Monday, November 30, 2009

Deals of Note for Monday

"Archway Inks 350,000-SF Renewal in Valley Forge

Marketing Operations Firm Extends Lease at Distribution Center Archway Marketing Services has renewed its lease of the 352,456-square-foot distribution building 1001 Trooper Road in Norristown, PA.

Located in the Valley Forge Corporate Center, the facility delivered in 1969 and was expanded in 1980. Features include 31,721 square feet of office space, 24 loading docks and two drive in bays. It sits on 33 acres.

Archway specializes in marketing, fulfillment and supply chain management services. Archway was represented in-house."
By Vickie Katlic

"Performance Years Inks 30,000-SF Deal in Hatfield.

Performance Years, a supplier of classic Pontiac car parts, signed a 30,000-square-foot industrial sublease in Hatfield, PA. The tenant is moving from 2880 Bergey Road to 2705 Clemens Road, which keeps the company in the West Montgomery County Industrial submarket.

Built in 2006, the 80,000-square-foot warehouse is in the Clemens Business Center building park and is situated on approximately seven acres. Building features include six loading docks, two drive-in bays and ceiling heights of up to 28 feet."

By Melannie Skinner

Tuesday, November 24, 2009

Warren Buffett group in $468M deal for Horsham's Capmark

"A joint venture of Warren Buffett's Berkshire Hathaway Corp. and New York-based Leucadia Corp. has agreed to purchase Horsham-based Capmark's loan servicing business for $468 million, up from an earlier "stalking horse" bid of around $400 million, Reuters reports here.

The deal was welcomed by Capmark workers who believe "Berkadia" is more likely to keep them employed than other potential bidders, such as PNC, which has its own commercial mortgage loan-servicing unit.

Capmark is one of the largest servicers of office and apartment complex loans. The company, once part of General Motors' financial arm, faced mounting losses incurred under current owner KKR, and filed for bankruptcy protection in Wilmington earlier this year."

Monday, November 23, 2009

Region's recovery may begin during the winter

More encouraging signs about recovery coming.

"Two of the newest measures of the health of the regional economy are showing signs that a turn in the business cycle may be near.

The Greater Philadelphia Leading Index has risen for five straight months through September. The index, built by the economics firm IHS Global Insight, uses indicators that generally change direction six months before the overall economy.

Phil Hopkins, director of research for Select Greater Philadelphia, which sponsors the quarterly report, retained his cautious outlook, but said the leading index could be forecasting a bottoming of the regional economy this winter.

(Remember: bottoming is good because it means the next direction is up.)

With lots of economists and analysts speculating that the U.S. recession ended during the summer, that doesn’t put our region too far behind the curve. But the start of an economic recovery often feels a lot like the end of a contraction because of the lousy job market.

Hopkins said it may be the end of 2010 before the region sees “sustained growth in employment.”

The other measure, the Greater Philadelphia Coincident Index, fell for the 20th time in the last 21 months. (A coincident index tracks indicators that vary directly with movements in the business cycle.) Hopkins noted that the month-over-month decreases have become more gradual and the hope is that it will begin to increase during the next three months.

In truth, the paint is still wet on these two indexes, which were launched in the thick of last fall’s global economic crisis. So while Hopkins is encouraged by the trends showing up in the indexes, the next quarterly report in February may be the key one that determines if these regional tools can “catch the turning point” in the business cycle.

All recessions are different, but Philadelphia’s reputation has been that it lags during recoveries. Following the 1991 recession, it took the Philadelphia area 69 months before employment surpassed its pre-recession peak, Hopkins said. It took the nation only 31 months.

But after the 2001 recession, the Philadelphia region surpassed its previous peak in employment in 41 months compared with 47 months for the U.S. as a whole, Hopkins.

And this time? IHS Global Insight forecasts the employment level here climbing above its pre-recession peak during the second or third quarters of 2012. Sounds bad, but that would be faster than 34 states."

Wednesday, November 18, 2009

Fed Reserve's TALF Program Backs First New Issue CMBS

Developers Diversified, Goldman Sachs Put CMBS Deals Back in Action
Fed Reserve's TALF Program Backs First New Issue CMBS

Town Center Plaza in Leawood, KS, benefited from the first new CMBS deal in more than a year
The first new-issue commercial mortgage backed securities (CMBS) supported by brick-and-mortar properties in nearly two years successfully sold this week.

DDR Depositor LLC Trust 2009 Commercial Mortgage Pass Through Certificates, series 2009-DDR1 represents the beneficial interests in a trust fund established by affiliates of Developers Diversified Realty Corp. The trust fund will consist primarily of a single promissory note secured by cross-collateralized and cross-defaulted first lien mortgages on 28 of Developers Diversified Realty's properties. Goldman Sachs Commercial Mortgage Capital originated the $400 million loan.

The deal sold at its asking price and saw strong investor demand. The word on the street was that the deal was up to five-times oversubscribed. The capital markets had been looking to this deal as a measure of investors' appetite for risk involving commercial real estate assets and, in some ways, as a sign of the potential strength of the recovery.

As sold, DDR's five-year loan would bear an interest rate of less than 6% after factoring in all fees and expenses. As a result, the strong demand for this deal could prompt other potential borrowers to pursue CMBS financing, according to Opin Partners LLC, an investment house in New York. In fact, DDR is said to have another upcoming securitization, and other REITs are also expected to come to the table including, Fortress Investment Group, which may have as much as $650 million in commercial mortgages to package into a new-issue CMBS eligible for TALF funding.

The Federal Reserve's TALF (Term Asset-Backed Securities Loan Facility) was key to the deal. The Federal Reserve created TALF to help market participants meet the credit needs of households and businesses by supporting the issuance of asset-backed securities collateralized by commercial mortgage loans, auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, or residential mortgage servicing advances.

Eligible borrowers on the DDR deal can borrow Fed funds for the five-year fixed period at a rate of 3.5427%. TALF funds can only be used for the purchase of AAA-rated class of securities. Of the $400 million DDR deal, Fitch Ratings rated $323.5 million as AAA ($41.5 million was rated AA and $35 million A). The DDR deal is expected to close officially next week at which time, the loans will also be funded.

Some of key ratings drivers cited by Fitch Ratings included:

Loan-to-Value Ratio (62.4%): The Fitch stressed value is $641 million, based on a Fitch weighted average cap rate of 8.7%.

Debt Service Coverage (1.44x): The Fitch-adjusted cash flow for the 28 properties was $55.6 million, approximately 16.% less than the trailing 12 months net operating income.

Strong Tenancy and Mix: A majority of the portfolio is anchored by national or large regional tenants, with Wal-Mart representing the largest tenant exposure at 10.3% of the total square footage and 5.4% of base rent. The top five tenant concentrations, which represent 23.2% of total square footage (and 15.2% of base rent) are all investment-grade rated. Other top tenant concentrations include TJX Cos., Lowes, Home Depot, and Bed Bath & Beyond.

The 10 largest properties backing the deal and their allocated loan amount are listed as follows:

Town Center Plaza, Leawood, KS; 649,696 square feet; $54.3 million;
Hamilton Marketplace, Hamilton, NJ; 956,920 sf; $44.4 million;
Plaza at Sunset Hills, Sunset Hills, MO; 450,938 sf; $30 million;
Brook Highland Plaza, Birmingham, AL; 551,277 sf; $26.4 million;
Crossroads Center, Gulfport, MS; 545,820 sf; $26.4 million;
Mooresville Consumer Square, Mooresville, NC; 472,182 sf; $19.5 million;
Deer Valley Towne Center, Phoenix, AZ; 453,815 sf; $18.9 million;
Downtown Short Pump, Richmond, VA; 239,873 sf; $13.4 million;
Abernathy Square, Atlanta, GA; 129,771 sf; $13 million; and
Wando Crossing, Mt. Pleasant, SC; 325,907 sf; $12.8 million.

- Mark Heschmeyer

Office Delinquencies Latest Driver of CMBS Troubles

Great article on delinquencies and Commercial Mortgage Back Securities.

"Job losses and subsequent office loan defaults, coupled with continued hotel underperformance, resulted in another monthly increase in U.S. CMBS delinquencies. And new matured balloons and past due loans secured by interests in non-traditional assets propelled U.S. commercial real estate loan CDO delinquencies past 10% for the first time, according to the latest index results from Fitch Ratings.

U.S. CMBS late-pays rose again in October, up 28 basis points to 3.86%. The office sector had the highest increase in delinquencies since September with 19.4% additional delinquencies followed by hotels, with a 16.5% increase.

Delinquency rates for all major property types were as follows:

Office: 2.29%,
Hotel: 6.81%,
Retail: 3.55%,
Multifamily: 6%, and
Industrial: 3.09%.

Office delinquencies increased $557.4 million in October 2009. Contributing to the increase were three newly delinquent loans greater than $50 million, the largest of which was 550 S. Hope St., a $165 million loan in GSMSC 2007-GG10. The loan transferred to the special servicer in August 2009 after the borrower, Maguire Properties, stated that it would no longer fund the debt service shortfalls. Cash flow from the property has not increased to the banker's underwritten expectations at issuance as lease expirations are not yielding the higher assumed rental rates.

"Though longer leases on office properties have historically mitigated sharp changes in performance, continued job losses are expected to increase pressure on the office sector," said Susan Merrick, managing director of Fitch and U.S. CMBS group head. "With the looming possibility of leases expiring on space under-utilized by companies that have downsized, office performance may not reach a trough for a few years."

However, it should be noted that even with the increase in October, the office sector has the lowest delinquency rate currently at 2.29%.

Hotel delinquencies increased $493.9 million in October. The hotel sector has the highest property type delinquency index at 6.81%, with nine delinquent loans of more than $100 million. Newly delinquent hotel loans included three related Red Roof Inns loans that had been included in the index in August. The loans, totaling $292.8 million, became 60 days late after reverting to 30 days in September.

The largest newly delinquent loan in the index is Riverton Apartments, a $225 million loan collateralized by a 1,230 unit rent-stabilized, multifamily housing project in Harlem, NY. The loan has been in special servicing since August 2008 after the borrower was unable to convert rent-stabilized units to deregulated units as quickly as projected when the loan was underwritten. The loan had been using debt service reserves to remain current.

By dollar balance, retail loans continued to lead the index with $4.9 billion of delinquent loans, stable from September. The delinquency volume for multifamily loans rose only slightly to $4 billion from $3.9 billion, while hotel loan delinquencies increased from $3 billion last month to a total of $3.5 billion in October. Loans collateralized by industrial properties ended the month with $746 million of delinquencies, a 3.8% month-over-month increase.

The Fitch commercial real estate loan CDO delinquency index for October increased to 10.8% from 8.7% last month, with non-traditional property types now representing 44% of all delinquencies, a disproportionate amount compared to the% of all collateral in CREL CDOs. Non-traditional property types, which include loans secured by interests in land, condominium conversions and construction projects, comprise only 13% of the collateral in Fitch rated CREL CDOs.

"About a third of the new delinquencies are large matured balloon loans that may be ultimately extended," said Karen Trebach, senior director of Fitch.

The largest new delinquency was a $110 million A-note secured by a portfolio of eight multifamily properties in five states. An affiliate of the asset manager assumed the loan and subsequently extended it for a year at a below market rate, which was 200 basis points lower than the coupon at origination. Without this spread reduction, the cash flow would not have been sufficient to cover debt service. Upon its newly extended maturity date, this loan defaulted.

New delinquencies secured by non-traditional property types this past month included two loans secured by interests in land and two secured by construction projects. Land loans currently comprise the largest component of the index with 32% of all delinquent loans. Approximately 40% of all land loans in the Fitch rated CREL CDO universe are now delinquent with increased delinquencies expected. Other non-traditional asset types also have high overall delinquency rates with condominium conversions at 23% and construction loans at 29%. Fitch assumes all loans secured by interests in land and other non-income producing assets experience a term default as part of its rating reviews."

Pintzuk Brown Holdings Grabs Caln Plaza for $4.3M

Investor Group Purchases Fully Leased Shopping Center in Coatesville

Pintuk Brown Holdings acquired the Caln Plaza shopping center at 1847-1855 E. Lincoln Highway in Coatesville, PA, for $4.25 million, or about $75 per square foot.

The 57,400-square-foot retail center is located on approximately nine acres of land on the busy Business Route 30. Caln Plaza is currently 100 percent leased and is anchored by Amelia's Grocery Store, Family Dollar and Rent-A-Center.

-Michael Nylund

Willis of Pennsylvania Inks 31,500-SF Office Renewal

Great blurb about Willis in Radnor.

Willis of Pennsylvania Inc. signed a 31,524-square-foot lease renewal at 5 Radnor Corporate Center in Radnor, PA.

The five-story, 164,577-square-foot office building at 100 Matsonford Road was built in 1985 and is in the Upper Main Line submarket. It is part of the Radnor Corporate Center building park.

The landlord, Brandywine Realty Trust, received in-house representation.

Pain, but no ‘blood in the streets’

Great quick piece in the Inquirer.

Cutting through the gloom at today's 2010 Emerging Trends in Real Estate Forum hosted by the Urban Land Institute Philadelphia was Robert Fahey, who sells commercial real estate for CB Richard Ellis.

Fahey said his group, which works from northern Delaware north to Princeton and west to Harrisburg, had closed six deals in the last two months after a two-year slump.

Fahey, an executive vice president, told a crowd at the Union League that buyers and sellers had started reaching consensus on prices, which they could not do for a long time.

There has been pain for sellers, he said, but it has been short of "blood in the streets."

Thursday, November 12, 2009

Pfizer Reducing R&D Space After Wyeth Acquisition

This article is on how the Pfizer acquisition of Wyeth is effecting the Collegeville, PA location.

"Pfizer Reducing R&D Space After Wyeth Acquisition

Pfizer Inc. is significantly reducing its research and development operations, following the $68 billion acquisition of competitor Wyeth that made it the world's largest pharmaceutical company.

As part of a new R&D model, Pfizer plans to consolidate its primary operations into five sites in Cambridge, MA; Groton, CT; Pearl River, NY; La Jolla, CA; and Sandwich, U.K. Pfizer intends to run its BioTherapeutics, PharmaTherapeutics and Vaccines divisions out of these facilities. Additionally, some specialized research is to be handled at other sites.

Pfizer is reducing its R&D footprint in an effort to more efficiently make use of its real estate. Some functions in Collegeville, PA; Pearl River, NY; and St. Louis are to be moved to other locations. Pfizer also plans to completely discontinue operations in Princeton, NJ; Clinton County, NY; Sanford and Research Triangle Park, NC; and Gosport, Slough/Taplow, U.K. R&D operations in New London, CT, will be moved to the nearby facility in Groton.

The consolidation cuts Pfizer's R&D space by 35 percent, going from 20 facilities to five main hubs and nine specialized centers. Approximately 2,000 employees are expected to lose their jobs.

"In less than a month, we have made complex business decisions needed to combine these two R&D organizations thoughtfully yet quickly," said Martin Mackay, president, PharmaTherapeutics Research & Development.

Two of Pfizer's competitors, Johnson & Johnson and Eli Lilly, also recently announced major staff reductions."

Wednesday, November 11, 2009

Real Estate Deals of Note

Here are a couple of deals that recently got done in the Philadelphia area.

"BioClinica Inc., a provider of bio-imaging and data systems support for clinical trials, signed a nine-year lease for 36,143 square feet at Rittenhouse II in Norristown, PA.
The 65,716-square-foot office building at 800 Adams Ave. is in the Valley Forge Corporate Center. The three-story building was built in 2008. It is only minutes from Route 202, I-76 and the Valley Forge interchange of the Pennsylvania Turnpike.
O'Neill Properties Group, the landlord, was represented in-house by Timothy Dugas and Larry Doyle."

"The industrial building at 195 Oneill Road in Quakertown, PA, sold for $3.4 million, or $44 per square foot, in a sale between private parties.
The 77,502-square-foot warehouse was built in 1974 and sits on about five acres. It features 11 loading docks, three drive-in bays, 24-foot ceiling height and heavy power."

Monday, November 9, 2009

How to spot recovery

Another great article in the Inquirer this morning about CRE and recovery.

Special Report: Commercial Real Estate's Troubles

Exactly when the Philadelphia region's distressed commercial real estate landscape will shed its "Space Available" banners is uncertain.

Some experts suggest recovery is a year away. Others lean closer to three years, given that two significant changes must precede it: employment growth and a resumption in lending.

What's more predictable, those experts say, is what the recovery will look like.

One of the first signs of a turnaround will be a spike in rents - a basic function of demand outpacing supply.

In the office market, currently not considered overbuilt and not expecting new spaces for at least three years, "I think you'll see 20 percent" rent increases, said Sid Smith, managing partner of the regional office of Newmark Knight Frank Smith Mack, a global real estate services company.

As for the rest of commercial real estate's postrecession constitution, expect a "new normal" premised on lessons learned over the last year of pain, said Jim Mazzarelli, regional director of Liberty Property Trust, a major landlord in this area, with about 10 million square feet of office space.

For one, landlords will not assume that tenants, especially established, high-profile tenants, are forever. As a case in point, real estate professionals refer to this year's dissolution of the venerable Wolf Block law firm, which added 175,000 square feet of vacancy to Philadelphia's Market Street West submarket.

"The days are gone when you would [assume] a major law firm would be around for 60 years and give them $10 million in [building-improvement] capital," said Dave Campoli. He is a regional vice president for HRPT Properties Trust, a national real estate investment trust with nearly 5 million square feet of commercial office space in Philadelphia.

In the new world, Campoli said, such a law firm likely will have to put up a portion of the cost of any site improvements it wants.

Tenants will be choosier, too, he said, doing more vetting of landlords to verify whether they have the financial foundation to fulfill promises made at the time a lease is signed.

That will lead to what Liberty Property's Mazzarelli calls "flight to a stronger brand." It's a pattern he contends will dominate commercial real estate decisions when the economy picks up.

Traditionally, economic downturns have triggered so-called flights to quality in the office market. That's when tenants take advantage of depressed rents and move to higher-end buildings whose rents in boom times were beyond their budgets.

At the heart of "brand flight" will be tenant concern over "who's going to take care" of them once they move into a building, Mazzarelli said.

"Companies that are in a tough business environment don't want to have to worry about the real estate they're housed in," he said. "They don't want to worry about the roof leaking or whether taxes are being paid."

What kind of buildings will fill up first when businesses resume the hunt for space?

When it comes to big-box retail, early indications suggest the answer is: big-box retail.

Brandon Famous, chief executive officer of Fameco Real Estate L.P., a broker of retail space, said electronics retailers trying to break into this market have been "scouring" the region for empty Circuit City stores and signing leases at rental rates nearly half what was being charged three years ago.

In the office market, the properties offering energy-efficient, sustainable features will be in highest demand, and not necessarily because tenants have had a green consciousness-raising, said Brenda Gotanda, a partner and specialist in green building at the law firm Manko, Gold, Katcher & Fox L.L.P., of Bala Cynwyd.

Interest will come as much from a recession lesson - that no cost-saving opportunity can be ignored - said Gotanda, who represents owners of office buildings, including Liberty Property Trust.

In Pennsylvania, she said, added impetus for property owners to incorporate features such as solar panels, motion-detection light switches, and automatic window shades will come from the double-digit increases in energy prices expected when state-imposed electricity-rate caps expire next year.

At HRPT, Campoli does not disagree. But he said selling green features to tenants as a long-term cost-savings measure might not be easy - at least not in the early stages of an economic recovery - if it means boosting rents to help cover installation costs.

He speaks from experience. When he recently proposed some green features in one of HRPT's properties, warning a major tenant that those additions would result in a rent increase, Campoli said the tenant replied, "Why don't you have a blood drive if you need to feel good?"

In today's offices, "it's just survival mode right now," Campoli said.

It's a little like that in Matthew McManus' world, too. He is chairman of Bluestone Real Estate Capital, an investment bank for real estate investors, primarily in three sectors - multifamily, hospitality, and health care.

"We had a very scary 2008," he said recently, noting that the nearly $400 million in business his firm closed that year involved deals made in 2007.

So far this year, Bluestone has closed just under $250 million in business, McManus said. But out of this slow time has come innovation.

Working with developer Bart Blatstein, Bluestone is pulling together an institutional-equity fund of between $100 million and $150 million that will start making investments the first quarter of next year in Philadelphia and the surrounding counties.

"We're subscribing to the belief," McManus said, "that risk can be controlled by investing in your backyard."

Sunday, November 8, 2009

Commercial real estate facing worse days

This is a great local commercial real estate article from the Sunday Inquirer.

Special Report: Commercial Real Estate's Troubles

From his 30th-floor Center City office, William J. Hirschfeld has an in-your-face reminder that all is not well in commercial real estate.

His view is of One Liberty Place, the 61-story premier office address that, to the casual observer, is a glistening marvel. To Hirschfeld, it's also a constant prod that he's "gotta make the doughnuts."

That means finding a tenant for the 54th floor, a spectacular space that, despite pulse-quickening views, Hirschfeld, as One Liberty's leasing manager, has had no luck filling since Cigna moved out three years ago.

It's just a hint of the harrowing state of affairs in commercial real estate, where vacancies are on the rise across virtually all sectors, rents and property values are dropping, building owners are low on funds, and financing options are drying up.

And bad as things are, they're expected to get worse - the next slide in the snowballing economic crisis that began with the collapse of the housing market and continues to claim casualties.

"There's a tremendous amount of pain coming," declared Sid Smith, managing partner of the regional office of Newmark Knight Frank Smith Mack, a global real estate services firm.

There's plenty of pain already, and abundant evidence that economic suffering is as contagious as flu in the workplace:

The office market is faring the worst, a direct result of layoffs and the shuttering of businesses altogether. At the close of the third quarter, the office-vacancy rate in the Pennsylvania suburbs was 18.4 percent; in South Jersey, 16.1 percent; in downtown Philadelphia, 12.6 percent, according to data from Grubb & Ellis Co., a national commercial real estate services company. For the combined region including Wilmington, the rate was 16.3 percent, slightly better than the national rate of 17.1 percent, which Grubb & Ellis attributed to the diversity of this area's economy and a lack of overbuilding before the recession started.

Those who have lost jobs or fear losing them are shopping less. That, in turn, has led to retailers' going out of business or pulling back on expansion plans, leaving empty storefronts in shopping centers and on Main Streets, and vacant big-box hulks. The region's retail-vacancy rate is put at 8.3 percent.

With shopping down, so is a lot of manufacturing and the need for stockpiling inventory, thus creating vacancies in warehouses and other industrial spaces.

Multifamily commercial properties (apartment and condo buildings) don't have a lot to crow about, either: Vacancies have been on a gradual climb there, too, currently about 8 percent in this market. Some reasons: unemployment (young people aren't leaving home, for instance) and abundant now-less-expensive homes for sale.

All this empty commercial space is driving down rents, creating a capital-flow problem for the landlords who can least afford it - those with debt coming due. Of the $3.5 trillion in outstanding commercial debt, an estimated $535 billion will mature over the next two years, according to Marcus & Millichap, a national commercial real estate brokerage firm.

Property values are down as well, as much as 40 percent since October 2007, the most recent peak. Those drops contributed to the bankruptcy filing last month by Capmark Financial Group Inc., a commercial-property lender in Horsham that wound up owing more to its own creditors than its loans were worth.

As fortunes in commercial real estate have worsened, a new trend has emerged: Tenants are scrutinizing the creditworthiness of landlords.

Smith, of Newmark Knight Frank Smith Mack, said that was "something we spend more time on than we ever had in the past."

"Today, it's one of the first questions you ask," he said. "You want to know the capitalization of the landlords, can they meet their obligations. The landlords fortunate to have capital are making leases."

But who will be well-capitalized is a bit of an unknown.

Commercial real estate "is going through a whole regime change in terms of financing," said Tim Schiller, a senior economic analyst at the Federal Reserve Bank of Philadelphia. "There's going to be less lending into this industry and requirements for more owners' capital."

For instance, a property bought in 2005 for $10 million with a $7 million mortgage now might be valued at $6 million, said Steve Blank, a senior fellow in finance at the Washington-based Urban Land Institute.

"Now, you go into the bank to refinance the existing loan," Blank said, "and the bank says, 'We can only give you 60 percent loan-to-value.' Sixty percent times six million is $3.6 million."

With the bank willing to refinance only $3.6 million of the original $7 million mortgage, that leaves a stomach-churning gap of $3.4 million.

"How does that gap get closed?" Blank asked. "Will the owner decide to put more money into the property? Will the bank accept a lower-than-full payoff? These are the imponderables."

Some analysts estimate the credit crisis has driven $138 billion worth of U.S. commercial properties into default, debt restructuring, or foreclosure.

Not that lenders are eager to go with the most severe option: taking possession of property.

"It's just not so easy for the banks to go into foreclosure mode," Blank said. "One of the reasons is they need to have income or equity before they can take the losses."

With more than 100 bank failures so far this year, Blank said his guess was that for at least the short term, lenders will opt for a "pretend-and-extend" strategy - settling, perhaps, for payment of interest for a time.

"Everyone is going to try to get through this by kicking the can down the road for a while," he said.

Because commercial real estate is a lagging indicator, recovery is not expected until at least three to six months after the economy shows signs of growth. Meanwhile, more office vacancies are coming.

The recent merger of pharmaceutical heavyweights Pfizer Inc. and Wyeth will result in the closing of Wyeth's Great Valley campus next year. The 87-acre site consists of two buildings with a combined 529,000 square feet.

In Center City, a big question mark is what will become of the 160,000-square-foot Rohm & Haas Co. headquarters on Independence Mall in the wake of the company's acquisition by Dow Chemical Co.

What those properties don't have going for them is "trophy" status like One Liberty Place does.

"Trophy" is the top subsector of the highest class of office building. Compared to the rest of the office sector, it is performing well, said Hirschfeld, One Liberty's leasing agent and senior director at Cushman & Wakefield of Pennsylvania Inc.

One Liberty's crisis years were 2005 to 2007, when it was 42 percent vacant compared with 9 percent today. Asking rent then was $28 to $30 a square foot, plus electric; today, it's $36 to $38 a square foot, plus electric.

On a recent sun-soaked afternoon at One Liberty's bare 54th floor, Hirschfeld was upbeat. He noted that few buildings in the city offered such spellbinding views: the Schuylkill and Delaware River, the Ben Franklin Bridge, William Penn atop City Hall, the soaring Comcast Tower.

"We have prospects," Hirschfeld said. "Whether we're going to do a deal very soon, who knows?"

By Diane Mastrull
Inquirer Staff Writer

Friday, November 6, 2009

Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters

This is a great article about the bottom being near.

Most Market Forecasters See a Pricing Bottom Next Year, and at Least One Prognosticator Suggests that Transaction Pricing for Institutional Investment-Quality Real Estate May Have Already Bottomed in the Third Quarter

Having reviewed the next round of commercial real estate surveys, forecasts and emerging trends issued this past week for 2010, about the only good news appears to be that the market has hit bottom -- or will soon. Rents and values have continued to fall across virtually every commercial real estate sector and across almost every market.

However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.

Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.

At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.

"There is some gloom and doom, but it's going to be a great time to buy if you're able to do so," said Susan Smith, director of PwC's real estate advisory practice. "With all the pain and challenges, buyers are still anticipating the opportunity to capitalize on it and buy some decent quality assets at great pricing.

"But it's going to take time."

The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.

Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.

Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.

A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.

Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."

"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases" from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.

Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.

The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are "largely dead" and drop to new depths, practically to "abysmal" levels for office, retail and hotels. Warehouse and apartments scored only marginally better at "modestly poor."

Markets to Watch

Washington D.C. was the hands-down favorite market among respondents, with normally tight-fisted insurers and banks providing financing for new deals. Bethesda, home to the National Institutes of Health, should benefit from increased biomedical spending and inside-the-Beltway Virginia markets are expected to suffer only modest erosion relative to past downturns.

San Francisco. Despite volatile prices, occupancies and rents, the Bay City's expanding tech industry fed by nearby Silicon Valley ranks the city as one of the top buys for apartments, warehouse, office and hotels.

Austin. Investors expect the Texas capital's low state taxes and a pro-business environment to fuel future growth and corporate relocations.

Boston. The city's universities, life science and high-tech companies make Beantown a long-term favorite, with a tight downtown apartment and condo market.

New York. The recovery pace depends on the hammered banking industry, and Midtown availability rates are expected to skyrocket from mid single digits into the mid-teens as office rents fall 40% or more.

Rounding out the top 10 markets to watch are Houston, Seattle, Raleigh/Durham, Denver and San Jose - all of which are strong in some combination of green technology, high-tech and life science.

One of the main questions appears to be what constitutes a market bottom and when will we get there, particularly with regard to CRE prices and values? Most of the forecasts call the pricing bottom for next year, and sooner rather than later, but the MIT Center for Real Estate suggests that transaction pricing for institutional real estate at least may have already bottomed in the third quarter.

Editor's Note: Wall Street is now worrying about the deals completed in 2005 and earlier. If the concerns are correct, tens of billions of more dollars in commercial mortgage-backed securities (CMBS) may be at risk of credit downgrades. For the full version of this story, including a CoStar Analytics survey of current cap rates versus 2004, click here.

Here are some other highlights (or lowlights depending on your perspective) from this week's forecasts and surveys:

Commercial property markets remain extremely stressed with high unemployment pushing up vacancies, no credit capacity and values still plummeting with little prospect for significant near-term improvement, according to Real Estate Roundtable's latest quarterly survey of the sentiments of senior commercial real estate executives.

Despite shrinking rents and values, some developers, owners and investors are optimistic that 2010 will bring slight growth in national productivity and improved liquidity in credit markets, according to NAIOP's annual Vital Signs survey, with 44% of respondents predicting that borrowing will improve somewhat in the coming year.

For the first time in more than a year, transaction prices in commercial property deals sold by institutional investors rose in the third quarter, suggesting that the U.S. market may have found a bottom, according to the aforementioned MIT Center for Real Estate in Cambridge, MA. The center’s transactions-based index (TBI) rose 4.4% in the third quarter from the second quarter, the largest jump since before the start of the mid-2007 market downturn.

NAIOP: Confidence Will Improve - Slightly

Respondents to the NAIOP Vital Signs report, a survey of nearly 400 developers, owners and investors conducted in early September, said an increase in consumer and business confidence will likely bring higher household and corporate spending throughout 2010. Lenders, chiefly banks, private investors and insurers, will loosen their purse strings a bit in 2010.

For 2009, 64% of NAIOP respondents felt that borrowing money was the same or somewhat easier than a year ago. But confidence improves a bit for 2010, with 80% of this year’s participants indicating that loans will remain difficult or become somewhat more available. Almost 32% of respondents feel that industrial rents will improve in 2010 as availability rates start to level off. But they noted that new industrial development remains slow in 2009 and will be almost non-existent in 2010.

"Obviously the volatile markets of the last year have created great concern for those seeking capital, and the decline in development is the consequence," said Douglas Howe, chairman of NAIOP and president of Touchstone Corp. in Seattle. "While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2010."

Almost all NAIOP respondents saw office rents deteriorate in 2009, and most expect rents to level off next year, with a few markets expecting a slight increase. Vacancy rates are expected to continue to increase in 2010 -- especially in markets heavily impacted by the residential meltdown -- and begin leveling off by the end of the year. Virtually no one in the NAIOP survey had a positive take on office or industrial development -- a far cry from the boom years when development interest was in the mid 40% range.

RE Roundtable: 'Grim Reality Sets In'

The three indices tracked by the Real Estate Roundtable Sentiment Survey have risen considerably since the near-collapse of financial markets last fall -- a reflection of respondents' collective sense of relief at having survived the worst of the turmoil. However, the latest numbers, based on a survey of more than 100 respondents, remain well below the ideal of 100, with the "current conditions" index standing at 56. An index of 100 means all survey respondents have answered that conditions today are "much better" than they were a year ago and will be "much better" 12 months from now.

"The problems now are more clearly defined and there's a grim sense of reality setting in, but that's a long way from saying markets are stabilizing or that conditions are on the mend," said Roundtable President and CEO Jeffrey DeBoer. "

Though the percentage declined to 77% from 93% in the previous quarter, a large majority of respondents still noted that property values are down versus a year ago. And they aren't optimistic about the future, with 71% saying they expect values to remain "about the same" or to erode even further in the next 12 months.

Although capital market conditions remain "extremely fragile," the survey shows some somewhat improved outlooks for 2010. On the debt side, 28% of those polled said credit availability is worse today than a year ago, compared with 71% who said so in the previous quarter.

Echoing the Federal Reserve's latest Beige Book report last week, DeBoer cautioned that any signs of improvement or a leveling off in the rates of decline should be looked at in the context of where things stood 12 months ago.

MIT: Prices May Have Bottomed

The new report by the MIT Center for Real Estate notes that not only did the transaction price index (TPI) show gains, but transaction volume grew markedly for the second straight quarter in a row. Together, the report yields the first increase in market sentiment in two years. Prices that buyers are willing to pay, MIT's so-called demand index, posted a 12% increase after eight consecutive quarters of decline.

"One quarter does not a trend make, and we are still well below normal trading volume," acknowledged MIT center research director David Geltner in a press release. "Nevertheless, this is the strongest sign of a bottom that we’ve had in two years."

For its indices, MIT uses transactional data from the National Council of Real Estate Investment Fiduciaries (NCREIF), a trade group representing institutional real estate investment companies.

Article By Randyl Drummer
November 4, 2009

Feds Ready To Start Pushing Banks Toward CRE Loan Workouts

Here is a great article on Fed and Bank workouts.

With regulators shutting down seven more troubled banks on Friday, the government is getting ready to issue new workout guidelines that will push banks to restructure troubled commercial construction and mortgage loans to head off massive foreclosures that some economists believe could threaten the fragile economic recovery.

Although most of the big banks are reporting solid profits so far, early third-quarter bank earnings reports reflect hits to the bottom lines of banks weighed down by bad commercial real estate debt, especially regional and community banks. The Federal Deposit Insurance Corp. (FDIC) on Oct. 16 closed the 99th bank of the year, San Joaquin Bank in Bakersfield, CA. With the closures of Partners Bank and Hillcrest Bank Florida, both of Naples, FL; American United Bank of Lawrenceville, GA, Flagship National Bank of Bradenton, FL, Riverview Community Bank of Otsego, MN, Bank of Elmwood, WI, and Dupage Bank of Westmont, IL, on Friday, the number of banks and thrifts that have failed since Jan. 1, 2008, now stands at 132 total and shot past the century mark to 106 this year alone.

The 106 failures of 2009 are the most in a single year since 1992. Though nowhere near the scale yet of the huge bank collapses of the late 1980s and early '90s - 534 banks closed in 1989 alone - many analysts believe the current wave of failures is just now getting ready to break. The FDIC has flagged 416 banks and thrifts with combined assets totaling almost $300 billion as at-risk, adding more than 100 to the problem list in the second quarter.

One of the biggest current sources of that risk is losses on deteriorating commercial real estate mortgage, with small- and medium-sized banks particularly overweight in CRE loans, FDIC Chairman Sheila Bair and other federal regulators said in testimony last week before the U.S. Senate Banking, Housing and Urban Affairs Committee.

Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision deputy director of examinations, supervision and consumer protection Timothy Ward testified they are close to finalizing new guidelines for banks on how to modify troubled commercial real-estate loans to reduce defaults and foreclosures, and how to account for losses from those loans. Some analysts say the "extend and pretend" practices of lenders who extend loan maturities because they're unwilling to seize properties from borrowers and take the losses are prolonging the slump in transaction activity and delaying the process of price discovery.

"The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values," Bair said. "Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability."

Community banks held 38% of the banking industry's small business and small farm loans as of June 30, but "the greatest exposures faced by community banks may relate to construction loans and other commercial real estate loans," Bair said. "These loans made up over 43% of community bank portfolios, and the average ratio of CRE loans to total capital was above 280%."

Up to now, troubled loans at FDIC-insured institutions have been concentrated in three main areas -- residential mortgages, construction loans and credit cards. Net charge-offs for construction loans over the past two years have totaled about $32 billion, with almost 40% for single-family residential construction, Bair said.

But the biggest area of risk for rising bank losses during the next several quarters is commercial property lending. While commercial mortgage-backed securities (CMBS) and other debt vehicles had emerged as significant funding sources in recent years for commercial property, "banks still hold the largest share of commercial mortgage debt outstanding, and their exposure to CRE loans stands at an historic high," the FDIC chief said.

As of June, such debt backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of all loans and leases, the chairman said.

KeyCorp, a Cleveland-based regional bank with 993 branches in 14 states, this week reported a third-quarter loss of $397 million after setting aside $733 million in reserve for current and future loan losses.

KeyCorp took $587 million in net charge-offs in the quarter, up from $502 million in the previous three months. CFO Jeffrey B. Weeden attributed the increase largely to continued weakness and nonperforming loans in the bank's commercial real estate construction portfolio.

The deep recession, job losses and ongoing credit market disruptions has made this a particularly challenging environment for commercial real estate, reducing demand for space and eroding rents and vacancy rates. Investors have been forced to re-evaluate their required rate of return, causing capitalization rates to rise and property values to decline.

With the CMBS market still shut down, financing is harder to obtain and large volumes of CRE loans are scheduled to roll over in coming quarters, with falling property prices making it more difficult for some borrowers to refinance.

Construction loans have been suffering for a while, but loan losses on CRE properties have been modest so far, with net charge-offs on loans backed by nonfarm, nonresidential properties just $6.2 billion over the past two years, Bair said. However, delinquent loan volume has quadrupled over the same period, and the FDIC expects it to rise further as more commercial loans come due over the next few years.

Few details were forthcoming about the new loan modification guidelines and how they might affect the commercial real estate positions of lenders.

"We don't really have a lot of information at this point," said Charles S. Hyle, executive vice president and chief risk officer for KeyCorp, responding to a question during the company's earnings call Wednesday. "Certainly there have been public statements by the regulators that they are very focused on commercial real estate, but in terms of what impact, how they might change what they're doing, is still very much an open question."

U.S. Federal Reserve Board Governor Daniel Tarullo said in his testimony that the new guidelines will support "balanced and prudent decision making with respect to loan restructuring, accurate and timely recognition of losses and appropriate loan classification."

The guidance will reiterate that loans should not be classified based solely on declines in the value of collateral, Tarullo said.

"The expectation is that banks should restructure CRE loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss recognition," Tarullo said.

On one hand, banks have raised concerns that Fed examiners don't always take a balanced approach in assessing CRE loan restructurings, he said.

"On the other hand, our examiners have observed incidents where banks have been slow to acknowledge declines in CRE project cash flows and collateral values in their assessment of the potential loan repayment," Tarullo said. "This new guidance, which should be finalized shortly, is intended to promote prudent CRE loan workouts as banks work with their creditworthy borrowers and to ensure a balanced and consistent supervisory review of banking organizations."

-Costar News October 23, 2009

When Is a Lease a Lease?

I found this great article on defining lease liability on the books.

Sarah Johnson, | US
November 2, 2009

A revamped lease accounting standard in the works will likely put hundreds of billions of dollars in assets and obligations onto some companies' balance sheets. That has had companies that will be most affected by the changes — such as airlines, retailers, and railroads — dreading any progress the rule-makers might make in creating a new standard. And executives of those companies have been pushing for the United States and international accounting boards not to apply the new rule to all leases.

Businesses may have gotten at least part of their wish, if the decisions made at a recent joint meeting of the Financial Accounting Standards Board and the International Accounting Standards Board are any indication. In one of the latest agreements made in the boards' glacial move to overhaul the existing lease accounting rules, FAS 13 and IAS 17, they have chosen to exclude some leases from a final new standard.

But since the boards have yet to explain how companies will know which leases will be exempted, it's too early to tell how much of an impact this change could have on the effects of the new rule, which won't be ready until at least 2011. It's also too early to know whether it will lead to the restructuring of how current lease agreements are arranged.

After all, the standard-setters must tread lightly to avoid creating a new standard with defects that are similar to those critics have cited in the one U.S. companies have been following for 35 years. A particular concern about the current rule: bright-line rules can result in the structuring of leases to inaccurately reflect a company's assets and liabilities.

Under the current rule, standard-setters believe, companies have been reworking leasing agreements to have them fall under the "operating lease" classification. In 2005 the Securities and Exchange Commission staff estimated that in this way, publicly traded companies are able to hide $1.25 trillion in future cash obligations. For example, as IASB chairman David Tweedie has noted, airlines' balance sheets can appear as if the companies don't have airplanes.

That could change under the new plan. Companies would have to capitalize assets that have traditionally fallen under the operating-lease classification. The result: companies that lease would appear more highly leveraged.

Earlier this year, FASB and the IASB released a paper outlining their initial thoughts on the plan, and they expect to propose a standard next year. But they're still ironing out the details and have met six times so far this year on the subject. They have only recently begun deliberating how lessors will fit into this new regime.

At least one item they have agreed on: the premise. Rather than distinguish between capital and operating leases, companies should think about their "right to use" a leased item, whether it be plants, property, or equipment. Lessees will record that right as an asset and their obligation to pay future rental installments for that item as a liability.

In simple terms, "The basis of the right-to-use model is to move off of thinking about the thing [under lease] and think about the right to use the thing," according to IASB board member James Leisenring.

For lessors, "the concept behind the right-of-use model is, I've given you an [item], it's mine, so it should be on my books and I'm letting you use it, day by day," explains FASB member Thomas Linsmeier.

Lessors will have to record a liability for their commitment to lending out an item and giving up the temporary right to use it. The thinking is that even though they are not using the item, the lessors still retain control of it and need to account for it. And their right to receive rental payments will be recorded as an asset.

Last week the standard-setters decided that lease contracts that are effectively purchases — in which an item is financed for ownership — will be scoped out of the new standard. Previously, the boards seemed to be tilting toward including all leases under a new standard. "A one-size-fits-all model for lessee accounting was the expedient approach, but it wasn't the correct approach," says Bill Bosco, who consults for the Equipment Leasing and Financing Association and sits on the International Working Group on Lease Accounting for the U.S. and international accounting boards.

The ELFA, which celebrated the move and has been very active in trying to influence the final standard, believes the boards are acting too quickly to meet their 2011 deadline and have accused them of not following due process. In particular, the discussion paper released earlier this year did not address lessors, so it did not give the public an opportunity to comment on the subject before a proposed standard is released, according to the trade group. In addition, the ELFA has always feared the rule would be too sweeping, and it doesn't want it to apply to small or short-term leases. According to the ELFA, more than 90% of leases involve assets worth less than $5 million and have terms of two to five years.

Rule-makers have yet to decide on issues of materiality for this standard. And they have not yet seriously discussed how companies will transition into compliance with the new rule and whether they will have to rebook current leases. Moreover, an effective date has not been proposed.

The changes apparently won't deter CFOs from their need for leasing agreements. In a survey of 846 CFOs and controllers in late September and early October, 59% told Grant Thornton they would continue to use leases or lease financing the same way they do now.

Still, says Bosco, with specifics in the new rule still being worked on, it may be too early to tell how it could affect lessees' behavior. For instance, small businesses that use leasing agreements for their short-term capital needs will still need them. And the new rule may not allow much wiggle room. "All leases will be capitalized, so the ability to do any financial engineering, which [the boards] are very afraid of, will be severely diminished," he says. "All leases will be on the balance sheet."


Monday, November 2, 2009

New Commercial Real Estate Company

Joe O'Donnell has started OMEGA Commercial Real Estate, Inc. OMEGA Commercial Real Estate, Inc. is a full service real estate company specializing in corporate tenant/buyer representation, landlord/seller representation, project leasing and investment sales for the Philadelphia and surrounding suburban areas. Joe O'Donnell has seven years of experience in all facets of commercial real estate transactions. His new website and contact information can be located at . Please contact us if you have any questions or needs.
(610) 616-4604