Housing Market Tracker - Commercial Real Estate Outlook

 |  Includes: FCE.A, FSP, HOT, HSP, IRET
by: Judy Weil

Quotes of the Day

"In prior boom cycles, commercial real estate has responded by overbuilding. The industry has clearly learned its lesson because this time commercial real estate is enduring a credit crunch, not a crisis, partially because it resisted this urge." - Dennis Yeskey of Deloitte LLP's Real Estate Capital Markets practice. (Money News, Feb. 20th)

"Commercial practitioners can anticipate a weaker, though positive, net absorption in the office and industrial sectors later in the year with fewer new commercial buildings reaching the market," – Lawrence Yun, chief economist, National Association of Realtors. (National Association of Realtors, Feb. 20th)

Commercial Real Estate and Real Estate Investment Trusts (REITs)

Thrift Industry Posts a Record $5.2 Billion Loss. "Office of Thrift Supervision Director John Reich predicted a stressful year for the banking industry and described a "contagion" in the housing-market turmoil that has spread to rising commercial real-estate, small-business and credit-card delinquencies. Federal bank examiners have ramped up scrutiny of commercial real-estate portfolios, especially at smaller banks with high concentrations of these products." (Wall St. Journal, Feb. 21st)

Apollo Fund Sells Citicorp Plaza for $100M. Chicago: "A fund by Apollo Real Estate Advisors has sold the Citicorp Plaza to Parkway Properties Inc. Apollo Real Estate Advisors’ Value Enhancement Fund IV LP sold the three-building complex to Parkway Properties Office Fund LP for $100 million... The 11-story office buildings have a total of 600,446 sf... The cap rate for this deal was 5.8% with a leveraged internal rate of return of approximately 11.8%, according to a Parkway released statement." (Globe St., Feb. 20th)

Shares Of Host Hotels Slip As Lodging REIT's Cautious On 2008. "Host Hotels & Resorts (NYSE:HST) [reported] a sharply higher fourth-quarter profit... Specializing in lodging properties, the REIT reported net earnings of $294 million, or $0.54/share, up from $196M, or $0.36, earned in Q4'06. On a continuing operations basis, HST would have earned $0.49/share, matching the average estimate of analysts... and up from $0.30 in Q4'06. Quarterly funds from operations improved to $0.75/share from $0.58... Total revenue increased to $1.81 billion from $1.71B on the back of a 5.6% rise in revenue per available room, the industry benchmark known as RevPAR, as well as HST's acquisition of... properties from Starwood Hotels & Resorts (NYSE:HOT)." (CNN Money, Feb. 20th)

Forest City Proposes $450M Waterfront Project. "NY-The City of New Rochelle is now going over the details of a new plan to develop the Echo Bay area along its waterfront. Forest City Residential Group (FCE), the designated developer for the project, has proposed a $450-million mixed-use development on approximately 24 acres. The plan... calls for 600 luxury apartments, 62 townhomes, 42 condominium units and 100,000-sf of retail. Also part of the plan will be some restaurants and docking space for small boats. A significant part of the endeavor will be the creation of approximately five acres of public parkland and... a promenade walkway for public access." (Globe St., Feb. 20th)

Commercial Property Prices To Drop 5-10 Percent. "Mark Zandi, chief economist of Moody's Economy.com: Commercial property prices will likely decline between 5%-10% as the impact of a slowing economy and aggressive underwriting take a toll. Defaults on office building, retail stores and hotel loans will fall short of the residential mortgage crisis, but still exceed their historical average... Retail properties will see the most significant problems as the U.S. economy flirts with recession. "Price drops... between 5%-10%." Fundamentals in commercial real estate, such as vacancy rates, are still relatively strong and may not [weaken] until 2009... Regional banks that provided commercial real estate loans have especially large risks." (Reuters, Feb. 20th)

Commercial Real Estate: Safe Haven Investment. "Deloitte LLP’s 2008 Real Estate Capital Markets Industry Outlook: While economic uncertainty and the credit crunch have led to investor anxiety in many markets, commercial real estate remains comparatively attractive. From 2004-2006, core private commercial real estate had annual returns of more than 17%, while the S&P had an average annual return of 10.44%, NASDAQ returned less than 7%, and bonds returned less than 5%. Due to the weak U.S. dollar, commercial real estate in the U.S. is relatively attractive to foreign investors compared to other international markets. Overall vacancies in commercial real estate remains stable, and rent continues to increase." (Money News, Feb. 20th)

Fourth Quarter Commercial Real Estate Index Eases. "Commercial real estate market activity is expected to decline moderately with fewer business opportunities for commercial practitioners in the months ahead, according to a forward-looking National Association of Realtors index of the commercial real estate sectors. The Commercial Leading Indicator for Brokerage Activity(1) slipped 0.4% to an index of 120.1 in Q4 from a reading of 120.6 in Q3, but remains 0.1 above Q4'06 when it stood at 119.9. This is the second straight quarterly dip after reaching a record of 120.7 in Q2'07. The index showed nine consecutive quarterly gains prior to these declines; NAR's track of the index dates back to 1990." (NAR Press Release, Feb. 20th)

Tokar Faces Downtown Elyria Foreclosures. Ohio: "Jay G. Tokar, of Avon, [is] the man behind several real estate transactions that added numerous buildings on Middle Avenue between Broad and Second streets to his real estate portfolio... However, many of those same buildings are now up for foreclosure, according to complaints filed in county Common Pleas Court. Tokar is named as the defendant in three complaints along with Tower Holdings, a real estate company he partially owns. Lender MTS Unlimited out of Florida is seeking to foreclose on more than 15 downtown parcels. The unpaid balance on the properties... totals more than $746,000 and acquired interest, court records show." (Chronicle Online, Feb. 20th)

Investors Real Estate Trust Announces Increase in Regular Quarterly Common Share Distribution, and Declares Series A Preferred Share Distribution. "Investors Real Estate Trust (NYSE:IRET) announced today that its Board of Trustees has declared a regular quarterly distribution of 16.80 cents per share/unit payable on or about April 1, 2008, to common shareholders and unitholders of record at the close of business on March 14, 2008. The distribution reinvestment price will be the closing NASDAQ share price on April 1, 2008, less a discount of 5%... Investors Real Estate Trust's Board of Trustees also declared today a distribution of 51.56 cents per share on the Company's Series A Cumulative Redeemable Preferred Shares (NASDAQ:IRETP)." (CNN Money, Feb. 20th)

U.S. Architects See Demand Drop as Developers Fear Recession. "Demand for U.S. architectural services fell in January for the first time in four months as developers concerned about a recession cut spending, the American Institute of Architects said. The Architecture Billings Index declined to 50.7 last month from 55 in December, the Washington-based institute said Wednesday. That was the lowest score since July 2006, when it was also 50.7. Any score above 50 indicates an increase in billings from the previous month. The drop may signal a "sustained'' decline in demand from developers of warehouses, offices and apartment buildings as the economy slows, the institute said." (Bloomberg, Feb. 20th)

Carlyle Wants $1 Bln Of Japan Elderly Homes, Eyes REIT. "U.S. private equity firm Carlyle Group wants to build a portfolio of homes for the elderly in Japan worth up to $1 billion that could be spun off into a REIT in a couple of years. Rio Minami, head of Carlyle Japan Real Estate, said the firm wanted to build and buy between 20 and 30 elderly residences over the next two to three years, growing the collection to as much as $1B from about $250 million now." (Reuters, Feb. 20th)

S&P Nov S&P/GRA Commercial Real Estate Indices Up 4.9%. "Standard & Poor's S&P/GRA Commercial Real Estate Indices, a measure of the change in commercial real estate prices, grew 4.9% from a year earlier, but fell 0.3% from October. S&P said the Mid-Atlantic South was the only region to post an annual decline, down 1.9% from November 2006. The Desert Mountain West reported a 7% increase, while the Northeast and Pacific West regions posted increases of 6.6% and 6.4% respectively. The warehouse sector increased 8.2%, the office sector rose 7.5% and the retail sector grew 5.4%. The apartment sector grew 2.4% from a year earlier." (CNN Money, Feb. 19th)

Franklin Street Properties Corp. Announces Fourth Quarter and Full Year 2007 Results. "Franklin Street Properties Corp. (NYSEMKT:FSP), an investment firm specializing in real estate, announced today Net Income of $61.1 million and EPS of $0.86 for the year ended December 31, 2007. The Company also announced Funds From Operations of $75M or $1.06/share, Gains On Sales [GOS] of properties of $23.8M or $0.34/share, FFO plus Gains on Sales (FFO+GOS) of $98.8M, or $1.40/share, and provided an update on other activities." (Fox Business, Feb. 19th)

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