Posts Tagged ‘commercial real estate’

Distressed CRE Has Hit a Plateau

Monday, January 10th, 2011

Distressed CRE Has Hit a PlateauDistressed commercial real estate volumes seem to have reached a plateau of $186.9 billion in October,  according to a report prepared by Delta Associates that crunched numbers provided by Real Capital Analytics.  The trend has been apparent for several months, according to Delta’s CEO Greg Leisch.

Even as the industry breathes a collective sigh of relief, the question remains:  When will the amount of distress start to recede?  Industry experts believe that is unlikely to happen before 2012.  According to Delta, the plateau first came onto the scene in the spring of 2010, though the firm doesn’t expect any consequential progress next year.  Leisch says that lenders will continue to extend debt obligations, even as commercial property values stabilize in some markets.  2011 is likely to bring yet more pain, with $300 billion worth of CRE loans coming due.  Delta’s report notes that the office sector has the greatest number of distressed assets, valued at $45.6 billion nationally.

There’s also good news in the fact that commercial property values increased 1.3 percent in October, according to Moody’s Investors Service.  That’s the second consecutive monthly gain and represents a 3.2 percent increased over the previous year, notes the Moody’s/REAL Commercial Property Price Index.  The Moody’s/REAL Index is 42 percent below the high point it reached in 2007.

Robert Bach, chief economist for Grubb & Ellis, Inc., said demand is rising for trophy office buildings in cities such as New York, San Francisco and Washington, D.C.  In Chicago, 300 North LaSalle went for $655 million and the Hyatt Center fetched $625 million.  Next year, investors may purchase lower-quality buildings in prime markets, and top-tier office towers in secondary markets.  “This investor enthusiasm has been confined to core properties in primary, supply-constrained markets,” Bach said.  “There’s still a lot of distress out there.”  Despite the remaining distress, commercial properties sales doubled to $16 billion during the 3rd quarter when compared with the same timeframe in 2009, according to Real Capital Analytics East Coast properties averaged a 22 percent increase over 2009, with prices rising 9.1 percent in New York City and 17 percent in Washington, D.C.

Will Healthcare Be Commercial Real Estate’s Savior?

Tuesday, November 30th, 2010

Will Healthcare Be Commercial Real Estate SaviorWith the Patient Protection and Affordable Care Act now the law of the land, commercial real estate executives are waiting to see what impact the legislation will have on their business.   Consensus is that the new healthcare law changes crucial demand drivers for real estate by introducing alternative models to deliver medical services.  The potential to impact commercial real estate lies in the fact that as many as 32 million additional Americans will receive coverage when the law becomes fully implemented in 2014.  They will need a place to receive healthcare.

In a white paper written by Kenneth Meyer and Rob Grossman, Principals with Deloitte Consulting LLP, the authors note that “Using an industry multiplier of 1.9 SF required per patient to estimate the net effect of additional patients on space utilization, it can be estimated that 64 million SF will be required to meet the increased demand.  Since the demand for additional medical space will begin almost immediately, the industry cannot afford a long wait due to development of new medical office buildings, nor can the industry continue to thrive by building more square footage without addressing current square foot absorption.”

To fill growing demand, retail locations are becoming increasingly important to healthcare, especially wellness centers, preventive care clinics and urgent care clinics -a new and emerging trend.  As of February of 2010, there are approximately 1,200 retail clinics in the United States.  “CVS leads the market with 569 retail clinics in 25 states and the District of Columbia,” according to the authors.  “Recent changes in healthcare legislation should help to drive demand and support profitability.  Retail space dedicated to health education could see a boost in the near future.”

Healthcare providers present diversity in a tenant mix and can protect the owner against shifting market conditions.  “A recent study of Fitch-rated Real Estate Investment Trusts (REITs) in the U.S. further illustrated the strength of the healthcare real estate sector,” according to Meyer and Grossman.  “In 2009, Healthcare REITs were the only property type that did not receive a downgrade by Fitch.  In fact, during that same time period two Healthcare REITs actually received ratings upgrades.”

Covered Bonds Could Be a Viable Alternative to CMBS

Monday, November 15th, 2010

A financing vehicle invested in Prussia in 1769 could be the solution to failed #CMBS.A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS).  The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet.  This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.

Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe.  In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds.  Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.

“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant.  “Covered bonds, on the other hand, are a very clean and simple tool.  A bank makes a loan, keeps the loan on its books, and issues a covered bond.  There is no sale and resale of mortgages.”  With a covered bond, several elements protect the bondholder.  All assets in the covered pool are subject to monthly monitoring by an independent third party.  If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing.  Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.

Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them.  Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value.  The FDIC wants access to these assets when a bankruptcy occurs.  The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk.  “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.

Foreign Investors Blocked From Investing in U.S. Commercial Real Estate

Wednesday, October 6th, 2010

Although foreign investment in United States commercial real estate doubled in the 1st half of 2010 compared with 2009, activity is still sluggish, thanks to the slow economy and a lack of trophy properties offered for sale.  Currently, the United Kingdom is the hottest international destination for investment, according to Jones Lang LaSalle research.  So far this year, $7 billion of foreign money has been invested in British properties, compared with just $4.3 billion in U.S. real estate.

“The rise in cross-border transaction volume also shows a real estate return in the major markets, and an encouraging 176 percent increase year over year in the United States, which  had the greatest fall in cross-border investment during the downturn,” said Steve Collins, managing director, Americas, for Jones Lang LaSalle’s International Capital Group.  “Demand is especially robust for well-leased, core-style product in gateway markets such as New York and Washington, D.C., whereas demand remains much weaker for the non-gateway cities markets.”

Another obstacle to foreign ownership of American real estate is the 1986 Foreign Investment in Real Estate Property Tax Act (FIRPTA), which gives the government the ability to tax gains earned when an overseas company sells a property.  Opponents say that law blocks the flow of foreign capital into the United States; an attempt to overhaul FIRPTA this summer failed in Congress.  Representative Joseph Crowley (D-NY) has introduced legislation that will increase the percentage of foreign ownership in publicly traded REITs from five to 10 percent before proceeds are taxed under FIRPTA.  Although the legislation passed the House by a wide margin, the Senate has not yet acted on it.

“It’s certainly not what we hoped for.  It’s really just a start,” said Jim Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE), “It may encourage a little foreign investment, but it’s only going to impact foreign investors who are already investing in REITs, allow them to take a bigger piece of a company.  But there are a lot of countries in the Middle East and Germany that don’t invest in REITs.  They’re direct investors and the new law won’t have any impact on them.”

Waiting for Defaults

Tuesday, October 5th, 2010

Commercial real estate may be in better shape than thought. Real estate professionals who had been expecting a worst-case scenario – an onrush of distressed commercial properties coming onto the market – are still waiting for that to come to fruition.  Ben Johnson, writing in the National Real Estate Investor, notes that “Keep on waiting/lurking seems to be the prevailing view.  According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by nine basis points to 4.28 percent in the 2nd quarter, up from 4.19 percent in the 1st quarter. For those of you keeping score on a historical scorecard, at its cyclical low in the 1st half of 2008, the commercial mortgage default rate was 0.58 percent.  A mere pittance.  Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.”

Instead of accelerating, Johnson says that the negative drift seems to be slowing.  “Year-over-year increases had been accelerating for 13 consecutive quarters through the end of 2009, but have moderated more recently,” he said.  The dollar volume of commercial mortgages in default recorded the smallest increase since the 2nd quarter of 2007.  Approximately $46.2 billion of bank-held commercial mortgages currently are in default, an increase of $547 million from the 1st quarter of 2010.

The Alter Group Named NAIOP’s 2010 Developer of the Year

Wednesday, September 22nd, 2010

NAIOP honors The Alter Group as its 2010 Developer of the Year.I am pleased to announce that The Alter Group has received the great honor of being named the 2010 Developer of the Year — the industry’s most prestigious award — by NAIOP, the Commercial Real Estate Development Association on behalf of our entire national team and our talented executive group, which has been in place for more than 30 years.

As a company, The Alter Group has stayed true to our core values and our traditional way of doing business:  maintaining solid underwriting standards; a conservative attitude towards investment; and really focusing on strong credit, both for our tenants and our assets.  We continue to work to assure that every asset has the right fundamentals in place, from a prime location to the right tenant mix, so that we can guarantee its stability over the long term.

Our industry is first and foremost about people and building communities that flourish.  These were the values that motivated the pioneers of our industry – my Dad, among them – to go to new places, to make deals over a cup of coffee and a handshake, and to see the potential in our communities.  We’re still a people business and I think this, more than anything, is what distinguishes The Alter Group.  I want to thank all of you who have partnered with us over the years – our clients, our service providers and the many municipalities that have helped us to flourish.  It is because of these that we have been here for 55 years.  We thank you.

Federal Presence Strengthens Washington, D.C.’s Office Market

Tuesday, September 7th, 2010

Washington, D.C.’s 10.4 percent office vacancy rate is far below the 17.3 percent national average.  Washington, D.C.’s commercial real estate market – including its Virginia and Maryland suburbs – continues to be the nation’s most stable with vacancy rates far below the national average.  The area’s vacancy rate stood at 10.4 percent at the end of the first quarter, far below the 17.3 percent national average, according to Reis, a New York-based real estate research firm.  Effective rents have fared well through the Great Recession, sliding just five percent from their 2009 peak high of $41.43 PSF.

“There is a tremendous amount of domestic capital looking to invest in D.C. for obvious reasons,” said John Kevill, managing director in Jones Lang LaSalle’s Washington, D.C. office.  “Aside from its solid fundamentals, investor demand is being stoked by the area’s dominant industry, the federal government.  The office market is benefitting from continued government spending in areas such as healthcare, the war on terror and the economic stimulus package.  That activity is really differentiating our economy from virtually every other economy in the country, which is why we are seeing an increase in transactional velocity”

As an example, Jones Lang LaSalle at present is listing twice the number of for-sale properties than just one year ago.  A key selling point for an office building in Landover, MD, is a 10-year lease just signed with the General Services Administration (GSA) on behalf of the Department of Defense.  The two-story Class B office building recently sold for a cap rate of 8.4 percent; the purchaser was the Government Properties Income Trust.  Real Capital Analytics reports that cap rates for Maryland office properties averaged 9.4 percent over the past year.

Investors Showing Scant Interest in Mid-Tier Office Properties

Wednesday, August 18th, 2010

Mid-tier property transactions still awaiting recovery.  Although property investment – especially for trophy buildings – is coming back more strongly than industry analysts had anticipated, mid-tier properties are not yet enjoying a similar rebound.  According to Real Capital Analytics (RCA), properties valued at $20.6 billion were sold during the 2nd quarter of 2010, an 86 percent increase over last year.

According to Dan Fasulo, an RCA analyst, owners of mid-tier properties are having more difficulty finding buyers.  “Eventually the bidders who keep losing out on these competitions are going to readjust their expectations and will start to try other strategies, whether it’s investing in lower-quality property or going into a secondary market.  It’s inevitable.”

Declining vacancy rates also could create renewed interest in mid-tier properties, said Ryan Severino, an economist with Reis, which believes that national office vacancy rate will fall from its 17.7 percent peak this year.  “A lot depends on what happens to the office sector overall, but we are beginning to see the first glimmer of stabilization,” Severino said.  Still, financing for smaller transactions is difficult to obtain – a stark contrast with trophy property deals.

Some smaller community banks are willing to provide capital to owners of mid-tier properties.  In the 1st quarter of 2010, approximately 80 percent of mortgage originations refinanced existing projects, according to Randy Fuchs, a principal of Boxwood Means, a real estate analysis firm.  In contrast, refinancing comprised just 50 to 60 percent of loan originations in 2006 and 2007.

Chicago Boasts 2010’s Biggest Commercial Transaction

Tuesday, August 17th, 2010

In Chicago’s – and one of the nation’s — largest commercial transactions of 2010, the 60-story, 1.3 million SF 300 North LaSalle Street skyscraper was sold for a whopping $655 million.  That adds up to $500 PSF. The buyer was KBS Real Estate Investment Trust II (KBS REIT II). The LEED Gold certified building, which is 93 percent occupied by such tenants as Kirkland & Ellis, LLP; Boston Consulting Group; GTCR Golder Rauner, LLC; and Quarles & Brady, LLP, is a Class AAA tower completed in the spring of 2009 by Hines Interests.300 North LaSalle Street sells for $655 million – that’s $500 PSF.

“This high-quality property, with its strong tenant credit and long-term leases, fits perfectly within our investment parameters to provide long-term cash-flow stability,” said Bill Rogalla, KBS Realty Advisors senior vice president.  “It qualifies as one of the newest and highest-quality properties built in the U.S. in Recent years.  The building’s features, unmatched view corridors and LaSalle Street address resulted in a rapid lease-up even during the economic turndown.  We expect the building’s Class AAA-quality and environmental attributes to contribute to significant tenant retention over the long term.”

The interesting thing about the deal is it’s an indication of the large capital pipeline the REITs have amassed.  Also, it proves that assets with long-term leases and high-credit tenants are still trading at historically low cap rates.

John Vivadelli: The Real Estate Perfect Storm

Tuesday, July 27th, 2010

Commercial real estate is currently experiencing a perfect storm, one that will utterly change the way corporations utilize their office space in the future.  This is the opinion of John Vivadelli, CEO and founder of AgilQuest Corporation and a well respected industry expert in the fields of alternative office environments; real estate metrics and cost management; and business continuity.

Prior to founding AgilQuest, Vivadelli was instrumental in developing IBM’s workplace management system in the 1990s to support the company’s transformational workforce mobility program, creating their “office of the future”.  This new workplace strategy resulted in reconfiguring the technology giant’s real estate footprint by shedding millions of square feet that saved hundreds of millions of dollars annually. AgilQuest provides the services and systems necessary for companies and governments to achieve similar results.

According to Vivadelli, this perfect storm is impacting both the supply and demand sides of commercial real estate.

John Vivadelli talks about the real estate perfect storm.  On the supply side, the United States has approximately 12.5 billion sq. ft. of commercial office space, which carry an estimated $1.2 to $1.4 billion in loans that will come due in the next two years. Many of these loans will not qualify under new reserve requirements.  While the average base vacancy rate is currently 17 percent nationally; that statistic does not include shadow space – square feet that are paid for but not occupied – which adds another 5 to 20% to the overall vacancy rate.  Additionally, with the upcoming implementation of FASB Rule 13, both owned and leased properties will have to be reported on corporations’ balance sheets.  Off-balance-sheet leasing will no longer be an option.

On the demand side, he sees a fundamental shift downward in real estate absorption.  The nation’s unemployment rate is approximately 10 percent, with an additional seven percent who have opted out of looking for a job. Some of these jobs will never return.  Add to that the number of workers who perform their jobs remotely and stay connected to the office via PDA, cell phone and laptop, and the average actual occupancy rate between 8 a.m. and 5 p.m. is between 30 and 50%.  That means over half of all office space across Corporate America is vacant on any given day.  Considering that an average of $60 is allocated per sq.ft., that adds up to $360 billion that companies are paying to landlords for office space that is empty and they don’t need.  This wastes 1.5 quads of energy and results in 40 million metric tons of unnecessary carbon released every year.  As companies recognize the scale of the problem, the real estate industry will see a profound shift in how we use space.

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