Housing Market Tracker - Commercial Real Estate Outlook

 |  Includes: AMB, PLD, PRC
by: Judy Weil

Quotes of the Day

"Last year we would have gone, 'Oh, no!' But is it really a surprise that any project is having trouble with financing now?" Richard Lee, executive VP and director of marketing at First American Title in Las Vegas, said of developer Ian Bruce Eichner's default on a $760 million loan for a casino/hotel project in Las Vegas. (Slatin Report, Jan. 18th)

"Cash is king." - Arthur Pasquarella, CFO of BPG Properties in Philadelphia. Private property investment firms are seeing pension funds investing heavily now in commercial real estate-- they're the ones with the money right now. (Philly.com, Jan. 21st)

Commercial Real Estate and Real Estate Investment Trusts (REITs)

Prologis European Properties Leases Madrid Property To Transcommerce Net "ProLogis (NYSE:PLD) European Properties [PEPR] said it has leased 4,514 sq.m. of distribution space in ProLogis Park Alcala, near Madrid, to Transcommerce Net [TCNET]. The six-year lease agreement is in line with current market levels and covers a portion of one building in Alcala DC5. 'This transaction reflects rental growth of some 6% and is immediately accretive to unitholder returns,' PEPR CEO Robert Watson said." (CNN Money, Jan. 21st)

Cash Is King Amid Credit Crunch "As the credit crunch makes loans harder to get for real estate investors, private property investment firms that get their funding from pension funds and other wealthy investors have found themselves in a stronger competitive position... Last July... BPG collected $850 million in new cash from the Pennsylvania State Employees' Retirement System and corporate, insurance, university and foundation investors... Michael Hines at broker CB Richard Ellis: Even as banks like Citigroup and Deutsche Bank write off tens of billions in mortgage investment losses, equity investors such as pension systems have committed billions to new commercial real estate investments." (Philly.com, Jan. 21st)

Property Crunch Deepens "Dutch insurer Aegon NV became the latest firm to freeze withdrawals from its U.K. commercial-property fund by a rush of investors looking to cash out because commercial real-estate values are falling. Scottish Equitable, Aegon's U.K. unit, said investors wishing to cash in policies or transfer out of its $3.9 billion fund will have to wait as long as a year... No significant customer withdrawals have been reported in the U.S. partly because most real-estate funds there are structured as limited partnerships for institutional investors. They are more restrictive about when investors can redeem their funds." (Wall St. Journal, Jan. 21st)

Archstone Smith LBO Sags Under Debt - Barron's "Barron's: Lehman Brothers (LEH) and Tishman Speyer Group may not be able to sell the debt from their leveraged buyout of apartment REIT Archstone Smith. Out of a $4.6 billion bridge loan, only $500 million had been sold to investors as of October's closing. Peer apartment REITs have since declined 30% on average, making it harder to sell debt. Archstone has more than $16B of debt, keeping interest expense at $1B-plus annually. That's more than its Q2'07 annual cash flow rate of $700M... Archstone's rising cap rate may denote a $14B enterprise value. But with $16B in debt, that means negative equity. Rent increases should slow as unsold house inventory become rentals." (Seeking Alpha, Jan. 20th)

AMB Buys 902,000-SF Wal-Mart Warehouse "AMB Property Corp. has acquired a 902,000-sf warehouse here that is occupied by Wal-Mart in a deal that pushes the San Francisco-based company's Southern California portfolio past 22 million sf. Terms were undisclosed, but the San Francisco firm is believed to have paid about $80 million in acquiring the distribution center from New York Life. The property is now called AMB Loma Grande Distribution Center and is occupied by Wal-Mart in a lease that runs to 2011 with an option to renew." (Globe St., Jan. 18th)

Cosmo Oh Boy Ian Bruce Eichner, who is building the $3 billion Cosmopolitan Resort casino-hotel rising next to MGM's $9B City Center project, defaulted on a $760 million construction loan from Deutsche Bank. The default notice was received by Eichner's general contractor, Perini Construction Corp. (PRC), whose once high-flying stock took a 26% hit on the news. Construction hasn't stopped on the 2,900-unit condo-hotel project, which Eichner representatives say is 84% "sold." Of course, with the project not due to open until December 2009, "sold" doesn't mean squat – not one of those sales has actually closed, The Slatin Report can confirm." (Slatin Report, Jan. 18th)

Gobs Of Jobs? Not Quite. "Executive search firm Ferguson Partners'... annual Industry Hiring Trends Forecast & Compensation Survey, compiled from the responses of 275 real estate professionals nationwide: The jobs outlook for commercial real estate... is surprisingly steady and even upbeat... Ferguson: The residential and commercial mortgage finance businesses have "hit a brick wall." The homebuilder world "has dropped off the face of the earth." And as for the CMBS world, once "a huge contributor to the demand for human capital, Wall Street is pretty much dead in that space." Demand on a year-over-year basis has declined dramatically. Today, demand "is primarily for people who are underwriting restructuring or workouts." (Slatin Report, Jan. 17th)

Crystal River's CDO May Cause Problems "Crystal River Capital (CRZ), a mortgage REIT managed by Brookfield Asset Management (NYSE:BAM)... [issued[ Crystal River Capital CDO 2005-1, a diversified issuance backed by whole loans, CMBS, and RMBS. As disclosed in Q3 10-Q, CRZ retained "all of the non-investment grade securities, the preference shares and the common shares" related to the 2005-1 CDO... On January 11th, S&P cut the rating of 2005-1's investment grade tranches D-1, D-2, and E to junk, which may trigger the failure of O/C tests and certainly cuts the value of the non-investment grade tranches held by CRZ. Thus CRZ is still liable for payments on the debt securities but may not receive the corresponding cash flows from the collateral pool." (Patrick Harden in Seeking Alpha, Jan. 16th)

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