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.

In contrast, the apartment market remained one of the most healthy real-estate markets in the third quarter, benefiting from the struggling home-sales market. Many would-be buyers, unable to get mortgages or worried about the darkening economy, are renting apartments instead.

• Nearly 1 in 6 Owners 'Under Water' 
• Steep declines in US Property Prices
• How Many Millionaires in your zip code?
• Trump

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

• Largest Property Owner in the United States
• San Francisco Property Market
• San Francisco's most expensive home
• New York Property
• New York Coops
• Washington DC
• Boston
• Seattle
• Los Angeles
• Hawaii
• Some of the Most Expensive homes in US
• Ivana Tower, Las Vegas

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