Housing Market Tracker - Commercial RE May Falter, but CMBS Looks Tempting

Quote of the Day

"People still need a place to live, [and] a bad homeowner could be a very good renter." - Richard Anderson, a senior real estate analyst at BMO Capital Markets, on why apartment REITs could be a good investment. (International Herald Tribune, Mar. 23rd)

Commercial Real Estate and Real Estate Investment Trusts [REITs]

Skittish REIT Investors Look for Value in Vornado. Vornado's (VNO) annual dividend is 4.2%... it’s trading at 13.9 times its consensus 2008 funds-from-operations multiple… considerably less than the 20.3 times for that of rival Boston Properties (BXP)… Analysts believe Vornado's New York office portfolio -- 45% of the company's asset value -- will hold up [in a recession, with] little exposure to the financial brokerages. Vornado CEO Stephen Roth: In Q4’07, Vornado signed 545,000-sf of new leases at rents 90% higher than the old leases, a record for Vornado… 2008 could remain rocky for REITs, but Vornado [has] cash on hand and [an] available credit line, a combined $3.5 billion.” (Wall St. Journal, Mar. 25th)

Newest Data Show Commercial Slump. Tennessee: “Real estate information company Chandler Reports: Commercial real estate in Shelby County registered a sub-par February. Foreclosures rose, while sales and lending volume each slumped. The dollar amounts especially were meager, the numbers show. There were 79 commercial sales in Shelby County for the month (made by 74 entities), a 15.1% decline from the 93 in February 2007 and a 27.5% decline from the 109 in January 2008. But total sales in terms of dollar amount were only $44.6 million, a 79.7% decline from the $219.8M in February 2007 and a 69.8% decline from the $147.6M in January 2008.” (Memphis Daily News, Mar. 25th)

Commercial Real Estate: LI Forces Join To Form Policy. “In the interest of "finding common ground to confront common problems," four groups that have at times kept their distance are joining to form what will officially be called the Long Island Real Estate Organization -- the first group incorporating professionals from the industrial, residential and development communities to focus exclusively on public policy. Association for a Better Long Island president Ed Blumenfeld says it took the "perfect storm" of today's uncertain market to create an "unprecedented coalition" comprising representatives from his group, the Commercial Industrial Brokers of Long Island, the Long Island Builders Institute and the Long Island Board of Realtors.” (Newsday, Mar. 24th)

Pension Fund Increases CMBS Allocation. “San Francisco City and County Employees’ Retirement System this month increased its investment in CMBS through a new Fidelity fund… The fund has committed $25 million to the Fidelity Real Estate Opportunistic Income Fund L.P. The fund will invest primarily in high yield real estate debt securities and instruments backed (directly and indirectly) by commercial property. Some of the capital will be invested in residential mortgage-backed securities and subordinated securities of real estate CDOs, according to staff and advisor memos. The $25M commitment will be allocated to the 5% “opportunity” segment of the SFERS Fixed Income Portfolio.” (Globe St., Mar. 24th)

Banner Year: Commercial Real Estate Did Well In 2007, But The 2008 Outlook Is Murky. NM: “The Albuquerque metro area is coming off a banner year in commercial real estate, but the prospects for 2008 appear far more murky. CB Richard Ellis analysis of Real Capital Analytics data: Last year, just more than $415.1 million changed hands in 48 deals involving office, industrial and retail properties priced in excess of $5M. The volume was roughly double the 29 deals worth a total of $176.6M in the metro during 2006, which was a much more typical year in local commercial real estate… While 2007 was memorable… investment adviser Patti Peixotto of CB Richard Ellis said, "It's phenomenally slower this year." (Trading Markets, Mar. 24th)

Port Authority Cuts $60M Lease Buy-Back Deal. “The Port Authority of NY/NJ has cut a deal to buy back the long-term leasehold of the Northeast Auto-Marine Terminal, involving 119 acres occupied by that facility… The deal is valued at $60 million. The PA’s [plan] for the site, surrounded on three sides by water, [includes] demolishing the existing import auto processing center and turn it into a container shipping terminal… Officials say it is part of an effort to prepare the port for the coming expansion of the Panama Canal and an expected influx of new shipping traffic… It’s also part of the authority’s 10-year, $2-billion capital improvement plan.” (Globe St., Mar. 24th)

DebtX To Sell $380 Million In Commercial Real Estate Loans. “DebtX, the nation's largest loan sale advisor for commercial debt, Monday announced the sale of more than $380 million in Commercial Real Estate loans secured by properties in the southeastern US. The transaction includes more than 200 lending relationships. The loans range in size up to $20M and are secured primarily by land and commercial and residential development projects throughout the Southeast, including Atlanta, Orlando, and South Florida. Investors will be given the opportunity to bid on pools and individual loans. Performing, sub-performing and non-performing loans are being sold. The first of four loan portfolios will bid April 15, 2008.” (Press Release, Mar. 24th)

As Home Prices Fall, REITs Get Attention. “Multifamily rentals could actually benefit from [current] economic woes… Occupancy rates for apartments have remained stable, averaging in the mid-90% range, and rising in some cities, industry reports show. Home ownership has fallen steadily nationwide… to 67.8% at the end of 2007 from a peak of 69.2% in 2004. Some would-be buyers are now waiting for home prices to bottom out, while others are finding it harder to get a mortgage… Many apartment REITs traded near their 52-week lows not too long ago, though they have been moving higher recently. Apartment REITs [on] average lost 25% last year, are [now] up 15.6% year-to-date.” (International Herald Tribune, Mar. 23rd)

Commercial Real Estate Steady In Area. “The high rate of commercial building may slow in the near future, but the local market is anticipated to stay competitive… Local commercial real estate company Realtec: In Loveland and Johnstown, 2.4 million-sf of retail space and 981,673-sf of future office space construction have been proposed. For all of Northern Colorado, there’s 4.4 million-sf of retail, 1.7 million of office space and 1 million of industrial real estate construction proposed for this year and beyond… In 2007, 173,395-sf of office space were built in Loveland and Johnstown, with a net absorption of 167,247-sf. Industrial vacancy rates are low [and] will remain low [says Realtec.]” (Reporter Herald, Mar. 23rd)

Market Conditions Don't Slow Pace Of Big BWI Resort. Maryland: “Tracie Reynolds, spokesman for Office of Planning and Zoning: Commercial construction in Linthicum County continues to be strong. Applications for commercial construction permits more than doubled in January-February 2008 compared to 2007, rising from 71 to 156. Robert Hannon, president and CEO of the county Economic Development Corp., said there is 15 million-sf of commercial space being planned in the county portion of the Baltimore-Washington Parkway corridor. These projects are being developed because of the growth and lively activity of the BWI area and Fort George G. Meade.” (Hometown Annapolis, Mar. 23rd)

'Doomsdays' and Bargains in CMBS. “Prices of top-quality commercial-real-estate debt… are priced at levels that imply default rates could reach 80%, or even 100%, of their underlying loans, [fund managers] say. Though historically, the worst period in the commercial-real-estate debt market saw defaults on those bonds reach roughly 31%. [Despite a coming] commercial real estate slump, managers argue that the doomsday scenario [for these] high-quality securities is unwarranted… Banks and brokerage firms in recent months [have been] hedging against commercial-real-estate loans made by those firms [by] selling CMBX indexes… Hedge funds… piled on the selling with bets that the index would fall, further driving the index down.” (Wall St. Journal, Mar. 22nd)

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Comments

[johnthebear]

It was reported that General Growth Properties and Simon Property Group are planning to sell shares to raise cash, which would dilute current shareholders value. This is comparable to a recent experience in England. The press in England reported that capitalization rates in England were lower than mortgage rates and the REIT was forced to sell shares to raise cash for redemption's. With rising mortgage rates and thus cap rates, it will be difficult to sell even prime office buildings that are fully leased without significant discounts.

In looking at the balance sheet of Simon Properties, the long term debt was reported to be $19 billion in real estate which was financed with $17 billion in long term debt. I question the terms of the long term debt. Moody's reported in the first half of 2007 that 59% of the mortgage debt for commercial properties was interest only! They also reported the loan to value ratio was typically 110% or more. Talk about leverage!

So, the reason for the sale of shares may be that the short term, interest-only loans at substantially higher interest rates have pushed Simon to the point of collapse. Could this be true?

[User 169225]

As an economist and an owner of several multi-unit properties in four states, I find it curious that Seeking Alpha would be "pimping" REITs. If you want to invest in real estate, but the real thing rather than investing in an asset you have no control over and are subjected to management's "nickel and dime-ing" their investors when things get difficult.