Housing Market Tracker - Commercial Real Estate and REITs Review

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Quote of the Day

"The problem is there are no buyers. Nobody wants to take a really big loss and jump the gun too quickly. There's a game of chicken going on." – An investment professional at a commercial REIT told Jeffrey Eisinger, Conde Nast columnist. Trade magazine Commercial Mortgage Alert says Wachovia, Lehman, Credit Suisse, Morgan Stanley, and J.P. Morgan are sitting on commercial real estate loans, waiting to unload them. (Conde Nast's Portfolio.com, January, 2008)

Commercial Real Estate and Real Estate Investment Trusts (REITs)

• Wall Street's Next Crisis (Conde Nast's Portfolio.com, January, 2008): "The commercial-real-estate blowup—while ugly—won't be as bad as the current housing crisis. It's a smaller market, and any single property often has a diversified group of tenants with different sources of income. The supply of buildings didn't increase dramatically over the past several years, as in residential real estate... But there will be trouble, in part because of the rise of the untested commercial-real-estate structured-finance market... In 1995, $15.7 billion worth of commercial-mortgage-backed securities were issued. Through Q3'07, $196.9B was issued, according to Commercial Mortgage Alert, a trade publication."

• Illiquidity and Insolvency in the Commercial Real Estate Market (Felix Salmon in Seeking Alpha, Dec. 18th): "Jesse Eisinger of Conde Nast's Portfolio.com: Both borrowers and lenders made assumptions about future [commercial real estate] cash flows and appreciation that were unsustainable... The Peter Cooper Village/Stuyvesant town purchase [in NY] is emblematic of this since the purchase [was made under the] assumption... that they [could] wrest [historically higher] rent increases... Also, around 80% of commercial loans were interest-only in recent periods, about double from 2003. In Q1, 90% were IO. So these borrowers are going to be highly vulnerable to liquidity issues... Moreover, prices in commercial RE are already falling. Brian Fitzgerald of Wachovia (WB) estimated that prices had already fallen around 5% to 10% in major markets by late fall."

• Real Estate Developer Gets $1.4B Cash Infusion (Eli Hoffmann in Seeking Alpha, Dec. 17th): "WSJ: Goldman Sachs (GS), Abu Dhabi's ever-expanding investment arm and others have agreed to invest $1.4 billion into privately-held real estate developer Related Cos., a deal that will allow it to continue investing despite today's less borrower-friendly climate. The deal includes about $400 million from Goldman and Michael Dell's investment firm MSD Capital, giving them a 7.5% stake in Related. Abu Dhabi and Saudi company Olayan Group will invest about $1B... Related CEO Stephen Ross said the current capital infusion will allow his firm to diversify; it recently acquired the Equinox chain of fitness centers and a majority interest in retailer Virgin Megastores NA."

• Strategic Pounces On Punta Mita (The Slatin Report, Dec. 17th): "Seeking to expand the already expansive success of its Four Seasons Punta Mita property, Strategic Hotels & Resorts has acquired the lone remaining hotel site – indeed, the lone remaining for-sale development site - at the 1,500-acre Mexican resort development, on the Pacific Coast near Puerto Vallarta. With the $53 million purchase of the 57-acre site from DINE, the Mexican firm that originated and remains the master developer of Punta Mita, Strategic (BEE) now owns three of the four hotel and resort sites there and is poised to profit from the continued development of the sprawling gated peninsula."

• Property Play (Wall St. Journal, Dec. 17th): "Commercial real estate delivers regular income -- whether from rent checks or dividends from a REIT. And the sector has traditionally kept pace with inflation and provided "sufficient risk-adjusted returns," says Grant Conness, a financial adviser at 1031 Alternatives Group. Indeed, while the residential housing market is struggling, commercial real estate is showing solid fundamentals in many markets -- with occupancies high, increasing rent growth and supply under control. Commercial real estate has [also] gotten increasingly sophisticated and transparent as an investment vehicle in the past 20 years. In part because of the emergence of the [public] market for REITs."

• IFA Hotels & Resorts Enters the United States (Al Bawaba.com, Dec. 16th): "IFA Hotels & Resorts (IFA HR) has made its first investment into North America by completing a $300 million hotel deal to be built in Manhattan with leading US real estate developer Related Companies. This landmark investment signifies the company’s continued aggressive expansion into international markets. Talal Jassim Al-Bahar, IFA HR Chairman and Managing Director: “This deal further diversifies our global portfolio and product mix and places us in a position for further expansion in this region and surrounding areas.”

• Commercial Mortgages Keep Family Firm Afloat (News Journal, Dec. 16th) Florida: "The residential real estate (mortgage business) is off probably close to 55%, but because we have the commercial business, which has not slowed down, we have been able to carry on," said Mary Spearman, co-owner of Gulfstream, a family mortgage business. According to the Volusia County Department of Economic Development housing construction in the county was down nearly 19% in Q3. But commercial projects were up more than 20% in Q2 and more than 26.5% in Q3'07."

• Companies Making News (Trading Markets, Dec. 16th) Michigan: "Michigan-based Agree Realty Corp. (ADC) increased its quarterly cash dividend to $0.50/share. Agree Realty is a REIT... Marriott International Inc. opened a 79-suite TownePlace Suites by Marriott in Warren at 7601 Chicago Road. The TownePlace Suites Warren will operate as a Marriott franchise, owned and managed by A & M Hospitality of Southfield."

• Implications of Commercial Real Estate Collapse (Minyanville, Dec. 15th): "U.S. office sales fell 70% in October from a year ago, industrial sales declined 24%, and retail and apartment sales dropped 50%, according to New York-based research firm Real Capital Analytics Inc. The declines are the biggest since the company began keeping records in 2001. [Michael Shedlock's] comment: We have yet to see the fallout from [those numbers.] When it comes it will not be pretty. How can firms hire if they are not building stores or opening up new offices? Why would they want to hire now anyway? Unemployment is poised to skyrocket."

• Commercial Sales Outlook Turns Darker (Chicago Tribune, Dec. 15th): "The struggle to sell the 6-year-old UBS Tower office building this fall signals the dramatic slowdown in Chicago's multibillion-dollar commercial-property sales market... The tower has been on the block for four months, but a deal to sell the 50-story office for perhaps $600 million probably won't be reached until next year, according to industry sources... Mark Zandi, chief economist at Moody's: As job growth slows, demand for office space slackens. In the Chicago area, job growth fell to 42,000 during the 12-month period ended in October, down from 51,000 a year earlier and well off the peak of nearly 100,000 in 1998."

• Is It Time to Buy REITs? (Motley Fool, Dec. 14th): "There's still no guarantee that REITs have hit bottom... If investors expect that REIT-owned properties will lose value, they won't be in a hurry to buy a depreciating investment. For average investors saving for long-term goals like retirement, however, holding a small fraction of your assets in REITs... adds diversification to the income-producing side of your portfolio, while including the potential for long-term price appreciation that real estate offers. Unless you think the U.S. real estate market is in for a long-term decline -- like the drop in Japanese land prices from 1990-2005 -- investing in REITs through a mutual fund or ETF makes sense."

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Comments

[Kunst]

I won't repeat my general comments on CRE, which I posted on two other articles. Specifically on this one:

"The supply of buildings didn't increase dramatically over the past several years." Well, that may depend on where you are. In the Sacramento area (South Placer in particular), there has been serious overbuilding and many new centers have had empty retail spots for many months now.

"Moreover, prices in commercial RE are already falling." In 2005 and 2006, retail rental prices went up substantially. In the last 6 months, they have fallen not quite as substantially. I am being quoted $2.25/sf (and "we can phase that in over time") in a new center that was going for $2.75-$3.25 three to six months ago.

The commercial real estate market is just off the edge of its cliff, while residential is rolling down its. This would not be a wise time to invest in commercial real estate. I do think it will be a target for the SWFs, but not until it is much farther down.