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06.07.2009 16:56:45

D. Clayton

Economic Update - Legacy CMBS Now Under TALF

In a major expansion of the Term Asset Backed Securities Loan Facility (TALF), the Federal Reserve said on Tuesday that investors will be able to buy existing securities backed by commercial real estate loans--so-called "legacy" CMBS. The commercial real estate industry has been pushing for this for some time, and it will at last be possible starting in July. The crash of the CMBS market has created a very large storm on the horizon for commercial real estate, formed by loans that will need to be refinanced in the coming months and years with no way to do so, even for relatively healthy loans. By essentially providing the credit itself, the Fed is hoping that the new policy will help refinance some of the loans and ameliorate the storm. Earlier this month, the Fed expanded the program to newly created (and highly rated) CMBS, but precious few of those are coming on line. With the expansion, the question becomes, how much of the billions and billions in CMBS isn't refinancible under any circumstances? The homebuilding industry had been hoping for an uptick in construction activity in April, but the U.S. Department of Commerce said no dice Tuesday. New home construction dropped 12.8 percent from March, to an annual pace of 458,000 units. Single-family construction did see an uptick--2.8 percent to an annual pace of 368,000 units--but that was offset by a sharp drop in starts for multifamily properties. Demand for new houses still isn't there, so builder doldrums is still fairly much a function of that most basic economic principle, supply vs. demand. Monday, do-it-yourselfer Lowe's reported weak but "better than expected" numbers. Tuesday, its larger rival Home Depot reported similarly weak numbers as consumers still put off that expensive, multi-part home rehab project or appliance acquisition in favor of duct tape and other cut-price home maintenance solutions. Sales for the DIY retailer's first quarter were $16.2 billion, down 9.7 percent from the same period last year, while comparable-store sales, an important retail metric, were down 10.2 percent. Turnaround for this retail segment is still "eventually." During Home Depot's quarterly conference call on Tuesday, chairman and CEO Frank Blake put it this way, referring specifically to his company: "Overall it's important to emphasize that most of our markets that are improving versus last year are only showing a slower rate of decline, not positive comps. Getting to less bad is not the same as getting to recovery." Perhaps discouraged by the housing numbers, the Dow Jones Industrial Average took back some of its Monday gain on Tuesday, losing a modest 29.2 points, or 0.34 percent, while the S&P 500 was down 0.17 percent and the Nasdaq lost 0.13 percent.

TALF | investors | commercial real estate loans | homebuilding

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06.07.2009 16:55:18

D. Clayton

Stimulus Programs, Financial Market Intervention to Benefit CRE--But Not Right Away

The government's pumping up of the economy via various programs created by the nearly $800 billion economic stimulus package and interceding in the financial market will indirectly incite the revival of the commercial real estate market, according to a new report by Marcus & Millichap Real Estate Investment Services. But the major impact is unlikely to be felt this year. The present state of the commercial real estate market leaves a great deal of room for improvement. Marcus & Millichap notes in its report that sales volume, restricted by the gap between buyers' and sellers' pricing, has barely made a blip on the radar within the last six months. While the pricing disparity showed some signs of improvement in the first quarter of 2009 due to declining property fundamentals and the ongoing general inaccessibility of debt capital, there remains the issue of the impending maturity of commercial mortgages with which the industry must contend. Approximately $218 billion of commercial mortgages will come due this year, followed by $270 million between 2010 and 2011, so while commercial delinquency rates were relatively low as the economy headed downward, the lag effect will soon come into play. The CMBS delinquency rate increased in the first quarter and is on track to increase even further to the 4 percent to 5 percent range by the close of 2009. Banks could see the delinquency figure climb to $53 billion, as indicated by recent stress tests. However, the aforementioned stress tests have also revealed that, with the new federal programs coming into play, capital should become more easily accessible, thereby eventually spurring an uptick in commercial real estate conditions, particularly since the majority of property sectors avoided overbuilding as the downturn approached. Yet, visible change in the commercial real estate market, will trail economic recovery by about six to nine months. Improvement is on the way, but the impact of the federal stimulus package and financial market intervention won't be felt at its strongest until after the year has come to a close. As Marcus & Millichap notes in its report, one can look to the apartment and industrial sectors, which are most sensitive to job creation and increased consumption, to show the first signs of recovery.

Stimulus | property fundamentals | commercial real estate | increased consumption | recovery

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06.07.2009 16:53:42

D. Clayton

Despite Spring Thaw, Harsh Forecasts Continue for Retail

The retail sector’s current distress will eventually provide ample opportunities for investors and retailers. But the slight spring thaw in consumer attitudes about retail will not be enough to prevent harsh conditions for the rest of the year, according to multiple national assessments of the retail sector published during the past week. “Though contraction will be the harsh reality for most, the strongest concepts will benefit, not only from the elimination of their competition, but from the best tenant’s market in decades,” Colliers International’s spring survey concludes. On the other hand, recent indicators of improving consumer confidence are still a long way from restoring the market. The recession has dug a deep hole that the nation’s retailers and retail real estate industry will not be able to fill to any extent until at least next year. As Cushman & Wakefield Inc.'s report points out, 130 million square feet of retail space has gone dark nationwide since the start of the recession. Of 42 markets surveyed by Colliers, 36 reported negative net absorption during the first quarter, including five that registered more than 600,000 square feet of negative absorption. The few markets that have relatively low vacancy levels have benefited from relatively low development. Little new supply is coming the market; nationwide, the retail sector added only 6 million square feet of inventory during the first quarter in the 42 top markets tracked by Colliers, and 11.6 million square feet is under construction in those markets. Detailing the daunting environment, Colliers predicts that retail center values will ultimately slip 30 percent from the 2006 peak of market pricing, and up to 50 percent for troubled properties in weak markets. In the absence of a healthy credit market, other retailers are bound to join the roster of bankrupt chains that so far includes Levitz, Linens ‘n Things, Steve & Barry’s, Circuit City and Gottschalk’s. Since minimal capital is available for reorganization, the Colliers report asserts, “Chapter 11 reorganization has become little more than a delaying action before total liquidation.” Distressed assets will eventually increase investment sales activity, which dropped 72 percent in 2008. Yet the complicated nature of bankruptcy filings may put the lion’s share of assets on the market later than some investors expect. “Expect to see a one- to two-year time frame from the initial default on a loan to the marketing of that asset--meaning defaults that occur within the next three years won’t go up for sale until 2010 to 2014,” says Jim Khoury, managing director for Jones Lang LaSalle Inc., in a spring retail overview published by the firm.

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06.07.2009 16:51:56

D. Clayton

Pocketing $387M, SL Green Becomes Latest REIT to Raise Equity Via Public Offering

SL Green Realty Corp. has jumped on the bandwagon of REITs that, facing credit markets that are frozen like a block of ice, have opted to raise funds through public offerings. The company, which is still New York City's largest office landlord, just walked away with net proceeds of approximately $387.4 million after selling 19.55 million shares of common stock. SL Green's shares were offered at $20.75 each, representing quite a premium over the company's lowest share price of $7.75 within the last 12 months, but a far cry from the high point of $101.07 during that period. No commercial real estate concern can say that its stock has returned to the high values seen just 18 months ago, but SL Green is faring better than some other REITs. The company reported $263.4 million in revenue for the first quarter of 2009, compared to approximately $253.4 in the first quarter of 2008, and after announcing its public offering, its status was upgraded from sell to hold by brokerage and investment banking firm Stifel Nicolaus & Co. Inc. Additionally, although sizable new leases are quite a rarity these days, SL Green managed to orchestrate a deal last week with accounting firm Marcum & Kliegman L.L.P. to take 67,200 feet at the REIT's 750 Third Avenue office tower in Manhattan; the transaction marked the largest tenant relocation lease in Midtown Manhattan so far this year. Proceeds from SL Green's offering will be used for general purposes, as well as for capital purposes that could include investment activity, the occasional acquisition of its subsidiaries' indebtedness in the open market, and the paying down of debt at appropriate maturity dates. SL Green did not return calls by press time. Other REITs that have recently turned to public offerings in an effort to obtain quick cash--predominantly for debt reduction--include shopping center REIT Regency Centers, which pocketed $310.5 million on its sell of 10 million shares of common stock in late April. Early last month, leading distribution facilities provider ProLogis brought in a whopping $1 billion with its public stock offering of 152 million shares. And in late April, Washington Real Estate Investment Trust announced it had priced an underwritten public offering of 5 million common shares of beneficial interest at $21.40 per-share, with hopes of raising over $100 million to repay outstanding borrowings under its line of credit and for general corporate purposes.

credit markets | Investment | REIT | tenant relocation lease | line of credit

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06.07.2009 16:50:19

D. Clayton

Recession Hits D.C. Office Market

As the country struggles in the midst of an economic downturn, Washington, D.C., with its large governmental employment sector, has thus far managed somewhat better than most cities. But according to a new report by Cassidy & Pinkard Colliers, the area market is starting to feel some pains. The D.C. metropolitan area office sector met an overall negative net absorption of 817,000 square feet in the first quarter of 2009, up from negative 793,200 square feet in the fourth quarter of 2008, according to the first quarter 2009 Cassidy & Pinkard report. Vacancy rates, meanwhile, have grown in the D.C. region, registering at 11.7 percent and rents continued to fall across the region during the quarter. “The D.C. metro may in fact be in a recession,” Kevin Thorpe, vice president & director of market research at Cassidy & Pinkard Colliers noted. “The region has suffered three consecutive months of job losses, with the brunt of the pain experienced in Northern Virginia and Suburban Maryland.” He added that due to economic compression, much of the market, especially the suburbs, is now giving space back. According to the report, the District of Columbia’s itself actually saw a jump in net absorption during the year's first quarter, reaching a positive 174,300 square feet--up from positive 86,600 square feet in the fourth quarter of 2008. But other areas are suffering. In Northern Virginia, net absorption was a negative 555,600 square feet in the first quarter, from negative 703,500 square feet in the fourth quarter. And in Suburban Maryland, net absorption was a negative 435,900 square feet in the first quarter, from negative 176,300 square feet in the fourth quarter. But the region's employment prospects are likely to get a big boost, as the area is home to many government agencies that will get a large chunk of the government's stimulus package in the coming years. As a result of the stimulus package, roughly 64,000 new jobs are anticipated to be produced in the District. Cassidy & Pinkard predicts that by 2019, the office needs will reach 14 million square feet, with 10 million square feet being required by the close of 2011. And projects that are already in the pipeline continue to move forward. Already 10 million square feet of office space is scheduled to deliver in 2010. Just yesterday, CPN reported that while many office projects are delayed or halted all over the country, Duke Realty Corp. is going ahead with the development of the U.S. Department of Defense's 1.7 million-square-foot office complex in Alexandria, Va. Duke has just broken ground on the $1 billion project and is on target to complete construction in September 2011, as originally scheduled. Also, Boston Properties Inc.’s 2200 Pennsylvania Ave. in the West End, a 430,000-square-foot office building is still going up on a 60-year ground lease from George Washington University Hospital. Outside the district, Monday Properties plans to break ground this year on 1812 N. Moore St. on top of the Metro station in Rosslyn, Va. Another project is a build-to-suit for National Public Radio’s planned headquarters at 1111 N. Capitol St., N.E.

Real Estate | falling rent | governmental employment sector

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