CIBC World Markets Forecast
Rents Signal Rise of D.C., Fall of N.Y
The office market in Washington, D.C., is
poised to topple New York as the nation's most expensive, reflecting the
declining fortunes of the nation's financial center and the government
expansion under way in the U.S. capital.
Rents declined in almost all of the 79
American cities tracked by Reis Inc., a New York based-research firm, in the
fourth quarter of 2009. The largest fall was in New York, where average
effective rents -- or the net amount tenants pay after landlord concessions --
fell nearly 20% to $44.69 per square foot annually. It was the sharpest decline
in rents ever recorded by Reis since it began compiling data in 1981.
By contrast, average rents in Washington
were $41.77 per square foot, down 3% annually. Reis estimates that by the end
of this year, rents in New York will come down to around $41.07, slightly below
their estimates for Washington of $41.27.
Much of the demand comes from an expanding
federal government and contractors and companies that need close access to the
government. Of the 16 largest leasing transactions in Washington last year, 10
were by government agencies, according to tenant-brokerage firm Studley. In the
fourth quarter of 2009 alone, the Department of Agriculture leased 330,000
square feet in southwest Washington, and the General Services Administration,
which handles leases for government agencies, added 1.4 million square feet of
new leased office space last year, bringing its total in Washington to 8.4
million.
More government leases are in the pipeline.
The Department of Homeland Security is currently looking to lease an additional
1.1 million square feet of space, whereas the Department of Veterans Affairs is
seeking about 300,000 square feet, according to a person who follows the
market.
An increasing number of corporations are
also moving to the Washington area, often to be closer to government power
brokers. Northrop Grumman Corp. announced earlier this week that it will
relocate to the Washington, D.C., area from Los Angeles. Northrop said it
wanted to be closer to its main clients, the Department of Defense and
intelligence agencies, and Congress, which controls appropriations. Hilton
Hotels Corp. relocated its headquarters from Beverly Hills to the Washington
area last year, saying it needed to be closer to Europe.
The aerospace firm will choose its new
headquarters site, which will house about 300 corporate employees, after
receiving incentive proposals from officials in Virginia, Maryland and
Washington, D.C., a spokesman said.
Tishman Speyer, one of the country's largest
real-estate companies with about 51 million square feet in its U.S. office
portfolio, slashed its rents in New York by 50% from 2007, an adjustment that
brokers say happened marketwide. In December, the company signed roughly 1
million square feet of leases in New York, a firm record.
Nationwide, Tishman signed about 2.25
million square feet of leases in the first half of 2009. In the second half of
the year, it signed more than double that amount, 4.8 million, according to
co-CEO Rob Speyer. - 2010
January 8 WALL
ST. JOURNAL
Office Rents Dive as Vacancies Rise
Rent for office space is falling at the
fastest pace in more than a decade as vacancies create a glut and landlords
slash prices to attract tenants.
Nationwide, effective office rents fell 8.5%
in the third quarter compared with the same period a year ago, the steepest
year-over-year decline since 1995, according to Reis Inc., a New York
real-estate research firm.
The decline came as companies returned a net
19.6 million square feet of space to landlords in the third quarter, slightly
more than in the second quarter. For the first three quarters of this year, the
net decline in occupied space totaled a record 64.2 million square feet, the
highest so-called negative absorption recorded since Reis began tracking the
data in 1980. (That doesn't count space that left the market as a result of the
2001 terrorist attacks.)
The vacancy rate, meanwhile, hit 16.5%, a
five-year high, according to Reis.
Declining rents and rising vacancies in the
office sector signal more woes for the commercial-real-estate market, which
already faces a lack of credit and plummeting property values. With landlords
more likely to default, financial institutions, which hold trillions of dollars
in commercial-real-estate debt also face more pain. "It means more losses
for the banks, because they will have to write off more bad debt," said
Victor Calanog, director of research for Reis.
For tenants, however, falling rents
represent opportunities to save. Landlords are offering concessions, in the
form of free rent and build-out costs. "There's a recognition [from some
companies] that this is probably a bottom, let me lock in long term," said
Mary Ann Tighe, a New York-based leasing broker with CB Richard Ellis, who has
negotiated corporate relocations for tenants including advertising firm Ogilvy
& Mather and retailer Limited Brands
As bad as the current environment is for
landlords, analysts say it will worsen as unemployment continues to rise.
"Even though the technical recession may be over, the labor market
typically takes anywhere from 18 to 24 months to bounce back in a consistent
way," said Mr. Calanog, who predicts vacancy will rise through 2010 and
may not peak until 2011. "If employers are still shedding jobs, they are
also going to shed space."
Vacancies are highest in areas with poor
housing markets and industrial cities. They are approaching historic highs in
Southern California; Las Vegas; Phoenix; southwest Florida; Detroit; Dayton,
Ohio; and Hartford, Conn. Other cities, including Dallas and other parts of
Texas, and Atlanta, are seeing high vacancy rates largely as a result of
overbuilding.
Rent declines were steepest in big cities
with large financial sectors, which saw the greatest run-up in rents in 2006
and 2007. They include Seattle, which has been slammed by the failure of
Washington Mutual Inc., New York and San Francisco. But the office market
deteriorated broadly across virtually all regions: Of the 79 metro areas that
Reis tracks, office vacancies rose in 72 of them and effective rents declined
in 68 of them.
In Boston, intellectual-property law firm
Fish & Richardson PC recently signed a lease for 124,000 square feet of
space in a new development under construction on the South Boston waterfront,
paying about $48 a foot with about $85 a foot in tenant improvements from the
landlord, according to a person familiar with the deal -- compared with the
roughly $55 a foot the firm is paying now to landlord Equity Office.
In its attempt to persuade the tenant to
stay, Equity Office, which is owned by private-equity firm The Blackstone
Group, initially offered the firm $84.50 a foot in December 2007, but dropped
the price over time to stay competitive and sent wine and champagne gift
baskets to all of the firm's 45 principals, according to Tim French, Fish &
Richardson's Boston managing principal.
"We were like the belle of the
ball," said Mr. French. -
2009 October 8 WALL
ST JOURNAL
A new Deutsche Bank research report looks at markets that potentially have the
hardest to fall and finds the NY region the most vulnerable, with a 47% price
plunge possible. Does that seem severe? Maybe. But we could see it, given that
New York is at the epicenter of the weakest industries in the world: Wall
Street, law and media.
Macquire Properties Warns of Loan Defaults
Creditors to Get Seven Buildings with
$1.06 Billion in Debt; Vacancies and Falling Rents Pressure Landlord
Maguire Properties Inc., one
of the largest office-building owners in Southern California, is planning to
hand over control of seven buildings with some $1.06 billion in debt to
creditors, the latest sign that rising vacancies and falling rents are causing
stress in the commercial real-estate sector.
Maguire, which borrowed heavily during the
go-go years to make disastrous top-of-the-market investments, mostly in Orange
County, notified the buildings' mortgage holders Friday that it expected
"imminent default" on the loans. The buildings are all worth less
then their mortgages and aren't generating enough cash to pay debt service and
finance leasing expenses.
Maguire's problems are an example of the
mounting pain among owners and lenders to office buildings, stores, hotels and
other commercial real estate that is causing concern among banks and regulators
that the sector may drag down a hoped-for economic recovery just as it is
getting started. Initially, a dearth of financing caused the distress. But
Maguire's problems show that falling rents and rising vacancies are causing
landlords to run out of cash.
Robert Maguire, the developer who founded
the company and took it public as a real-estate investment trust in 2003,
bought properties during the years before the bust on the assumption that rents
would continue rising. But just the opposite has happened in Orange County,
where the vacancy rate hovers around 20%, up from 6% three years ago, according
to Maguire.
Chief Executive Nelson Rising, who was
brought in by the company's board last year to succeed Mr. Maguire, said in an
interview that restructuring the debt on six of the buildings, located in
Orange County and Los Angeles, is one possibility. But he said the most likely
scenario is that the mortgage holders will take over the properties and try to
sell them. Maguire already has a deal to turn over one of the buildings, Park
Place One, in Irvine, Calif., to LBA Realty, a real-estate company that
acquired the debt on the property at a discount in the spring. A telephone call
placed to LBA's principal wasn't returned.
The debt on the other six properties was
packaged by Wall Street firms and sold as commercial mortgage backed
securities, or CMBS, to dozens of institutional investors. Mr. Rising said that
Maguire would work closely with the servicers of that debt to transfer control
of the buildings. The seven buildings, with 4.2 million square feet, make up
about 20% of Maguire's portfolio.
Maguire, scheduled to release its
second-quarter earnings Monday, will take a $345 million charge on the
properties' loss in value. The company also is set to report a net loss of $380
million for the quarter, compared with a net loss of $110 million a year
earlier.
Mr. Rising has succeeded in reducing
Maguire's debt by about $1.6 billion. His plan has been to sell or give back to
lenders troubled properties and shore up Maguire's balance sheet to the point
that it is able to raise capital like other real-estate investment trusts have
been doing.
But Maguire's future still looks dicey. The
company still has $3.5 billion in debt, and some analysts say that amount
exceeds the value of its remaining properties. "Almost every building in
[Maguire's] portfolio is under water," says Michael Knott, an analyst with
Green Street Advisors. "I don't envy some of the choices that they are
having to make."
Maguire's stock, which traded around $12 a
share one year ago, has been trading below $1 a share in recent months, a sign
that many investors expect the company to fail.
Mr. Rising acknowledged that Maguire is
encumbered with properties that are cash-flow negative, including three
recently constructed buildings. But he expressed cautious optimism that the
company would be able to dig out of its problems. "With this particular
initiative we've made a big step," he said.
Landlords throughout the country are
watching the cash flows of their buildings dwindle. Office vacancies nationally
hit 15.4% as of June 30, up one percentage point from a year earlier, as
businesses dumped 25 million square feet of space on the market, according to
Colliers International.
Not only are vacancies rising, but landlords
often have to cut rents when tenants renew their leases to keep the tenants.
Owners also have to lay out incentive packages to attract tenants by offering
them interior build-outs and months of free rent. Mr. Rising estimated that it
would have cost Maguire about $31 million a year to keep the seven buildings
because they weren't generating enough money to pay these and other expenses
and debt service.
While these trends are clobbering landlords,
tenants who have the good fortune to be in the market for space are getting
deals. For example, accounting firm Moore Stephens Wurth Frazer & Torbet
signed a $3.35 million, seven-year lease a few months ago for 19,000 square
feet of space in a Maguire-owned building in Brea, Calif.
Maguire cut its initial rent offer by about
20% to $25 per square foot and offered generous incentives: footing the bill
for the space's renovation and charging only a $10,000 monthly rent for the
first year, according to John Metzen, Moore's administrator. "We got what
we thought was an incredible deal," said Mr. Metzen, whose firm was
represented by CB Richard Ellis. - 2009
August 10 WALL
ST JOURNAL
Worse in store for US commercial property
The US commercial real estate market is bad
and investors expect it to get a whole lot worse, according to a closely
followed survey by PricewaterhouseCoopers.
'As investors painfully watch the value of
their assets decline, many feel troubled knowing that the ills of the US
economic recession have yet to fully impact the commercial real estate
industry,' starts the first- quarter Korpacz Real Estate Investor Survey of
more than 100 investors from real estate investment trusts, pension funds,
private equity firms and insurance and mortgage firms.
Many investors are struggling with ways to
preserve the value of their investments and maintain ownership in the wake of
restricted debt sources, declining tenant demand, and falling values, the
survey said.
Investors do not expect the commercial real
estate sector to rebound until well into 2010 at the earliest.
'Investors are not expecting this recovery,
when it does happen, to be a sharp recovery where it hits bottom and bounces
up,' said Susan Smith, a director at PricewaterhouseCoopers in the real estate
group and the survey's editor. 'It's going to be a very slow sluggish
recovery,' she said. 'There are just too many things right now that are
impacting the industry to make investors very confident about what's going on,'
she said.
Some property owners are lowering rental
rates and increasing concessions, which results in lower revenue.
Compared to a year ago, the average amount
of free rent landlords are offering has increased to six month in several major
office markets, such as Boston, where it rose from 2.15 months; Manhattan,
where it grew from 41/2 months and San Francisco, where it rose from 31/2
months.
One investor in the survey suggested 'making
the best deal you can today because tomorrow's deal will be worse.' Investors
believe that the overall cap rates, or returns, for US commercial real estate
over the next six months will rise by an average 0.47 percentage points from
7.49 per cent in the first quarter 2009, the survey said. When cap rates rise,
prices fall.
In the retail real estate arena of malls and
shopping centres, investors expect power centres, home of the big box stores,
to lose value by the greatest amount, with cap rates rising by an average of
0.744 percentage points from 7.63 per cent, according to the survey. They see
cap rates for regional malls rising 0.65 percentage points.
Investors expect rent and occupancy for
retail properties to continue to decline in 2009, the survey said. Last year,
store closings rose 50.1 per cent to 6,913 and forecasts call for more than
8,000 store closings in 2009, according to the survey.
Most investors said they expect the eroding
fundamentals to press values down by 10 per cent to 26 per cent from the 2007
peak, with the most pessimistic investors seeing declines of about 40 per cent,
the survey said. - 2009
March 19 Reuters
Morgan warns of big fund writedown
A sign that pension funds and other
institutional investors are about to get clobbered by losses in commercial real
estate
Morgan Stanley has told investors to expect
a fourth-quarter writedown of up to 60 per cent on the equity in a marquee
$US8.8billion ($13.9 billion) real estate fund, according to a letter to
investors.
Morgan Stanley hailed the
commercial-property MSREF VI International fund as "the largest-ever real
estate fund" when it announced its debut in June 2007.
The Wall Street firm projected a 22.4 per
cent overall average annual return for the vehicle, which made big, highly
leveraged investments on commercial properties scattered in Japan, Germany,
China and Australia.
The fourth-quarter losses come on top of a
$US1 billion shortfall during the first nine months of last year, which means
the fund has lost about two-thirds of its $US6.5 billion in invested capital in
18 months. Among the fund's bad bets: a $US3 billion acquisition of more than
two dozen office buildings in Germany in July 2007 at a very low yield of 3.5
per cent.
The fund invested $US350 million of equity
in the project.
As of September, Morgan Stanley valued the
equity stake at just $US23 million, according to the fund's third-quarter
report reviewed by The Wall Street Journal.
MSREF and other "opportunity
funds" were among the many tantalising investments sold by Wall Street to
large institutions over the past five years. Opportunity funds are different
from other real estate funds in that they make extra use of borrowed money for
purchases, sometimes more than 70 per cent of the value of the properties,
compared with about 50 per cent for more traditional real estate investments.
The leverage makes it easier to produce higher profits if values rise. But if
they fall, the decline can quickly wipe out equity.
For the fund managers, there was another
benefit: opportunity funds rewarded them with high fees and a cut of any
increase in asset value.
Across Wall Street, the value of the assets
held by opportunity funds jumped from $US134 billion at the end of 2005 to
$US280 billion at the end of 2007.
Many of the buildings in the funds are now
worth less than their mortgages. Even worse, some of them are no longer
producing enough cash flow to service their debts, meaning the funds have to
invest more or face foreclosure. Industry experts say writedowns in excess of
50 per cent for 2008 will be typical.
The decline in asset values, however, has
been somewhat difficult to track.
That is because managers of such privately
held real estate funds have been slower to mark down values on properties than
publicly traded real estate companies. The appearance of dismal returns shows
how steep losses sustained by the commercial real estate industry are being
absorbed by retired teachers, policemen and other beneficiaries of the
institutions that were chasing the funds' high returns. The looming losses will
likely increase the pressure for higher taxes to shore up government-employee
pensions and more cutbacks at universities and foundations.
Particularly hard hit have been those
investors that came late to the real estate party.
Investors in MSREF include the Pennsylvania
fund responsible for investing school-teacher pensions and the Montana fund
that manages the pensions of state employees. Many of the other giant
investment banks, like Goldman Sachs and Lehman Brothers Holdings, also offered
opportunity funds, as did numerous boutique firms.
Cheap debt allowed the funds to leverage
their investments in commercial property and tout annual returns in excess of
30 per cent. Some funds that focused on real estate in Britain, where
appraisers have been more aggressive in marking down prices, have taken a
bigger beating. - 2009 March
5 WALL
ST JOURNAL
RETAIL
Retail Vacancies Hit Multiyear Highs
According to Reis Inc., a New York real-estate research firm, 10.3% of the
retail space at U.S. shopping centers -- open-air centers typically anchored by
a grocery store or big-box retailer -- was vacant in the third quarter. That
was up from 8.4% in the same period a year earlier and was the highest vacancy
rate since 1992. At enclosed malls, the vacancy rate rose two percentage points
to 8.6%, the highest rate since Reis began tracking mall data in 2000.
The hardest-hit retail properties were those completed this year. Of those,
30% opened half-empty or worse, according to Reis data, which cover the 77
largest U.S. markets.
Mall and shopping-center owners are reeling from two years of flat to
declining retail sales and waves of store closures. Many are still trying to
find tenants to fill hundreds of vacancies created by the closures last year
and early this year of chains including Linens 'n Things Inc., Circuit City
Stores Inc. and Gottschalks Inc. Meanwhile, the closures continue to mount,
with chains such as Blockbuster Inc., Hollywood Entertainment Corp.'s Game
Crazy, Zale Corp. and AnnTaylor Stores Corp. cumulatively closing more than
1,000 stores.
The Federal Reserve has tallied nearly 8,300 store closings announced by
retailers so far this year, including more than 1,500 large anchor stores. Last
year, the International Council of Shopping Centers, an industry trade
association, counted 6,900 such announced closures. The next-highest annual
total recorded by the trade association was 7,000 in 2001.
As demand for retail space plummeted, average retail lease rates continued
to decline in the third quarter, down 3.7% to $16.89 per square foot for
shopping centers and off 3.5% to $39.18 for malls. And the outlook for a
recovery in the near future appears bleak. "We don't see rent levels in
retail returning to 2008 levels until 2016," said Victor Calanog, Reis
director of research.
Glenn Rufrano, chief executive of Centro Properties Group, which owns 610 U.S. shopping centers, said Centro has
managed to find new tenants to occupy stores vacated by bankrupt retailers, but
only after making concessions.
Relief won't come soon. Market-research company Retail Metrics Inc. predicts
that the 31 retailers it tracks will report Thursday an average decline of 0.8%
in September sales at stores open at least a year. That would mark the 13th
consecutive month of same-store sales declines. In addition, the National
Retail Federation trade group disclosed its prediction Tuesday that this year's
holiday-season sales will amount to a 1% decline from last year's total. That
is on top of a 3.4% decline last year from 2007 levels.
"If sales are flat, plus or minus, that won't be so bad, especially
since our tenants are carrying lower inventories," Centro's Mr. Rufrano
said. "What we're hoping against are big negative sales over
Christmas."
Some retailers are holding off on expansion plans until they can see how
many closures occur after the holiday season and how willing landlords might be
to cut deals to fill that space. Shopping centers tend to suffer more vacancies
than malls because they house more local tenants. "The better malls are
still strong," said Larry Meyer, executive vice president at
affordable-fashion retailer Forever 21 Inc., which has opened dozens of stores
this year. - 2009
October 8 WALL
ST. JOURNAL
Vacancy rates at U.S. malls and shopping centers continued their steep rise
in the third quarter as slumping sales forced retailers to close stores.
Malls are seeing their highest vacancy rate since 2001, according to data
released by real-estate-research firm Reis Inc. For shopping centers, the rate
is the highest since 1994.
The developers of the Mall of America are
watching a bet on retail property in Las Vegas sour. Triple Five Group's
Village Square project has seen occupancy and rents plummet since 2007 and is
now delinquent on its mortgage.
Village Square, a retail and office property
spanning 237,834 square feet, is two months late on payments on its $60 million
securitized mortgage, according to a loan servicer's report. The 11-year-old
property anchored by a movie theater went from 95% occupancy upon the loan's
origination in 2007 to nearly 77% by the middle of last year. It recently
signed new leases at average rates of $24 a square foot, compared with its
historical rates of $30 to $45.
Edmonton, Canada-based Triple Five, is led
by the Ghermezian family. The Village Square project is located in Summerlin, a
master-planned community in the Las Vegas region that seems to be an epicenter
of property pain. The community is owned by mall owner General Growth
Properties Inc. in partnership with the Howard Hughes estate.
- 2009 Febrruary 10 WALL
ST. JOURNAL
US commercial property seen falling by
20%
But office properties should
fare relatively well over the near term, say JPMorgan analysts
(NEW
YORK) The US commercial real estate market could decline by as much as 20 per
cent over the next five to eight years as tighter credit squeezes business
property but with less ferocity than it choked the housing market.
'We
believe commercial real estate loan performance peaked in 2007 and will
deteriorate on an accelerating trajectory through 2009,' JPMorgan analysts said
on a conference call on Tuesday.
They
said they expect values to fall by 20 per cent from their peak last year, and
losses to total about US$120 billion, or 4 per cent of the US$3.2 trillion
outstanding commercial real estate loans.
Commercial
Mortgage Backed Securities (CMBS) would account for about US$30 billion of the
losses and collateralised debt obligations (CDOs) would account for about US$40
billion of the losses, they said.
CDOs
are bonds based on pools of the riskiest CMBS bonds, leases, mezzanine loans
and other real- estate related instruments.
CMBS,
including CDOs, accounted for 23.6 per cent of lending at the end of the third
quarter of 2007, JPMorgan said.
Problems
in the CMBS market will become apparent between 2010 and 2012, as many
five-year mortgages mature, the JPMorgan analysts said.
This
would lead the commercial property market into a more gradual decline than the
housing market, which has been slammed by losses related to sub-prime
mortgages. Those losses are expected to reach US$200 billion, or 15 per cent of
the US$1.25 trillion of outstanding loans, the JPMorgan analysts wrote in a
report discussed on the call.
Many
commercial properties have been financed with low-interest, five-year mortgages
that will have to be refinanced or the properties will have to be sold.
Lenders
who do not sell their loans but rather keep them on their balance sheets, such
as insurance companies and commercial banks, are expected to loose US$50
billion over the five-to-eight year period, giving them enough time to adjust
reserves, the JPMorgan analysts said.
'The
relatively conservative underwriting of banks and insurance companies is likely
to insulate them from many of the problems that will plague loans securitised
into fixed-rate CMBS,' the JPMorgan report said.
Moody's
Investors Service recently said it expected commercial property values to
decline 15-20 per cent over the next few years and the delinquency rate to
increase into the 1-2 per cent range.
But
Michael Pralle, former head of GE Real Estate and now president of JER
Partners, a real estate private equity firm, said real estate values already
have fallen by 10 per cent or 15 per cent. 'It's literally the arithmetic of
the lending.'
He said many buyers have lowered offers as they factor in the higher costs of borrowing
and lower amounts of cash available to borrow.
Office properties, the largest sector of the commercial real estate market '. . .
should fare relatively well over the near term due to the longer-term nature of
their underlying tenant leases', the JPMorgan analysts wrote. But, they added,
retail and hotel properties, which are very sensitive to changes in the overall
economy, are expected to underperform.
Benjamin Lambert, chairman of commercial real estate brokerage Eastdil Secured, said
values at the very top of the office market would slip slightly, but the
overall market may see values decline 10 per cent or 15 per cent. Eastdil
Secured is a subsidiary of Wells Fargo & Co.
JPMorgan analysts said they expected that the relatively restrained construction of
offices, apartment buildings, warehouses, shopping centres and hotels that
occurred between 2003 and 2007 would mitigate losses.
This compares to the residential market, which has suffered from a glut of houses
for sale.
JPMorgan also said declines would not be limited to the United States, adding that UK
commercial property prices are like to fall 23 per cent and commercial property
prices in Europe and Australia are apt to decline by 5 per cent to 10 per cent.
- 2008 March 6 REUTERS
U.S. commercial real estate may decline 21% by 2010
After suffering a beating from their
exposure to home loans, banks and securities firms are about to take their
lumps from office towers, hotels and other commercial real estate. And the
losses could last longer than those from the subprime shakeout.
As the economy wobbles and financing costs
rise because of the credit crunch, commercial-real-estate values are starting
to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21%
to 26% in the next two years. That means misery for securities firms with
exposure to commercial-real-estate loans and commercial- mortgage-backed
securities.
William Tanona, a Goldman analyst, expects
total write-downs of $7.2 billion by Bear Stearns Cos., Citigroup Inc., J.P.
Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co.
and Morgan Stanley in the first quarter. Those firms had combined
commercial-real-estate exposure of $141 billion at the end of the fourth
quarter.
If there is a silver lining, it is that the
excesses that overtook the U.S. housing market aren't as prevalent in
commercial real estate. Overbuilding of shopping malls, office parks and other
commercial property hasn't been rampant, although vacancy rates are climbing in
such markets as Orange County, Calif., and Las Vegas, which have been hit by
the weak housing market.
Market values of commercial-mortgage-backed
securities, which are pools of mortgages that are sliced up and sold to
investors as bonds, are down about 5% since late last year, compared with
declines of roughly 50% or more last year for some collateralized debt
obligations. CDOs are debt pools of repackaged residential-mortgage bonds, and
they have been brutally hit by losses on mortgage investments.
Overall, commercial-real-estate write-downs
in the first quarter are expected to rival those for CDOs and leveraged loans.
Mr. Tanona predicted write-downs of commercial-mortgage-backed securities
should "intensify" in the first quarter to $7.2 billion from $1.8
billion in the fourth quarter. By comparison, he foresees first-quarter
write-downs of $10 billion in CDOs and $5.8 billion in leveraged-loan
commitments.
So far, default rates on
commercial-mortgage-backed securities are a slim 0.4%. But that is likely to
rise as loose lending standards on some commercial-real-estate loans come back
to haunt lenders and investors. More than $50 billion of five-year, full-term
interest-only loans written at aggressive loan-to-value ratios could turn into
defaults "at a significant level" if the loans can't be refinanced
this year, according to Jones Lang LaSalle, a real-estate brokerage and
money-management firm in Chicago.
The sluggish economy will add more stress,
because demand for office and retail space is likely to suffer. On the other
hand, the commercial-property market hasn't seen the kind of excessive supply
that caused property values to tumble in the last recession, which could help
maintain real-estate prices.
Tough to Assess Impact
It isn't easy to size up the potential
damage. Financial firms' public reports "don't paint a full picture,"
says Peter Nerby, a credit analyst at Moody's Investors Service. For example,
Morgan Stanley reports commercial-mortgage exposure before and after the effect
of offsetting transactions, or hedges, while Bear, Goldman and Lehman don't.
When times were good, underwriting
commercial mortgage-backed securities was a bonanza for Wall Street. Global
volume of those deals more than tripled to $294.8 billion last year from $85.8
billion in 2003, according to data tracker Dealogic. The surge helped fuel
rising values on commercial property.
But demand for commercial-mortgage-backed
securities has plunged because investors want higher returns to compensate for
growing risk. As a result, deal flow has slowed, drying up a profit stream for
investment banks. January was the first month in more than a decade in which
not one issue was sold.
Problem With Leftovers
An even bigger problem is the firms' own
holdings of leftover, unsold commercial-mortgage-backed securities. Because the
market for these bonds has virtually shut down and made it hard to determine
what they are worth, Wall Street firms are being forced to rely on the CMBX
index, which tracks the performance of commercial-real-estate bonds with
different credit ratings.
Portions of the index have more than tripled
this year, indicating soaring perceptions of risk. The index's movement implies
a 5% loss rate, pressuring banks to mark down the value of their bonds even
though the underlying properties are still generating cash.
Morgan Stanley, last year's No. 1
underwriter of commercial-mortgage-backed securities, cut its exposure to such
mortgages by 52% to $17.5 billion after hedges in the fourth quarter, compared
with three months earlier. That might have pointed investors to the spot where
Morgan Stanley expects the "next shoe will drop," Guy Moszkowski, an
analyst at Merrill Lynch, said in a report.
Another trouble spot is the debt financing
provided last year to facilitate leveraged buyouts of real-estate concerns. One
of the biggest examples: A group led by Bear still is trying to sell the debt
offered to Blackstone Group LP for its $20 billion takeover of Hilton Hotels
Corp. In December, Moody's cut its ratings on Bear, partly blaming the firm's
"concentrated risk" from the Hilton deal.
"You couldn't have been a player in
this market without having legacy deals [that you're stuck with], because the
market collapsed so quickly," said an executive at a large bank.
- 2008 March 4 WALL ST JOURNAL
US commercial property sales down 70% in Oct
US office building sales fell 70 per cent in October from a year earlier, yet another sign the credit crunch that began in the US housing market has spread to the commercial real estate
market, Real Capital Analytics said on Tuesday.
 |
Sub-prime: The credit crisis has weighed on commercial property, especially the
office market |
But the five-year bull run on commercial
real estate may not be over, although the participants have clearly changed,
the real estate research firm said.
The credit crisis has weighed on US
commercial real estate and the office market in particular, making purchases
funded nearly all by debt a thing of the past. Even lower-leveraged deals
are harder to come by as borrowing rates rise and risk becomes a significant
factor in obtaining a loan.
'The remarkable increase in sales
activity, rise in prices and compression of cap rates (the first year's
yield on the property) since 2001 ended abruptly in August,' the Capital
Trends Monthly report said. 'Since then, the dramatic fall in sales volume,
drop in prices and rise in cap rates certainly meets the definition of an
inflection point.'
But capital has continued to flow into
commercial property, especially globally, and the greater cycle may not be
quite over, the firm said.
Sales of significant office properties -
those more than US$5 million - fell to US$4.4 billion in October. More than
US$14 billion are reported in contract, but only US$4 billion of these have
been announced. Sellers have pulled properties off the market when they
could not get the price they wanted.
New offerings have exceeded closings
2-to-1 over the past 60 days, the report said.
The credit crisis has meant cash rules
again and those loaded with it - foreign and institutional investors - make
up more of the buyers. Since the onset of tighter credit, their market share
has grown to 38 per cent of purchases from 26 per cent. These buyers
generally favour stable, steady cash producing properties in major markets.
The large, highly leveraged buyers, such
as private equity players, acquired US$78.5 billion worth of office
properties from January to August. But not a single significant acquisition
involving those funds have been announced since then.
Real estate investment trusts also have
not been active buyers since September. But the report said that may change
soon. Some larger players, such as mall owner Simon Property Group Inc and
apartment owner Avalon Bay Communities Inc, have raised capital by increasing
their credit facilities.
Apartments sales in general also have
plummeted. Excluding the US$22 billion sale of Archstone- Smith Lehman
Brothers Holdings Inc and a fund run by Tishman Speyer, sales fell 50 per
cent from a year ago to US$3.3 billion.
The sales of garden apartments were even
worse, down 60 per cent. -- 2007
November 22 REUTERS
Foreign investors buy billions of
dollars of prime commercial property in the U.S. every year. Where are they
from?
Foreign countries continued their American commercial property shopping
spree in 2006, providing more than 5% of the record $336 billion spent on
U.S. office towers, apartment complexes, retail centers, and industrial
buildings.
Half of the biggest U.S. single-asset real estate deals in history were
announced or closed last year. In the same period, overseas investors spent
a grand total of $19.96 billion on U.S commercial real estate—about flat
from the year before, but five times as much as they spent in 2001,
according to New York City-based research firm Real Capital Analytics.
"This whole globalization movement we've all been talking about so
long? It's actually happening right now," says Dan Fasulo, director of
market analysis at RCA.
The real story, however, may not be "how much," but
"who," as in who bought the most U.S. commercial property last
year. Though the players in the lineup of biggest foreign buyers remain
largely the same as in recent years, the order is constantly shifting.
Leading the Pack
The Middle East topped the list for 2006. Last year, the wealthy region
provided the biggest U.S. commercial real estate investors by sales volume,
at $5.29 billion, according to RCA.
Some of the other top shoppers may be more surprising—Australians spent
$3.78 billion on U.S. commercial real estate last year, the second-highest
sales volume on the list. Germany took fifth place, with $1.97 billion in
commercial real estate purchases.
The Pacific Rim region—Japan, South Korea, China, Hong Kong, Singapore,
and Taiwan—was the third-biggest investor at $3.29 billion, marking an
891% increase from the year before. (RCA doesn't break out its data by
individual country.)
Canada ranked fourth on RCA's list, with U.S. commercial real estate
purchases totaling $2.57 billion, no doubt helped along by Edmonton-based
Triple Five Group's $1.8 billion purchase of the Mall of America in
Bloomington, Minn. Other massive U.S.-to-foreign deals in 2006 included Hong
Kong-based Hudson Waterfront's $1.25 billion purchase of AXA Financial
Center in New York, and Dubai-based Istithmar's $1.2 billion purchase of 280
Park Avenue in Manhattan.
Diverse Incentives
"2006 was the year of the Middle East," says Fasulo.
"They're looking for all sorts of hard assets to invest in."
Investors from Middle Eastern countries such as Dubai, Bahrain, and Kuwait
tend to be high-net worth individuals and families flush with petrodollars
from the runup in oil prices in 2005, Fasulo explains.
Giant deals like Istithmar's Park Ave. buy helped the Middle East
displace Australia, the biggest foreign buyer of U.S. real estate in 2005,
with purchases totaling $7.7 billion that year. But the land down under
retained a solid second place on the 2006 list, as investors and
institutions continued to load up their portfolios with U.S. real estate.
With limited opportunity in their own country, which has only about 20
million people vs. 300 million in the U.S., Australians have naturally taken
to investing in real estate overseas, explains Jim Fetgatter, chief
executive of the Washington (D.C.)-based Assn. of Foreign Investors in Real
Estate (AFIRE). Much of the capital is coming from the country's
pension-fund pool, which has grown sharply since the mid-1990s, when a law
was passed mandating that employers put 9% of their workers' gross salaries
into retirement accounts similar to 401(k) plans.
Another Aussie Year?
Unlike the U.S., Australia doesn't have an established bond market, so
investors look to U.S. real estate for stability, Fetgatter notes. Among the
biggest Australian investors in U.S. commercial property are Macquarie Real
Estate, Centro Properties Group, and Galileo America Shopping Trust.
In 2007 Australia may once again take over the top slot. According to the
15th Annual AFIRE Survey, Aussies are likely to be the most active buyers of
U.S. real estate this year. 54% of AFIRE members, who collectively own $600
billion of real estate globally and $185 billion in the U.S., chose the
country as their prediction for the most active foreign investor in U.S.
commercial property for 2007.
Germany, a big player in the U.S. commercial real estate market since the
mid-1990s, took second place in the AFIRE survey, with 27% of members
choosing the country as 2007's most active investor in U.S. commercial
property. AFIRE Investors' other picks for 2007 included the Netherlands,
the Middle East, Ireland, Britain, Japan, and Singapore.
"There are different stories coming out of every survey,"
Fetgatter says. "It all ebbs and flows with what's going on with [the
countries'] own economies."
Safe Bet
Why is U.S. real estate whetting the appetite of international investors?
The falling value of the U.S. dollar against the euro and other currency has
little to do with the trend, Fetgatter explains, since most investors are
long-term and will leverage with locally borrowed money.
Commercial real estate in U.S., however, is viewed as a safe and
profitable investment by foreign investors. More than two-thirds of
investors surveyed by AFIRE said the U.S. remains both the strongest and
safest conduit for cross-border commercial real estate, and the country with
the best opportunity for capital appreciation.
"It seems contradictory," says Fetgatter "But while, yes,
you could invest in China and India and get better yields, when you factor
the risk in, it might not be worth it."
"First Stop"
Foreign investors are also finding it easier to find good real estate
investments in the States these days. Two years ago, 60% of AFIRE members
said it was "very difficult" to find attractive real estate
investments in the U.S. In the most recent survey, only 37.5% checked off
the "very difficult" option. Moreover, U.S. target acquisitions
for 2007 by survey respondent showed a median increase of 53% over 2006
levels.
What explains the sudden change in sentiment? Investors seem to be
passing less often on more risky investments; respondents to AFIRE's survey
said "value-added" real estate could comprise 25% of their
portfolio in 2007, up six percentage points from 2006.
"The U.S. is the first stop [for foreign investors]," Fetgatter
says. "It's a deep, diversified, and stable market."
- BUSINESS
WEEK February 14 2007
A consortium of private-equity firms offered $37.6
billion for Equity Office Properties, topping Blackstone's
bid for America's largest real-estate investment trust. The target of the
biggest-ever leveraged buy-out, Equity Office owns 20m square feet (1.9m
square metres) of office space in Manhattan alone, and is attractive because
rents in many of America's business districts are predicted to rise.
- 23 January 2007 ECONOMIST
HISTORICAL:
Foreigners Seem To Be Souring On
U.S. Assets
At a time when U.S. trade deficits are growing to historic
proportions, foreign interest in U.S. stocks and bonds may be fading. If
this continues, there could be consequences for U.S. interest rates and the
dollar.
Foreign purchases of securities in
the U.S. in May came to $56.4 billion. While that was large enough to
finance the current-account deficit, it was down 26% from April and
represented the lowest monthly total in seven months. It also marked the
fourth consecutive monthly decline of such purchases by foreigners.
The report on foreign purchases
included bad news for U.S. stocks, revealing that May was the third
consecutive month foreigners have been net sellers. That hadn't happened in
nearly a decade.
Potentially more troubling was the
slowdown in Asian purchases of U.S. debt -- especially in Japan, which holds
16% of all U.S. Treasurys. That country's nascent economic recovery has
eased the government's concerns about maintaining a weak currency to boost
exports, in turn reducing the Bank of Japan's need to intervene and buy
dollars.
The result: Japan bought $14.6
billion in U.S. Treasurys in May and $5.5 billion in April, according to the
U.S. Treasury Department. That is a significant drop from a monthly average
of $25 billion for the seven-month period ending in March. If the Japanese
economy continues to rebound, Tokyo's Treasury purchases are unlikely to
return to those lofty levels. That has some economists concerned.
"Japan is to the U.S. financial
markets what Saudi Arabia is to the world oil markets -- the primary
provider of capital," Joseph Quinlan, chief market strategist for Banc
of America Capital Management, wrote in a recent report.
"Self-sustained growth in Japan could ultimately obviate the need for
the Bank of Japan to purchase U.S. securities, leaving a buying void in the
U.S. Treasury market, helping to drive yields higher." Bond prices and
yields move in opposite directions.
Indeed, in the two months that
Japanese buying of Treasurys slipped, the yield on the 10-year note jumped
to 4.65% at the end of May from 3.88% on April 1, though it has since fallen
to 4.43%.
The Bank of Japan and other Asian
central banks have become an increasingly important pillar of support for
the Treasury market, because their currency interventions and large trade
surpluses with the U.S. have resulted in excess dollars to invest. Since
these central banks are concerned less about a high rate of return than a
stable and easily tradable investment, U.S. Treasury debt has been a major
beneficiary.
Yet if recent trends toward lower
U.S. investment persist, the U.S. eventually could have a tougher time
funding its current-account deficit, which reached a record $144.9 billion
in the first quarter. Any trouble financing that deficit would lead to
higher borrowing costs through rising U.S. interest rates. It also could
cause the dollar, which hit a three-week high against the euro on Friday, to
resume its decline.
Indeed, problems with the current
account could end up making the dollar "possibly quite a bit
weaker," said John Llwellyn, chief global economist for Lehman
Brothers.
For now, however, funding the
current account shouldn't be a concern, said Rebecca McCaughrin, an
economist for Morgan Stanley. She noted that in 2004 the U.S. needs to
attract a monthly average of $50 billion to fund that deficit. After
averaging $82 billion for the first four months of the year, the U.S. need
attract only about $35 billion a month for the rest of the year.
"Europeans alone could do it," Ms. McCaughrin said.
Still, foreigners now control 40% of
U.S. Treasury debt, and their purchases are unlikely to return to peak
levels seen at the start of the year, she said. "So U.S. interest rates
could still go higher, even if the current account is funded," Ms.
McCaughrin said.
Other foreign investors' appetites
for U.S. securities also have been waning, in part because rising oil prices
have forced some countries to spend more of their dollar reserves on energy.
That leaves fewer dollars to invest in the U.S. markets.
Mr. Quinlan said that is the case
for China, Asia's second-biggest buyer of U.S. securities, which bought $13
billion in U.S. assets through May, compared with $33.1 billion a year
earlier.
The pullback in Beijing's interest
in U.S. Treasurys was larger still: China was a net purchaser of $1.7
billion of U.S. Treasurys in the first five months of the year -- down 91%
from the $18.4 billion in net purchases a year earlier.
Even the United Kingdom, long a
reliable buyer of U.S. securities, turned negative in May, with net sales of
$4 billion. That was its first monthly net sale since October 1998 during
the near collapse of giant U.S. hedge fund Long-Term Capital Management and
the aftermath of the Russia financial crisis. Clear hints from the U.S.
Federal Reserve that it would be raising interest rates likely caused U.K.
investors to trim positions in U.S. Treasurys, Mr. Quinlan said.
Anticipation of the Fed's first rate increase in four years also may have
contributed to the three consecutive months that foreigners sold U.S.
stocks.
By many accounts, however, Japan
remains the critical buyer. Mr. Quinlan argued that Japan has become
"America's de facto banker, helping to keep U.S. interest rates low
over the past year." Currency traders say the Bank of Japan hasn't
intervened in the currency market since March, and the pace of Japanese
Treasury buying of the recent past looks unsustainable: Japan bought $175
billion in U.S. Treasury debt from September to March, a figure that exceeds
Japanese purchases of Treasurys in the previous seven years combined.
Ms. McCaughrin said there has been
anecdotal evidence that private Japanese investors, including banks and
pension funds, also have been scaling back purchases of U.S. assets and have
been investing more locally, to take advantage of a rebounding Japanese
economy, or in other overseas markets, to capitalize on the global economic
expansion. - by Craig Karmin
WALL
ST JOURNAL 26 July 2004
| In
most of the USA's 50 largest metro areas, annual growth in home prices
in the April-June quarter lagged behind 2001 growth rates, an
indication that not every city is sharing in the hot national real
estate market. The clusters of markets labeled "fast
appreciating" have price growth rates for the April-June quarter
in excess of the 7.4% U.S. average. |
| Expensive
metros (Median price: $180,000-plus) |
|
Median
price |
|
| Fast-appreciating |
April-June,
2002 |
Annual
price change |
| 2000 |
2000 |
2001 |
2002* |
| New
York City |
$303,800 |
13.3% |
12.2% |
22.3% |
| San
Diego |
$361,900 |
16.3% |
10.8% |
21.3% |
| Washington/Baltimore |
$249,700 |
3.5% |
17.1% |
20.8% |
| Providence |
$185,800 |
7.0% |
14.7% |
20.7% |
| Los
Angeles/Orange County |
$276,600 |
8.5% |
11.8% |
18.0% |
| Miami/Fort
Lauderdale |
$186,800 |
7.4% |
12.5% |
17.0% |
| Sacramento |
$202,100 |
10.4% |
20.0% |
15.8% |
| Chicago |
$223,700 |
0.4% |
15.5% |
13.0% |
| San
Francisco |
$540,500 |
33.4% |
4.7% |
11.8% |
| Boston |
$397,700 |
8.3% |
13.5% |
11.7% |
| Moderately
appreciating |
| Minneapolis/St.
Paul |
$183,000 |
9.2% |
10.6% |
7.4% |
| Seattle |
$260,500 |
n/a |
6.6% |
6.7% |
| Portland,
Ore. |
$181,200 |
3.1% |
1.3% |
5.5% |
| Denver/Boulder |
$227,700 |
14.9% |
10.9% |
4.0% |
| Midrange
metros (Median price: $135,001-$180,000) |
|
Median
price |
Annual
price change |
| Fast-appreciating |
April-June,
2002 |
2000 |
2001 |
2002* |
| Milwaukee |
$174,500 |
4.0% |
6.2% |
11.9% |
| Orlando |
$139,700 |
5.6% |
11.6% |
11.8% |
| Philadelphia |
$147,400 |
0.3% |
7.7% |
8.0% |
| Phoenix |
$152,400 |
6.3% |
3.7% |
7.9% |
| Moderately
appreciating/declining |
| Richmond,
Va. |
$143,900 |
1.0% |
2.7% |
6.6% |
| Hartford,
Conn. |
$174,700 |
6.1% |
4.6% |
6.1% |
| Las
Vegas |
$155,800 |
5.0% |
8.5% |
5.8% |
| Atlanta |
$146,900 |
6.1% |
5.8% |
5.2% |
| Austin,
Texas |
$160,900 |
11.0% |
6.4% |
3.8% |
| Columbus,
Ohio |
$142,200 |
3.3% |
5.1% |
3.5% |
| Raleigh/Durham,
N.C. |
$172,900 |
-4.0% |
6.2% |
3.5% |
| Charlotte |
$150,500 |
1.5% |
3.6% |
3.2% |
| Salt
Lake City |
$150,400 |
2.6% |
4.3% |
2.7% |
| Cincinnati |
$136,100 |
5.7% |
2.8% |
2.6% |
| Dallas/Fort
Worth |
$136,300 |
5.9% |
7.0% |
2.0% |
| Nashville |
$136,900 |
11.6% |
2.8% |
-0.8% |
| Low-cost
metros (Median price: Under $135,000) |
|
Median
price |
| Fast-appreciating |
April-June,
2002 |
Annual
price change |
| 2000 |
2000 |
2001 |
2002* |
| Oklahoma
City |
$94,400 |
1.4% |
11.2% |
8.5% |
| Moderately
appreciating/declining |
| New
Orleans |
$125,900 |
2.7% |
4.8% |
7.2% |
| San
Antonio |
$111,300 |
5.4% |
8.1% |
6.2% |
| Tampa/St.
Petersburg |
$128,000 |
17.9% |
11.6% |
5.6% |
| Norfolk,
Va. |
$122,000 |
-1.1% |
3.3% |
5.3% |
| Jacksonville |
$117,500 |
5.0% |
9.9% |
5.0% |
| Houston |
$131,600 |
10.3% |
5.4% |
4.6% |
| Memphis |
$128,400 |
3.9% |
8.2% |
3.7% |
| St.
Louis |
$135,000 |
5.3% |
16.2% |
3.0% |
| Grand
Rapids, Mich. |
$125,800 |
7.7% |
5.4% |
2.8% |
| Pittsburgh |
$102,100 |
4.1% |
4.5% |
2.4% |
| Greensboro/Winston-Salem,
N.C. |
$134,400 |
3.6% |
2.6% |
-0.3% |
| Indianapolis |
$116,900 |
1.3% |
4.1% |
-0.7% |
| Rochester,
N.Y. |
$92,000 |
-0.1% |
5.3% |
-1.0% |
| Buffalo |
$85,600 |
-2.0% |
5.4% |
-2.1% |
| *
— April-June; Note: Among the largest metros, no comparable data is
available for Detroit, Cleveland, Kansas City, Mo., West Palm Beach,
Fla., and Louisville
Sources:
National Association of Realtors and local boards of real estate
USA
Today 30 August 2002
|
