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Despite the economy in a funk and many Americans pulling back on spending, the rich are once again buying designer clothing, luxury cars and just about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering - they are zooming. And many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.

'If a designer shoe goes up from US$800 to US$860, who notices?' said Arnold Aronson, managing director of retail strategies at the consulting firm Kurt Salmon, and the former chairman and chief executive of Saks.

The luxury category has posted 10 consecutive months of sales increases compared with the year earlier, even as overall consumer spending on categories such as furniture and electronics has been tepid, according to the research service MasterCard Advisors SpendingPulse.

What changed? Mostly, the stock market, retailers and analysts said, as well as a good bit of shopping psychology. Even with the sharp drop in stocks over the past week, the Dow Jones is up about 80 per cent from its low in March 2009. And with the overall economy nowhere near its recession lows, buying nice, expensive things is back in vogue for people who can afford it.

The recent earnings reports of some luxury goods retailers and car companies show just how much the high-end shopper has been willing to spend again.

Tiffany's first-quarter sales were up 20 per cent to US$761 million. Last week LVMH, which owns expensive brands such as Louis Vuitton and Givenchy, reported sales growth in the first half of 2011 of 13 per cent to 10.3 billion euros (S$17.7 billion). Profits are also up by double digits for many of these companies.

BMW this week said it more than doubled its quarterly profit from a year ago as sales rose 16.5 per cent; Porsche said its first-half profit rose 59 per cent; and Mercedes-Benz said July sales of its S-Class sedans - some of which cost more than US$200,000 - jumped nearly 14 per cent in the United States.

The success luxury retailers are having stands in stark contrast to the retailers who cater to more average Americans.

Apparel stores are holding near fire sales to get people to spend. Wal-Mart is selling smaller packages because some shoppers do not have enough cash on hand to afford multipacks of toilet paper. Retailers from Victoria's Secret to The Children's Place are nudging prices up by just pennies, worried that they will lose customers if they do anything more severe.

While the free spending of the affluent may not be of much comfort to people who are out of jobs or out of cash, the rich may contribute disproportionately to the overall economic recovery.

'This group is key because the top 5 per cent of income earners accounts for about one-third of spending, and the top 20 per cent accounts for close to 60 per cent of spending,' said Mark Zandi, chief economist of Moody's Analytics. 'That was key to why we suffered such a bad recession - their spending fell very sharply.'

Just a couple of years ago, luxury goods retailers were suffering. Sales of luxury goods dropped 17.9 per cent in October 2008 from a year earlier, according to SpendingPulse, and double-digit declines continued through May 2009.

Now, many stores are stocking up on luxury merchandise, as shoppers flock to racks of expensive goods.

Jennifer Margolin, a personal shopper in San Francisco, said she had noticed changes in her clients' attitudes about spending thousands of dollars on just one item.

They 'pay full price if they absolutely love it', she said. 'Before it was almost completely shying away, where now it's like, 'OK, I'm comfortable getting a Goyard bag,' but they get it for the quality.'

Goyard bags, in addition to having a distinctive pattern, will usually run a few thousand dollars. And, yes, they are selling out quickly. -- NYT

  

U.S. pension plans, stung by the recession, are seeking more-conservative commercial real estate investments these days. “The pendulum always swings,” said Dale Anne Reiss, managing director of Artemis Advisors and a board member of IStar Financial, Post Properties and the Pension Real Estate Association. “Pension funds had gotten heavily into opportunistic investments and foreign investments looking to make double-digit returns. Now the pendulum has swung again and there is more concern about the risk component. Pension plans now want core properties — the lowest-risk component of real estate.” Core properties are typically A-quality assets in the best geographic locations and which generate steady yields.

Indeed, the CalPERS investment committee approved a plan to shift most of its $15.4 billion in real estate assets to the core category while reducing opportunistic real estate allocations from 51 percent to 25 percent.

“After this train wreck of a global recession, pension plans have changed their focus to higher-quality assets that generate yield,” said Stephen Duffy, who heads the real estate consulting and investment business for Moss-Adams Capital, of Irvine, Calif. “Today the focus is not in investment formats that are going to take years to pay off and have higher risks associated with them, but to go into high-quality assets that offer lower risk and more protection of capital.”

DRA Advisors, a New York City–based investment advisory firm, has been avoiding malls but scouring the country for open-air retail. About 40 percent of the firm’s investors are pension funds, another 40 percent are university endowments and the rest are insurance companies and other institutions. “Over the past two years, we have not been able to buy much retail, either because there wasn’t much available or the bid-ask spread was unappealing,” said Paul McEvoy, a DRA Advisors senior managing director. “Today a lot of the rents have been reset because of the economy and through consumer buying habits. That gives us a lot more clarity in balancing the amount of rent a tenant can pay relative to sales.”

For the wider range of pension plans, some neighborhood shopping centers should be considered core properties as well. “The supermarket and drugstore centers in mature communities where all the housing has been built out is often a stable asset,” said Duffy. “The worst years for neighborhood centers are behind. They are low risk.” --  2011 April 15   ICSC

BofA, is "a very active seller of commercial real estate" Chief Risk Officer Bruce Thompson said      -- 2011 March   BUSINESS WEEK

IN PLAY:

The Grand Hyatt Wailea has special memories for me - where Schmo's sister got married + East met West in the highest of society circles.    

“Even as the economy picks up steam, many of the nation’s malls and shopping centers are suffering a hangover due to changing consumer habits and the fallout from a massive building boom. Mall vacancies hit their highest level in at least 11 years in the first quarter… In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.”   -- 2011 April 7    WALL ST. JOURNAL

Durst gets nod for One World Trade Centre

Durst awarded right to buy into One World Trade Center, the 1,776-foot-tall office tower that will define the rebuilding of Ground Zero by the Port Authority of New York and New Jersey.

The family-owned Durst Organization controls 10 million square feet of commercial office space, with a current occupancy rate of 97%. Most recently, it successfully developed and opened One Bryant Park, the 2.1-million-square-foot tower on 42nd Street that is home to Bank of America's New York operations.   

The late Joseph Durst started his family's real-estate dynasty in 1915, buying an office building on 34th Street. His 65-year-old grandson, Douglas Durst, is now chairman of the Durst Organization. Related was founded in 1972 by Stephen Ross, who started out building government-assisted multifamily housing. He still runs the company at age 70.  - - 2010 July   CRAINS 

U.S. Property Plunge - how low will it go?
Difficult Call as building owners, distressed banks and regulators 'extend and pretend'

Canadians may look at the devastated commercial real estate market in the United States and see an opportunity to buy in cheap, as values in many markets have dropped by nearly half or more since their boom-era peak.

But a complicated interplay among struggling owners, the distressed banks that made their loans, and predatory buyers already on the scene is making it difficult to call a bottom. And, more importantly, it may be helping to postpone a day of reckoning.

It's not as if there hasn't been plenty of bad news already.

Whether one believes that commercial real estate follows the residential real-estate market or follows the general economy as a whole, both fell sharply over the past two years, leaving the commercial market nowhere to go but down. (Indices of commercial property prices from both Moody's and the National Council of Real Estate Investment Fiduciaries show declines of 35 per cent to 45 per cent from August of 2007 to August of 2009.)

And whether one believes commercial real estate was overbuilt, nearly no one's building now. Commercial construction values fell on a sequential basis by 31 per cent from the second quarter to the third quarter, and by the same rate from the third quarter to the fourth, says Michael Englund of Action Economics, based in Boulder, Colo. The decline seems to be mitigating in the first quarter of 2010, but will still likely be in the 20-per-cent range, Mr. Englund said.

"It's not clear where the bottom will be, but it's clear the market has collapsed," he says.

It has created a climate, says Pete Bolton, managing director of the Phoenix office of Grubb & Ellis, where "all the buyers now are all vulture funds. No one out there's saying, "I'm going to offer them a very fair price.' If [the owner] bought it for $100 a square foot, they're not going to offer them $80 - they're offering them $30."

Owners who have the cash flow and lending arrangements that allow them to sit back and wait can just say “no.” But for property owners who mortgaged at recent market highs of two or three years ago, and who have a very concerned lender, it creates a different dynamic.

Some of the offers are so bad, Mr. Bolton said, that both the distressed owner and the lender are willing to pass. “The bank says, ‘No, we're not going to take that offer' and the owner says, ‘Good, I'm going to hang out with the bank here for a little while.'''

Banking regulators, mindful of the havoc that could ensue, have announced “prudent commercial real estate loan workouts” – which cynics are calling “extend and pretend” loans that merely extend financing on a troubled piece of commercial property and pretend the borrower will be able to pay some day.

In late October, the Federal Deposit Insurance Corp., in conjunction with other bank regulators, announced a policy statement under which “performing” loans – those where the borrowers were still making payments – would not be declared problematic solely because the value of the underlying collateral declined.

Here's how the October guidance works in practice, says Matt Anderson of Oakland, Calif.-based Foresight Analytics. Say a bank has a $5-million loan on a commercial property that now has a market value of $3-million.

Previous regulatory standards would likely force the bank to classify the entire $5-million loan as non-performing. But regulators offered banks the opportunity to split the loan into two pieces for regulatory purposes, as long as adequate payments were still coming in from the borrower.

The first piece would be a $3-million loan that's fully collateralized at the new, lower property value; piece two would be a $2-million portion that represents the vaporized market value. The $2-million loan would likely be deemed non-performing.

To critics, softening the standards to keep even more American banks from failing just kicks the current commercial real estate problems down the road.

To hear banks tell it, however, the idea of the friendly regulator throwing them a lifeline on such troubled deals is a fiction worthy of the next Tim Burton movie. They insist that despite the public statements, regulators are approaching their balance sheets with a new-found zeal

R. Michael Menzies, a Maryland banker and chairman of the Independent Community Bankers of America, testified before Congress on March 25 that “community bankers are saying that the field examiners are overzealous and unduly overreaching and are, in some cases, second guessing bankers and professional independent appraisers and demanding overly aggressive write-downs and reclassifications of viable commercial real estate loans and other assets.”

A variety of bankers' trade groups have proposed, so far without success, an even more generous accounting than the FDIC's October standard. It would see current mark-to-market losses amortized over 10 years. (That would chop the $2-million loss in our example into 10 pieces of $200,000 each, protecting the income statement and the bank's regulatory capital ratios.)

“On the one hand, the regulators are going and giving banks more flexibility on how to deal with commercial real estate exposure, the loans problematic from a valuation standpoint,” says Mr. Anderson of Foresight Analytics. “On the other hand, the regulators are putting a lot of pressure on the banks with commercial real estate exposure.”   - 2010 March 30   GLOBE & MAIL Report on Business

U.S. Property PublicCo Accounting Changes
Leasing rule changes will hit net income and balance sheets

A sea change is coming in how companies account for their real estate and other leases, and experts are urging companies to start preparing now.

Proposed rule changes, intended to bring U.S accounting into line with international standards, would require companies to charge off the cost of their leases on their income statements during the early years of the lease.

The change, which will be finalized next year, probably will reduce the net profit that companies report, burden balance sheets and may even affect executive compensation tied to company performance, experts say.

It will affect private and public companies, and nonprofit agencies, as well as government agencies that file financial reports using current GAAP (generally accepted accounting principles) rules, said Mindy Berman, managing director of capital markets in the Boston office of Jones Lang LaSalle.

“It’s a big deal,” Berman said. “It’s going to put an enormous burden on internal accounting groups.”

The U.S. Financial Accounting Standards Board and the International Accounting Standards Board are jointly revising the standards.

Though the change is not expected to take effect for two or three years, it will apply to all leases in effect at the time. As a result, companies already are considering how to structure — or restructure — their real estate and other leases. At the same time, landlords and real estate investors are having to understand the new constraints for their tenants and factor them into negotiations

Certain companies will be affected more than others. Those with multiple leases, such as retailers and banks, will obviously have more at stake.

But even for an average company, the financial impact could be substantial. In one case Berman studied, a company that relied heavily on leased facilities would see its debt increase sevenfold under new guidelines that treat rent like an installment loan payment, with interest expense. By comparison, two competitors with fewer leases would see their debt rise by as much as 150 percent.

To be sure, many companies are currently blending and extending their leases to take advantage of lower lease rates and perks such as free rent and hefty tenant improvement packages, brought about by the real estate market crash. The savings may well offset the upcoming changes in accounting for some tenants.

“We don’t want the accounting tail to wag the business dog,” Berman said.

But the new standards “will add significant assets and liabilities to the balance sheet in the early years with a detrimental effect to net profits on the income statement,” said Todd Anderson, senior managing director of global corporate services in the Los Angeles office of CB Richard Ellis real estate firm.

That could decrease shareholder equity in the early years of a lease when lease depreciation is the greatest and increase it in the later years, Anderson said. In turn, the altered financial reporting could affect executive compensation packages based on profit and loss performance, Anderson said.

The lack of grandfathering means a 10-year lease signed today could be a drag on earnings when the rules take effect in 2013 or 2014.

Because they affect company balance sheets, the proposed changes could affect companies’ compliance with their loan covenants and renewal of their credit lines and bonding, said Mary Actor, a principal at the accounting firm Berntson Porter & Co. PLLC, in Bellevue.

One more factor that’s driving early action: Companies that report three-year comparisons on their financial statements could have to reflect these changes as soon as next year. Large public companies probably will be asked to do “dual track” accounting for a two-year period to show what their operations look like under current accounting standards and what they will look like under the new standards.

“We definitely have started talking to our clients about it,” Actor said.

Landlords, including real estate investment trusts and asset management funds that use GAAP reporting, “will have their own pain because they are going to have to sit there and estimate how long a tenant will be in a space and they may not necessarily reach the same conclusion as the tenant,” Berman said.

She’s advising landlords to get familiar with the proposed guidelines so they can understand where tenants will be coming from in upcoming lease negotiations.

“They will start getting push-back from tenants trying to shorten their lease terms,” Berman said.

leasing will become more important in corporate real estate decisions.

“The functionality of the real estate will still drive decision-making,” Footh said. But the decision on whether to own or lease property will become more important, probably ranking third after labor costs and logistical issues related to a particular location, he said.

Companies may well opt for shorter three-year leases instead of 10-year leases, especially initially because they are easier to take into account, said Anderson, of CB Richard Ellis.

Shifting landscape

With new lease accounting guidelines in the works,  Jones Lang LaSalle advises clients to:

— Make sure the company’s chief financial officer and controller are aware of the proposed changes.

— Examine the impact of the new standards on company finances and decide whether it’s better to lease or own company real estate and whether lease terms should be renegotiated.

— Start planning how the company will implement the proposed accounting changes. If the company uses outside accounting software, make sure the vendor plans to modify the system to accomodate the upcoming changes.

— Figure out how to value lease extension options under the new guidelines.   -   BUSINESS JOURNAL    2010 August 30

  

California State Sale Would Cost $1.3 B

The plan to sell top-notch state-owned office buildings for quick cash could cost California taxpayers about $1.3 billion over the long haul, according to documents associated with the proposed sale.

Through a move known as a “sale-leaseback” the state hopes to generate $2 billion or more by selling 11 office properties, most of them in the Sacramento region, and lease them from the new owners for 20 years.

The sale, prompted by the state’s budget crisis, would provide some immediate benefits, such as paying off debts on the buildings, freeing up about $660 million for the general fund and shifting repair and maintenance costs to new landlords.

That might provide a modicum of relief to cash-strapped California, but it also would mean taxpayers would foot the bill for about $5.2 billion in rent over the next two decades.

Bids from prospective buyers are due Wednesday and the state’s Department of General Services, which is handling the transaction with CB Richard Ellis, has said the response has been “tremendous.”

The proposal has raised eyebrows around Sacramento.

“Looking at it from a taxpayers’ perspective, there are question marks,” said Bob Dean, who heads the Sacramento office of commercial real estate brokerage Grubb & Ellis. “What are we obligating ourselves to pay for the next 20 years? Is it a healthy decision?”

In today’s market, tenants are looking for ways to reduce operating costs, but the leaseback deal would escalate the state’s annual costs, Dean said.

The Department of General Services plans to perform a more detailed analysis of the costs and benefits once the bids come in — one that could paint a better long-term picture, state officials say. They cautioned it might be too early to scrutinize the financial implications.

“In the final analysis if it doesn’t pencil, we’re not obligated to sell the property,” said Gerald McLaughlin, a senior real estate officer with the department. He noted that the extra money paid in rent over time could be mitigated by the “time value” of money, meaning that funds in hand today are worth more than the same amount in the future. It’s a view shared by others in the real estate business.

“On the surface it may not look like a good deal, but when you understand the time value of money, it probably is a good deal,” said Chris Strain, who heads brokerage Cushman & Wakefield’s Sacramento office.

The sale would provide stability to the state by shifting liabilities to landlords for major repairs, General Services spokesman Jeffrey Young said.

The office properties include the massive East End Complex on Capitol Avenue, the Attorney General building on I Street, the Franchise Tax Board on Folsom Boulevard and properties in San Francisco, Los Angeles and Oakland.

Short-term windfall

Gov. Arnold Schwarzenegger’s office last year asked General Services to start examining a possible asset sale as the governor questioned whether the state should be in the real estate business, Young said. Representatives of the governor did not return calls seeking comment about the deal.

California owns about 10 million square feet of offices in the Sacramento region and leases 7 million square feet. It has built or purchased property with the idea of saving money over time through ownership. But unforeseen expenses, such as repairs that could run upwards of $40 million at the state Board of Equalization building in Sacramento, have the state’s experts rethinking the strategy.

And operating buildings generally costs California more than it would a private owner, which can farm out services to the lowest bidder.

General Services budgeted $71.9 million in annual maintenance costs for the 11 properties. According to CB Richard Ellis’ financial analysis, the upkeep, security and landscaping on the buildings would cost a prospective buyer about $50 million, a 30 percent savings.

The Legislature last year voted to authorize the sale after state workers determined which assets would make the best sellers. Pressure to sell might have increased due to the state’s financial condition. The Legislative Analyst’s Office has said the state must address a general fund budget shortfall of at least $20.7 billion before the Legislature enacts its next budget.

Under the deal as envisioned, the state would earn about $2 billion through the sale, then retire debt on the buildings at a cost of $1.3 billion to $1.5 billion. That leaves $660 million left to pay for general fund programs if the state gets its asking prices.

If the sale goes through, the state would no longer be responsible for an estimated $1.9 billion for repair and maintenance over the next 20 years; those costs would become the new landlords’ responsibility.  - 2010  April 9     BUSINESS JOURNAL

   

The new U.S. - China tug - of - war 

U.S.-China relations seem more strained than any time since Richard Nixon and Zhou Enlai signed the Shanghai Communique in 1972. China's ancient sense of superiority - which, during the last dynasty, led to decay and obscurantism in confronting the modern world - appears almost overnight to have been discovered once again. Clearly, the leaders as well as the people of the Middle Kingdom are feeling their oats.

But their geopolitical goals and strategies have not changed fundamentally despite their new wealth. Taiwan is the main question on which they're pushing the United States, but the dynamics of this issue are the most positive in decades.

China today is like a poor Chinese farmer who suddenly enjoys a modest windfall - not through a lottery but through hard work, savings and good investment. But he continues to adhere to his long-term plan to have his family become the wealthiest and most respected in the county. This will require decades, perhaps generations, of work and savings but also education and making use of his rivals when possible but realizing that, unless they're hostile, their individual prosperity can be mutually beneficial.

THE BUSH YEARS

The years of George W. Bush were strange ones in U.S.-China relations. When Mr. Bush first took office in 2001, his administration saw the prevention of China's rise to regional military parity with the U.S. – which, if attained, would give China the basis for a global challenge to America's assumed benevolent pre-eminence - as a critical security goal. After 9/11, Mr. Bush turned over political and economic relations with China to Colin Powell, his secretary of state, and like-minded senior trade officials. Their instruction was to retain good ties with China and keep the Taiwan/mainland issue under control.

But geopolitical strategy and defence procurement, deployment and targeting regarding China were all left in the hands of neo-conservative civilians in the Pentagon. Without specifically naming China, the National Security Doctrine of 2002 affirmed the policy of maintaining U.S. global pre-eminence if necessary, it implied, through pre-emptive war. Defence secretary Donald Rumsfeld repeatedly accused the Chinese of an unseemly increase in defence spending and a lack of transparency in its military expenditures. But the Chinese response to the bold implication that China was a long-term threat to the U.S. was restrained, as was their response to the Pentagon's reported plans for new U.S. naval and air deployments to Asia, as well as nuclear retargeting toward the region.

The rhetoric of the Bush administration, meanwhile, emphasized friendly relations. This extended especially to trade. The money flowing into the American economy was consumed in good part by America's spiralling consumption of Chinese goods. Wall-Mart became The Great Wall-Mart. The booming Chinese economy that resulted provided the foundation for a future Chinese arms race with America if that was their intention - which the Pentagon believed it was. But still, there was no program in China to build hundreds of intercontinental ballistic missiles to offset the huge U.S. advantage in this field and the new anti-missile system that the Bush administration had begun to deploy.

CHEN AND OBAMA

The election of Chen Shui-bian, an openly pro-independence candidate, as president of Taiwan strained relations across the strait. But this had little effect on U.S.-China affairs, as Bush officials were careful not to seem to be backing away from the U.S. commitment not to support or encourage Taiwanese independence. In 2003, in a rare rebuke, Mr. Bush publicly lambasted Mr. Chen for his provocative words on the issue. Still, large U.S. arms sales to Taiwan went ahead. The Chinese generally responded only rhetorically, and briefly.

When the Obama administration took office, it made it clear that it believed the best way to assure a positive Chinese role in the world was to treat the Middle Kingdom as a prospective partner, not as the No. 1 potential enemy. Yet, paradoxically, China chose to get tough with Barack Obama in ways it never did with Mr. Bush.

Senior Chinese officials insist that China will not raise the value of its currency, and scold the U.S. for asking. Having profited from U.S. prolificacy, Beijing now demands that Washington protect China's $2-trillion in investments in U.S. dollar instruments. And China has sternly admonished America for its $6.4-billion arms deal with Taiwan and for Mr. Obama's meeting with the Dalai Lama.

STRANGE HIGH DUDGEON

In addition to Mr. Obama's geopolitically friendly posture toward China, there are other factors that make Beijing's high dudgeon with Washington seem strange. Aside from the negative effect on China of the arms sales package - the planning for which was inherited from Mr. Bush - several significant developments should have fundamentally reduced the possibility of U.S.-China tension over Taiwan, as well as strains across the Strait. This is the first time since Chiang Kai-shek fled to Taiwan in 1949 that some sort of long-term settlement between the island and the mainland seems conceivable.

The new dynamics include the domestic political turnabout in Taiwan with the 2008 electoral defeat of Mr. Chen and the return to the presidency of a Kuomintang leader, Ma Ying-jeou. Mr. Ma has reaffirmed the one-China principle but insists that Taiwan must retain its existing level of autonomy. Since the election, there have been cross-Strait visits and official agreements on direct air travel, postal relations and other matters. And Chinese President Hu Jintao has called for talks to end the formal state of hostility between Taiwan and China. Mr. Hu did not mention "peaceful liberation" and, instead, called for peaceful development and a settlement framework that implies that the two negotiating parties would be co-equals.

Soaring economic integration across the Strait, meanwhile, continues. More than a million Taiwanese now reside in China. Most important, however, is the striking change in mood and perception in Taiwan. This transformation reflects popular consciousness of an already "risen" China and of America's new, more realistic geopolitical strategy toward coping with this phenomenon.

The result is less belief in Taiwan that America would persist in any protracted U.S.-China conflict over a Taiwanese move toward independence. There should also be a new fear that a Taiwan-China peace deal that's conceivable today - such as the one Mr. Hu may be suggesting - may not be on the table in 10 or so years. All of these factors have spilled the momentum out of the sails of Taiwanese independence.

THE JOYS OF HUBRIS

In sum, many in China are understandably feeling the joys of hubris. But the core leadership is very likely using Beijing's widely perceived leverage as a tactic - a short-term wedge to advance its position with Washington on issues such as Taiwan and Tibet. At a minimum, the Chinese probably expect to achieve some expansion of U.S. verbal support of China's sovereignty over these two entities and American "opposition" to Taiwanese independence, as well as support for peace talks across the Strait.

The principals in the Politburo probably appreciate the change in Washington's policies under Mr. Obama. They likely still adhere to Deng Xiaoping's advice that they not try "to take the lead" but concentrate on building up the country's economic, scientific and technological foundation. This, they believe, will be the basis of China's ultimate attainment of an unexcelled military and economic position in the world.

These leaders are also likely to understand that the achievement of this grand goal will still rely on a thriving U.S. market for Chinese goods. And this condition, they know, will, in turn, require a healthy American and world economy - and probably also an indefinite continuation of American military power in East Asia and the sea lanes to the region. They probably also believe that the Middle Kingdom's interests depend on the same military forces containing the threat of messianic terrorism on China's border.

The best evidence for these conclusions is the failure of China's leaders to significantly withdraw their holdings in U.S. dollar instruments [?] and to launch a crash program to build hundreds, if not thousands, of ICBMs that could reach the United States. We should all be watching to see whether these restraints continue.

Last year, during a visit to the U.S., Premier Wen Jiabao said China needed decades to catch up with moderately developed countries and 50 years to catch up with the most advanced countries (i.e., the U.S.). I think he and most of his colleagues still believe that.

Jay Taylor is author of The Generalissimo: Chiang Kai-shek and the Struggle for Modern China, winner of the 2010 Lionel Gelber Prize    - 2010 March 22   GLOBE & MAIL

NOTE:  We do not necessarily agree with this viewpoint but we post the article to raise awareness.  

 
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

440 Broadway lease deal
SQUARE FEET    6,400 sq. ft
FLOORS                Basement, 1 &2
RENT                      $575 per sq ft
  - 2010 July 8   CRAINS

Fifth Avenue - former Takashimaya space

Thor Equities, the new owner of the Takashimaya building on New York's Fifth Avenue, plans an extensive remodeling as part of an effort to land a retailer large enough to lease the first eight floors of the building. Thor paid $142 million for the property this summer, and expects to spend up to $60 million on the renovations. The owners say they'll be talking to both European luxury department stores as well as more moderately priced merchants as they search for a tenant. The Wall Street Journal

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

Gauging local markets
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

 

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