U.S. Commercial Real Estate Loans Hit 10% Delinquency

U.S. 10 Year Treasury Hits

a Record Low Low yet...

NEW YORK, May 30, 2012 /PRNewswire via COMTEX/ -- Trepp, LLC, the leading provider of information, analytics and technology to the CMBS, commercial real estate and banking markets, released its May 2012 U.S. CMBS Delinquency Rate today (full report available Friday, June 1 at http://www.trepp.com/knowledge/research ).

The delinquency rate for U.S. commercial real estate loans in CMBS jumped 24 basis points in May to 10.04%. In the process, the rate broke through the 10% threshold for the first time ever.

Back in December, Trepp predicted that 2012 could be a rocky year for CMBS in terms of the delinquency rate. This prediction was in anticipation of five-year loans securitized in 2007 beginning to reach their maturity dates. At the time, the delinquency rate was around 9.51%, and it was expected that these maturing loans could lead to a spike of 70 basis points in the short term.

It appears that this prophecy has come true. Up 24 basis points in May alone, the delinquency rate has increased 67 basis points in total since February. Whether the rate finally breaching the double-digit mark will carry some psychological impact remains to be seen.

The good news for the CMBS market is that the five-year loans originated in 2007 were heavily front-loaded. This means that by the end of this June, the number of these loans reaching their maturity date will start to dwindle.

"While cracking the 10% barrier might weigh on the market's psyche for a short time, there are likely better days ahead in terms of delinquencies over the next six months. A big driver of the recent surge in the delinquency rate has come from loans that were originated in 2007 that are coming due now. As we get later in the year, the impact of this trend will dissipate. The next two or three months could be bumpy, but the second half of the year should bring a leveling off of the rate," said Manus Clancy, senior managing director at Trepp.

Currently, $59.1 billion in loans are delinquent. This excludes loans that are past their balloon date but are current in their interest payments. There are $79.2 billion in loans with the special servicer.

The increase in the delinquency rate was driven by weak performance among hotel and industrial loans. Overall, four of the five largest property types saw delinquencies rise. Only the apartment sector improved, and that was by a single basis point.

Delinquency Chart

CMBS Overall Delinquency Rate Up 52% Year Over Year (Trepp) as REITS Continue Launch

Overall CMBS Delinquencies Hit a

Record 9.2% in December as

REITS Spend 2010 Partying in the Exosphere.

Trepp Reports CMBS Delinquency Rate Hits

Record High of 9.2% in December Despite Market Optimism

(NEW YORK – JANUARY 5, 2010) - Trepp, LLC, the leading provider of CMBS andcommercial mortgage information, analytics and technology to the global securities and investment management industry, released today its December 2010 Delinquency Report. This month’s report contains a special section on the Major CMBS Events of 2010 as well as Delinquency Rate and Triple A Spread charts covering the past 10 years.

The U.S. CMBS delinquency rate rose again in December with the percentage of loans 30 or more days delinquent, in foreclosure or REO climbing 27 basis points to 9.20%, the highest in history for U.S. commercial real estate loans in CMBS. The value of delinquent loans now exceeds $61.5 billion.

The decline in the delinquency rate in October 2010 now appears to have been a blip, as the rate has since increased by 62 basis points. December’s 27 basis point jump comes despite the fact that new issues continued to make their way into the calculation and servicers continued to resolve troubled loans. The new deals - which theoretically should have low delinquencies for a while - will continue to put downward pressure on the delinquency rate as issuance continues to grow in 2011. Similarly, the resolution of troubled loans will also help to lower the rate.

“Many have speculated that between the emergence of new CMBS lending, the resolution of many troubled CMBS loans and an uptick in trophy property sales, that the commercial real estate crisis was nearing its final stages,” said Manus Clancy, Managing Director, Trepp. “The December delinquency rate underscored that there still may be some nasty surprises in store even as the market shows some signs of healing.” Trepp Report

Delinquency Rates (Percent 30 Days + delinquent)

• 8.97% Industrial (up 125% YOY)
• 14.31 % Lodging (up 11% YOY)
• 16.48% Multi-family (up 78% YOY)
• 6.93% Office (up 103% YOY)
• 7.86% Retail (up 43% YOY)
• 9.20% Overall (up 52% YOY)

Best leave defaulting to the real esate professionals (do not try this at home)

While a homeowner who lost a house to

foreclosure would find it difficult to

borrow for years, developers who defaulted

on enormous loans have still

been able to attract money.

(do not try this at home as these are trained professionals)

The New York Times

By Charles V. Bagli
Other Charles Bagli articles

1/1/2011

Larry Gluck, the apartment building king whose company defaulted on loans in New York, San Francisco, Los Angeles and Washington, recently bought the Windermere Hotel in Manhattan and Tivoli Towers, a subsidized housing complex in Brooklyn.

Ian Bruce Eichner, who lost two major New York skyscrapers to foreclosure in the early 1990s and defaulted on a $760 million loan for a Las Vegas casino resort in 2008, is working on a plan to rescue One Madison Park, a troubled 50-story condominium project.

Even Harry Macklowe, whose $7 billion gamble on seven Midtown skyscrapers at the top of the market almost cost him his entire empire, is out looking for new deals.

Industry lore has it that New York is one of the toughest, most unforgiving real estate markets in the world. The costs are so high, the unions so ornery, the politicians so demanding and the rivalries so fierce, that one false move invites financial disaster.

But the truth is that there have been surprisingly few career fatalities among New York developers, even though they have lost billions of investor dollars on overpriced real estate and have littered the city with unfinished apartment buildings. While a homeowner who lost a house to foreclosure would find it difficult to borrow for years, developers who defaulted on enormous loans have still been able to attract money.

The reasons, experts say, are that there is still plenty of money floating around and that the market has a very short memory.

“You can always find an investor who’ll put up equity with a guy, unless he’s Attila the Hun,” said Daniel Alpert, managing partner at Westwood Capital, a real estate investment bank.

For some of these developers, however, putting together a deal is not as easy as it used to be. Large banks and pension funds that endured huge losses have become very picky. Scott Lawlor, the founder of Broadway Partners, bought 28 office buildings in 2006 and 2007 and is now stuck with heavy debts on what is left of a portfolio whose value has dropped by at least a third. He is trying to come back with a focus on distressed residential real estate but has been unable to attract institutional money, according to lawyers and real estate executives who know him. He is now trying to line up wealthy investors.

Hedge funds and private equity funds are still offering backing for deals, believing that the real estate market will warm up again this year. There are also new investors looking to get into real estate, including funds based in China, and Norwegian pension funds.

And there have been casualties. Shaya Boymelgreen, the once-ubiquitous developer who built more than 2,400 apartments during the boom, broke with his money partner, was peppered with lawsuits from condominium buyers and was evicted from his offices in Brooklyn.

The $3 billion real estate portfolio that Kent Swig, a scion of a West Coast real estate family, put together over the past two decades is slowly slipping through his hands, and he warned last year that personal bankruptcy could be in the offing.

But while a homeowner who is foreclosed upon is often on the brink of financial ruin, many developers who defaulted emerged relatively unscathed themselves. Most of them invested relatively little of their own money in the deals, preferring “O.P.M.,” or “other people’s money.” One of the best-known examples is Tishman Speyer Properties, which lost $56 million on Stuyvesant Town and Peter Cooper Village, while lenders and other investors lost over $2.4 billion. Read On Garth



US CMBS Loan Delinquencies Rise to 8.63% (up 76% YTD)

Global Credit Research - 13 Dec 2010

New York, December 13, 2010 -- The delinquency rate on loans included in US Commercial Mortgage-Backed Securities (CMBS) conduit/fusion transactions increased 24 basis points in November to 8.63%, according to Moody's Investors Service's Delinquency Tracker (DQT). The increase was larger than the 15 basis point increase in October, but continued a trend of moderate increases that has prevailed over the second half of the year.

In November, 294 loans became newly delinquent, while 245 previously delinquent loans became current, worked out, or disposed.

"As has been the case in recent months, the resolution and liquidation of troubled loans has helped to largely offset the increase in delinquent balance," said Moody's Managing Director Nick Levidy.

In all, the total number of delinquent loans increased in November to 4,091, and the total balance of delinquent loans increased by approximately $1.1 billion to $53.8 billion.

Year-to-date, the Moody's Delinquency Tracker has risen 373 points. Though the largest basis point increase since May, November's 24 basis point rise was still significantly below the average monthly increase of over 50 basis points that occurred during the first five months of the year.

Moody's Delinquency Tracker (DQT) tracks all loans in US conduit and fusion deals issued in 1998 or later with a current balance greater than zero.

The office sector had the greatest increase in delinquency rate among the five core property types in November, gaining 44 basis points to 6.72%. During the month, $1.2 billion in office loans became newly delinquent and only $455 million became current, worked out or disposed.

The other sectors saw moderate increases in delinquency or were essentially flat.

Retail properties saw the next highest net increase after offices, an increase of 27 basis points to 7.14%.

Industrial properties had a 13 basis points increase to the delinquency rate, its delinquency rate stands at 6.36%. Industrial remains the best performing of the five property types.

Multifamily also experienced a modest increase in its delinquency rate, ending November at 13.90%, a 13 basis point increase since October.

The hotel loan delinquency rate remained essentially flat in November, increasing only three basis points. The hotel delinquency rate remains the highest among the major property types at 16.42%.

By region, the Midwest had the best performance of the four regions covered by Moody's Delinquency Tracker in November. In the Midwest, the delinquency rate fell six basis points to 8.57%.

The South saw the largest increase in its delinquency rate in November, rising 67 basis points during the month to end at 10.86%, the highest delinquency rate among the regions.

The West posted the second largest increase, as its delinquency rate rose 34 basis points to 9.70%, more than double the rate a year ago.

The East had essentially no change in its delinquency rate, rising only one basis points to 6.60%.

By State, Nevada continues to have the largest delinquency rate by a very large margin. Its delinquency rate rose another 31 basis points to stand at 27.50%. With a jump in its delinquency rate of over 700 basis points, Alabama has surpassed Michigan as the second worst performing state, with a delinquency rate now of 18.81%. Michigan's rate dropped 45 basis points in November to 14.43%. Moody's Announcement


November 2010 Delinquency Rate Recap

• Overall          8.63%
• Office            6.72% (up 90% YTD)
• Retail            7.14% (up 36% YTD)
• Industrial       6.36% (up64% YTD)
• Multifamily  13.90% (up 58% YDT)
• Hotel           16.42% (up 67% YTD)

A Trip Down Memory Lane

December 2009 Delinquency Rate Recap

• Overall            4.9% 
• Office              3.19% 
• Retail              4.52% 
• Industrial         3.42% 
• Multifamily      8.14% 
• Hotel               9.07% 

CMBS Delinquencies Rise and Approach 8%

S and P 500 REIT IYR up 18% Year To Date

while CMBS delinquencies continue rising.

NEW YORK--(BUSINESS WIRE)--The reprieve in delinquency increases was short-lived as U.S. CMBS late-pays resumed their climb this past month, according to the latest delinquency index results from Fitch Ratings. The full results are featured in this week's U.S. CMBS newsletter.

Delinquencies rose 18 basis points (bps) to finish November at 7.96%. Driving the increase was $1.6 billion of new defaults on office-and retail-backed loans.

'Office and retail properties fared well during the recession due to generally longer-term lease agreements, but they are now most vulnerable to asset-specific performance declines for the same reason,' said Managing Director Mary MacNeill. 'As office leases originated at the peak of the market come up for renewal, they will be marked down to lower market rents, pressuring operating income.'

Current delinquency rates by property type are as follows:

• Multifamily: to 14.75% (from 14.57%);
• Hotel: to 14.27% (from 14.14%);
• Retail: to 6.55% (from 6.25%);
• Industrial: to 6.01% (from 5.83%);
• Office: to 5.63% (from 5.38%).

Additional information is available at Fitch Ratings

December 1, 2010 CMBS Delinquency Data Recapped

on Housing Wire

The delinquency rate on loans backing commercial mortgage-backed securities jumped to the second highest rate on record in November, up 35 basis points to 8.93%, according to a monthly report released by Trepp analytics firm.

A total of $60.3 billion in CMBS loans are delinquent. Of the nearly 9% that are delinquent, most (2.92%) are more than 90 days past due.

November's CMBS delinquency rate is second only to September's rate of 9.05%. The delinquency rate in November 2009 was 5.65%. The rate in October dipped down to 8.58% boosting analysts' anticipations delinquencies would continue to fall. Now they are not so confident.

"We frequently pointed out that as servicers became more adept at processing troubled loans, the delinquency rate would continue to see downward pressure," the Trepp report said. "The November numbers throw cold water on the enthusiasm that's built up over the last six months."

Delinquencies for loans on multifamily properties spiked in November, making it the worst performing sector for the first time in more than a year. The delinquency rate now stands at 15.8%, up from 14.6% in October and up from 8.8% one year ago.

The lodging sector of CMBS fell to 14.6% from 14.9% in October, but still maintains the second highest rate, followed by the retail sector (7.6%), the office sector (7%) and the industrial sector (6.6%). Housing Wire Site for More Real Estate Information

Commercial Real Estate Prices take a hit in October (per CoStar)

Diana Olick recaps CoStar report coming out 12/8/10. Commercial real estate prices took a hit in October. CoStar notes there is a very limited amount of high quality supply which adds to the valuation volatility. Once again, Grandpa maintains the REIT market is ahead of itself and continues to price in absolute perfection while the commercial real estate marketplace is hardly defined as perfection.

Steep cuts in Federal spending that could cut right through to commercial real estate (Diana Olick)

Diana Olick
Link to Diana Olick Site
CNBC
12/1/10

Just when you thought the commercial real estate market was finally on the upswing, new roadblocks to recovery may be lurking right around the corner. President Obama's deficit commission recommended some steep cuts in Federal spending that could cut right through to real estate.

"The commission’s recommendations, if implemented, would be a sizable drag on commercial real estate in the short term as increased taxes and reduced government spending will have a cooling effect on the economy," says Christopher Macke of CoStar Group, a commercial real estate analytics and data service provider.

The most glaring risk is in jobs cuts.

The recommendation to reduce the federal workforce by 10 percent, or 200,000 jobs, would cut the need for office space. It's as simple as that.

"DC's office market fundamentals, in particular, have benefited from growth in federal payrolls and related private sector jobs. Even in other markets, there is some evidence that GSA-tenanted office buildings trade at a premium (tenant credit quality matters a lot these days)," notes Sam Chandan of Real Capital Analytics. "Ultimately, the impact on fundamentals and property values would be concentrated in the one market that would stand to lose a meaningful share of total office space demand, i.e. Washington, DC."

DC surely has the highest share of federal workers, but CoStar estimates it's still only 17 percent of the total 3.6 million employees, so the pain would surely spread outside the district. But then take $100 billion out of defense spending, and you're obviously reducing employment in local markets that are heavily dependent on defense. Much of that is also in DC, and beyond.

Now here's one you might not have thought of: If you scrap the mortgage interest deduction on mortgages over $500,000 (currently it's capped at $1 million), then you reduce consumer wealth, which in turn reduces consumer spending, which in turn reduces retail space demand.

"Eliminating or scaling back this vital housing deduction will shrink the local tax base of many communities, causing already cash-strapped state and local governments to further cut jobs and essential services," adds Bob Jones, chairman of the National Association of Home Builders.

CoStar agrees, pointing to likely inevitable state budget gaps that it says will result from the deficit reduction proposals. Those gaps would force states to cut spending even more (can they possibly??), which would mean more layoffs at the state level and reduced consumer spending, hitting both office and retail. Then, states might be forced to sell off more of the real estate they own, which could reduce commercial prices.

"It is always best to have corporate spending driving the economy, but absent that somebody has to spend," adds Macke.

National Associaiton of Realtors: Commercial Real Estate Markets Stabilizing

It appears REITS are not responding well

to the "stabilizing" commercial real estate

industry. SPG, PSA and BXP all down over

$1.30 while IYR is down $.60+. Maybe...

just maybe, the REITS are ahead of themselves!

National Association of Realtors
Washington, DC, November 29, 2010

Commercial real estate markets are flattening out, with modestly improving fundamentals expected in 2011, according to the National Association of Realtors®

Lawrence Yun, NAR chief economist, said commercial real estate sectors appear to be stabilizing. "The basic fundamental of rising commercial leasing demand, resulting from a steadily improving economy, means overall vacancy rates have already peaked or will soon top out," he said. "The outlook for the office and industrial markets has moderated with modestly declining vacancy rates expected as 2011 progresses, while the retail sector should hold fairly steady. Still, high vacancy rates imply falling rents."

Yun anticipates a rise in household formation from an improving economy, which will increase demand for housing, both ownership and rental. "Multifamily housing is the one commercial sector that has held on relatively well in the past year, and can expect the best performance in 2011," he added.

"Apartment rents could rise by 1 to 2 percent in 2011, after having fallen in 2009 and no growth in 2010," Yun said. "This rent rise therefore could start to force up broader consumer prices as well." He noted that the housing shelter cost of primary rent, and owner's rental equivalence, is the biggest component in the Consumer Price Index, accounting for 32 percent of its total weight.

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 400 local market experts, shows vacancy rates are slowly improving, but rents continue to be soft with elevated levels of subleasing space on the market.

The SIOR index, measuring the impact of 10 variables, rose 1.6 percentage points to 42.6 in the third quarter, but remains well below a level of 100 that represents a balanced marketplace. This is the fourth straight quarterly improvement following almost three years of decline.

The last time the commercial market was in equilibrium at the 100 level was in the third quarter of 2007; the index now matches where it was at the beginning of 2009. Fifty-nine percent of respondents expect improvements in the office and industrial sectors in the current quarter.

Commercial real estate development continues at stagnant levels with little investment activity, but is beginning to pick up in many parts of the country.

NAR's latest COMMERCIAL REAL ESTATE OUTLOOK offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Markets

Vacancy rates in the office sector, where a large volume of sublease space remains on the market, are forecast to decline from 16.7 percent in the current quarter to 16.4 percent in the fourth quarter of 2011, but with very little change during in the first half of the year.

The markets with the lowest office vacancy rates currently are New York City and Honolulu, with vacancies around 9 percent. All other monitored markets have double-digit vacancy rates.

Annual office rent is expected to decline 1.8 percent this year, and then slip another 1.6 percent in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be a negative 3.7 million square feet this year and then a positive 16.4 million in 2011.

Industrial Markets

Industrial vacancy rates are projected to decline from 13.9 percent currently to 13.2 percent in the closing quarter of 2011.

At present, the areas with the lowest industrial vacancy rates are Los Angeles, Salt Lake City and Kansas City, with vacancies in the 8 to 10 percent range.

Annual industrial rent is likely to fall 4.0 percent this year, and decline another 3.4 percent in 2011. Net absorption of industrial space in 58 markets tracked should be a negative 25.1 million square feet this year and a positive 134.0 million in 2011.

Retail Markets

Retail vacancy rates are expected to change little, declining from 13.1 percent in the fourth quarter of this year to 13.0 percent in the fourth quarter of 2011.

Markets with the lowest retail vacancy rates currently include San Francisco; Orange County, Calif.; and Honolulu, with vacancies in the 7 to 8 percent range.

Average retail rent is seen to drop 3.4 percent in 2010 but largely stabilize next year, slipping 0.3 percent in 2011. Net absorption of retail space in 53 tracked markets is projected to be a negative 0.5 million square feet this year and then a positive 5.0 million in 2011.

Multifamily Markets

The apartment rental market - multifamily housing - is expected to get a boost from growth in household formation. Multifamily vacancy rates are forecast to decline from 6.4 percent in the current quarter to 5.8 percent in the fourth quarter of 2011.

Areas with the lowest multifamily vacancy rates presently are San Jose, Calif.; Miami; Boston; and Portland, Ore., with vacancies in a range around 4 percent.

Average apartment rent is likely to rise 0.2 percent this year and another 1.4 percent in 2011. Multifamily net absorption should be 85,200 units in 59 tracked metro areas this year, and another 147,000 in 2011. NAR Report and Link to site

U.S. office sector will be the slowest to recover

By Dan Levy
Nov. 23 (Bloomberg) -- The U.S. office sector will be the slowest to recover as companies absorb empty space and advances in technology reduce the need for square footage, said Kenneth Rosen, a professor at the University of California, Berkeley.

Unoccupied “shadow inventory” accounts for 3 percent to 5 percent of total business leases, and that space will be filled before firms sign new rental agreements, Rosen, chairman of Berkeley’s Fisher Center for Real Estate and Urban Economics, said at a conference in San Francisco. Cloud computing and other tech advances let employees work away from offices, further reducing space needs, he said.

“Every company has shadow space,” Rosen, who also runs Berkeley-based hedge fund Rosen Real Estate Securities LLC, said in an interview yesterday. Most U.S. cities face prolonged vacancies because of the surplus, excepting Washington, New York, San Francisco, Boston and parts of the Silicon Valley, where technology and venture capital spur leasing, he said.

“If you’re in the knowledge-based industries such as VC, everything ‘green’ and social media, there is a large, growing demand for space,” Rosen said.

The average vacancy rate in U.S. central business districts fell to 14.7 percent in the third quarter from 14.8 percent in the second quarter, Cushman & Wakefield Inc. said last month. The overall rate including suburban areas rose to 17.5 percent, the highest since 1993, from 17.4 percent, according to the New York-based broker.

Prices for U.S. commercial property rose in September after falling to an eight-year low the previous month, Moody’s Investors Service said yesterday. Demand for the best office buildings in major markets pushed up the Moody’s/REAL Commercial Property Price Index 0.3 percent from a year earlier as investors sought returns higher than fixed income. Prices gained 4.3 percent from August.

Rise in CMBS

The issuance of commercial mortgage backed securities is likely to increase to $25 billion next year and $60 billion by 2013, driven by investors in highly rated portions who demand more conservative underwriting and protection, Rosen said. CMBS peaked at $234 billion in 2007 before the credit bubble burst and sales plunged 95 percent the following year, according to data compiled by Bloomberg.

Demographic trends, the high cost of new construction and record home foreclosures make companies that own apartments good investments, according to Rosen. Senior housing is a “sweet spot,” as are multifamily properties in cities with workers aged 20 to 34, he said.

Interest rates on 10-year Treasury notes will rise to as high as 5.5 percent in two to three years, so real estate investors with good credit and long-term tenants should take advantage of current low rates, Rosen said.

Expect a continuation of commercial property defaults nationwide

"Probably another 12 to 24 more months

of rent declines, we can expect a continuation

of commercial property defaults nationwide"

Clearwater, FL (Vocus/PRWEB)
November 16, 2010
Guardian Solutions

Last month, investment group Paulson and Co., Blackstone Group, and Centerbridge Partners purchased bankrupt hotel corporation Extended Stay Inc. (which operates more than 600 hotels), for $3.93 billion, less than half what previous owner Lightstone Group paid for it at the height of the real estate boom in 2007.

While this is the largest commercial real estate sale so far this year, it happens to be a distressed based transaction, according to Guardian Solutions. Distressed asset sales are alarmingly becoming more commonplace in today’s economic climate as struggling commercial property owners are forced to sell at a loss.

“Because there’s still an estimated $3.5 trillion of loans outstanding and probably another 12 to 24 more months of rent declines, we can expect a continuation of commercial property defaults nationwide," says Ira J. Friedman, President of Guardian Solutions, a Florida based commercial loan restructuring firm.

The latest release of the Moody’s/REAL Commercial Property Index showed a notable monthly decline of 3.3% since July suggesting that the nation’s commercial property markets are continuing to slump through a tremendous downturn that has seen prices down some 45.31% since the peak set in October 2007.

Major challenges still lay ahead for commercial real estate, including the uncertainty related to the use of valuations such as cap rates and comps; the manner in which these metrics are employed, directly affect the outcome of proposed sales as well as alternative solutions like loan restructures for distressed properties.

One group of commercial property owners who were able to successfully renegotiate mortgage restructures for two of their hotel properties through Guardian Solutions was AllStar Investments, LLC.

“Guardian Solutions took what appeared to be a hopeless situation for two of our hotels and turned them both around. They negotiated a discounted buy-out of the notes at approximately .60 cents on the dollar,” said an AllStar Representative.

In August 2010 more than one in four commercial property sales involved distressed real estate, according to Moody's. During that month, U.S. commercial property prices also fell to their lowest level since June 2002, according to the Moody's/REAL Commercial Property Price Index.

Shrewd investors with substantial cash on hand who can afford to sit out an uncertain market are banking on the economy to rebound and see appreciable gains on their investment down the road. But how long they will have to wait is anyone’s guess.

“In order for these types of buyout deals to work, investors are buying properties at deep discounts from the market highs of previous years; the intent is to turn them into performing assets at today's market price," added Friedman. "Some of what you are seeing is investors seizing the opportunity to buy established commercial properties for less than what it would cost to build. It is a potentially faster path to profitability than with a start-up."

Guardian Solutions Link

Attention REIT Buyers: Hidden Impact of Slimmed Down (a.k.a. voluntary downsizing) Stores

This " voluntary downsizing" , whether by

the mall ownership or the retailer,

has mostly negative implications.

Analysis by Kenneth Leonard
Kenneth Leonard Bio
Gerson Lehman Group
11/15/10

Summary

An article titled "BIG STORES SLIM DOWN IN A BID TO FATTEN PROFITS" in the 11/10 issue of the NYT, caught my eye and prompted me to comment for the benefit of any GLG reader who closely follows the Mall REIT industry. The impact of this growing activity is poorly understood and the NYT article did not contribute to this lack of information.

Analysis

The first thing any analyst should take away from this article is that the writer is simply not familiar with the industry she is covering. She writes about this activity as if it were a phenomenon when in actuality it is simply a recurring activity. It is not well understood because most people do not notice it when it happens. In fact, neither the stores nor the malls in which it occurs, have any interest in calling attention to this occurrence.

This " voluntary downsizing" , whether by the mall ownership or the retailer, has mostly negative implications.

For the retailer it means that they have badly misjudged the market or sales potential and must pay for their mistake until the end of their lease term. Their rent and CAM charges continue for the entire space so if they reduce their size by 50%, they have effectively doubled their occupancy costs. It also means that they will be making substantial and costly adjustments to their basic prototype and buying patterns. The only good thing that comes from this enforced downsizing is that they will have less inventory and less employee help on the floor.

When the mall ownership is forced to lease only the front portion of vacant mall stores because of poor demand for deep spaces, it has an even greater impact on the bottom line of "the downsizer". The most obvious cost is that the tenant who only pays for a portion of the space available between the four walls of their proposed space, is doing so for the entire length of their lease.

Take for example a typical 20'x100', 2000 sf, vacant storeroom in any mall anywhere. If the only tenant available is only willing to lease the "front" 20'x50', 1000 sf space, (which happens more times than owners of underperforming mall REITs care to admit), the mall owner has not only lost the income from 1000sf of space that he built or bought for approximately $200.00 psf, but he must now take the pro rata share of CAM and RE Taxes out of his own pocket to pay for what that tenant did not lease. This situation is fixed for the entire term of the lease because there is no way to lease the "back" portion of that space for the entire term of the lease.

In the typical under performing regional mall this type of downsizing occurs quite frequently. Whenever any prospective investor is attempting to evaluate the true market value of any "C" level mall, they must be careful to add this hidden vacancy rate to the actual vacancy rates or they will find that they are buying much more vacant space than they bargained for. Additionally, this type of vacant space has virtually no chance of ever being leased.

Manhattan are rising...what about those vacancies??

Maybe no one's to blame for New York's

retail malaise -- but the truth won't change by

anyone pretending that it doesn't exist.

New York Post
11/9/10

It's just dandy that asking rents for retail spaces in certain tourist-trampled parts of Manhattan are rising, as the Real Estate Board of New York reported yesterday. We're even told that since last spring ground-floor asking rents in Times Square jumped to $1,700 per square foot -- for a 21-percent increase since that time.

To which most New Yorkers with eyes will respond: oh, please. And not just because asking rents often bear little relation to actual rents.

While REBNY notes that "vacancies persist . . . beyond the popular and well-known shopping corridors," it omits what's obvious to any attentive pedestrian: namely, that oodles of vacancies exist within those supposedly white-hot zones as well.

Worse, they're proliferating, even at heavily trafficked corners. What a miserable signal they send at a time when New York's status as world financial capital is jeopardized as never before. And how puzzling, given that most of the city enjoys a low crime rate and quality of life immeasurably improved over even 15 years ago.

Manhattan's widespread, chronic store vacancies are far more numerous than in other major world cities and were so even before the financial crash two years ago. But the culture of self-congratulation in the retail-leasing industry is so entrenched, it's almost impossible to get an acknowledgement of how dysfunctional our retail climate can seem to even casual observers.

The REBNY report is based on findings of an advisory board of -- guess who? -- retail brokers. They can hide behind fantasies of propaganda about European designers supposedly eyeing Manhattan, but they can't hide windows-full of "Prime Retail Location" signs. They're everywhere -- the whole Wall Street area, Bleecker Street, Third Avenue above 42nd Street, West 57th Street.

At many prominent locations, stores remain vacant for years, lending an air of defeat. Think of the Eighth Avenue side of the new Hearst tower; the former Times Square Theater on West 42nd Street, where Marc Ecko walked away from a deal after tying up the site for four years; and huge spaces in the Flatiron district that have stood dark seemingly forever.

REBNY counts 110 million square feet of Manhattan retail space. Yet -- strangely for a trade organization so statistically astute -- it doesn't cite a vacancy rate.

We'd guess that's at least 12 percent overall and far higher in certain parts of town -- astonishing in a city blessed with incalculably wealthy shoppers and probably the heaviest sidewalk traffic in the Western world.

Vacancies were even higher in the late 1980s and early '90s due to a glut of overpriced space in new buildings, when developers needed to realize the unrealistic rents they promised banks in pro forma statements. But today, there isn't that much ground-level retail in new buildings.

Something's more fundamentally out of kilter in the calculus of what tenants can pay; how little landlords seem to need retail rent income (or they wouldn't let spaces stand empty so long); and the leeway lenders give them in letting them carry the black holes indefinitely. Complete article
























 









Steve Cuozzo

Commercial Real Estate's EXTEND and PRETEND Uneven Rebound

By Venessa Wong
Bloomberg/Businessweek
11/4/10

In October, an investment group that included Blackstone Group (BX), Paulson and Co., and Centerbridge Partners purchased Extended Stay, a bankrupt U.S. hotel owner, for more than $3.9 billion, less than half what previous owner Lightstone Group paid for it at the peak of the real estate boom in 2007. While it is the biggest commercial real estate sale so far this year, according to CoStar Group (CSGP), a Washington (D.C.) real estate information and analytics company, it is also a reflection of the current U.S. commercial property market: distressed assets and struggling owners selling at a loss to investors with plenty of cash who can afford to wait for the economy to rebound.

Extended Stay was the victim of overleveraging by Lightstone and a drop in demand as the economic downturn dried up business for the midprice chain, which is based in Spartanburg, S.C."Nothing is wrong with the properties," says Bruce Ostly, an analyst in Portland, Ore., for Integra Realty Resources, a commercial real estate valuation and consulting firm. "The ownership got in trouble," Ostly says, "by buying and financing at the peak of the market based on inflated price."

In order for the market to pick up again, new owners must buy the properties and "make [them] work at today's price," says Brian Glanville, Integra's managing director and chairman of the real property board of RICS (Royal Institute of Chartered Surveyors) Americas. "What you're seeing is an opportunity to buy properties for less than what you can build them for today."

Obstinate Gap

In real estate, "you take risks, and you're rewarded if you're right," Glanville says. In the boom period from 2005 to 2007, many investors such as Lightstone bought at the wrong time and at the wrong price. The problem, he says, is that the market has not been allowed to function.

Commercial real estate values have fallen—by as much as 20 percent to 30 percent from peak levels in some markets—and a gap persists in most of the U.S. between what commercial real estate sellers want and what the buyers are willing to pay, says Glanville.

Extend and Pretend

Banks have modified loans, through a practice called "extend and pretend," to prevent owners from defaulting, but "the banks are no longer willing to carry them," he says. Owners "have to face reality now and see what they can get."

In August 2010 more than one in four sales involved distressed real estate, according to Moody's. During that month, U.S. commercial property prices also fell to their lowest level since June 2002, according to the Moody's/REAL Commercial Property Price Index.

Looking Up: Trophy Buildings

The situation is expected to get worse: More than one-third of the $270 billion in U.S. commercial real estate loans maturing in 2010 will be under water (or have mortgages greater than the value of the property), reported trade publication National Real Estate Investor. It expects the rate to grow to 63 percent by 2012.

Among the most stable segments: trophy buildings, whose prices have increased by 23 percent from their 2009 trough in such major cities as New York, San Francisco, Boston, Los Angeles, and Chicago as buyers and lenders seek secure investments, according to an Oct. 19 report on Bloomberg.com.

New data from Los Angeles-based commercial property giant CB Richard Ellis (CBG) show the national vacancy and availability rates for office, industrial, and retail space all exceeded 10 percent in the third quarter. The company predicts vacancies will decrease next year, although rents are expected to remain low due to the high availability of space.

Complete report



Commercial Real Estate Market May Be Recovering But It’s Going To Be A Long Journey

Real Estate Journal Online
11/4/10

There have been numerous reports saying that the commercial real estate market is faring better than the rest of the economy. While this may be true, a recent survey reveals that there should be caution in moving within the said market. The survey may agree with the reports, it also reveals that growth is but incremental.

The Real Estate Roundtable released its fourth quarter survey of over 110 senior commercial real estate executives and it agrees that the market indeed is improving, along with prices, transaction volume, and even access to capital. The survey, however, reveals that the improvement is mostly centered on “class A” properties that are well-leased and well-located. The respondents also talked of debt and equity shortage.

Since the start of the year, the overall Sentiment Index had a relatively flat trajectory but saw a one point drop this quarter to 73. The number will most likely stay that way as respondents say economy might not be “much better” a year from now but will only be “somewhat better”.

“Positive opportunities certainly exist; however, our industry overall will continue to be weak until the job market improves. More than anything, we need a return to hiring, which would boost consumer spending, lift occupancy levels and operating income, and begin to repair the dramatic erosion of commercial property values, which are fundamental to owners’ ability to obtain debt and equity capital. That’s why we continue to urge policymakers to look at policy ideas through a ‘job creating prism,’” says Roundtable Chairman Daniel M. Neidich (Dune Real Estate Partners).

Jobs are very important in spearheading the economic growth. With job creation remaining low, this should give everyone a cue to stay cautious.

Debt availability also gained little support from respondents as those saying it is “somewhat better” outweighs those saying it is “much better”. There was also a slight increase in percentage of those admitting debt availability is “somewhat worse” this year.

Even in the equity side, those saying that equity availability is better have declined from last year’s. And those saying that the situation is “about the same” saw a 2% increase in the fourth quarter survey.

The signs may be good for the commercial real estate market. This is no reason, though, to be reckless as much work still needs to be done for the market to function properly as before.

 RE Journal Online

Shhh, don't wake up REIT buyers but Wells Fargo VP says commercial real estate is relying on Corporate America to "Pull us out of the ditch"

"The recovery of the commercial real estate market

is going to depend nearly exclusively on corporate America,

and that sector is currently not spending."

Bryan Ellis Real Estate Letter

11/4/10

Williamsburg, VA – Carlos Evans, executive vice president and group head of the Eastern division of Wells Fargo National Commercial Banking described an oddly bleak yet optimistic scenario this morning during his speech at the “Reinventing Real Estate” conference at the College of William and Mary. Evans, who bemusedly described the ordeal that Wells Fargo and the other big banks have undergone since 2008 by saying, “today, people think banks are like a piñata; if you just keep whacking at them good stuff comes out,” believes that “there is no hiding that the banks were part of the problem” of the “perfect storm” that hit the lending and real estate markets in 2008. However, he firmly believes that the one remaining “leg” of commercial real estate that is intact will pull the entire industry “out of the ditch” it is currently in.

Evans believes the commercial real estate market recovery will happen when 3 “legs” of support are in place: construction, public (city/local government) funding and corporate America.

Evans described his outlook on the remainder of 2010 saying simply: “Things are getting better.” However, he elaborated, construction spending, which is usually the primary source for recovery in the commercial market, is “not going to be there” in 2010 or 2011 – and possibly not for longer than that. Additionally, he added, public spending is also likely to be greatly reduced due to local governments’ own set of budget problems. As a result, he said, the recovery of the commercial real estate market is going to depend nearly exclusively on corporate America, and that sector is currently not spending.

There are some bright spots indicating that the spending could start soon, though. Not only is credit availability improving, but activity in capital markets is also on the rise. However, until businesses start borrowing and spending some of the capital that they are earning, Evans pointed out, the recovery will be a “slow, long pull.” While companies used to tap, on average, about 50 percent of their potential, now they are down to tapping about 30 percent, he said – and that number has been on the decline for the past 30 months.

However, “it is totally against the grain for American businesses to sit on the sidelines and pile up cash,” he reminded the audience, saying that all that is needed is a catalyst to “trigger” borrowing and spending. Evans speculated that the trigger could possibly be Tuesday’s elections, but believes that “Corporate America needs to see conviction in the government that something will be done about the level of debt in this country and the expense of programs in this country” in order to resume “business as usual” and return the commercial industry – and quite likely the job market along with it – to the “new normal.”

The Bryan Ellis Real Estate Letter has a reporter on site at the Reinventing Real Estate conference at the College of William & Mary in Williamsburg, Virginia. This article is based on information garnered from that conference. Link to Bryan Ellis Real Estate Letter

Boston Properties another example of the REIT Pump

Boston Properties (BXP) reported earnings on 10/26/10 and naturally Beat The Street. They managed to beat the consensus (a.k.a. collection of stock pumpers) by 4 pennies.

Boston Properties stock ($87.40 close on 11/2/10) has launched 30% year to date and 40% during the prior 12 months. During this meteoric rise in the stock price, the collection of stock pumpers quietly set consensus earnings and revenue targets below year ago figures.

Welcome to Wall Street, pump the stock while setting retracting fundamentals.

Boston Properties Q3 Earnings Report "Highlights"

• Funds from Operations (FFO) for the quarter were $150.8 million, or $1.08 per share basic and $1.07 per share diluted. This compares to FFO for the quarter ended 9/30/2009 of $158.5 million, or $1.14 per share basic and $1.13 per share diluted
• Net income available to common shareholders was $57.7 million for the quarter compared to $65.8 million for the quarter ended 9/30/2009. Net income available to common shareholders per share (EPS) for the quarter was $0.41 basic and $0.41 on a diluted basis. This compares to EPS for the third quarter of 2009 of $0.47 basic and $0.47 on a diluted basis.
• The overall percentage of leased space for the 139 properties in service as of September 30, 2010 was 93.4%.
• Revenue climbed to $388.2 million from $377.3 million. Analysts were predicting revenue of $368.6 million. Rental revenue rose to nearly $372 million from $359.4 million.
• Expenses grew to $331.7 million from $308.4 million

Boston Properties Guidance and Grandpa's Notes

• Q4 2010, FFO $1.09 to $1.12 (stock pumpers est. is $1.09)
• NOTE: Q4 2009 actual FFO was $1.15
• NOTE: the pumpers have a 2010 FY FFO target of $4.33
• Fiscal Year 2011, FFO $4.20 to $4.40 (stock pumpers est. is $4.42)
• NOTE: Fiscal Year 2009 FFO was $4.71

BXP stock has launched 30% year to date and 40% during the prior 12 months yet the company expects fiscal year 2011 FFO to come in 6.6% to 10.8% less than FY 2009. The stock pumpers consensus guesstimate for 2011 FFO is 6.2% less than FY 2009!

At $87.40, BXP has a PE of roughly 20.2 based on 2010 estimates and 19.78 based on 2011 estimates.

Wall Street stock pumpers love American equity buyers.

I unloaded my largest client's shares of BXP and now I'm

Short...like taking candy from a baby...

Vornado Realty Trust: some analysts and investors said this may be as good as it gets for now

But some investors and analysts are raising

questions about how much growth can be

expected from Vornado

By A.D. PRUITT
Wall Street Journal
11/2/10

Vornado Realty Trust, one of the nation's largest commercial landlords, reported a 26% decline in third-quarter profit, but the results were stronger than expected as the company benefited from higher rents and occupancy levels at its retail properties.

The results, released Tuesday, suggest that commercial-property markets in the nation's urban centers are on the mend. But some investors and analysts are raising questions about how much growth can be expected from Vornado and its shares, which last week hit a 52-week high.

Excluding debt-related payments and other items, funds from operations—a profitability metric for real-estate investment trusts—rose to $1.22 a share in the third quarter from $1.18 a share in the same period last year. Profit fell to $104.3 million, or 52 cents a share, from the year-ago period when the company benefited from a gain from discontinued operations. Revenue rose 5.3%, to $707 million.

Vornado has benefited from strong leasing and rental rates in Washington, D.C., where demand for office space from the federal government has propped up the market. Another core market, New York City, has seen rents and occupancy declines stabilize.

The company's results come in the wake of stronger-than-expected earnings recently reported by other office REITs Boston Properties Inc. and SL Green Realty.

But with Vornado's stock up 24% since the beginning of the year, some analysts and investors said this may be as good as it gets for now. Acquisitions have been difficult because few desirable properties have come to market and when they have prices have been bid up.

"Vornado is so large there is a constant concern on how they can deploy capital in such a way that will help to grow the wealth of the company. It takes a lot to move the needle," said Michael Knott, an analyst at Green Street Advisors.

He said there has been an element of surprise with the company in terms of their investment choices, including its recent 9.9% stake in retailer J.C. Penney Co. "I think there is an uncertainty or complexity discount priced into the stock that's been pretty consistent," Mr. Knott said.

Grandpa's 2 cents worth on Vornado

Fitch: US CMBS continue to default at a record pace (10.6% In 3Q ) "Trick or REIT"

"Trick or Treat REIT

'Loans continue to default at a record

pace, with large loans driving the trend,'

said Fitch Managing Director Mary MacNeill.

'Hotel and office properties were the largest

contributors to defaults this past quarter.'

(Q3 2010 default rate up 61% since Q4 2009)

By Matt Jarzemsky (Dow Jones Newswires)

The Wall Street Journal
10/22/10
The default rate for loans in U.S. commercial mortgage-backed securities increased to 10.6% in the third quarter as debt continued to sour, Fitch Ratings said Friday.

The rate at the end of the third quarter was up from the second quarter's 9.48% and 6.59% at the end of last year, the rating agency said.

Commercial real estate has been pummelled as occupancy rates and rents languish, pressuring property owners. The sharp drop in property values has left landlords often reluctant or unable to sell their properties to repay loans.

So far this year, $21.66 billion in such loans have defaulted, up from $17.75 billion for all of 2009, the rating agency said Friday. The number of loan defaults, 1,452, was nearly equal to last year's 1,464.

Loans originated in 2000 and 2005 each saw third-quarter default rates increase more than 1 percentage point from the spring--commercial property debt often has a five- or 10-year term--as did loans made in 2007, the height of the market's frenzy.

Hotel and office properties had the biggest increases in defaults, rising 2.86 and 1.15 percentage points, respectively.

Fitch currently has $26.9 billion of its fixed-rate commercial mortgage-backed securities on watch for downgrade and has a negative outlook on an additional $42 billion.

REITS continue to launch while earnings remain in question...the usual equity market "when you wish upon a star"

Sing A Long with REITS...

Like a bolt out of the blue

Fate steps in and sees you through

When you wish upon a star

Your dreams come true

By A.D. Pruitt
The Wall Street Journal
10/19/10

As earnings season gets under way for real estate investment trusts (REITS), analysts are warning it isn't going to be pretty.

High vacancy rates and low market rents are continuing to drain cash flows from office, retail and industrial buildings even as many analysts and economists predict an industry bottom will emerge this year. Hotel and apartment companies are expected to be the strongest performers given an increase in corporate and leisure travel and a growing population of renters.

"I think earnings will be weak. The idea we're going to have robust earnings is just not going to happen in most property sectors," says Mike Kirby, director of research for Green Street Advisors, a firm based in Newport Beach, Calif., that closely tracks REITs.

But the tepid earnings represent a disconnect from the performance of REIT stocks this year, which have outshone the broader market.

For instance, The Dow Jones All Equity REIT index, which tracks 155 REITs, was up 12.8% for the third quarter compared with returns of roughly 10% for the Standard & Poor's 500-stock index and the Dow Jones Industrial Average.

The reason: Investors are looking past the current weak fundamentals and into next year, where a strong recovery is expected to take root.

REITs also are benefiting from the greater availability of credit in commercial real estate and the hunger of investors for higher yields.

Most REITs pay substantial dividends because of the rule that they must pay at least 90% of their taxable income out as dividends.

But dividends at some REITs may come under pressure if rents and occupancy rates continue to fall.

Mr. Kirby anticipates weakness in both property-level earnings and funds from operations, a key profitability measure for REITs that translates into earnings before depreciation and amortization.

"In most property sectors, vacancy rates remain very high and rents are staying quite low," Mr. Kirby said. He said, in general, fundamentals are bouncing along the bottom and cash flows are still declining, albeit slightly.

The office vacancy rate was 17.6% for the third quarter, a 17-year high, according to research firm Reis Inc. The firm noted effective rents have declined 12% to $22.04 a square foot from the peak in 2008. But the rate of deterioration slowed in the third quarter in a sign the market is stabilizing.

Richard Anderson, an analyst at BMO Capital Markets, says the earnings releases for Boston Properties Inc. and Vornado Realty Trust will serve as bellwethers for the market.

"There are pockets of optimism, [but] as a general rule, the office business remains weak," Mr. Anderson says. "It remains a tenant's market for the most part. They are negotiating better deals for themselves [and] are reluctant to make long-term commitments to their space, as the economy remains in a state of flux."

For retail, the vacancy rate hit 10.9% for the third quarter, close to the historic high of 11% in 1990, and the firm projects the national warehouse vacancy rate to reach 11.7% by the end of 2010, a 0.3-percentage-point-increase from the end of 2009, according to Reis.

Earnings from hotels and apartment operators are expected to come in relatively stronger compared with other sectors, although they will likely be far from robust.

Host Hotels and Resorts Inc. last week said third-quarter funds from operations were flat on a per-share basis at 11 cents, but revenue rose 11% to $1 billion. The lodging sector, one of the hardest-hit during the economic downturn, has been on the mend as steep cuts in rates draw in more corporate and leisure travel.

Haendel St. Juste, an apartment REIT analyst at Keefe, Bruyette & Woods, said earnings by apartment operators should improve sharply because demand for rentals has surged amid the housing crisis.

"People don't want to buy, they want to rent these days," said Mr. St. Juste, referring to the wave of national foreclosures and perceived disincentives to buy new homes. He noted that every 1% decline in home ownership adds 1 million to 1.5 million new renters to the market.

His firm expects average funds from operations for apartment operators to decline about 3% during the third quarter from the same period last year.

The national apartment vacancy rate stood at 7.2% at the end of third quarter, according to Reis. That was down from the second quarter's 7.8% and 7.9% at the end of the third quarter a year ago.