31 posts tagged “debt”
LoopNet conducted a poll of its members -- groups of investors, brokers and owners -- last month and asked where they thought the commercial real estate market was headed in the coming year. Optimism for 2010 may have broken as respondents seem to have grown somewhat pessimistic about the timing of recovery, continued price declines, and access to affordable debt financing. Expectations for the timing of a market recovery continue to drift with nearly half of the respondents expecting improvement in 2011 or later.
"Despite the declines in pricing seen over the past quarter, respondents’ expectations for future pricing declines remain almost unchanged from the last survey," LoopNet expounded in their CRE blog. At the beginning of Q3, 52% of respondents expected to see future declines of 11% or more. At the beginning of Q4, that number is 53%. This suggests that future expectations of cash flow and value have continued to deteriorate, preventing pricing from stabilizing even after the declines in Q3.
For more news and information visit Blumberg Capital Partners.
The Federal Reserve releases its latest Beige Book, a running commentary on current economic conditions, based on information collected before August 31, 2009. The reports from the 12 Federal Reserve Districts indiate that the nation's economic activity continued to stabilize in July and August, but the data on commercial real estate suggest that the demand for space remained weak and that nonresidential construction-related activity continued to decline. The report summarized the Real Estate and Construction sector as follows:
Reports on commercial real estate markets indicated that demand for space remained weak and that construction continued to decline in all Districts. Atlanta, Philadelphia, Richmond, and San Francisco reported that vacancy rates increased, while rates held steady in the Boston and Kansas City Districts and were mixed in New York. Boston, Dallas, Kansas City, Philadelphia, and Richmond commented that the demand for space remained weak. Commercial rents declined according to Boston, Chicago, New York, Philadelphia, and Richmond. Rent concessions were reported in the Richmond and San Francisco markets, and Richmond noted that some landlords had postponed property improvements in an effort to conserve cash. Construction remained at very low levels, with modest improvements noted in public construction in the Chicago, Cleveland, and Minneapolis Districts.
For more news and information, visit Blumberg Capital Partners.
Newmark Realty Capital, Inc. has arranged financing in the amount of $64,700,000 for Carillon Point, a 26 acre mixed-use property located in Kirkland, Washington, according to a Commercial Property Executive article. Michael Taylor of Newmark secured the financing for the owners with John Hancock Life Insurance Company. The loan has a fixed rate, a 20 year term and is amortized over 25 years. Mr. Taylor had arranged the original financing on the property in 2001, a debt replaced by the new fixed-rate loan.
Carillon Point includes 445,000 square feet of Class A office space, the boutique 100 room Woodmark Hotel and a 200 slip marina. The land has been owned by the same family since World War II and was developed to its current use between 1989 and 1991. "Carillon Point is one of the premier properties in the regions, and there was extremely low leverage on it, but the biggest challenge was its size," Taylor told CPE. "In this market, few lenders are making loans over $25 million, and for loans over $50 million, there are even fewer. For this property, we had lenders compete for it, but it was less than a handful; three years ago there would have been dozens."
For more news and information, visit Blumberg Capital Partners.
SL Green Realty Corp., a REIT focused on Manhattan office properties, has entered into a sale-purchase agreement to sell 49.5% interest in 485 Lexington Avenue to a joint venture partnership comprised of Herzliya, Israel-based Optibase Ltd. and Gilmore USA LLC. The JV, Mazal 485 LLC, will take ownership of nearly half of Green 485 JV LLC, the entity designated as owner of 485 Lexington (also known as Grand Central Square), in exchange for providing SL Green with approximately $20.8 million, as well as a loan of $20 million according to a Commercial Property Executive article.
The transaction results in an implied asset valuation of approximately $504.2 million, or $547 per square foot, and includes $450 million of existing debt, which will remain outstanding. The implied cap rate of this transaction is 6.25%. SL Green CEO Marc Holliday commented, "This is a first, but significant step towards the sale of interests in 485 Lexington Avenue. If ultimately approved, the transaction would demonstrate that the Midtown Manhattan office market continues to stand as one of the world's top locations and that investor interest is once again on the rise."
SL Green originally acquired the 921,000 square foot office tower in 2004, and immediately embarked upon a $90 million capital repositioning program which included window replacements, installing a new lobby, replacing retail storefronts, and upgrading corridors and elevators. The property is currently 96.8% occupied with tenants including Citigroup and The Traveler's Indemnity Corporation which, together, occupy half the space.
For more news and information, visit Blumberg Capital Partners.
The Moody’s/REAL Commercial Property Price Index (CPPI) has been released by Real Capital Analytics showing a 7.6% decline in May 2009, leaving the index 34.8% below the peak measured in October 2007. And, as reported on Bloomberg.com, about $2.2 trillion of U.S. commercial properties bought or refinanced since 2004 are now worth less than the original price, raising the threat of more foreclosures.
The CPPI measures the change in actual transaction prices for commercial real estate assets based on the repeat sales of the same assets. RCA notes that large commercial real estate price declines in the last two months suggest that a bottom may be starting to form, although higher transaction volumes would be necessary in order to draw any more definitive conclusions. There were 282 transactions in May, 52 of which were repeat-sales transactions, passing the old low set in the early 2000’s.
"We have evidence that prices have fallen over 30% and the leverage you can get is 50-60% of value, so for owners holding on to properties, they're going to have to come up with a big check," Dan Fasulo, managing director with RCA, told CPN. "On non-healthy properties, lenders are foreclosing on those assets; they're throwing in the towel, and on development sites, as well. There's no income anyway, so they might as well take it back."
For more news and information, visit Blumberg Capital Partners.
Philip Blumberg was interviewed by Nikkei Veritas in a piece titled "Still early to buy U.S. commercial real estate" and expressed his view that the U.S. commercial real estate market still has a way to go before bottoming out. An excerpt:
It seems you earned 17.6% in profits last year.
"Our past three years of devoting ourselves to sales, without buying, bore fruit. We built up cash savings and released ourselves from the need to rely on debt. We made sure that buildings we own or manage are fully set up, with gyms and cafeterias, which kept rents from going down."
"I've been predicting the confidence collapse for more than two years. With so much risk investment, which relied on cheap leverage, prices went up to an unrealistic level."
To read the full article, click here.
Barry Sternlicht is starting a mortgage REIT in a time when credit is badly needed to restore market liquidity.
Sound familiar?
This new innovation in the debt markets, which provided high leverage at low rates, without recourse or risk to the borrowers, required other non-securitized loan providers, such as commercial banks, to be competitive and keep up or drop out, further rapidly expanding credit.
As the reaction to the overly abundant credit, initially in the sub-prime residential market, spread to other sectors, in the form of credit market contraction, a price/value decline was set off.
Lack of credit has also dried up capital for the purchase market, currently with transaction volumes at their lowest level in decades.
Historically, its almost always increased capital flows that induce the major crisis in real estate, not recessions.
And the re-establishment of prudent, patient capital flows that cures it.
When capital flows to real estate dramatically increase its often debt, abundant cheap debt, that starts the cycle.
A predictable cycle, that stops only when the effects of over-levered inflated investments are felt.
Those effects are usually in the form of too much capital fueling over building with eventually insufficient demand to keep up (eg the residential markets today),
Because real estate is a lagging re-actor (due primarily to the long time lag in development and the lease renewal lag in commercial assets) the supply/demand reaction is delayed, and the imbalance becomes dramatic.
So does the crash - typical of real estate.
These cyclical problems and solutions are very similar across time.
Barry Sternlicht is a very bright and experienced innovator to real estate structures and I'd give respect to his mortgage REIT direction as one means of restoring capital flows to real estate.
Blumberg Capital Partners was featured today in an article on Commercial Real Estate Direct titled "Fund Managers Brace for Changes in Dealings with Investors". An excerpt:
Blumberg Capital Partners, a value-add debt and equity investor in Coral Gables, Fla., is launching a closed-end fund and its chairman, Phillip Blumberg, expects its limited partners to set restrictions on the use of debt financing. He also expects those co-investors to seek terms that would enable them to cash out of the fund early, even though closed-end funds typically require investors to commit for their full life cycle.
To continue reading, click here.
CoStar published an article today investigating the pricing trends for commercial mortgage-related investments, finding the conditions not so separate from those in play on the property side -- even with funding available for debt and mortage investments, there's still a disconnect between what buyers are willing to pay and what sellers are willing to accept. Several industry experts weighed in on the issue, including Michael Singh, managing director of Jones Lang LaSalle Americas in LA: "If notes are available at the right price, investors are ready to move... pricing has been a big sticking point as seen in the continued wide bid-ask spread. Lenders generally seek to recover 80% or more on performing notes while investors typically bid sub 60%."
David S. Akeman, director of capital markets of Stan Johnson Co. in Tulsa, OK, told CoStar Group: "There is a market, but I hear that most lenders or note holders typically aren't discounting the performing commercial real estate notes enough to attract buyers. Many I have personally spoken with are still trying to discount less than 10%. One life company is trying to hold out for par on a vacant Stock Building Supply (property) that is no longer paying rent. This will change in the future, but right now the lenders are stressed, not distressed."
For more news and information, visit Blumberg Capital Partners.
Real Estate Econometrics has published its second quarter 2009 commercial mortgage default report, based on FDIC data, revealing that the commercial real estate loan default rate has hit its highest level since 1994. The report summarizes current and historical performance (delinquency, default, and non-accrual status) of commercial mortgages held by depository institutions, as well as the current five-year forecast for mortgage performance. 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.
As reported in CPN, banks and thrifts hold about half of all commercial real estate debt, representing about $1.6 trillion worth of outstanding loans. A large share of the most troublesome loans—those at highest risk of default—were originated in 2006 and the first half of 2007.
For more news and information, visit Blumberg Capital Partners.
