LWR Commercial Real Estate
Sarasota Real Estate
Ignore the crowd… invest in commercial real estate
Jan 8th
Jon Markman over at Morning Money writes a great “thinkpiece” on commercial real estate and how it was so far stymied the chicken little’s of the talking head networks. The “next shoe to drop” has instead bolstered the REIT funds with $17 billion in cash infusions to take advantage of these remarkable revaluings.Take 5 minutes and go through our market and try to see if the contrarian view might be the most profitable one for the long term investor. Full story here.
Of all the independent institutional research that I receive, some of my favorite comes from Justin Mamis, a veteran of all the financial wars we’ve seen over the past five decades.
Although he’s steadfastly bearish, no matter the climate – like those codgers you see wearing heavy coats on sunny days in Florida – the Canadian analyst has lasted so long because he’s quick with colorful phrases, and his research is amusing and insightful.
Just last week, Mamis recounted a conversation he had enjoyed years ago at the table of his new boss, the legendary analyst/historian/portfolio manager Don Coxe: “At dinner, [Coxe] would lean back in his chair in that professorial manner of his and “remind” the guests that the Sanhedrin, the Hebrew Court of Law, had a rule that if every member voted the same way, the decision went the other way,” Mamis wrote. “Unanimity had to be misguided.”
That story got me thinking: What is one investment theme that the public and/or pros could agree on today?
It’s a totally subjective question, meaning everyone will have a different answer. But I figured that would be a great “thought exercise” and came up with three statements I’ll bet virtually everyone would agree with. They are:
- U.S. healthcare reform will fail.
- The U.S. budget is out of control.
- China will dominate this century.
- Commercial real estate is still a disaster waiting to happen worldwide.
The odd thing about that last statement is that – across the board – commercial real estate stocks have been among the strongest performers over the past few months. But it’s been a very quiet move, generating little in the way of attention.
Coming off a hellacious decline, these stocks are now enjoying solid uptrends. Although not quite as cheap as they were a year ago, these stocks are still well off their highs, and feature still-low valuations. Add in their expected income streams and it’s understandable why these stocks are still the “go-to” choices for a lot of fund managers.
These stocks make a lot of sense. Unlike manufacturers who are dependent on hit products and flaky vendors, most real estate owners have long-term contractual obligations that have offered surprising stability in this tough economy. For instance, take SL Green Realty Corp (NYSE: SLG), the largest owner of office real estate in New York.
As you may have heard, that’s a city where a lot of too-big-to-fail financial companies reside.
Since real estate is such a capital-intensive industry, it is battered during the sort of capital famine seen last year. But the credit bull market is enabling companies with good collateral to refinance their debts, a transformation that’s helped real estate investment trusts (REITs) to raise more than $17 billion since the start of 2009. The REITs have used this infusion to shore up their balance sheets and to acquire properties from less-adroit owners. As part of its recent earnings reports, SL Green has reported that the government’s direct aid to banks has directly it to maintain a high occupancy rate and steady rents.
I talked about this a lot in the summer, and will stick to my guns: There’s no reason that REITs like SL Green can’t get back to their share-price levels of September 2008 at minimum over the next year or two. For SL Green that would require a return to an $85 share price – a 78% return from Wednesday’s closing price of $47.70.
The REITs are not yet back to paying the big dividends for which they used to be loved — which is why oil-and-gas master limited partnerships (MLPs) like our Linn Energy LLC (NASDAQ: LINE) have become so popular. But those REIT payouts will return.
I recognize it’s still tough out there for property owners: My office lease in downtown Seattle is up, and the owner offered me twice the space in a better building (with an awesome Puget Sound view) for nearly the same amount I’m paying now – if I agreed to take a longer contract. I’m taking them up on the offer, recognizing that’s the kind of deal-making going on now to get the real-estate industry through 2009-2010 rough patch.
But don’t get hung up on what’s happening now. Investors should be valuing REITs on their prospects for 2011-2012 prospects. For now the vote is that they’ll be much better.
We’ll discuss this more as the New Year advances. In the meantime, if you are a commercial property lessor, lesee, broker or developer, I welcome your thoughts.
2010: Buyer’s Market for Commercial Real Estate
Jan 7th
The ideal time to invest in commercial real estate is 2010 – that’s when commercial property prices will hit bottom, according to a recently published survey of industry experts, including investors, developers, lenders, brokers, and consultants.
The Emerging Trends in Real Estate 2010 study, released last week by PricewaterhouseCoopers LLP (PwC) and the Urban Land Institute (ULI), says commercial real estate (CRE) players predict vacancies to continue to increase and rents to decrease across all property sectors before the market hits bottom next year.
The consensus is that property values will ultimately drop 40 to 50 percent on average from 2007 market peaks, making 2010 and 2011 the opportune time for investors to buy at or near cyclical lows.
“Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases,” said Stephen Blank, ULI’s senior resident fellow for real estate finance.
The survey data also indicates that investors believe capital will slowly begin to flow back into commercial real estate markets by the end of 2010, led by all-cash investors.
Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers, explained further, “For 2010, our report finds that investors will need to time the cycle and only cash-buyers will benefit from the emerging opportunities. Equity investors will need to focus on quality assets and expect to hold for at least a five- to seven-year period during the recovery, allowing fundamentals to slowly improve.”
The research firm Real Capital Analytics, Inc. estimates that commercial real estate loans in default, foreclosure, or bankruptcy now total roughly $130 billion. By being selective on offers from both distressed sellers and banks that are clearing out bad loans and real estate owned portfolios, investors will score bargains on premium properties, according to the study.
Blank says the CRE property market recovery will likely begin to gain traction before 2012, and survey participants believe that the markets performing well before the crash should be the top-performers coming out of it, with investors continuing to favor global gateway markets on the East and West Coasts.
According to the survey, Washington, D.C. ranks number one as the “recession-proof” city. Value declines there have been less than other markets as employment is buffered by the federal government.
Long-term confidence holds for New York and Boston despite financial industry downsizing. West Coast gateways – San Francisco, Seattle and Los Angeles – have all suffered ratings declines, but remain among the survey’s top major markets. Texas markets also continue to show strength, according to survey participants.
As prices hit their floor, the PwC and ULI study predicts that lending will be conservative, expensive, and extended only to the most-favored banking relationships. Real estate investment trusts (REITs), private equity funds, and even refashioned mortgage REITs will start to provide loans to battered borrowers but at a steep price, the companies said in their report.
Amendment 4 a bad idea for Florida
Jan 6th
http://jacksonville.com/business/2010-01-03/story/amendment_4_a_bad_idea_for_florida
BY ABEL HARDINGSTORY UPDATED AT 11:17 PM ON MONDAY, JAN. 4, 2010
When Florida voters go to the polls in 11 months, they’ll vote for a new governor and U.S. senator. They’ll also decide the fate of Amendment 4, which has the potential to clog future ballots and repeatedly drag voters to the polls to approve every future change to a county’s comprehensive plan.
In Duval County, that would have meant dozens of additional ballot items in 2009 – a depressed year in real estate.
It’s not hard to see why Amendment 4 – or the Hometown Democracy initiative as it is known – is attractive to some. In a bid to “boost growth,” the Florida Legislature rolled back much of the state’s growth management laws in the past legislative session. In a state where debate has raged for decades over the negative effects of unplanned growth, the move was both surprising and disappointing.
Amendment 4, which would require referenda for every change to Jacksonville’s comprehensive plan, is not the answer.
In 2006, the small town of St. Pete Beach passed legislation similar to the Hometown Democracy initiative. The results have been ruinous.
St. Pete Beach learned quickly that voter-approved comprehensive plan changes can be both cumbersome and expensive. After developers and community leaders launched a campaign to push through a new growth management plan that narrowed the city’s version of its Hometown Democracy-style laws, St. Pete Beach was sued. Hundreds of thousands of dollars in legal fees later, development slowly returned.
Both sides of the debate have tried to spin the St. Pete Beach story to their benefit. Opponents argue that development would grind to a halt and courts would be flooded with legal challenges. Supporters assert that the lack of a defined process – where planners reviewed changes, a commission voted in favor of them and voters had the ultimate say – was what was responsible for St. Pete Beach’s problems.
There is no doubt that Florida must get serious about smarter development. The glut of unoccupied homes around the state is testament to the fact that developers greatly overestimated demand, and that local governments failed to provide necessary checks and balances.
But, by subjecting every change to a county’s comprehensive plan to a referendum, voters are giving elected officials license to stop doing their jobs.
In Duval County, Jacksonville City Council members are charged with responsibly amending our comprehensive plan. If they fail to exercise those duties in a trustworthy manner – and there are certainly times when they have not over the years – then they should be replaced in the next election.
According to the Duval County Supervisor of Elections Office, the last election called in North Florida, which featured a state Senate seat and two Atlantic Beach races, cost taxpayers nearly $700,000 and voter turnout was less than 4 percent. One can only imagine the cost to taxpayers that scores of additional ballot initiatives would create, not to mention the difficulty associated with getting voters to the polls.
Amendment 4 is not the way to solve Florida’s growth problems. Electing honorable officials and holding them accountable is.
CMBS Delinquencies Jump 500% in 12 Months
Jan 6th
The pain in the commercial real estate (CRE) sector has yet to ease, and the sting has become glaringly evident in the secondary market for CRE debt, where investors find themselves holding unprecedented volumes of nonperforming assets. The percentage of loans at least 30 days past due in the commercial mortgage-backed securities (CMBS) universe closed out 2009 at 6.07 percent, according to Trepp LLC. That’s a staggering 502 percent jump over the 1.21 percent CMBS delinquency rate just 12 months earlier.
In the Eye of a Commercial Real Estate Storm
Jan 5th
As always, a picture’s worth a thousand words and here is one that deserves to be seen more than once.
Unfortunately, the point that is driven home quite effectively is we have coasted through the eye of the storm and are too busy patting ourselves on the back to get ready for the hurricane ahead.
The only difference is that for this wave of resets, the Federal Reserve has already played its hand. Back in 2007, the Fed had pumped a few hundred billion Dollars into the financial system, but had yet to resort to the unbelievable array of lending windows/ bailouts/ outright acquisition of toxic waste assets.
Since then the Fed has done the following:
- Cuts interest rates from 5.25-0.25% (Sept ’07-today)
- The Bear Stearns deal/Fed buys $30 billion in junk mortgages (March ’08)
- Opened various lending windows to investment banks (March ’08)
- Taken over AIG for $85 billion (Sept ’08)
- Implemented the $700 billion Troubled Assets Relief Program (Oct ’08)
- Bought commercial paper (non-bank debt) from non-financials (Oct ’08)
- Offered $540 billion to backstop money market funds (Oct ’08)
- Backstopped up to $280 billion of Citigroup’s liabilities (Oct ’08).
- Given another $40 billion to AIG (Nov ’08)
- Backstopped up $140 billion of Bank of America’s liabilities (Jan ’09)
- Bought $300 billion worth of Treasuries (Mar ’09)
- Bought $1.25 trillion in agency mortgage backed securities (Mar ’09-’10)
In closing, here’s how the stock markets fared in 2007-2008
Tough times for Sarasota and Manatee commercial real estate
Jan 4th
By KEVIN L. McQUAID
Published: Monday, January 4, 2010 at 1:00 a.m.
STAFF PHOTO / CHIP LITHERLAND
It’s more difficult to borrow money, vacancies are up, values and rent are down and the key to a solution – jobs – could be years away.
To borrow a biblical expression, it may be easier these days to pass a camel through the eye of a needle than it is to get a commercial real estate loan.
Despite federal bail-out money intended to stimulate lending, loans for investment in office buildings, shopping centers, industrial sites and raw land are increasingly rare, the result of falling values and other factors.
Commercial property owners and mortgage brokers say the lack of capital also stems, in part, from new federal regulations intended to staunch foreclosures and halt the aggressive lending practices of the early 2000s.
“It’s ironic that the federal government put all the stimulus money into banks, while another branch of the government is over-regulating capital reserve requirements on banks,” said Brett Hutchens, chief executive officer of Casto Lifestyle Properties, a Sarasota development firm that owns shopping and lifestyle centers nationwide.
“The same government is providing both the carrot and the stick to lenders,” Hutchens said. “It’s created gridlock and made lending and borrowing very, very difficult.”
“It’s a Catch-22 the government has imposed,” said N.J. Olivieri, president and owner of Sarasota-based Horizon Mortgage Corp. “They tell the banks to make loans but then tell the FDIC to tighten the restrictions on new lending.”
New regulations notwithstanding, lenders say the pullback in available credit is appropriate, given the shaky economy.
“Banks are simply not looking to take extended risk today,” said Charlie Murphy, chief executive of the Bank of Commerce, a Sarasota lender, and a board member of the Florida Bankers Association, a trade group.
“It’s not unusual for banks, in bad economic times, to tighten their lending standards,” Murphy said. “And regulators are not too happy these days about allocating new money to commercial real estate.”
Other forces
Banks have been hurt, as well, by other forces beyond their control.
Most notable has been the exit from the lending market by risk-averse insurers and pension funds, typically a key source for permanent mortgages.
That has crippled commercial real estate owners seeking to refinance or simply shift loans from banks, as is usually done.
That, in turn, has forced banks to keep mortgages on their books, which further limits their ability to cut new loans — especially in the construction and real estate sectors.
The precipitous drop in commercial real estate values — combined with falling rental rates on nearly every property segment — represents the largest factor in the dearth of lending, however.
Retail rental rates have fallen by as much as half, and many tenants remain unable to pay rent at all, part of the fallout from the longest economic recession since the Great Depression.
Vacancies, too, from super-regional malls to neighborhood-anchored strip centers, have risen dramatically.
“In many cases, shopping centers are full, but not all of the tenants are paying rent,” Olivieri said. “Landlords don’t want their space to go dark, so they’re letting them stay put.”
Office rents have also fallen, in Southwest Florida and nationwide — by 20 percent to 30 percent in some cases.
“In some submarkets, there is an even greater devaluation of rents,” said John Harshman, president of Harshman & Co., a Sarasota commercial real estate brokerage firm.
The lack of income, and decrease in values, has forced many property owners to come up with new equity on loans to satisfy lenders’ re-appraisals, investors say, even on performing mortgages.
Regulators, too, are calling on banks to beef up reserves and loan coverages by thinning loan-to-value ratios.
Restrictions
Meanwhile, the few commercial real estate loans that are available come with excessive restrictions, including onerous equity requirements and repayment schedules, which are also the result of new federal regulations.
In many cases, lenders that once required investors to put down 20 percent or 30 percent equity are demanding twice those percentages — and borrowers’ personal guarantees — before they will consider loaning money.
“We’ve gone from having an unsecured line of credit, on a performing loan, to getting a commitment for just one-year from the bank, and the terms are complex,” said Andy Dorr, a senior vice president with Githler Development Co., a Sarasota real estate investment and development firm.
As a result, Horizon and others have begun lining up equity partners for developers or investors, Olivieri said.
At the same time, Dorr said, the costs associated with commercial real estate borrowing — appraisals, origination fees, legal expenses and environmental analysis — have increased in many cases.
The hiked fees and the lack of new capital are both tied, investors and lenders say, to the fear that a commercial real estate meltdown is in the offing. Already, development giants such as mall owner General Growth Properties have defaulted on commercial real estate loans — a signal to some analysts that another wave of foreclosures is ahead. Next year alone, hundreds of billions of commercial real estate loans, many of which were cut during the real estate boom and required interest-only payments, will mature or come due nationwide. When that occurs, many predict, defaults will spike.
“Everyone keeps saying that commercial real estate is the next shoe to drop,” Hutchens said. “Well, I have to agree: It’s about to drop.”
The answer, industry experts say, can be summed up in a single word: Jobs.
“We have to stimulate the economy with more jobs and small business,” Murphy said. “When we have jobs, then businesses expand and the economy cycles upward. The opposite is also true, and it creates a vicious, self-fulfilling prophecy.”
“People have to go back to work,” Olivieri said. “Specifically, in construction.
“Construction has always led the way out of recession; it’s key. It starts the employment cycle, and then retailers hire and the cycle returns to supply and demand. But if you don’t have a job, if you don’t know where your next dollar is coming from, then you don’t spend,” Olivieri said.
Unfortunately, for Florida, that job growth may be a long time in coming.
Unemployment in Southwest Florida stands at 12.7 percent, slightly above the 11.5 percent statewide average, which is at the highest level since October 1975. Nationally, unemployment is just under 10 percent.
Even more dire are some economists’ predictions that Florida’s unemployment rate will not fall to 6 percent — within the range of a moderately healthy economy — until 2018.
If that proves true, experts believe commercial real estate will remain depressed well into the future.
“The 12 percent unemployment rate in Sarasota and Manatee counties, and the 10 percent rate nationally, will create more commercial real estate vacancies,” Harshman said. “And more vacancies will, in turn, further drive down commercial real estate values.”
This story appeared in print on page D6
Copyright © 2010 HeraldTribune.com — All rights reserved. Restricted use only.
Morgan Stanley Walking Away from Loan Commitments
Dec 29th
Morgan Stanley (MS) is walking away from five office buildings it bought two years ago at the height of the market for $6.5 billion (that’s “B”… not “M”), which have since lost as much as 50% in value. The reason, says a corporate spokeswoman, “This isn’t a default or foreclosure situation… we are going to give (the lender) the properties to get out of the loan obligation.”
So let me get this straight….
Even as Banks were getting rewarded with billions in bailouts for pumping up the industry I work in to feed my family… so that they could profit on both the way up and especially on the way down by using trades that paid off with leverage when everything collapsed… I myself have gone on record, actually branding consumers and homeowners as “punks,” for strategically defaulting on loans that they realistically still have the means to continue paying.
And all the while the banks have been spewing out rhetoric about how morally reprehensible it is to damage the fabric of our society by turning our backs on these contracts tthat underpin our agreements.
So here we are, at the beginning of the most extreme financial crisis since the Great Depression. And, with the direct impact of bailouts that came straight from taxpayers, Morgan Stanley, which was saved from collapse due to its own irresponsibility, ended up clocking banner results this year… and the average compensation and benefits they paid each employee for just the first three quarters of 2009… was roughly $175,000… per employee.
Now they “give (these) properties away to get out of the loan obligation”??
And they have the blatant audacity to say in the same breath that “this isn’t a default or foreclosure situation”?
Don’t take my word for it. Read the objective story from Bloomberg.
For some subjective commentary, I recommend: Huffington Post and Calculated Risk.
In the part I like best, Calculated Risk writes:One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes…. I wonder if hearing about “rich” banks that are paying “large” bonuses walking away from commercial buildings also weakens the social pressure?
Florida Home Prices See 4% Gain
Dec 29th
Hit hard by the housing downturn, Florida is one of two states that realized gains of more than 4 percent in home prices, according to a quarterly housing valuation analysis by IHS Global Insight.
In South Florida, prices started to inch up in the third quarter.
In the Miami metropolitan area, prices increased to an average of $191,200 from $182,900 in the previous quarter. However, they remain down significantly from the third quarter of 2007, when the average price was $312,600.
The Fort Lauderdale metropolitan area saw a slight improvement, with an average price in the third quarter of $148,000, up from $147,700 in the previous quarter, but still down from $248,600 in the third quarter of 2007.
The West Palm Beach metropolitan area saw the average home price inch up to $164,400 in the third quarter from $163,600 in the previous quarter. In the third quarter of 2007, the average home price was $262,000.
Nationwide, in year-over-year terms, house prices increased during the third quarter by 0.9 percent, according to the Federal Housing Finance Agency, the first since the second quarter of 2007, when the national housing market began its slide. From its peak in 2007, the U.S. housing market is now down 10.7 percent, on average, the IHS noted.
For the first time since the IHS study began in 2005, no metropolitan areas were extremely overvalued. There were 52 in 2005.
Homes in Miami-Dade County were deemed fairly valued, while those in Broward and Palm Beach counties were considered undervalued.
For the nation as a whole, the housing market is now slightly undervalued – 8.6 percent when weighted by market value and 10.1 percent when weighted by housing units, according to IHS.
“While the rate of decline has decreased throughout the year as the market began to stabilize,” said James Diffley, group managing director of IHS Global Insight’s Regional Services Group, in a news release. “It’s not at all clear that the market is on a recovery path.”
Pat Neal Development at Full Speed in Lakewood Ranch
Dec 9th
B
Neal Communities Lakewood Ranch
y RICHARD DYMOND
rdymond@bradenton.com
LAKEWOOD RANCH — A 795-unit Lakewood Ranch residential subdivision that had been in slowdown construction mode for 15 months is now moving at full speed.
In a holding pattern due to a sluggish economy since it broke ground on Aug. 7, 2008, Central Park at Lakewood Ranch is expected to have models by July, developer Pat Neal said Wednesday.
The 300-acre site, which is offering lower-priced homes, is situated between 44th Avenue on the north and Malachite Drive on the south, north of State Road 70 and off Lakewood Ranch Boulevard.
Neal said he ramped up the operation recently because he sees a window of opportunity to sell lower-priced homes.
Central Park will offer a two-bedroom, 1,028-square-foot home with a double garage, energy efficient appliances and a “through view” from the front door to the back yard in the low $100,000s, Neal said.
Neal has sold 56 cottages starting at $129,000 at Forest Creek in Parrish and 49 in River Sound on Morgan Johnson Road.
Central Park won’t have any cottages, however, Neal said.
“This is a cyclical business, and people can get their best buy at this time of the cycle when prices are low so we are rushing hard to get this on the market,” Neal said.
Neal said he wasn’t sure if other builders would follow him.
“I would say I am good with timing and good with building toward the market,” Neal said.
Two earth-moving crews were on the 300-acre site Wednesday along with two pipe crews installing water, sewer and stormwater lines.
A utility company was installing switch cabinets and road crews were building curbs.
Power has been supplied to the subdivision’s one lift station.
“We have 85 percent of the earth-work done,” said Chris Reese, vice president of land development for Neal. “Water and sewer are 60 to 66 percent completed.”
Neal, who is Manatee County’s most prolific home builder with 7,600 since 1969, said he relied on sales figures this year to make his decision.
In September, October and November of this year Neal sold 30, 24 and 24 homes, respectively.
For the same three months in 2008 he sold six, four and six homes, respectively, he said.
So far this year, Neal has been able to put roughly 249 buyers into new homes.
In 2008, his sales were 141. In 2007, he sold 118, his lowest total since 1991, he said.
“The market has returned in a number of respects,” Neal said. “Prices are low. The interest rate for consumers of primary homes is at 4 7/8, the lowest in 40 years.
“Most economic indicators are pointing upward except employment,” Neal said.
Although Manatee County has a lot of homes in inventory, most of it is at higher prices, Neal said.
The keystone of Central Park may be a huge park similar to the parks found in small hometown America in the 1940s, said Leisa Weintraub, vice president of marketing for Neal Communities.
The 10-acre park will have a softball field, two tennis courts, two dog parks, a large play area for children, a splash park, a picnic pavilion and a butterfly garden.
Central Park is close to several schools, including Gullett Elementary and Lakewood Ranch High, which is about one mile to the south.
More Central Park information is at nealcommunities.com.
