet almost exclusively on condos during the housing boom. More than four-fifths of Corus's loans are concentrated in construction and development projects, mostly condo buildings in speculative markets such as South Florida and Nevada and overbuilt cities such as Atlanta and Phoenix.

Related link:
Corus Bank Facing Condo Crash

CRE May Not be the Other Shoe to Drop?

The Times Economix blog argues that commercial real estate will not suffer the same crisis that followed from the housing surplus.

For months now, experts have been predicting that commercial real estate will be “the other shoe to drop.” But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.

Those Who Bet Against CRE - Part II

CNBC's real estate reporter Diana Olick interviewed investor John Jacquemin, President and CEO of Mooring Financial Corp. Mr. Jacquemin's firm currently shorts REITs and the CMBX. Here are some excerpts of the interview:

We anticipated a weakness in late 2006, so we were shorting commercial real estate and particularly we were shorting the CMBX, which is a credit derivative index on commercial mortgage backed securities.

We are still holding our positions because we don’t think we have seen the worst. We think that that there is an oversupply, and unlike the late 80’s early 90’s when we had true overbuilding, especially in offices, this time around my friends in commercial real estate have said we are not going to see a lot of trouble because we haven’t seen the kind of overbuilding back in the late 80’s. Now that is true in a sense, but in a sense it’s not, because …we built malls, stores, restaurants, hotels, to meet a level of GDP that was unsustainable, a level of consumer spending that was unsustainable, the consumer was saving nothing, basically.

Once again, I see an investor who has some fundamental misconceptions about commercial real estate. It's interesting how Mr. Jacquemin's timing is a bit off. If Mooring Financial started shorting back in 2006, they probably lost quite a bit of money in the beginning. Well,with the gains in 2008, maybe they've broken even.

Happy Boycott CNBC Day!

Just turn it off!

Watching The Bad Bank

Hotel Room Arbitrage

An interesting proposal from Clusterstock, apparently in London it's now cheaper to stay in a five-star hotel than a Travelodge:

Guardian: Luxury hotels in London are slashing their rates to such an extent that it can now be cheaper to stay in a five-star hotel than a Travelodge. Analysts believe the bizarre situation has arisen because demand is falling fastest at the top end of the market, while budget chains prosper.

On Thursday last week, we checked prices at hotels across the capital for a one-night stay the following night. A double room at the Travelodge Covent Garden cost £102.50, including breakfast for two. However, a five-minute walk away, a double at the five-star Grange Holborn, including breakfast, as well as access to the large swimming pool, sauna, steam room and gym, cost just £86.25.

The End of the Affair

Is America's love affair with malls on the rocks?