Are we seeing spillover into Commercial?

I spoke with one of my bay area clients this morning and he informed me that the $1.8B buyout from Starwood Capital Group for Mission West Properties (as mentioned in a recent article) fell through this morning. Apparently, Starwood could not secure financing for the deal and has dropped their bid to purchase the Silicon Valley industrial inventory. We also spoke about several other commercial deals that he and other developers are "watching very closely" to see if there is going to be a spillover effect in the commercial sector.

As I pulled up my Monday morning national journal reports, I noticed that commercial foreclosures in North Texas have increased 30% over last year at this time (highest in the Metroplex since 1994). From the article:

Commercial foreclosure postings in North Texas through August have reached their highest level in 13 years as the downturn in the housing market clouds the broader real estate picture.

So far this year, 806 commercial buildings have been listed for the auction block in the Metroplex, according to Foreclosure Listing Service, an Addison-based firm. This year's total is 30% higher than the 621 postings in the same eight-month period last year.

Every commercial property category was hit. Retail foreclosure postings are up 42%, apartments are up 37%, office postings are up 36% and industrial postings are up 24%. Postings are up 26% in the miscellaneous category, which includes uses such as restaurants, car washes and day care centers.

Quicksand

The Boston Herald reported today that a bill has recently passed the Mass. State Senate and is awaiting State House approval to protect renters that would otherwise be thrown out of a foreclosed home that they were renting. Under the measure, anyone who acquires property through foreclosure would have to let tenants stay until the renter's existing leases run out.

The problem arises when the savvy "subprime" borrower (speculator) leases the property to his children/relatives at below market rents for extended terms allowing the banks (hedge funds) to foreclose the property. Now, the banks would be saddled with foreclosed property years later waiting for these "sweatheart" leases to expire.

Yet another fallout from the foreclosure crisis has been large numbers of renters who lose their housing through no fault of their own, said State Sen. Sue Tucker, an Andover Democrat who sponsored the bill. The Senate felt very strongly that tenants deserve some protection.

The speculator's children sublease the property for market rent and make more money off the banks. Under this bill, the State Government's intervention will only prolong the agony of this down cycle and create more quicksand for the market to wade through.

Credit Market Report

Credit Market Report August 7, 2007 (Requested by a client to forward as a post)

U.S. Treasury prices fell and yields rose as investors pushed money back towards stocks on Monday while the corporate bond market remains stagnant. The Dow Jones Industrial Average posted its largest gain of the year yesterday, helping to erase significant losses incurred last week. Corporate credit markets, notably investment-grade corporate bonds, have ground to halt making it difficult for firms to access capital and leaving investors with little good options. The dry-up in available capital is largely due to an increase in investor risk aversion caused by the problems of the sub-prime mortgage market. For July, U.S. corporate bond issuance was down 77% from June, with only 25 high-grade issuings for July, compared to 94 in June and 121 in May. Tuesday brings the Federal Open Market Committee’s meeting on interest rates and updates on productivity and consumer credit will be released. Sentiment among the investing community is for the Fed to keep the Federal Funds Rate, an overnight lending rate between banks, at its current level of 5.25%.

Treasury Rates are as of late-afternoon August 6, 2007 as reported in the Wall Street Journal.

Fixed Rate Indices
Maturity Coupon Yield
2-year..........07/09.........4 5/8%.........4.49%
5-year..........07/12.........4 5/8%.........4.55%
10-year........05/17.........4 4/8%.........4.73%
30-year........02/37.........4 6/8%.........4.91%

Floating Rate Indices
30-day LIBOR.................................5.33000%
90-day LIBOR.................................5.35625%
Six-month LIBOR............................5.25688%
1 Year LIBOR..................................5.11625%

Rates in the London market based on quotations at 16 major banks for August 6, 2007.


Prime..............................8.25%
Last Effective Change: 6.29.06

Spread Markets
10-year SWAP Spreads................................71.3 bps
10-year SWAP Rate......................................5.449

As reported by RBS Greenwich Capital 8.7.2007 8:52 AM EST

Tea Leaf Update

A couple of years ago at the national Coldwell Banker Commercial convention in San Francisco, I sat in on a speech given by an economist (Jeff Thredgold) about the current state of affairs around the country. Since then, I have been receiving his weekly updates about current topics affecting our economy via PDF. Below is a brief exert from this week's Tea Leaf Update:

Many Wall Street and global commercial banks and investment banks are currently sitting on billions of dollars of “loans” they never had an intention to keep on their books. Such firms act as the bridge lender between a private equity firm in getting a new deal financed and the ultimate purchaser of the loans, such as hedge funds, retirement funds, wealthy individuals, insurance companies, etc. Many of these ultimate debt buyers are currently telling major banks “Thanks but no thanks…we don’t want any more.” Nobody wants the hot potato.

The ripple in financial markets? The sharp drop in the Dow last week comes to mind. The Dow had its worst week in four years. Scared money goes in search of safety and liquidity. Hence, the sharp rise in U.S. Treasuries last week, with bond prices having their largest gain in 10 months.

Writing a Compelling Executive Summary

By now (7/30/07), the word is out on the housing slump, but the verdict is still out as to its affect on the commercial markets (one side note - I received an email from a fellow CCIM in St. Louis that is advising for sale a local 184k SF shopping center for $3.9M or $21.14/SF with two large vacancies totally 72% of the property - I haven't seen these types of properties since the RTC days).

So, as the credit crunch grows from Wall Street to Main Street, the need for developers and brokers to artfully pitch their ventures will become tantamount as more projects chase tighter purse strings from private sources. It might be time to recall an article and website that I found effective in developing a "compelling executive summary". As the San Jose VC firm, Garage Technology Ventures, points out on their website, the job of the executive summary is to sell, not to describe (although designed for the submitting technology ventures to the fund, I still think this applies to real estate developers in this market).

Here's the short list (click 'website' link above for full article) in writing a compelling executive summary (adapted for the 'real estate' slant):

1. The Grab - Direct, specific and concise statement why you have a really big project;
2. The Problem - Make clear that this is a big problem (or need) in the market that you're going to solve with your project;
3. The Solution - Make clear that you fit into the market after the project is complete (and absorption is taken into account in your proforma);
   
4. The Opportunity - Basic market info why your project works in the local market and why there could exist further expansion after the initial phase and absorption is complete;
5. Your Competitive Advantage - Know your project's price points vs. the existing competition;
6. The Model - How specifically are you going to generate income (i.e.: lower rents than competition, taking advantage of pent-up demand, etc.) and when?
   
7. The Team - Why is your team uniquely qualified to use these funds for this project;
8. The Promise - Your fundamental objective is to show the financial viability of the project and how it will meet the lenders' needs (5 yr, 10 yr proforma and any levels of equity participation promised with the project); and,
   
9. The Ask - State the minimum amount that you will need to complete the project (assuming that you'll include a "fudge factor" for entitlement overruns that always occur in development).

National: Upcoming Wall Street expectations

NEW YORK (MarketWatch) -- U.S. stocks will continue to fall next week, in continuation of a sell-off that saw the Dow Jones Industrial Average experience its worst week in over four years, due to nervousness that the easy-money binge of the last few years has come to an end.

Another heavy week of earnings, including 99 reports from S&P 500 companies, capped by the all-important July employment report on Friday, also awaits investors.

But stocks will remain vulnerable to any new signs of distress from hedge funds hit by their exposure to bad U.S. home loans, as well as from credit markets, where Wall Street firms and corporations are finding it harder and harder to obtain financing.

"We're finishing up earnings season and the general tone has been positive," said Owen Fitzpatrick, head of the U.S. equities group at Deutsche Bank. "But it's been overwhelmed by the whole subprime and credit-market issues."

View article..

National: The Credit Window is Now Closed

"The credit window is now closed," writes strategist Barry Ritholtz in his blog, and the "multi-engine plane" that is the market has lost one of its sources of power ("liquidity - what is occurring today is a full blown repricing of the liquidity spigot slowly turning off").

As for the U.S. housing market, economist Mark Zandi expects a lot more pain, but not a recession. Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax:

1. Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.
2. Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It'll be 2010 before the housing market could be termed "normal."
3. About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.
4. About 20% of the subprime loans written in the last half of 2006 will fail, with the peak of the defaults not coming until 2011. A "significant number" of these borrowers never made a single payment.
5. More than 2.5 million first mortgages will default this year and next year. Subprime borrowers will experience significant financial distress.
6. The U.S. economy will grow less than 3% annualized through the middle of 2009. A healthy job market should prevent a recession, although the jobless rate will likely rise to 5% from 4.5% by the end of the year.
7. Consumer spending has already slowed and will slow further.

View article..

CNNMoney: Subprime woes hit junk bonds

This article yesterday from CNN confirms an earlier post (July 16, 2007) I found regarding the two prong approach of identifying the losses from the subprime market (and recasting those losses to junk status) and its affects on the market..

NEW YORK (CNNMoney.com) -- Woes plaguing the subprime mortgage market are spreading to junk bonds, according Bill Gross, manager of the world's largest bond fund.

Credit markets are facing a "sudden liquidity crisis" in the high-yield bond sector as a growing lack of confidence has frozen future lending, the PIMCO bond manager wrote in an August investment newsletter posted on the PIMCO Web site.

Video More video CNNMoney.com's Allen Wastler looks at adjustable rate mortgages resetting from their low teaser rates. Play video

"Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole -- Nathan's Famous Coney Island style -- are having a serious bout of indigestion," he wrote.

The subprime mortgage market, in which loans are granted to high risk borrowers despite little or poor credit, has been battered by rising default rates and delinquencies.

U.S. mortgage lenders, including bankrupt New Century Financial, as well as Countrywide Financial (down $3.92 to $30.14, Charts, Fortune 500), which slashed its full-year earnings estimates Tuesday, have been stung by massive losses. Two Bear Stearns (down $2.86 to $131.39, Charts, Fortune 500) hedge funds were also virtually wiped out.

View article..

National: Mortgage Delinquency Map

Mortgage delinquencies continued to climb in the second quarter, new data show.

The map below shows how delinquency rates have increased in those metro areas as the housing market has slowed. The pickup in delinquencies has been particularly notable in parts of Florida and California. Nationwide, delinquency rates climbed to 3.15% in the second quarter, compared with 2.87% in the first quarter.

The map below shows the two counties in Northern California, San Joaquin and Merced, that lead the way in delinquencies over the period.

View article..

National: Top Business Journal Real Estate Headlines

Every week I receive the top real estate headlines from business journals around the country. Below is a shortened list of top news stories that can provide some great insight into the regional markets and direction of the commercial market. One interesting note in this week's trend is the fact that office rents appear to be rising enough to support new construction in several markets (from Boston and Tampa stories)

Albuquerque
Outside developers aid Westside commercial expansion

Atlanta
New Midtown tower among city's largest

Austin
St. Croix bolsters presence in S.E. Austin with purchase

Baltimore
Lancaster Foods doubles warehouse space in Jessup

Baltimore
COPT plans Harford Co. office park: At 800,000 square feet, it would be the county's largest complex

Boston
In reversal, new now cheaper

Boston
Google eyes E. Cambridge sites

Dallas
Growth study set for Lancaster airport area: 306-acre field could have future as cargo airport

Dayton
Defense contractor training center to open near Wright-Patt

East Bay
SunCal deal for Alameda Point OK'd: Mayor: 'I believe this is our last shot'

Honolulu
Honolulu's office vacancy rate falls to 6.5%, driving rental costs even higher

Houston
Single tenant fills spec building: Foster Wheeler leases entire Energy Center I to consolidate offices

Jacksonville
Industrial center planned

Memphis
Finard invests at Court Square: BankTennessee to lease Welcome Wagon space

Milwaukee
Rust-Oleum plans huge Kenosha warehouse

Milwaukee
California firm acquires Pewaukee buildings: Two prime properties bought for $37 million

Nashville
Building hosting CMT on the block

Orlando
Research park begins search for additional site

Pittsburgh
Sale pending on Union Trust

Pittsburgh
U.S. Steel could go back to Duquesne

Portland
Energy efficiency even playing a role in baseball stadium plans

Sacramento
Opus plans 8M square feet near Port of Stockton: Logistics center would serve overflow from deep-water ports

San Antonio
New data center planned for the city's far West Side

San Francisco
Shorenstein to quit BofA for older digs

San Jose
Carl Berg tentatively agrees to sell Mission West Properties

San Jose
Commercial condos target smaller space pent-up demand

Seattle
Redmond rezone spurs hopes for corporate HQ

South Florida
Potential for office space glut seen

South Florida
Weston developer tests office condo market in Jacksonville

South Florida
New developments hope to revitalize Opa-locka airport grounds

St. Louis
13-acre tract on The Hill up for grabs

Tampa Bay
As rents rise, office costs need closer look

Tampa Bay
$30-something office rents become norm

Tampa Bay
Demand for industrial space outpacing new projects, sales

Washington, D.C.
Real Estate: D.C. rethinks real estate with a GSA-like assessment

National: When the housing rebound comes

(Money Magazine) -- If you're the sensitive type of homeowner, you may want to skip the rest of this paragraph, which recounts the unrelentingly grim news about home prices.

At least 42 percent of major housing markets are in decline, with some projected to fall by double digits over the next five years.

One alarming sign: The National Association of Realtors has reversed its usually sunny outlook and is now predicting a 1 percent drop nationwide in existing home prices in 2007, the first such prediction in the four decades since NAR started tracking prices.

Still, no bear market lasts forever, and indeed, predictor NAR, quickly recovering from its unusual flash of pessimism, is forecasting that prices will bottom out this quarter.

How will you know?

Because housing markets are intensely local, it won't do much good to check national figures. Instead, stay alert to leading indicators of recovery in your local market, such as:

Inventory is declining

A local broker should be able to tell you the months' worth of inventory - that is, the estimated amount of time, given the current pace of sales, that it would take to sell all the homes currently up for sale.

In markets with fewer than 6.5 months of inventory, homes tend to be appreciating faster than inflation, says Mark Dotzour, chief economist at the Real Estate Center at Texas A&M; above 6.5, prices are lagging inflation.

Above nine or 10 months, prices start to drop, creating an ice-cold market for sellers. Compare the current data with that of the previous few quarters to see whether the trend is downward or upward.

View article..

Home Buyer Tip: A 6-step plan for boosting credit score to buy home

WASHINGTON (MarketWatch) -- Question: I need some assistance in cleaning up my very poor credit score of 638 from Trans Union and 559 from Equifax. It's not the result of any credit cards but poor choices (which I admit) and a divorce with little to no child support of three girls. I'm in my mid-forties and all three girls are over the age of 18.

My question is how do I increase my FICO score within the next 6-10 months and is there a reputable agency that can work on my behalf? I would like to purchase a home early next year. I know there's a lot of work that needs to be done and would greatly appreciate any assistance you or an agency can provide.

List below.. View article for details..

1. Settle collections
2. Get rid of the 'black marks'
3. Clean up late pays
4. Get even
5. Remain open
6. Remain active

National: The end of the old MLS?

So you think that Silicon Valley won't have an effect on the real estate business? From today's San Francisco Chronicle, there is a new player in the home buyer's arsenal of online tools that works as an "aggregator" of information from the traditional MLS, craigslist, trulia, zillow, etc. in a netvibes type interface.

Terabitz.com, the brainchild of a near-child, will go live with its real estate "dashboard," where users can create a personal page from for-sale listings, valuation tools, maps, photos, crime statistics, weather and neighborhood cafes, banks and airports. Whereas other sites usually provide a few of those resources, Terabitz says its hub aggregates all the information a home shopper needs -- from a place to peruse four-bedroom colonials to where to find a baby crib.

The home buyer (and for that matter, any lender, investor or potential seller) can view current inventory for sale and for rent from multiple sources, giving the home buyer more resources than most agents may have in their standard MLS database (also, it is the agent that pays an annual fee to input their listings into the database). It also gives the agent's potential clients the information of recent sales comps, a common request from clients when they're interested in making an offer or signing a listing agreement.

Terabitz works like this: The visitor types in a city or ZIP code. Then under tabs such as "listings" or "education" or "financing", there are icons representing different items - or "bitz" in company parlance -- such as Google's home listings, nearby colleges, neighborhood photos and local mortgage rates. By dragging and dropping the icons into the "workspace," users can choose which information they want on their page. The data is available in list form, or, for certain data sources, a layered map. From there, the user can save those snapshots and e-mail them to their friends, family or mortgage broker.

As Terabitz (or other online resources like it) gain acceptance as an aggregator of information for the "masses", additional venture capital will flow in an effort to make the site a "one stop shop" for the home buyer and sellers. As it's been reported recently, 80% of home buyers use the internet to find their next big purchase.

Ashfaq Munshi, CEO of Terabitz and a Silicon Valley veteran who was the former chief executive officer of Level 5 Networks, said he has raised $10 million from Tudor Capital, part of the Tudor Hedge Fund. Munshi plans to charge vendors for Real estate site has all kinds of info and "Do-it-yourself" features allows users to add data they want placement -- for instance, Starbucks would pay a fee for always being first on a list of local cafes. Terabitz would also make available, for a fee, sites for real estate brokers and others.

A real estate agent's ability to adopt and adapt to these trends in technology is half the battle in this business. It is essential to stay current with the trends in "end user" access.

View article..

National: Market Cycles & Income-producing Real Estate

Number Of Months From Peak-To-Peak of Each Business Cycle Since 1900

Information Source: Nat’l Bureau of Economic Research, Inc.

An investor needs three pieces of information for developing a reasonable investment strategy and the chart provides this information: (1) The average length of time from peak-to-peak for the prior twenty-one cycles is 58 months. (2) The current business peak was reached in March 2001. (3) We are presently 68 months into the current cycle. What have we concluded so far?

• Given the country’s current economic model, the economy is cyclical.
• Bull markets don’t last forever.
• Recessions don’t last forever.
• The average cycle for the past 100 years from peak-to-peak is 58 months.
• The peak for the current cycle was March 2001.
• We are 68 months into the current cycle.

This information gives an investor the next possible peak and the length of time needed for the subsequent peak. The average is 58 months. The shortest peak-to-peak business cycle is 17 months and the longest is 128 months. Given those conclusions, the real estate investor has to follow a sound investment strategy which includes techniques that insure staying power.

View article..

National: The Great Mortgage Party Hangover

This is a recent article I pulled from Inman and the assessment of the troubles that has yet to affect our industry. Lou Barnes discusses the premature "housing crash" that the bond market buyers anticipated a year ago, only to get clobbered with resilient market data ("People are buying cars, going to restaurants, taking vacations in Tahoe.. just not buying houses" from a recent Sacbee article). Now, the market pundits and bond agencies are acknowledging their timing errors and are re-rating their methodologies with stricter guidelines, leading to a two-part "end game": (i) where are the loses? and (ii) what is the effect?

Part one, the mortgage losses. Very little money has been "lost." The market value of the securitized mortgages in question has fallen 30-70 percent, but if you don't sell, you don't have to recognize loss. The re-rating of this stuff to junk will force institutional investors to sell, to recognize, and probably depress value farther. We will also learn who has lost, and it's going to be an embarrassing and painful parade. This week, S&P, Moody's and Fitch downgraded no more than 1 percent of the trash outstanding; the outcome for the other 99 percent is sure as sunrise, the holders in frozen panic. Market losses from forced sales are near, but there is still little actual credit loss from defaulted mortgages -- that's still ahead, and the loss magnitude will depend on the depth and length of the housing recession.

Part two, the housing market. Housing moves slowly, in an aching grind. Sellers resist discount, preferring to hold vacant, or to rent at a loss, or to stay put. Loan servicers are slow to foreclose: they are not staffed to do so (or to do anything except to send you all that mail trying to get you to buy insurance and pre-pay programs), fiddle endlessly and pretend to negotiate workouts of hopeless cases. The housing picture is changing -- not selling, just changing. Foreclosure data is notoriously bad (every county and state has different procedures and law), but RealtyTrac's trend is probably about right, if only in consistency of error. The pattern is stark: national foreclosure filings are up 56 percent year-to-date, but mortgage defaults are up 86 percent -- foreclosure lag. Based on housing markets early to the distress party, Colorado the leading example, Bubble Zone foreclosures will increase for at least the next three years (announcements of bottom in 2008 are fantasy-based). Do some math. Home resales run a tad over 6 million annually, plus another 1 million new-builds. Re-sellers still want to re-sell, and builders, desperate to unload land and to maintain survival volume, are still building at undercut prices. Demand is off (un-affordability and anxiety), but a new seller has arrived: first-half '07 foreclosure filings just short of 1 million. Pull-through from filing to foreclosure is unpredictable, but it looks as though re-sellers and builders will soon be joined by another million foreclosure re-sellers (or two, or three...). That's market saturation, not clearing. We are going to get spillover into GDP. Book it. And we're going to see a serial credit panic. However, the disaster mongers are mistaken. Credit losses are distributed globally, and there is great long-term strength in housing (population growth, land scarcity, wealth...). The forecast here continues to be for a long period of flat prices in the Bubble Zones, but vastly more foreclosure damage from flat prices than previously modeled or imagined, the Great Hangover from the '01-'06 Mortgage Credit Party.