Office Tenants In Driver's Seat

Even before the financial meltdown last fall, most U.S. office markets were going noticeably soft. In particular, vacancies were rising as businesses downsized, reorganized or otherwise felt skittish about committing to any new use of office space. Now that the worst recession in at least a generation is under way, what was once only a worrisome trend for U.S. office landlords is full-blown reality.

Few dispute that current conditions in almost every office market could be called a “tenants' market.” Tenants have the edge now, provided they themselves aren't beaten up so badly by the economy that they can't take advantage of that fact.Though each major metro market has its own distinct features, the overall numbers are telling. According to Reis Inc., the overall U.S. office vacancy rate climbed to 15.2 percent by the end of the first quarter of 2009, compared to 14.5 percent at year's end 2008 and 12.8 percent during 1Q08. Office-space users vacated nearly 25 million square feet during 1Q09, moving in tandem with the spike in the U.S. unemployment rate during that period. People go, then the space goes, and people are still going.Moreover, since commercial real estate tends to be a lagging indicator, even if the economy starts to grow again later this year--something of a tall assumption--office landlords might not feel the benefit for quite a while longer than that. In some ways, this office downturn is like previous ones, Bill Lichwala, president and CEO of Plante Moran Cresa told CPN. “Financially solid tenants are now able to negotiate with a lot of strength,” he said. “At first, landlords resisted lowering rents, and offered more concessions, because lower rents affect the building valuation a lot more.”But now rents are going down. According to Reis, office rents were an average of 3.2 percent lower in the first quarter of 2009 than a year earlier. “Landlords simply can't compete anymore without competing on rents,” said Lichwala, whose Southfield, Mich.-based firm specializes in tenant rep. “They can only offer so much in the way of incentives, and that's reached its limit.”Lichwala pointed out that in one way, however, this office market isn't like previous slumps in space usage. “Previously, landlords needed to be sure that a tenant was creditworthy before a deal would be inked,” he said. “That's normal due diligence, and it hasn't changed. But now tenants need to be as sure of the solvency of the landlords as much as the other way around. It isn't any good to negotiate a sweet concession package if the landlord goes into receivership and can't afford it.” By: Dees Stribling, Contributing Editor of CPN.com

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Commercial Real Estate Tornado hit Texas

Commercial real estate values are continuing their downward spiral, dropping 8.6 percent in April, according to a report released Wednesday by Moody's Investors Services and Real Estate Analytics.

That's the largest one-month nationwide decline on record. And the Southern region of the U.S., which includes Texas, is seeing the worst declines. Prices for investment properties in the Southern sector of the country are off more than 20 percent in the last year, Moody's researchers said.

U.S. commercial real estate values are down 29.5 percent from their peak in late 2007. "The question is will this mark the bottom or not," said Neal Elkin of Real Estate Analytics.
The biggest declines have come in the office sector, where prices are down about 29 percent nationwide from a year ago. And shopping center values have fallen 18.5 percent.
Another recent commercial property report predicts that the Dallas area will have the largest decline in office prices in the country during the coming year. That forecast last week by PricewaterhouseCoopers predicts that the commercial real estate market won't begin to recover until 2011.

Some industry watchers are even more pessimistic. The top analyst for Deutsche Bank's Commercial Mortgage Backed Securities operation predicted last week that the U.S. property market won't recover until 2017. "We are currently in something which is comparable to what we saw in the 1990s and potentially worse," Richard Parkus said at a New York real estate summit sponsored by the Reuters news agency. By STEVE BROWN / The Dallas Morning News stevebrown@dallasnews.com


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Got Money? Invest in US. Commercial Real Estate

NEW YORK (Reuters) - Brazil, Russia, India and China move over. There's another emerging market for commercial real estate opportunities.

"Now that the meltdown has happened, the new emerging market is the United States," Tom Shapiro, president of real estate investment firm GoldenTree InSite Partners, said on Tuesday at the Reuters Global Real Estate Summit in New York.

The U.S. commercial real estate crash, in which prices are down more than 20 percent and are expected to fall 40 percent to 50 percent, has created a landscape of what is expected to be a land of vast opportunity for those with cash.

"I think there's going to be the best opportunity to make money in the last 20 years in real estate in the U.S.," Shapiro said.

GoldenTree InSite stopped investing in U.S. real estate in early 2006 and has focused most of its attention and cash on Brazil, where it has invested in residential and office properties.

But with about a $1 billion to use, it is poised to return to the U.S. market and take advantage of the right projects that need or will need money when they come up short.

"We are just at the point now where we are seeing some very interesting entry points on certain transactions," he said.

New York-based GoldenTree InSite is an opportunistic real estate company that invests funds raised from pension funds and other institutional investors.

Shapiro said his firm not only considers location but places more weight on the merits of an individual project.

"We're more about finding the right project in the right location," he said. "We're not looking for shotgun shots. We're looking for rifle shots."

Still, Shapiro said his firm likes big cities, such as Los Angeles and New York where downtrodden commercial real estate markets tend to rebound strong.

"San Francisco right now is a pretty interesting place to think about because San Francisco is a very diversified economy," he said.

He also mentioned residential land and hotels are of note because they are bottoming out.

"There's a lot of projects, whether it be development or operating properties, or properties that need to be renovated that were done with the best of intentions but relied on increasing fundamentals, rents working and not having construction overruns," Shapiro said.

GoldenTree InSite has not yet committed any funds to a new U.S. investment. It is not only evaluating what project to invest in, but how to enter the deal -- via equity, mezzanine financing or by buying distressed senior mortgages. Depending on the position of the financing, investment could be bought at 20 cents or 30 cents on the dollar.

For U.S. investing, GoldenTree InSite is likely to add leverage to its existing capital but will use it carefully, Shapiro said.

(Reporting by Ilaina Jonas; editing by Carol Bishopric)



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CRE Prices Fall 8.6%

Commercial real-estate prices fell 8.6% in April as deals were closed after having been negotiated during the dark days of late 2008 and early 2009, Moody's Investors Service said.

"The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real-estate markets," says Moody's Managing Director Nick Levidy. He added more distressed sales appear to be occurring.

The monthly decline, which leaves prices down one-quarter from a year earlier, continues the losing streak for the commercial real-estate sector, which had held out longer than residential real estate. However, commercial real estate began to feel the recession late last year, as retailers and other businesses cut back when financial markets and consumer sentiment were plunging.

Overall sales volume also fell sequentially in the month to 285, the lowest level since Moody's began tracking the figures in 2000.

By region, apartments are holding up the best in the East, down 12%. The South, the worst-performing region over the past year, saw declines of more than 20% in all sectors.

The three major office markets - New York, San Francisco and Washington - suffered declines as well, with Washington posting the biggest year-over-year fall at 21%. New York and San Francisco had declines of 13% and 20%, respectively.

-By Jay Miller, Dow Jones




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Commercial Real Estate Outlook

The state of commercial real estate has become a growing concern for the economy. Martin Cohen, chairman and co-CEO of Cohen & Steers Capital Management, shares his outlook for the sector.

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Motor City Maham

They call this the Motor City, but you have to leave town to buy a Chrysler or a Jeep.
Borders Inc. was founded 40 miles away, but the only one of the chain's bookstores here closed this month. And Starbucks Corp., famous for saturating U.S. cities with its storefronts, has only four left in this city of 900,000 after closures last summer.

There was a time early in the decade when downtown Detroit was sprouting new cafes and shops, and residents began to nurture hopes of a rebound. But lately, they are finding it increasingly tough to buy groceries or get a cup of fresh-roast coffee as the 11th largest U.S. city struggles with the recession and the auto-industry crisis.

No national grocery chain operates a store here. A lack of outlets that sell fresh produce and meat has led the United Food and Commercial Workers union and a community group to think about building a grocery store of its own.

One of the few remaining bookstores is the massive used-book outlet John K. King has operated out of an abandoned glove factory since 1983. But Mr. King is considering moving his operations to the suburbs.

Last week, Lochmoor Chrysler Jeep on Detroit's East Side stopped selling Chrysler products, one of the 789 franchises Chrysler Group LLC is dropping from its retail network. It was Detroit's last Chrysler Jeep store.

"The lack of retail is one of the biggest challenges the city faces," said James Bieri, president of Bieri Co., a Detroit-based real-estate brokerage. "Trying to understand how to get it to come back will be one of the most important keys to its resurgence -- if it ever has one."
Detroit's woes are largely rooted in the collapse of the auto industry. General Motors Corp., one of downtown's largest employers and the last of the Big Three auto makers with its headquarters here, has drastically cut white-collar workers and been offered incentives to move to the suburbs. Other local businesses that serviced the auto maker, from ad agencies and accounting firms to newsstands and shoe-shine outlets, also have been hurt.
The city's 22.8% unemployment rate is among the highest in the U.S.; 30% of residents are on food stamps.

"As the city loses so much, the tax base shrinks and the city has to cut back services," said Margaret Dewar, a professor of urban planning at the University of Michigan. That causes such hassles for retailers as longer police-response times, as well as less-frequent snow plowing and trash pickup.

While all of southeast Michigan is hurting because of the auto-industry's troubles, Detroit's problems are compounded by decades of flight to the suburbs. Hundreds of buildings were left vacant by the nearly one million residents who have left. Thousands of businesses have closed since the city's population peaked six decades ago. Navigating zoning rules and other red tape to develop land for big-box stores that might cater to a low-income clientele is daunting.
The lack of grocery stores is especially problematic. The last two mainstream chain groceries closed in 2007, when The Great Atlantic & Pacific Tea Co. sold most of the southeast Michigan stores in its Farmer Jack chain to Kroger Corp., which declined to purchase the chain's two Detroit locations, causing them to close.

A 2007 study found that more than half of Detroit residents had to travel twice as far to reach a grocery store than a fast-food outlet or convenience store. Michelle Robinson, 42 years old, does most of her shopping at big-box stores in the suburbs. When visitors staying at the hotel near her downtown office ask where to shop, she sends them to a mall in Dearborn, 12 miles away.
A few retailers are thriving. Family Dollar Stores Inc. has opened 25 outlets since 2003. A handful of independent coffee shops and a newly opened Tim Horton's franchise cater to workers downtown.

Discount grocer Aldi Inc. opened stores in the city in 2001 and 2005. A spokeswoman said the chain is "very bullish" on Detroit. Farmer's markets draw crowds looking for fresh produce.
Olga Stella, an official at the Detroit Economic Growth Corporation, works to persuade businesses to move to the city. She says companies have underestimated Detroit's economic potential and that Aldi and Family Dollar are proof there's money to be made here.
Meanwhile, the former Lochmoor Chrysler Jeep is now Lochmoor Automotive Group, a used-car dealership and repair shop. Gina Russo, daughter of the dealer's longtime owner, is being groomed to take over the family business. She has agreed to start selling small pickup trucks made by India's Mahindra & Mahindra Ltd.

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Real Estate Lawyer Gary Wachtel on Commercial Tenant Strategies

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The "Apocalyptic" Commercial Real-Estate Crash

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Rough Times For Commercial Real Estate CRE

The Commercial Real Estate Meltdown @ Yahoo! Video

A Ticking Time Bomb (CRE)

WASHINGTON -(Dow Jones)- Some lawmakers welcomed news Tuesday that 10 of the nation's largest banks are poised to repay billions of federal assistance but warned that a "ticking time bomb" in commercial real estate could deal a punishing blow to lenders and the economy.
"I am very concerned about the ticking time bomb we face in commercial real estate lending," congressional Joint Economic Committee Chair Carolyn Maloney, D-N.Y. said at a hearing Tuesday. She noted that an estimated $400 billion of commercial real estate loans are coming due this year, with another $300 billion due in 2010.

If commercial real estate developers cannot refinance or pay off that debt, " we could expect to see the default rate on commercial mortgages climb much higher," Maloney warned.
Maloney's comments came at a hearing into the $700 billion Troubled Asset Relief Program approved by Congress to help banks saddled with soured assets linked to risky home mortgage loans. Just before the hearing began, the U.S. Treasury Department announced that 10 recipients of so-called TARP funds will repay a total of $68 billion, which Maloney called "welcome news."

The hearing follows the release of a new Congressional Oversight Panel report on the TARP, which faulted recent "stress tests" of 19 large financial firms by the Treasury Department and the Federal Reserve, saying the economic assumptions probably were too rosy and that the projections only run through 2010.

"We simply are asking for more," Congressional Oversight Panel chair Elizabeth Warren told lawmakers. She recommended that the stress tests be run again, with tougher assumptions, and be continued as long as banks hold troubled assets.As a case in point, Warren noted that the U.S. unemployment rate projected for 2009 under the stress tests' "worst-case scenario" was 8.9%, but "we're now at 9.4%,"

"This is a real concern, the worst case scenario in 2009 is in fact not the worst case," said Warren, whose panel is monitoring the Treasury's spending of the bailout money.
In addition, the oversight panel called for regulators to issue more information about the stress-test methodology, allowing outside analysts to replicate the tests themselves. -By Judith Burns, Dow Jones Newswires

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Its Only Just Begun

NEW YORK (Reuters) - The default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.

During the first quarter 2009, the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25 percent from 1.62 in the fourth quarter of 2008, according to the real estate research firm's report released on Tuesday. The 0.63 percentage-point jump is the largest quarterly increase since at least 1992, and pushed the default rate to its highest level since 1994, the New York-based firm said. The default rate does not include loans on apartments, which increased by 0.68 percentage points between the fourth quarter and first quarter 2009 to 2.45 percent. The analysis of the data from the Federal Deposit Insurance Corporation (FDIC) includes non-farm, non-residential property where the primary source of repayment during the term of the mortgage is derived from the property's rental income. The multifamily results include buildings with five or more units.

Depository institutions hold about half the $3.2 trillion in debt on U.S. commercial property, with the commercial mortgage-backed securities market accounting for about 25 percent of that. Insurance companies and government-sponsored entities such as Fannie Mae account for the remainder.

Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets. Mortgages originated in 2006 and 2007 experienced the most significant cash shortfalls because of the large number of mortgages that were based on overly aggressive rent and occupancy projections.

"Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships," the report said. Real Estate Econometrics also revised its default projections higher. It sees the default rate rising to 4.1 percent by the end of the year, up from its prior forecast of 3.9 percent. By the end of 2010, the default rate is expected to rise to 5.2 percent, up from the prior outlook of 4.7 percent.


It expects the default rate for U.S. commercial loans held by banks to peak at 5.3 percent in 2011, up from its forecast of 4.8 percent. The more sour forecast was due chiefly to a more pessimistic outlook for the overall economy, a projected rise in long-term interest rates and a slower-than-expected policy response to commercial real estate credit constraints. It sees the national default rate for multifamily mortgages is projected to rise to 4.5 percent in the fourth quarter of 2009 and peak at 5.5 percent next year. ~ Reporting by Ilaina Jonas, editing by Matthew Lewis (Reuters)


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S&P's commercial real estate revolt

NEW YORK (Fortune) -- Despite near universal criticism of their many missteps during the credit bubble, the ratings agencies aren't irrelevant just yet.
Commercial real estate investors discovered as much last week, when an announcement by Standard & Poor's doused the spring rally in the beaten-down market for commercial mortgage-backed securities, or CMBS.

S&P's move left commercial property investors scratching their heads over the ratings agency's timing. The proposal, in which S&P warned it may soon downgrade hundreds of recent bond issues, could complicate a new federal plan to make financing more available for office buildings, apartment complexes and shopping malls.

Investors also wondered about S&P's change in tone on the prospects for the senior-most commercial real estate-backed debt securities. The ratings agency and its rivals Moody's (MCO) and Fitch have been under fire in Congress for their failure to alert investors to the housing bubble, and some observers wonder if they aren't hastily trying to make amends.
"They've spent 18 months getting raked over the coals for being too lenient, and now they appear to be oversteering," said Steve Jernigan, a director at NewOak Capital, an advisory, asset management and capital markets firm in New York.

S&P says politics aren't influencing ratings actions. "Our ratings are driven only by our best analytical judgment of the creditworthiness of the issuers and securities we rate and are formed independent of other concerns," spokesman Ed Sweeney said in an email. He added that S&P's comments last week reflect its "careful review and analysis of the current CMBS market and our expectations for it going forward." ~ By Colin Barr, senior writer at Fortune.com


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SpacePlace has gone Social!

Hello SpacePlace followers,

I wanted to update each and everyone of you on the activity we have been going through internally this week. If you have recently been to www.spaceplace.net, then you will notice we have are now active in Twittering...or is it Tweeting? Who knows? But we are live and working and I invite each of you to follow us as we will continue to give updates on site development progress, site features, launch date plans, and a bunch of other things that we work through on a daily basis. Also, we are now on Facebook! We love hearing from each of you... so please leave comments.

At SpacePlace™, we are doing our best to construct an interface and environment where commercial real estate professionals can resource a wealth of property, market, and CRE professional contact information, but this is your site and we need your feedback. Go to www.spaceplace.net and locate our 'Give Feedback' button and let us know what we can do to make doing business easier for you.

~Brad Boss, CEO of SpacePlace.net


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