Shorenstein Co. Sees Opportunities In The Market

San Francisco based office landlord Shorenstein Co. has been a net sellers in the past few years, but the company just raised more than $2 billion, its largest fund to date, to buy properties as the company starts to see more opportunities in the commercial market. Shorenstein's CEO Doug Shorenstein recently was interviewed by the San Francisco Chronicle:

Q: What are your impressions of where we are in the market cycle?

Shorenstein: I think we're definitely in a down cycle, there's very little debt available in the market today and the debt has been keeping the investment side of the market very buoyant for the last few years.

So prices have to come down and in fact are coming down. We're beginning to see signs of distress where people have very highly leveraged properties, properties with a lot of debt on them.

Some of that debt was short-term debt, debt that's coming due and there's very little relief out there for such owners. They're caught and they're going to have to sell, and they're going to have to sell at a point in time where buyers are going to have an advantage.

I think we're at a point now, where if you have lots of dry powder, you're in a good position. And if you aren't spending your time playing defense with existing problems, you're in a very good position. We also are at the beginning of a down market, we're in a recession, I believe, and in all recessions, we see a contraction of service jobs, which results in lower rents. So the revenue side of the business will be impacted.

America's Riskiest Housing Markets

Forbes published their list of the top 10 riskiest housing markets in America based on the highest foreclosure rates, slow job growth (or job loss) and a rash of listed homes. The winners are:

1. Detroit, Mich.
2. Orlando, Fla.
3. Cleveland, Ohio
4. St. Louis, Mo.
5. Miami, Fla.
6. Las Vegas, Nev.
7. Sacramento, Calif.
8. Denver, CO
9. Tampa, Fla.
10. Phoenix, Ariz.

Paulson's Regulatory Proposal

The New York Times has an executive summary of the Blueprint for Financial Regulatory Reform, a report from the Treasury Department on ways to improve oversight of the financial services sector. Read it here.

Weekend Roundup

Malls: A Dying Breed? Don't Bet On It. The American mall may not be the retail powerhouse it used to be, but most industry executives say malls are resilient and evolving. ("CoStar")

Investors Blame CMBX IndexFor Their Misfortunes. Some investors and issuers of CMBS are trying to do something about the two-year old CMBX index, which has been negatively influencing CMBS prices. ("WSJ")

Fear of Housing Slump May Be Seriously Overdone. MIT/CRE Professor Bill Wheaton offered a brighter view of housing market conditions than the gloomy one now in vogue. ("WSJ")

Commercial Real Estate Not Immune from Recession. ("NREI")

Residential Condo Glut to Worsen. Some experts say developers and owners of residential condominiums for sale in overbuilt markets would be wise to cut their losses and sell before another 100,000 units are delivered this year. ("NREI")

More Developers Tracking Projects' Progress With Cameras. Some developers are now using web cams to monitor construction projects. ("New York Sun")

An Easier Path to Real Returns. Investors should combine multiple assets (including REITs) to achieve growth and inflation protection over the long term. ("IndexUniverse")

The Effect of Inclusionary Zoning on Local Housing Market: Lessons from the San Francisco, Washington DC and Suburban Boston Areas. A research paper that examines the impact of the inclusionary zoning - a housing policy requiring developers to set aside a portion of newly produced housing units as affordable housing in exchange for certain benefits, on housing markets. ("Center For Housing Policy")

Architecture's New Knight: Jean Novel. French architect Jean Novel is the 2008 winner of the Pritzker Prize, which at this point is something like the knighthood of architecture. ("Times")

Recession: The Movie

Coming to a theatre near you:

Fremont Ordered to Raise Capital

Another bank with high exposure to subprime, as well as commercial real estate loans is in touble. From WSJ:

Cash-strapped mortgage lender Fremont General Corp. must raise new capital in 60 days, regulators said, or sell its bank subsidiary. The development further calls into question the viability of the firm after a string of setbacks since the start of the subprime-mortgage crisis.

The directive also restricts the interest rates that Fremont Investment & Loan may pay on deposits and states the bank is not permitted to make any capital, bonus, or compensation pay to the company or its officers. Further transactions between the bank and its affiliates also are restricted.

Fremont had been a major subprime home lender until it agreed to a cease-and-desist order with the FDIC in early 2007. The agency cited weak risk management related to subprime lending and commercial real estate loans for the order. Soon thereafter, Fremont sold or entered negotiations to sell most of its subprime residential real-estate business and assets.

Corus Bank Facing Condo Crash

Corus Bank, the Chicago based lender that has focused almost exclusively on condo projects might be facing a challenging environment in the next few months with the condo crash. 83% of its loans are construction loans, and most are on condo projects in cities such as Miami, Las Vegas and Atlanta. From WSJ:

Corus for now appears to have a cash cushion to avoid Countrywide's fate. According to a number of gauges monitored by the Federal Deposit Insurance Corp., Corus is among the best-capitalized in its peer group of midsize to big banks, and analysts say the bank has at least $300 million in excess cash to absorb any sudden loan losses.

But Corus faces extensive pain in coming months from increasing scrutiny by regulators and the fact that much of the fallout of the condo crunch has yet to be felt by lending institutions. They have yet to take the hit for the hundreds of projects that are about to be completed amid the worst housing market since World War II.

Corus-funded condo complexes valued at $2.2 billion -- about half the bank's loans outstanding -- are to be completed by June, meaning that thousands of condo units planned during the go-go housing years are due to enter a glutted market amid buyer cancellations, declining property values and a gridlocked mortgage market.

Under increased regulatory scrutiny, investors and analysts expect Corus to be more aggressive in adding reserves this year. "Corus is subjected to a significantly higher level of regulatory scrutiny because it is so concentrated," said Peyton Green, a senior analyst at FTN Midwest Securities Corp. in Nashville, Tenn. He predicted Corus will write down about $77 million in loans this year, up from $40 million in 2007, and will add $100 million to the loan-loss provisions.

Today, as banking regulators fret over the industry's failure to diversify risk, Corus also stands out for its high market and geographic concentrations. Miami alone accounts for $64.3 million of the condo loans on which Corus has stopped accruing interest.

Corus's fourth-quarter earnings already indicated a rapid deterioration in its business. Profit plummeted 96%, compared with the year-earlier period, to $1.9 million.Corus shares have lost about two-thirds from their housing-boom peak of $33.47 in April 2006.

Wednesday Links

Building Dorm Rooms Cheaper, Quicker and Quieter. Modular construction is increasingly being used in a more refined setting, to create quick and convenient dormitories and classrooms for colleges and universities. ("NYT")

Senior Housing Isn't About Real Estate. ("CPN")

Dirt Lawyer Speaks Asset Protection. Good advice on entity forming if you are considering investing in real estate. ("GawlGuy Talking")

Expert: Look for commercial real estate crisis this summer. Don Boyken from Boyken International sees trouble ahead for commercial real estate. Well, at least he sees the residential market starting to come back late this year("Daily Report")

Is Your Building Observing "Earth Hour" On March 29?

Wells Real Estate Funds' properties nationwide are:

Homes, companies and cities around the world will go dark for one hour, starting at 8 p.m., to promote environmental awareness, in an effort founded by the World Wildlife Fund. Wells is based in the suburbs of Atlanta, one of Earth Hour’s official participating cities.

Wells specializes in Class-A office properties and owns 105 buildings nationwide. Wells intends to darken its owned-and-operated buildings; the company has also invited tenants at some three dozen net-leased buildings to do likewise. Participating Wells buildings in Saturday’s Earth Hour event will include 222 E. 41st Street in Manhattan, 5 Houston Center and the Key Center tower in Cleveland.

In keeping with Earth Hour, Wells buildings will turn off interior and exterior lights between 8 and 9 p.m. local time, except for lighting required for safety or tenant commitments.

Credit Crunch's Impact on Financing

At this morning's Commercial Real Estate Due Diligence conference in New York City, experts offer their take of the credit crunch's impact on commercial real estate financing. A few takeaways:

• Life insurance companies, commercial banks and foreign banks are the most viable options for lending money.
• Cash flow is king. "Lenders don't want vacant space or condo projects. They want to lend to people with money. They have a lower risk tolerance."
• Some lenders are pulling back on hotel financing with the anticipation that ADR is going to decrease.
• Lenders want to see recourse, non-recourse loans have vanished and will not reappear until liquidity returns
• Sponsor needs to have a solid development plan in place
• Balance sheet lenders are requiring more equity and cash flow, whether on a short-term or long-term deal.
• Borrowers should go to as many capital sources as they can, and go in with due diligence.
  
  Read more here....

Distressed Opportunities In Commercial Sector?

At a conference for distressed residential real estate in Florida last week, some investors discussed opportunities in the commercial sector. From FT :

In commercial properties, such as offices, which have largely avoided the problems faced by residential real estate so far, investors are still seeing some opportunities.

They are already widely buying up mezzanine loans – which offer high rates of return as well as a shot at owning the buildings should borrowers default – as banks and hedge funds rush to improve their liquidity.

“[The banks] need to get them off their balance sheets,” said Jeff Barclay, head of acquisitions at Ing Clarion Partners.

He said Ing Clarion had been buying mezzanine debt, including in buildings in Stamford, Connecticut, that were part of the Equity Office Property portfolio.

However,

There is not yet much distressed commercial property – as opposed to debt – to invest in.

Investors say more cautious lending standards up until 2006, and less speculative building in the sector, are helping commercial real estate to avoid the meltdown seen in residential property.

One of The Best Distressed Opportunities For Hedge Funds

More hedge funds are starting to launch distressed residential mortgage funds. From FT:

Steve Persky, a principal at Dalton Investments, said his group was starting a distressed mortgage strategy for high net worth and institutional investors. “This is one of the best distressed sector opportunities I have seen in my lifetime,” said Mr Persky, who has been investing for more than 20 years.

“Prices have collapsed to such a level that some securities assume you will never get any capital back....It is an incredible buyers’ market. Institutions are desperate to sell. There is such a huge flight to quality, it has gotten very extreme.”

Related posts:
BlackRock, Highfields to Buy Distressed Home Loans
Subprime Eyed by Blackstone, Goldman for Contrarian Hedge Funds
Hedge Funds Ready to Bargain Hunt Mortgage-backed Securities.

CMBS Slow Down Affects Asia and Europe

We already know that the Canadian CMBS market vaporized overnight. Now it appears the slow down in the US CMBS market is affecting Europe and Asia. From WSJ:

Investor demand for the securities is so low that there has been only one new issue backed by European property this year, a €695 million ($1.07 billion) issue by Morgan Stanley, and part of that hasn't sold.

There have been a few new CMBS issues collateralized by Japanese real estate this year, with a combined value of about $1 billion, according to Standard & Poor's. This includes one issue from Morgan Stanley of about $500 million in February. Last year, there were about $20 billion in Japanese CMBS issues.

"This year, we expect that figure to be 20% to 30% lower as securitization lenders are slowing down their new loan originations," says Takenari Yamamoto, a CMBS analyst at Standard & Poor's in Tokyo. Japan is the biggest CMBS market in Asia, accounting for the majority of issues.

Just €20 billion in CMBS issues are likely to take place in Europe this year, less than half of last year's figure, according to Barclays Capital. Of this, as much as 25% of the collateral is likely to be old loans on banks' books rather than new loans made, according to Hans Vrensen, head of European securitization research at Barclays Capital in London.

In the U.S., CMBS issuance this year is also expected to drop by more than 50% to $108 billion, according to Commercial Mortgage Alert.

It's important to note that unlike the subprime mortgages, the default rate on the commercial-real-estate mortgages underlying the issues is only 0.3% in the U.S. for Fitch-rated loans, 0.2% in Europe and 0% in Asia.

No Fire Sale In The Office Sector

If investors are expecting a fire sale in the office sector, they are going to be disappointed. At the moment, the sellers are not giving up the high valuations gained in the last three years. According to the latest report from Real Capital Analytics:

February office sales amounted to a measly $2.5 billion, which is a 45% decline from January, a 95% drop from a year earlier and the lowest monthly volume total in five years.

During the first two months of the year, office sales totaled $6.8 billion versus some $20 billion in properties brought to market. The slow volume speaks to the widening bid/ask spread between buyers and sellers, with new listings outpacing closings by 4-to-1 in February and 3-to-1 in January. And tellingly, the deals getting done are considered more “core” or stabilized assets rather than value-added properties.

Read more here....

Congress Offers Extra Perk To Real Estate Industry

Similar to the incentives Congress provided after the Sept. 11 attacks, the New Economic Stimulus Act provides extra perk for the real estate industry:

Since 2006, only 2.5 percent of the costs of those improvements could be written off in the first year. The remainder had to be spread out over 39 years.

The new "bonus depreciation" schedule provides much quicker relief, bringing back the most generous depreciation rules that were in place after the Sept. 11 terrorist attacks.

With the change, landlords and commercial tenants can now write off 50 percent of the cost for "qualified leasehold improvements" in the first year alone, as long as the improvements are completed by the end of this year. The rest is written off in declining increments over just 15 years.

Read more here....

Goldman Says Subprime Losses May Get Up to $460 billion

Are you keeping tracking of the projected losses related to subprime? I can't. This is what Goldman is saying today:

Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

Read more in Bloomberg.

Related post:
How Much Subprime Losses Will Financial Firms Suffer?

Vornado Realty A Bargain?

Share price of Vornado Realty Trust is down 35% since its record high of $130 in early 2007. WSJ interviews Vornado Chief Executive Steven Roth:

For those who believe that losses from skyscrapers and shopping malls won't be nearly as severe as in the housing market, Vornado Realty Trust looks like a bargain.

The company is trading at 13.9 times its consensus 2008 funds-from-operations multiple, a profitability measure for REITs. That is considerably less expensive than the 20.3 times for that of rival Boston Properties Inc., another "best in class" office REIT, according to BMO Capital Markets.

Mr. Roth said the market may be undervaluing Vornado because it is a more complex company than Boston Properties. "One of the things we have on our agenda is to simplify our company."

The bottom line:

Vornado's cash on hand and available credit line, a combined $3.5 billion, means it is poised to take advantage of opportunities in the commercial sector.

Read more here....

The Green Edition

TIAA-CREF sets 10 percent energy reduction goal for its commercial real estate portfolio. ("CPN")

If you're not building Green, your product will become obsolete. ("GlobeSt.com")

Tenant led green real estate strategies gain momentum. ("RENX")

Green Principals Take Root. Firms bullish on the business of sustainability are starting to incorporate earth-friendly measures within their own operations. ("Real Estate Forum")

Buildings Need to Generate Energy Onsite. ("GlobeSt.com")

BlackRock, Highfields to Buy Distressed Home Loans

Is the housing market near the bottom? Investment Firm BlackRock Inc. and hedge fund Highfields Capital Management seem to think so. The two companies are setting up a new company PennyMac that will buy distressed home loans:

Blackrock and Highfields said PennyMac will raise capital from private investors and used the money to buy loans from financial institutions that want to cut their mortgage exposure. The firm will then work with borrowers to re-organize the mortgages and re-sell them later for a profit.

The launch of PennyMac, backed by respected firms like BlackRock and Highfields, may give investors hope that buyers for these stricken mortgages are poise to pounce. That could help stabilize the value of some mortgage securities and limit the impact of the credit crisis.

Related post:
Subprime Eyed by Blackstone, Goldman for Contrarian Hedge Funds
Hedge Funds Ready to Bargain Hunt Mortgage-backed Securities.

Apartments Benefit From Housing Woes

More and more people are optioning to rent instead of own, and this trend is benefiting the apartment sector so far. From NYT:

Indeed, occupancy rates for apartments have remained stable, averaging in the mid-90 percent range, and rising in some cities, industry reports show. Homeownership, meanwhile, has fallen steadily nationwide. The ownership rate slipped to 67.8 percent at the end of 2007 from a peak of 69.2 percent in 2004, according to the Census Bureau.

REITs that specialize in apartments are benefiting as well:

Apartment REITs, which had average losses of around 25 percent last year, are up 15.6percent, on average, this year through Thursday.

Certainly landlords are not having trouble getting financing. From GlobeSt:

Despite the credit crisis and seeming lack of financing out there, outstanding multifamily mortgage debt has risen to a record level, according to the Mortgage Bankers Association. Overall, commercial and multifamily loans came in at $3.3 trillion in the fourth quarter, the most recent data available. That’s an increase of nearly $85 billion (or 2.6%) from the third quarter, and $356 billion, or 12%, from the end of 2006. Of that amount, apartment paper accounted for $831 billion, an increase of $28.2 billion (3.5%) over Q3, and $90 billion (12.2%) over the prior year.

One potential concern for the sector is the impact of oversupply in condos. The issue was discussed at a New York REIT conference sponsored by the New York Society of Security Analysts. From NREI:

One issue that has emerged is how multifamily REITs have been impacted from the competition from condo properties that have been converted to rentals. John Coumarianos, a Morningstar equity analyst noted that up until a year ago rents were rising in places like California, whereas in the current environment landlords can’t hike rents so much. He believes that rent growth could also be decreasing because job growth is slowing.

So is it time to buy apartment REITs? Depends on who you ask, and some analysts are more optimistic than others, but one REIT appears to be high on most analysts' list. NYT:

HIGH on the list of most analysts is AvalonBay Communities. This REIT operates 184 apartment communities in markets like California, the Pacific Northwest, the Northeast and the mid-Atlantic region, areas described as having a “high barrier to entry,” meaning that developers may encounter obstacles to construction, like strict zoning limitations or community resistance to new developments.

Investing in Commercial REITs

CNBC's Melissa Francis discusses with REIT analysts Louis Taylor, Deutsche Bank Securities and Michael Bilerman, Citigroup. Watch it here.

Read The Wall Street Journal Online For Free

Do you know that every article on the Journal web site is free? You don't need to pay the $79/month subscription fee. Salon's Machinist blog explains how to get around the "pay wall", and it is totally legit, so don't feel bad.

The heart of this story is the power of search engines like Google and link aggregators like Digg, which drive torrents of Web traffic to newspaper sites. Newspapers want search engines to point at their stories; indeed, last year the New York Times dropped its subscription plan specifically to attract Web surfers at Google, Yahoo, Digg and others.

The Wall Street Journal also wants traffic from search and link sites, but instead of doing away with its pay gate, it has set up a technical method to let people from these sites come in for free.

The system works like this: If you click on a subscriber-only WSJ link from an ordinary Web site -- say, a link that I post here, or a link from within the Journal's own site -- you'll be sent to a limited version of the article, and you'll be asked to log in to read the whole thing.

But if you click on a link to that same article in Google News, you'll be sent to the full story for free. This is true, also, of WSJ links on Digg, and probably a few other big referral sites, too.

Read more here.....

The Outlook for the Economy and Real Estate: Up? Down? Sideways?

The outlook for the economy and real estate was discussed during a recent ULI webinar featuring industry experts Peter Linneman and Arthur Margon. ULI Senior Resident Fellow Stephen Blank moderated the event. Watch it here. You need to register on line first, but it only takes a few minutes.

Arthur Margon
Principal, Rosen Consulting, New York City

Albert Sussman Professor of Real Estate Finance
University of Pennsylvania - Wharton School of Business

Weekend Roundup

Credit crunch: Risk-taking. As the worsening financial crisis evokes the Great Depression, this economist explains how ‘lunatic’ risk-taking got us into this mess –and why the guilty will get away with it. ("Times Online")

Three Mall Owners Struggle with Pressure To Sell. Feldman Mall Properties, Pyramid Companies and Glimcher Seeing No Market for Mall Portfolios. ("CoStar")

Re-Appraising Risk: Some Appraisers See Cracks in Commercial ‘Firewall'. Overvalued Commercial Appraisals Based On Speculative Comps Could Add to Woes of Commercial Lenders Over The Next Year. ("CoStar")

Nation’s Greenest Building Code Up for Approval. San Francisco's proposed green building code could increase development costs by up to 5%. ("GlobeSt.")

Bush Energy Bill Taps GSA to 'Green' the Building Industry. The federal government is every landlord's dream tenant, but closing the deal is about to get a lot more difficult. ("CoStar")

Market Woes Lead Manhattan Renters Into Even Smaller Spaces. ("Developments Blog")

Bernanke's quiet skipper makes waves. N.Y. Fed's Geithner is steering Wall Street into uncharted waters. ("Market Watch")

Commercial Projects Stalling: Add Ratner’s Atlantic Yards to the List. ("Developments Blog")

Condo Market To Get Worse

This is not a surprise. Condo projects are near completion, and more units are coming to the market. From WSJ:

More than 4,000 new units will be completed in both Atlanta and Phoenix by the end of the year. Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos. San Diego, another hard-hit region, will add 2,500 units, according to estimates provided by Reis Inc., a New York-based real-estate-research firm.

The new building comes on top of unprecedented supply. The U.S. finished 2007 with a supply of condos large enough to absorb 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999.

The deluge means bad news for developers and potentially lower prices, including in cities such as Atlanta and Dallas that have avoided the worst of the housing bust. If defaults and foreclosures rise, lenders will feel the pain too.

Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months -- between the third and fourth quarters of last year -- the delinquency rate rose to 10% from 5.9%, says the Oakland, Calif., research firm.

The news isn't bad for everyone. Vulture buyers have started to circle, hoping to take advantage of foreclosed properties that banks may start dumping at fire-sale prices. Also, some condos are being converted to rental units, increasing supply for renters and putting downward pressure on prices.

Vegas Casino Attracts Bidders

The Cosmopolitan Resort Casino, the $3.9 billion condo-hotel complex that Deutche Bank started foreclosure proceedings on has attracted multiple bidders. From WSJ:

Related, led by real-estate tycoon Stephen Ross, has teamed with Starwood Hotels and Resorts Worldwide Inc.'s W Hotel group and an unidentified casino operator to try to take over the $3.9 billion hotel-condominium and casino project. The project's lender, Deutsche Bank AG, started foreclosure proceedings this month against the developer, Ian Bruce Eichner, on a $760 million loan.

An investor group led by private hotel firm Global Hyatt Corp. and New York hedge fund Marathon Capital also wants the Cosmopolitan. Mr. Eichner's plan had slated Hyatt to operate the hotel. And, Hyatt and Marathon had made a $175 million loan to Mr. Eichner on which he also is in default. That loan is subordinate to Deutsche Bank's. Marathon and Hyatt had tried to persuade Deutsche Bank to let them take over the project, but an agreement couldn't be reached, and Deutsche Bank went forward on the foreclosure.

Market Madness

Source: Art of The Deal

Moody's Says Commercial Property Prices Continue To Slide

Do you still believe in Moody's? This is what they have to say about commercial real estate values in their latest report:

Commercial real estate property prices declined for the third month in a row in January, falling 0.6% from December, as measured by the Moody’s/REAL commercial property price index (CPPI).

The index is now approximately 2.4% below its peak in October 2007. Moody’s expects the index to decline another 15% to 20% before bottoming out.

The CPPI measures the change in actual transaction prices for commercial real estate assets based on the repeat sales of the same assets at different points in time.

Banks Unloading More Commercial Real Estate Debt

According to Financial Week:

DebtX, a seller of commercial real estate debt, said it will put $380 million in commercial real estate loans secured by properties in the southeastern United States up for sale via a sealed bid auction.

The sellers are principally banks and financial institutions looking to lower their exposure to real estate. “With credit quality weakening, institutions are choosing to sell loans into the increasingly liquid secondary whole loan market, rather than incur the expense of protracted loan workouts,” DebtX CEO Kingsley Greenland said. “A loan sale expedites problem resolution, while enabling institutions to lower risk, improve diversification and strengthen profitability.”

Mr. Greenland said the banks selling the loans are not financially troubled, as about 75% of the loans are considered performing. The loans probably don’t meet the banks’ tougher underwriting standards, though, given the new credit environment.

Bidders are expected to include other banks, especially those that are located near the properties, he said. He is also expecting some bids from hedge funds with plenty of cash looking for the attractive yields the properties offer.

Note that the loans being sold are secured primarily by land and commercial and residential development projects in or near Atlanta, Orlando, and South Florida.

Related Post:
Commercial Property Values In For Steep Drop

'Doomsdays' and Bargains in CMBS

The recent aggressive moves by the Fed appear to be working as Commercial mortgage backed securities have rallied in recent days after months of declining. From WSJ:

Commercial-real-estate debt has rallied after months of declines, but some fund managers are betting that top-quality securities can still be bought on the cheap.

Their reasoning: Prices of top-quality commercial-real-estate debt are still at levels that are wildly out of line. Securities are priced at levels that imply default rates could reach 80%, or even 100%, of their underlying loans, they say. Historically, though, the worst period in the commercial-real-estate debt market saw defaults on those bonds reach roughly 31%.

While fund managers concede that commercial real estate is entering a slump, they argue that the doomsday scenario reflected in prices of high-quality securities is unwarranted.

"The implied losses are so severe that under any reasonable scenario you can't justify these levels," says Angelo Manioudakis, a portfolio manager at OppenheimerFunds. "There is still huge value."

Related post:
Bond Managers See Opportunities In CMBS
Bets On Commercial Real Estate Plunge Overdone?
CMBX Signals Trouble In Commercial Property; 'Doesn't Make Sense'

Companies Turn To Sale-leasebacks

More evidence sale-leasebacks might be a star in this market:

Companies seeking to free up capital and investors looking for stable sources of income to support commercial acquisitions have unleashed a wave of sale-leaseback deals in an indication that real estate remains a flexible industry adapting to shifting markets.

Under pressure to restructure their struggling businesses and raise capital for developing their core assets, firms like Citigroup and Deutsche Bank have turned to sale-leaseback deals to unlock the value of their major assets.

Related Post: Sale-leasebacks - A Star In This Market?

Credit Crunch For Dummies

ECON 101: Credit Crunch for Dummies

Credit Crunch's Impact On Values

CoStar has a good piece on how the financial instability and the lack of financing may drive commercial real estate values down:

It's a Catch 22. At a time when liquidity is needed to refinance and or complete deals, it is not easily available. No matter how willing the federal government is to provide liquidity, traditional lenders are reluctant to invest in risk or in products in which values cannot be determined. And until there is more liquidity, it will be hard to determine what damage the financial storm is taking on property and investors. And until the damage can be assessed, fewer deals will be getting done.

Filling The Real Estate Financing Gap

The CMBS market has been virtually shut down since last August, and the recent Bear Stearns collapse definitely doesn't help to ease investors' fears about these securities. Financing options for commercial real estate owners/developers seem to get more limited:

The run on Bear Stearns, which forced a bailout by the Federal Reserve and JPMorgan Chase & Co. (JPM), could prolong an issuance drought in CMBS by contributing "to the lack of confidence and the lack of a market," said Danielle Violi, senior vice president of CMBS Structured Finance at KeyBank Real Estate Capital, a unit of KeyCorp (KEY).

So who's filling the CMBS GAP? Certainly the traditional balance lenders like banks, insurance companies, private equity firms and pension funds. According to this:

"The money centers, regional banks and insurance companies can all step up and take some of that market share. But they too have to be more conservative in their underwriting standards. They've gotten a lot stricter, and the tightening structure is more important to lenders than pricing alone.

Regional and local developers who have trouble getting financing are teaming up with REITs for development projects:

These ventures signal that there are still areas across the country that can sustain new construction. Moreover, they solve the financing conundrum by teaming developers that have assembled sites, but have no funding, with REITs that have deep pockets and see an opportunity to grow portfolios without shouldering all the development risk. The joint ventures also minimize the risk for both parties, which is helpful given that projected development yields have dropped from the high double-digits to the mid single-digits in recent months.

Some equity players are seeing opportunities in the mezz field:

DALLAS-Ashford Hospitality Trust Inc., placing a bet on the mezzanine market, will put $2 billion of assets up for sale to fuel its lending plan. The Dallas-based REIT's leaders say not all will be left go, but they expect to shed at least $600 million of hotels outright or in joint ventures by year's end.

This is certainly not the best time to get financing for commercial real estate, but money is out there, for the doable deals.

Save The Banks

Watch it on Crooks and Liars blog.

The International Edition

INVESTING IN JAPAN 2008: Real estate downturn has yet to reach the bottom. ("FT")

Downtown offices remain at premium. Toronto downtown office vacancy at 4.7%, the lowest in 15 years. ("Toronto Star")

U.K. property values set to rebound in second half of this year. ("WSJ")

Chinese real estate market feels power of the brand. ("FT")

ICD not to buy Colonial after creditor talks fail. Investment Corporation of Dubai (ICD) said on Wednesday it would not buy Spanish real estate firm Colonial. This deal is like a soap opera! ("Reuter")

How green is The World? Evaluating Dubai's island-reclamation project The World, the three hundred islands laid out in the shape of the world map just off Dubai’s coast. ("Economist")

Downturn in Commercial Construction

News like this does not help to ease fear in the market. CPN is reporting that the February AIA Index (Architecture Billings Index ) plunged almost 9 points:

In February, the ABI rating stood at 41.8, the lowest rating since October 2001 and down from 50.7 in January. A rating above 50 indicates an increase in billings and a possible increase in construction activity.

Attributing the decrease in the ABI rating to the housing slump and tightening credit market, an AIA spokesperson told CPN today that a drop-off in housing developments reduces demand in retail stores, restaurants and entertainment establishments and discourage developers. “Anxiety in the lending market has seeped into the commercial sector, too,” continued Frank, “and there is always the possibility that lenders are no longer in the position to finance projects that were in the planning stages.”

Panic Overstates Commercial Real Estate Risk

CBRE Torto Wheaton Research makes a good case for the "fear factor", which is currently driving the commercial real estate market:

Currently, according to the report, CMBS and CMBX markets have priced in losses tied to doomsday estimates, more in line with 1992, at which point commercial banks lost 160 basis points.

One of the big differentiators between today’s ailing economy and that of 1992, is that there is currently an equilibrium with supply and demand in commercial real estate, which should weather the storm even as the economy is running out of steam.

Subprime Eyed by Blackstone, Goldman for Contrarian Hedge Funds

More evidence hedge funds are ready to take advantage of the housing recession and jump into mortgage-backed securities. The question is when and at what price:

For hedge funds pursuing mortgage-backed securities, raising money is proving to be easier than spending it.

Related post:Hedge Funds Ready to Bargain Hunt Mortgage-backed Securities

Tuesday Links

Suddenly, a Comeback Under Way in Brazil. Average rents in São Paulo's prime office markets rose about 24% last year from a year earlier while vacancies fell to about 10% from 13% over the period. Impressive! ("WSJ")

Hotels Face a Reality Check-Out. Two influential reports on the industry conclude that hotel occupancy will drop and revenue growth will slow in the U.S. this year and next. ("WSJ")

Credit market mayhem parallels the S&L crisis. ("Wellington Financial Blog")

For Foreign Investors, Profit Isn’t Only Goal. Foreign investors invest in real estate projects to get green cards. ("NY Times")

ARGUS Woos Japanese Firm with Real Estate Technology Expertise. ("NREI")

More New Yorkers Option to Rent, Not Buy. ("The Real Deal")

What Bear Stearns Means For New York Renters. ("New York Observer")

Manhattan landlords downgraded post-Bear. Deutsche Bank analyst Lou Taylor’s report warned that concerns about the office market will begin to weigh on the shares of local landlords. ("Crains")

Latest Fed Funds Rate

This is a nice graph/picture. Look how far we've come in 24 months.

Source: Reuters

383 Madison Avenue

Much has been written in recent days about the dramatic collapse of Bear Stearns, the 5th largest investment bank in US with 85 years of history. At the same time, Bear's head office at 383 Madison Avenue is increasingly playing a bigger role as JP Morgan has an option to acquire the building for $1.1 billion even if the deal to buy Bear falls apart. Some might be calling it the real estate deal of the century. The Slatin Report has a fascinating piece that uncovers the history of the Madison Avenue site:

Those who think that petrodollars are new on the scene will do well to recall that the valuable ground underneath 383 Madison is actually owned by the Saudi al-Babtain family, which bought the site for $55 million in the mid-1990s from Credit Suisse First Boston, practically stealing it out from under late developer Howard Ronson. Ronson had a two-year option with CSFB to develop the site, and thought he had just wrapped up enough lease deals to finally nail down a firm commitment from a construction lender. (One of the tenants that had pledged to take a few hundred thousand feet there: JP Morgan.)

Read more here.....

Other related posts:

"It's simply the best office building in the history of the world."
Bear Stearns' Office Space

"It's simply the best office building in the history of the world"

That's how Jimmy Cayrne, then CEO of Bear Stearns described the company's head office at 383 Madison Avenue. Now the building will be occupied by JP Morgan's investment bank.

Also see JP Morgan's Good Office Deal, Bear Stearns' Office Space.

Subprime Meltdown And Bear Stearns

Last June, Beet.TV interviewed John Vogel, real estate industry expert and a professor at the Tuck School of Business at Dartmouth. Vogel explains the roots of this mess and explains the role of Bear Stearns in the crisis at that time:




Source: Dealscape

"Bear" Trap for NYC Realty?

Discussing the impact of Bear's collapse on New York City real estate, with Greg Heym, Halstead Property chief economist; Dolly Lenz, Prudential Douglas Elliman; and CNBC's Michelle Caruso-Cabrera. Watch it here. Brokers!

Also see Bear Stearns Bailout "Falls" On Manhattan Real Estate Market.

Foreign Buyers Invest In Residential Real Estate In DC

Just like New York City, Washingon DC is attracting foreign buyers largely due to the weak US dollar. From Washington Post:

The Washington area is luring more than the usual crowd of diplomats. Now that the dollar is cheap, the region's appeal has broadened, enticing international business types and sophisticated investors who find comfort in the area's global reputation as a recession-proof market.

Several area real estate agents said inquiries from abroad have at least doubled since a year ago, mostly from wealthy Europeans and people in such growing economies as India and Russia, where the currencies are gaining against the dollar. Some are making all-cash offers. Even Web sites are seeing a surge in page views from overseas. The international traffic for D.C. area listings was recently up 60 percent year over year on http://Zillow.com, a popular real estate Web site.

The Wall Street Way

Source: Mises Economics Blog

Bond Managers See Opportunities In CMBS

The mispricing of fixed-income securities such as high-grade corporate bonds, CMBS and Muni bonds is creating opportunites for bond managers. From Pensions & Investments:

Andrew Phillips, managing director and co-head of U.S. fixed income of BlackRock Inc., New York, noted that high-grade corporate bonds have “unprecedented” spreads over Treasuries. The Lehman Brothers U.S. Corporate AAA bond index had a current yield as of March 13 of 4.59%, compared with the 10-year Treasury bond which yielded 3.53%.

“When Citi is cheaper than Colombia, which is on the verge of a war, it wakes you up,” Mr. Phillips said. BlackRock manages $131 billion in core fixed income strategies.

Mr. Phillips said BlackRock has made substantial bets on the commercial mortgage-backed market. He declined to say how big that bet was, but said “it's the largest verweight we've ever had in CMBS.”

“We think the underlying fundamentals (of the commercial mortgage market) are drastically different from the (subprime) residential market,” Mr. Phillips said.

He explained that CMBS are backed by longer dated mortgages and do not have adjustable rates like subprime residential mortgages. Yet, prices on commercial mortgage-backed securities have been hammered worse than the residential sector because hedge funds and proprietary trading desks were forced to sell these highly liquid securities during the credit crunch in order to meet margin calls.

Hedge Funds Ready To Bargain Hunt Mortgage-backed Securities

When comes to injecting liquidity into the market, the Fed can't do it alone. Financial Week is reporting that "about 60 other hedge funds are preparing to go bargain shopping for distressed (read: mortgage-backed) debt and leveraged loans for sale by besieged financial institutions.":

The London fund, Toscafund Asset Management, approached the board of Washington Mutual with an offer to participate in any consortium looking to recapitalize the mortgage lender, according to a report in the Wall Street Journal. Toscafund is part of Old Oak Holdings, which has a sizable stake in WaMu.

Such moves by hedge funds will help shore up the banks and begin to establish floors for “toxic” asset prices, industry experts say. “They're going to be buyers of paper from other hedge funds and from the investment banks,” said Mr. Snider. “People are expecting about $200 billion worth of mortgages will be sold.”

Dallas-based Highland Capital Management will be one of the buyers. The firm recently raised $1 billion to buy distressed collateralized debt obligations and buyout debt from the banks, according to Bloomberg. The firm has already invested more than $38 billion in assets—most of it in loans, bonds and structured products.

Other players poised to jump into distressed debt include funds organized by Goldman Sachs, Finstocks Capital Management, CapGen and Castle Creek. When the market starts to move, they are likely to put their money to work quickly.

Confessions of a Subprime lender

Richard Bitner, former mortgage lender looks at mortgage collapse with CNBC's Carl Quintanilla. Watch it here. This guy is going to get a lot of hate mail today.

Federal Reserve Announced Two Initiatives to Bolster Market Liquidity And Promote Orderly Market Functioning.

From FRB:

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

JP Morgan To Buy Bear Stearns for $2 Share In Stock-swap Transaction

From WSJ:

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies' boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday's close, Bear Stearns's stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

See also:
Recapping The JPMorgan Conference Call
The Cost of Bear's Crisis To Its Employees
Bear Stearns' Office Space
Wall Street's New Captain

Eliot Spitzer's Subprime Connection

One day after the Eliot Spitzer news came out, the Federal Reserve promised to inject $200 billion into the banking system. Is it just a coincidence? Not if you ask Greg Palast:

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

Do I believe the banks called Justice and said, “Take him down today!” Naw, that’s not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press – one was “Wall Street Declares War on Spitzer” - made clear to Bush’s enforcers at Justice who their number one target should be. And it wasn’t Bin Laden.

Facinating reading. See also Spitzer and Mortgages.

Weekend Roundup

Fostering Sustainable Homeownership. Fed Chairman Ben S. Bernanke's speech at the National Community Reinvestment Coalition Annual Meeting in Washington, D.C. ("FRB")

Despite carnage, REITs can offer solid foundation. ("Globe and Mail")

Office vacancies up this year, rent increases down, says realtors. ("Financial Week")

Dousing the fire. America's plan to fix the credit markets. ("Economist")

Shorts Move Into REITs at Record Levels. ("TheStreet.com")

Two Vegas housing projects involving some of the largest U.S. builders have received default notices on about $765 million in debt. ("Reuters")

Insurer Losses From Subprime Approach Katrina Claims. ("Bloomberg")

Deutsche Bank Forecloses On Vegas Casino

From WSJ:

The developer of the Cosmopolitan Resort Casino, a $3.9 billion condo-hotel complex on the Las Vegas Strip, has been notified by its primary lender that it will begin foreclosure proceedings.

The move by Deutsche Bank AG, the lender on a $760 million senior loan, comes after the developer, Ian Bruce Eichner, wasn't able to finalize a deal for new financing amid the credit crunch. Mr. Eichner in late February cut a tentative deal with two of his other lenders, Global Hyatt Corp. and New York hedge fund Marathon Asset Management, for a possible rescue of the twin-tower project. A default on the loan in January triggered automatic defaults on an additional $175 million in loans.

If foreclosure is completed, the project could prove to be one of the first big development projects in the country to be victimized for the continuing difficulties of securing new debt in a business that is heavily dependent on it.

Subprime Mortgage Blues

Source: CR

Bear Stearns' Office Space

The big story on Friday is the Federal Reserve and JP Morgan's bail out of the investment bank Bear Stearns. When the market closed, Bear's shares plunged; market capitalisation was $3.5 billion. However, according to FT, Bear's property in New York and New Jersey alone is thought to be worth as much as $1.34 billion:

Bear’s Manhattan headquarters on 383 Madison Avenue is worth about $1.2bn (€767m, £594m) and it could sell and lease back the property to raise cash, according to real estate brokers.

The company owns 1.2m sq ft in the building, which it built in 2002, and still strong demand for property in midtown Manhattan would draw a price of about $1,000 a square foot, said Michael Cohen of GVA Willams.

Bear also owns five buildings covering 673,000 sq ft in Whippany, New Jersey, thought to be worth a further $140m.

The property could prove an additional lure for JPMorgan, whose headquarters are just one block away Bear’s on Park Avenue, Mr Cohen suggested. JPMorgan has for some time been looking to build a new office tower on the World Trade Centre site, but has yet to sign a deal.

Bear has been looking at putting 30,000-60,000 sq ft of office space on the market for the past four or five months, said David Berkey, a consultant at L&L Holdings, Bear’s main adviser on its property in New York, New Jersey and Connecticut. The company has leases on more than 800,000 sq ft of space beside its headquarters in New York City, according to its last quarterly filing with the SEC.

Mr Berkey said the amount Bear was considering putting on the market was “nominal”, and that as yet “no decision has been made” about subletting the space. “Like all the financial service guys, there is just a downturn in their business … they have people sitting around doing nothing,” he said. “They are looking to make cuts if
necessary."

See also: It Is Tough to Value Bear, But It Had Better Sell Fast

Lenders Use MAC Clause

The material adverse change clause is common in real estate transactions, but lenders had not used the MAC clause to back out of commitments since the Sept. 11 attacks. This has changed:

Banks have used the clause after calamities such as the terrorist attacks of Sept. 11, 2001, to free themselves from lending obligations. With the spreads between commercial mortgage- backed securities and 10-year U.S. Treasuries at their widest in at least 12 years, banks are applying the concept to avoid lending at money-losing rates, scuttling deals, leaving borrowers at risk and casting doubt on contracts that have already been negotiated.

``We are in an extremely uncertain time and no one should feel sanguine about any agreements that are on the table,'' said Scott A. Singer, executive vice president of Singer & Bassuk Organization in New York, which arranges real estate financing. ``Lenders with the best intentions find the game changing on them. This is a time to put your head down and execute business as quickly and efficiently as you can.''

Attention, borrowers, stop negotiating!

CBRE Realty's Macklowe Exposure

CBRE Realty Finance Inc., the REIT affiliated with CB Richard Ellis said it's considering strategic "initiatives" after posting a fourth-quarter loss partly due to loans tied to Harry Macklowe. From WSJ:

The company, which has lost more than 70% of its market value since its initial public offering in October 2006, said it had hired Goldman Sachs Group Inc. to help explore "a wide range of strategic and operational initiatives." CBRE Realty declined to elaborate but in similar situations options have included possible sales of businesses or equity infusions.

CBRE Realty, which disclosed new detail about its loans to Mr. Macklowe yesterday, said it has made him two loans, both of which are considered non-performing, bringing its total nonperforming loans to $94.8 million, or 4.6% of its total assets.

CBRE Realty wouldn't say what the loans are for, but people familiar with the matter say one loan, for $42.8 million, is the junior-most position on a $510 million loan for an office building being developed at the site of the former Drake Hotel on New York's Park Avenue.

The Drake loan has been in default since late last year. Mr. Macklowe has had a de facto extension for more than three months because the loan is held by several lenders and they can't agree on terms of an extension deal, according to people familiar with the matter.

Treasury Secretary Hank Paulson's Recommendation

Treasury Secretary Hank Paulson proposes a mortgage and credit revamp. Watch is on CNBC here and here. The second video is about securitization.

You can get a copy of The President’s Working Group on Financial Markets report here.

Thursday Links

S&P raised subprime writedown to $285 billion, but says the bulk of the subprime pill has already been swallowed and "the end of write-downs is now in sight for large financial institutions." ("WSJ", "Market Beat")

Paulson prescribes medicine for Wall Street. Wants overhaul of mortgage derivatives market, criticizing its complexity. ("WSJ" "Market Watch")

Affordable Housing Takes a Hit. Affordable housing is the latest victim of the credit crunch. ("WSJ", "The Ground Floor")

GE May Buy $10 Billion of Japan Property as Crunch Spurs Sales. ("Bloomberg")

New York real estate players hope the arrival of spring will inspire a change in the commercial real estate market. ("New York Sun")

CBRE Report: U.K. Reels from Credit Crunch, but Continental Europe Stays Steady. ("NREI")

Seattle Passes New York , Washington DC in National Office Race. ("NREI")

Attention, Regional Banks. America's retail banks have stable sources of funds. But with their gargantuan real-estate exposures, they still could be in for a hairy ride. ("WSJ")

Global Landlord Looks Cheap. Peter Slatin, editor of the Forbes/Slatin Real Estate Report, recommends buying shares of New York-based real estate investment firm W. P. Carey & Co. ("Forbes")

Beach-house bargains. Thanks to the real estate crash, these days you might just be able to afford that condo by the sea. ("CNN Mony")

Midwestern Bank National City Looks For A Buyer. ("WSJ") It's a buyers market for banks. ("WSJ")

Commercial Real Estate Watch

A look at how the sector is faring, with Sam Chandan, Reis, Inc.; Frank Liantonio, Cushman & Wakefield and CNBC's Becky Quick.




CNBC's Rebecca Meehan is at the MIPIM Conference in Cannes and talks to Olivier Piani, president Europe of GE Real Estate, to find out where real-estate investors can find value in a troubled property market. Watch it here.



Watch CNBC's Sue Herera discuss whether the credit crunch may be seeping into the commercial real estate market, with Harvey Green, Marcus & Millichap, Real Estate Inv. CEO; Dennis Yeskey, Deloitte Real Estate Capital Markets director; and CNBC's Sue Herera.


Patrick Kanters from APG Investments spoke to CNBC's Rebecca Meehan about how to make returns in a troubled real-estate market. Watch it here.

More Bidders Surface For GM Building

NY Post is reporting that three new players Tishman Speyer, Mort Zuckerman's Boston Properties and Albert Behler's Paramount Group submitted bids for the second round. But one of those has since dropped out.

Mort Zuckerman was reported to be interested in the GM building earlier. Paramount Group is backed by German money and completed one of the largest transactions in Washington DC last year.

The Latest Fed Move

WL Ross & Co.’s Wilbur Ross sat down with Dennis K. Berman, WSJ’s global deals editor, to discuss whether the Fed’s move today is a sign of weakness:



Source: Deal Journal. Also read economists reaction here. But according to Market Watch, Fed action may have targeted Bear Stearns. Seems to make sense.

Middle East Investors Fund Developments in US

From WSJ:

When Related Cos. lost a key investor in a multibillion-dollar residential, retail and hotel project in Los Angeles last year, the U.S. developer looked past U.S. pension funds and instead filled the void with petrodollars: Istithmar World Capital PJSC, a Dubai government-owned investment vehicle, agreed recently to put up $100million.

Such sovereign-wealth funds have shot to public prominence in the U.S. after acquiring stakes to shore up financial firms, such as Citigroup Inc. Increasingly, government-controlled Middle Eastern funds and private Arab investors are becoming partners of convenience, if not choice, for real-estate developers grappling with tight credit and risk aversion among traditional investors such as pension funds.

"There is no question this trend will continue," says Frank Liantonio, executive vice president for global capital markets at real-estate broker Cushman & Wakefield. "We're in an environment where capital structures are strained. Sovereign-wealth funds are perfect candidates for solutions to the problems we're encountering."

Sovereign-wealth fund investment in U.S. property development is still relatively uncommon though it is bound to grow, says Jeff Blau, president of Related. "There is a macroeconomic shift in where wealth resides around the world, and these investors are searching for superior returns" in various assets, he says.

Financial Week has a special edition on Sovereign Wealth Funds here. IDD is holding a free web seminor on Sovereign Wealth Funds on March 26, you can register here.

Building to Build Community

A group of students from MIT Center for real estate recently travelled to Abu Dhabi, Istanbul, and London for a travel course to get an international perspective on how real estate developers build communities. So which city is the best for development, according to the students?

Respondents were divided. One picked Abu Dhabi hands down, citing the fantastic growth and opportunity. "If you own the land, you can build whatever you want," he said. Another picked Istanbul, which combines the growth potential of an emerging market with the richness of a culture dating back thousands of years. A third picked London, citing naturally location, location, location: "We saw it again and again," he said. "London is the epicenter of global business and finance."

Well, according to this, Istanbul is expected to outperform London. You can read the student presentation here.

RevPAR Outlook for U.S. Hotels in 2008

PKF Hospitality Research in Atlanta has lowered RevPar forecast for 2008 as a result of the slowdown in the US economy:

The research group said that it has lowered its 2008 forecast for revenue per available room, or RevPAR, from up 4.5 percent to a below-average 3.0 percent because of the declining economic fundamentals. The good news is that the group expects the decline in RevPAR to be short-lived.

“When looking at 2008, we believe that the U.S. hotel owners and operators will struggle to grow their revenues and profits, but market conditions will not be as damaging as we saw back in 1991 or 2001,” Mark Woodworth, PKF-HR president, said in a release.

PKF is forecasting demand for lodging to inch up 0.9 percent in 2008, half of the long-term annual average, but still a net gain for the year. Robert Mandelbaum, PKF-HR’s director of research information services, told CPN today they are forecasting 6 percent growth in RevPar for the first quarter. He said hotels would start to see the effects of the slowdown in the second and third quarters. Both Woodworth and Mandelbaum anticipate seeing a turnaround by the first quarter of 2009.

Read more in CPN....

Why Is BofA Rushing To Close The Merger With Countrywide?

I ask again. I have my own conspiracy theory, maybe will explore it this weekend. And thanks CR, this is the money quote of the day:

Getting the FBI to do your due diligence doesn't seem like a particularly great business strategy.

Read more in market watch and Bloomberg.

“Housing bubble, what’s the trouble?”

Sale-leaseback - A Star In This Market?

Sales-leasebacks represent 5% of the all investment sales. But is it going to be a star among deal types this year? It might, according to the Slatin Report:

There’s long been interest in sale-leasebacks, but in light of current market conditions, both sellers and buyers now have even stronger incentives to pursue them. On the seller’s side, monetizing real estate assets can be an effective way to pump up revenues at a time when revenues are relatively weak – which would be now, and even more so if the country actually slides further into recession. Also, many companies are still feeling the hangover from pre-crunch easy-money acquisitions. Selling real estate would be a way to pay some of that debt down at a time when it’s hard to refinance.

As for buyers, sale-leasebacks can represent a solid investment precisely when purveyors of both equity and debt are demanding solidity. Buying a portfolio of Walgreen’s or CVS locations with long-term leaseback provisions, for instance, is in some ways like buying a bond. The return is going to be there, and capital is looking for exactly that kind of safe haven in these skittish times.

Bank branches and medical office buildings appear to be strong sale-leaseback candidates this year:

Since last year, Citibank has been leading the way in the bank branch market subset by selling off some of its real estate; other financial companies are following suit in the face of writedowns and other money-sucking problems as they are forced to buy back bad mortgages. Of course, sale-leaseback investors need to be careful not to buy properties from banks completely crippled by the subprime meltdown. The best sale-leaseback candidates among banks would be those hurting only enough -- such as Citi -- to want to access some of the revenue offered by sale-leasebacks, not to cause an implosion.

Medical office buildings will also continue to command a lot of attention – and fetch good prices – in the sale-leaseback world. Two reasons: first, the healthcare sector of the economy is going to continue being a gold mine, whatever health insurance reforms (if any) might be dreamed up by the next US administration and Congress. Second, doctors and dentists are famously sticky tenants.

The State of Commercial Real Estate Market

New York-based TIAA-CREF is one of the largest institutional real estate investors in the world with more than $435 billion in total assets under management and about $25 billion in real estate assets. National Real Estate Investor interviews Philip McAndrews, TIAA CREF’s managing director and head of real estate portfolio management:

NREI: You have a lot of money to put in the ground. Will you be able to find suitable investments in the present market environment?

McAndrews: We feel confident that when we’re in inflexion points like we’re in right now that there is sufficient deal flow to satisfy investors’ needs while being able to navigate through some challenges in the economy.

We had the Russian ruble devaluation, we had 9/11, we had the dot-com bust, and real estate operators and managers managed through that. We’re faced with a capital markets issue now. Fundamentally, when you look at the subprime issue and how it has migrated into the CMBS marketplace, what’s going on is a repricing of risk. From our vantage point, though, commercial real estate fundamentals are very strong.

Our view is that the capital markets will probably take the better part of this year to clear the current backlog of securitized debt and once it recovers, there will be more stringent lending standards. Long term, we think that liquidity will come back to the marketplace.

Read more here....