Southern California Industrial Real Estate Blog

State of the Commercial Loan Market

By Robert Schroell

The rough ride isn’t over the for the commercial loan market.

Community banks in particular will likely have a tough time in 2010. Hundreds of regional institutions have a significant chunk of their loan portfolios ― up to and exceeding a quarter in some places ― in commercial mortgages.

At the same time, commercial debt is coming due at a staggering rate. The market will need about $1 trillion to service more than $3 trillion in commercial mortgage debt, according to a recent forecast by Keefe, Bruyette & Woods, a well-known New York analyst.

That’s likely to make cash a disappearing commodity, primarily for the banking industry. In fact, experts at Keefe, Bruyette & Woods are urging banks to consider offering extensions to cash-strapped homeowners, many of whom have struggled to refinance their existing mortgages.

A significant slew of delinquencies in CMBS (commercial mortgage-backed securities) and bank loans is also expected to shape the course of 2010. It’s also almost difficult to imagine CMBS delinquencies getting any worse ― the rate skyrocketed an astounding 500 percent last year, jumping past 6 percent in December 2009 for the first time ever.

The governor of the Federal Reserve Board recently tried to rally optimism, noting that recovery should begin to take root as the year progresses. But those rosy projections didn’t include the commercial real estate market, which continues to flounder amid strained credit conditions and stagnant refinancing.

All in all, it’s a less than inspiring picture of what’s likely on the horizon.

“We estimate that the weighted average price decline for the commercial mortgage market is roughly 25%,” the experts at KBW state in their analysis. “This suggests that almost all the equity in the commercial sector has been wiped out.”

Fortunately… there’s pretty much no place else to go but up.

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http://www.mortgageloanplace.com/commercial-mortgage.html

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http://www.acumenlawgroup.com/wp-content/uploads/2009/11/commercial-loan.jpg

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http://www.sbasmallbusinessloans.com/moneywalk.jpg

PHOTOS OF THE WORLD’S TALLEST BUILDING

Burj Dubai, the tallest building in the world (2,620 ft.)

The workers on the top girders can see the earth’s rotation.

REAL ESTATE DEVELOPERS IMPACT BY BERNIE MADOFF’S “PONZI SCHEME”

REAL ESTATE DEVELOPERS IMPACT BY BERNIE MADOFF’S “PONZI SCHEME”

Several major East Coast Real Estate Developers have been named as victims in Bernard Madoff’s complex Ponzi scheme, which is rumored to have stripped investors of $50 billion in assets.

According to GlobeSt.com this list includes:

· Larry Silverstein, the World Trade Center developer;

· The Wilpons and Rechlers families;

· Brokers at Newmark Knight Frank and CB Richard Ellis–including Stephen Siegel, chairman of worldwide operations there,

· New Jersey developer Fred Daibes is rumored to have lost a significant amount of money;

· Mort Zuckerman, the chief executive of Boston Properties;

· Fred Wilpon, who owns the Mets and is head of Sterling Equities;

· Steven Simkin, a partner at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison and chairman of the firm’s real estate department;

· A number of limited real estate partnerships in DC are also among the supposed victims.

· Other recognizable names on the list include John Malkovich, Sandy Koufax and Tim Teufel, - if these are the actor and baseball players, respectively, is unconfirmed, as is Larry King, the talk-show host, Frank Lautenberg, the Democratic senator from New Jersey, and Mark Green, a former public advocate of New York City.

Madoff was known to have focused on the rich and famous, sometimes requesting as much as a $20 million minimum.

A large number of the developers who invested with Madoff are reported to have pledged securities held by him for development projects. It has yet to be determined whether the actions of one person, will again impact bank lending criteria.

The complete client list of Madoff has been provided by the Wall Street Journal:

http://online.wsj.com/public/resources/documents/madoffclientlist020409.pdf

Info courtesy of:

http://www.globest.com/news/1341_1341/newyork/176748-1.html

https://ecf.nyeb.uscourts.gov/

http://designdepartment.wordpress.com/2006/09/07/

http://marketplace.publicradio.org/display/web/2006/10/27/down_in_debt/

http://www.observer.com/term/25509

http://gothamist.com/2007/09/07/revised_vision.php

http://blog.lib.umn.edu/mcgin017/blog/fall_2008/honors_intro_to_philosophy_fall_08/

INVESTORS STILL STRONG ON REAL ESTATE

INVESTORS STILL STRONG ON REAL ESTATE

Statistics are always fun, and we like this set, which surveyed more than 1,000 private and institutional real estate investors and documented their findings in the 2008 Real Estate Investor Outlook, conducted jointly by National Real Estate Investor, Marcus & Millichap and Countrywide Commercial.

Among the key findings:

• Availability and cost of financing moved up to the top concern for 2008. Unforeseen shocks to the economy rank as the second-highest concern among all groups except developers;

• 43 percent of developers express concern over rising surveyed more than 1,000 private and institutional real estate investors and documented their findings in the 2008 Real Estate Investor Outlook, conducted jointly by National Real Estate Investor, Marcus & Millichap and Countrywide Commercial.

interest rates

• Investors are optimistic about rental increases, although not as much as they’ve been in the past. Seventy-eight percent of respondents expect to see an increase in effective

rents for one or more property types compared to 84 percent in 2006. Investors feel

most positive about rental increases in the apartment sector.

• Replacement cost continues to be a key criterion for investors when they make acquisitions. Almost 90 percent of investors agree that replacement value is important. Nearly two-thirds of respondents indicate their most recent acquisition was at or below replacement cost, while 12 percent of respondents say their acquisitions were above replacement costs.

• Sixty-one percent of respondents say that returns are artificially low, with 38 percent

predicting that returns will rise back to long-term averages as conditions change and 23 percent forecasting returns will rise as conditions change but will not reach long-term average levels.

INVESTING IN THE DOWNTURN

INVESTING IN THE DOWNTURN

The 2009 Emerging Trends in Real Estate report released by the Urban and Institute and PriceWaterhouseCoopers LLP, suggests that real estate investors just sit and wait right now – soon opportunities will surface at big discounts. The first best batch of opportunities may not be in actually property, but in buying discounted loans and recapitalizing distressed borrowers and investing in maturity defaults, construction loans, or taking mezzanine positions and equity stakes in properties.

Other advice includes investing in publicly held REITs that will lead the market’s recovery, focus investments on “global pathway” markets — 24-hour coastal cities like Seattle, San Francisco, Los Angeles, New York and Boston.Other quick-hit suggestions from respondents in the ULI/PriceWaterhouseCoopers survey:

· Go green. Cutting energy and other operating cost is likely to be a growing priority for both landlords and tenants.

· Buy or hold multifamily; hold office. Hold hotels, buy residential building lots, but be prepared to hold.

· Purchase distressed condos in urban areas near transit.

· Focus on neighborhood retail centers with strong grocery anchors and chain drugstores.

http://www.costar.com/News/Article.aspx?id=41A9DE2D4E098EDEFBB56A05FBBB79A3

HOW GREEN RENNOVATIONS PAY OFF

HOW GREEN RENNOVATIONS PAY OFF

Green remodeling can pay off — not only in lowered utility bills, but also in buyer appeal when the property is sold.

Here are some green things to consider:

~ Energy-efficient products. Choose Energy Star appliances, double-paned windows, low-flush toilets, and compact fluorescent light bulbs.

~ Spray foam insulation. Seal the home with insulation that doesn’t let the heat or cooled air leak out.

~ Sustainable wood flooring. Select flooring certified by Forest Stewardship Council, which protects forests by managing the amount of wood harvested annually.

~ Locally made products. Buy products made less than 250 miles away to reduce transportation costs. Granite, for instance, is generally imported from afar.

~ Nontoxic paint. Use paint that is low in volatile organic compounds (VOCs) — chemicals that evaporate into the atmosphere. Look for Green Seal certified brands.

http://www.realtor.org/RMODaily.nsf/pages/News2007123106?OpenDocument

NEW MARKET TERMS

NEW MARKET TERMS

We get lots of interesting email…this one, from Sanddra ay Costalife Services rollover@costalifeservices.com  gives us a chuckle…

BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET — A 6 to 18 month period when the kids get no allowance and the wife gets no jewelry.

VALUE INVESTING — The art of buying low and selling lower.

BROKER — What my broker has made me.

STANDARD & POOR — Your life in a nutshell.

STOCK ANALYST — Idiot who just downgraded your stock.

INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nuthouse.

PROFIT — An archaic word no longer in use.

CAP RATES WILL RISE

CAP RATES WILL RISE

Cap Rates are predicted to be going up in the next 12 months, marginally, mind you, but they will rise. Let’s look at the statistics, in October 2007, the average cap rate for commercial property was 6.94 percent, according to Real Capital Analytics. In 2006, the average cap rate was 7.12 percent.

Cap rates for top-tier properties are not expected to rise more than 25 basis points while cap rates for lower-tiered properties and markets will increase 50 basis points to 75 basis points, predicts Hessam Nadji, senior vice president and managing director of Marcus & Millichap Research Services.

 “Many cap rates have been predicated on the availability of cheap debt, and that’s driven pricing to artificially high levels,” notes Bob Dougherty, chief acquisitions officer with Buchanan Street Partners “We’ve been underwriting a 100-basis-point increase in cap rates for almost two years because we’ve been expecting a correction. Now we think cap rates will return to historical norms of 200 [basis points] to 300 basis points over Treasuries.”

Industrial REITS: 1of 3 Areas of Real Estate Expected to Boom

Industrial REITS: 1of 3 Areas of Real Estate Expected to Boom

David Lee, who has managed the $2.5 billion T. Rowe Price Real Estate Fund (TRREX) since it opened in October 1997, says the following areas of the housing market are either doing well now or soon will be.

Mall companies. “There’s good scarcity value in regional malls and not a lot of construction going on in the mall business,” he notes. “Short of going bankrupt, we’re not convinced that all these retailers can close their way to profitability. They’re going to continue to pay rents to have stores in the highly profitable malls.”

Residential apartment communities. “If you can’t buy a home, you have to rent.”

Industrial REITs (or real estate investment trusts). Warehouses are pretty economically sensitive right now, Lee says.

Original from: http://www.realtor.org/RMODaily.nsf/pages/News2008070702?OpenDocument

INVESTORS EXPECT CONSTRUCTION COSTS TO INCREASE

INVESTORS EXPECT CONSTRUCTION COSTS TO INCREASE

70% of investors have experienced an increase in construction costs over the past 12 months, and more than half expect an increase in the next 12 months, according to the 2008 Real Estate Investor Outlook, which consulted 1,000  seasoned investors.

The Outlook suggests that construction costs increased an average of 16 percent. Going forward, respondents forecast construction costs to increase six percent.

Many experts believe the slowdown in single-family housing construction has decreased demand for commonly used building materials, therefore mitigating extreme price increases.

“Demand for concrete and steel hasn’t dropped off because there are still a lot of projects under development that use these materials – particularly public projects,” observes Rick Cavenaugh, president and COO of Fifield Cos., a Midwestern developer specializing in multifamily and office properties.

Statistics show global demand for building products continues to grow. These market dynamics make a substantial price correction unlikely. In fact, only eight percent of respondents expect a major pricing correction, while 90 percent expect there to be a minor or modest pricing correction for commercial real estate assets.