Commercial RE To Follow "Jingle Mail" Trend? [Housing Tracker]

Quote of the Day

"Kimco has done it, and they should. There's no problem. It's part of the game.” - Lawrence Longua, director of the REIT Center at New York University's Real Estate Institute, about defaulting on non-recourse loans and giving the property in question back to the lender. Grocery-anchored neighborhood shopping centers, where a loss of the grocery store often represents a loss of at least 40% in the property's income, may do this more than any other type of property owner. Kimco Realty Corp is the largest U.S. owner of grocery-anchored shopping centers, and had in the past defaulted on individual mortgages… Since then, Kimco has had no problem attracting lenders. (Guardian UK, June 10th)

Financing Trends For Commercial Real Estate and Real Estate Investment Trusts [REITs]

CMSA Study Finds CMBS Market Turning Around. “Jun Han, author of the CMBS market study for the Commercial Mortgage Securities Association: The commercial mortgage-backed securities market has turned the corner… Investors have marked-to-market… despite the fact that the CMBX market represents only a very small and thinly traded segment of the market. Han’s extensive tests of all 19,543 loans in the four CMBX indices against the [three recent] recessions, found few risks of poor performance… The CMBS market actually turned the corner with the Fed’s rescue of Bear Stearns... CMBS spreads peaked in mid-March. [However,] spreads will need to come down for buyers to be willing to move on deals.” (Commercial Property News, June 10th)

Expert: CMBS Fears Largely Unfounded. “Jun Han, author of the study commissioned by the Commercial Mortgage Securities Association and a principal of JHP Capital: One thing the commercial real estate market has going for it, unlike other down cycles, is that there is not an overbuilding scenario. For example, 1% of commercial real estate’s total inventory is under construction right now, as opposed to the recession of 1991, when 7% was underway. “There’s really not a lot of construction activity,” he said.” (Globe St., June 10th)

What's Next For The CMBS Market? “Moody’s: "The main issue is a standoff in the CMBS industry. Issuers don't want to make new loans unless they can sell the resulting bonds to investors, but investors don't want to buy bonds until the spreads have settled down. More people are sitting on the sidelines." Even banks that have cleared out their balance sheets and are in a position to issue new CMBS have been impacted by the overhang problem. That's because new loans are priced on the basis of recent CMBS issuance, but because no CMBS are being issued, the valuation of new paper and the potential yield in which it would trade remains uncertain.” (Real Estate Portfolio, May-June)

More US Commercial Property Defaults Likely. “Commercial property investors may soon follow the residential real estate trend [to] surrender a property to lenders when its value falls below the amount owed on a mortgage… Real Capital Analytics: U.S. commercial property transactions were off nearly 70% in Q1’08 versus Q1’07… Rather than sell at a loss, some REITs and other borrowers are opting to turn their assets over to lenders when the associated mortgage is "non-recourse"… Tara Innes, managing director of AIG Global Investments: “Corporate bond holders also may view default on a non-recourse loan favorably. They would rather see the company preserve its cash to repay corporate-level debt than use it to repay a mortgage on a bad investment.” (Guardian UK, June 10th)

Credit Crunched Buyers Look To Sellers For Financing. “As the tight credit market crimps property deals in New York City, sellers are beginning to offer help to their potential buyers in the form of financing for up to 80% of the purchase price... The blockbuster example of the seller financing formula is the reported offer by Deutsche Bank to bankroll part of the sale of seven Macklowe Properties' buildings that were once in the Equity Office Properties portfolio, which Harry Macklowe bought for $7 billion in 2007. Macklowe technically remains the properties' owner, but he reached a deal with Deutsche Bank to give it control after he defaulted on his payments.” (The Real Deal, June 10th)

Eastern Real Estate, Highfields Capital Form $1B JV. “Eastern Real Estate L.L.C. and Highfields Capital Management formed a $1 billion joint venture to acquire high-yield commercial real estate debt, provide preferred equity and purchase high-quality assets... Eastern will serve as the joint venture’s sponsor and invest its own capital alongside the nearly $1B being provided by Highfields. The joint venture is actively acquiring positions from financial institutions, which are seeking to increase their liquidity and provide alternatives for their capital-constrained clients. The two firms have closed on their first series of investments and expect to close approximately $400 million worth of transactions by mid-summer.” (CPN, June 10th)

Real Estate’s Stealth Recovery. “Morningstar: U.S. real estate funds have gained 7.09% year-to-date through June 4, 2008, compared to a drop of more than 8% for the DJIA. One true standout is First American Real Estate Securities (FARCX), a five-star fund that consistently turns in solid results. Year-to-date through June 4, FARCX has reported a trailing total return of 8.57%, beating the DJ Wilshire REIT Index (DWRTF) by 0.35%. Over the last three years, the fund turned in an annualized total return of 13.39%, besting the DWRTF by 2.93%. Over the last five years, FARCX reported an 18.98% annualized return, leading the DWRTF by 1.78%.” (Forbes, June 10th)

Survey Reveals Los Angeles and San Diego Commercial Real Estate Markets Are Moving Past the Credit Crisis. “Allen Matkins / UCLA Commercial Real Estate Survey: Some office space markets in California are holding their own. The survey polled panelists in Los Angeles, San Diego, and Orange County, and for the first time, San Francisco. Results of the survey reveal that in Los Angeles and San Diego, there was a sense that while credit conditions were going to remain tight for the near term, the credit crunch was starting to lessen. In Orange County and San Francisco, the panels believed the opposite it true.” (Press Release, June 10th)

LandSource Investors Take Long-Term View. “MacFarlane Partners says that the 15,000 acres of Santa Clarita Valley land owned by bankrupt LandSource is a good long-term investment despite the LandSource [bankruptcy]... LandSource Communities Development LLC and some of its subsidiaries, which own the land in the Santa Clarita Valley, filed [for] bankruptcy Sunday… LandSource said that it has received commitments for debtor-in-possession financing from a group of lenders led by Barclay’s Bank, including a $135 million revolving line of credit that will enable the company to meet post-bankruptcy petition obligations and fund operations during bankruptcy proceedings.” (Globe St., June 10th)

US Housing Pain Could Provide Upside For Aim-Listed Weis Fund. “A pair of US property developers are floating a new vehicle on London’s AIM market that will allow British investors to take advantage of the current distress in the US housing market… The Weis Development Corporation [will] offer potential shareholders a chance to invest as American residential property prices reach their nadir, hopefully profiting on the upside… Weis plans to operate as an investor in turnround and development schemes over a four-to-seven year timescale… Weis will act as an investor in related US companies, which will buy incomplete gated communities, ranging from about 300-1,000 properties.” (UK Telegraph, June 9th)

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Comments

[Redfish Mark:]

The CMSA study data is encouraging, but until spreads drop more the playing field still looks more like frozen tundra.

2008 Jun 11 11:24 AM

[Tom Lindmark:]

That's quite an article on Kimco and the rationale for putting commercial property back to the lender. Having been fairly severe in my criticism of residential property owners exercising their put option, I may have to go back and rethink my position.

2008 Jun 11 12:36 PM

[Malkiel:]

The "jingle mail" phenomenon is still, so far, urban legend not backed up with solid evidence that it's really happening in the residential market. Let's not legitimize the fairy tale by using the term until the facts on the ground justify the sound...

2008 Jun 11 03:42 PM

[Jingles:]

First American Real Estate Securities is really turning to the solid results.

Jun 04 01:24 AM

[Jingles:]

First American Real Estate Securities is really turning to the solid results.

Jun 04 01:25 AM