Commercial Real Estate Forum

Regulations - CAL : NO NEW 21-DAY TURNAROUND REQUIREMENT FOR SHORT SALE APPROVALS

Posted by Jack on 2009/10/4 11:43:57 (351 reads)

Recently enacted Senate Bill 306 does not require lenders to review short sale requests from sellers and their agents within 21 days. The new California law, which addresses certain escrow procedures, has been mischaracterized by some practitioners as landmark legislation calling for a 21-day turnaround for short sale approvals.
The new law inserts a short payoff amount request into the existing payoff demand law which generally requires a lender to respond to a request for a payoff demand statement within 21 days from when it is requested, typically by escrow. The new law essentially requires, after a short sale has already been approved, for the lender to respond to a request for a short-pay demand statement within 21 days. The lender’s response to escrow can be a short-pay demand statement or even, depending on the circumstances, a written statement electing not to proceed with the proposed transaction.
Another provision of SB 306 may also cause confusion. In practice, a lender may approve a short sale subject to its review of a closing statement prepared by escrow, but the lender does not review that closing statement promptly. Under the new law, if a lender fails to approve the closing statement within four days, the closing statement shall be deemed approved, but only if it is "not clearly contrary to the terms of the short-pay agreement or the short-pay demand statement provided to the escrowholder." The new law does not bind a lender to a short payoff amount in an offer that the lender has not approved.
Senate Bill 306 contains other technical changes in real estate related laws, such as, but not limited to, the following:
Expanding the existing requirement for a lender to contact certain borrowers to explore options for avoiding foreclosure at least 30 days before filing a notice of default, to include not only owner-occupied residences, but also owner-occupied residential property with two-to-four dwelling units.
Extending the existing requirement for a lender to record a notice of sale from 14 to 20 days before a trustee's sale. This provision does not change existing law requiring a lender to wait at least 20 days after mailing a notice of sale before conducting a trustee's sale.
This new law comes into effect on January 1, 2010. The full text of Senate Bill 306 is available at http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0301-0350/sb_306_bill_20090806_chaptered.pdf.

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National News Wire : Read about the important economic news from Reuters this past week

Posted by Jack on 2009/5/17 19:14:22 (408 reads)

Fiends & Scams:

1. U.S. regulators have recommended filing a civil fraud suit against Countrywide Financial co-founder Angelo Mozilo for insider trading… Bank of America, which bought Countrywide for $2.5 billion in July, last month dropped the Countrywide name from its mortgage operations, shedding a 40-year –old brand that became synonymous with risky lending practices that helped fuel a U.S. housing boom and bust… Founded in 1969, Countrywide – blasted for offering loans to would-be homeowners who could scarcely afford them – already faces a string of lawsuits over past business practices, as well as an FBI investigation

2. High-profile New York lawyer Marc Dreier pleaded guilty to criminal charges (securities fraud, conspiracy, wire fraud and money laundering) of running an investment fraud in the hundreds of millions of dollars involving fake promissory notes… He was arrested last December on charges of swindling hedge funds and investment funds in a four-year long scheme, which unraveled in the financial crisis.

3. In Search of Lord Madoff’s Loot… Five months after Bernard Madoff’s massive fraud was revealed, little of his victims’ money has been found and it appears increasingly likely that the worldwide hunt for their missing billions will drag on for years... So far, the court-appointed trustee has located only about $1 billion to be distributed to defrauded customers – a fraction of the $65 billion the confessed swindler purported to have in his nearly 7,000 client accounts.

Treasury:

1. The White House raised its forecast for this year’s U.S. budget deficit by $89 billion due to the recession, millions of new unemployment claims and corporate bailouts… The new estimate predicted a deficit of $1.84 trillion, or 12.9% of the gross domestic product for the fiscal year ending September 30. It updated the White House’s February forecast of a $1.75 trillion deficit, or 12.3% of GDP… The U.S. national debt is now approaching $11.3 trillion.

2. The U.S. is at risk of losing its triple-A credit rating unless it starts putting its finances in order, a former head of the agency in charge of fiscal accountability said… David Walker, former director of the Government Accountability Office, cited a warning from Moody’s Investors service nearly two years ago about ballooning healthcare and social security costs… “Signs are abound that we are in even worse shape now, and that confidence in America’s ability to gain control of its finances is eroding,” he said.

Fed:

1. Thoughts on the Economy… The U.S. economy has pulled back “from the edge of the abyss” but the recovery will be very slow as Americans find an equilibrium between the often voracious consumption of past years and a new-found focus on savings, Richard Fisher, president of the Dallas Federal Reserve Bank said… “I envision a slow recovery. Not a V-shaped snapback, nor even a U-shaped one, but a very slow slog as we find a more sensible and sustainable mix between consumption and savings and investment,” Fisher told a Texas Bankers Association meeting in San Antonio…. Gary Stern, president of the Minneapolis Fed, was also optimistic and also credited the Fed for the turnaround… Stern said the brighter picture is due to the Fed’s actions to cut interest rates and pump vast amounts of money into financial markets, some stabilization in consumer spending, and improved credit market conditions… “I think that there have been a number of more favorable developments in recent months that suggest we are nearing the bottom of the recession,” Stern said.

2. Meanwhile, a sharp critic of the Fed and prominent authority on monetary policy slammed the U.S. central bank for risking inflation and warned that government action had “caused, prolonged and worsened” the country’s financial crisis… John Taylor, a former undersecretary of the Treasury for international affairs and author of the widely cited Taylor Rule of central banking, ran his own numbers for the U.S. economy and said the Fed’s monetary stance was way too loose… “My calculation implies that we may not have as much time before the Fed has to remove excess reserves and raise the rate,” he said in remarks prepared for a financial markets conference hosted by the Federal Reserve Bank of Atlanta… “We don’t know what will happen in the future, but there is a risk here and it is a systemic risk,” he said.

3. Short-term interest rate traders are bracing for the possibility the Fed could begin raising interest rates later this year, even though many economists don’t see the Fed moving any time soon… The traders’ view of a possible rate hike has been embedded in short-term U.S. interest rate futures since mid-March on increased optimism of an economic turnaround and the start of a spring rally on Wall Street, although this week’s weaker-than-expected data has tempered the view… Adding to the expectations of tighter Fed policy is the weight of the some $2 trillion in new U.S. government debt supply aimed to finance the Obama administration’s stimulus and bailout

Banking:

1. Standard & Poor’s said the nation’s banking crisis has “merely entered a new phase” and might not end before 2013…The credit rating agency said the industry is being propped up by hundreds of billions of dollars of government support, especially for lenders considered too important to the financial system to fail… While efforts to spur lending, take bad assets off banks’ balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require… “There’s nothing to say that this banking crisis can’t go on for another three or four years,” S&P Managing Director Tanya Azarchs said.

2. FDIC Labels Bloomberg News Report “Misleading”… The FDIC disputed Friday’s Bloomberg report that said Chairman Shelia Bair believes some U.S. bank CEOs will be replaced in the next couple months as regulators assess lenders’ financial strengths… “Chairman Bair said that management changes could happen based on the capital plans that an institution must submit to the government,” the FDIC said in a statement. “She did not refer to CEOs specifically and the comment was in the context of capital plans submitted by the institutions. Chairman Bair also did not suggest the federal government will remove the bank CEOs.

3. U.S. officials have urged Bank of America Corp to revamp its board and bring in directors with more banking experience… A committee led by Walter Massey, the bank’s new chairman, is expected to examine the strength of the board and potential succession for CEO Ken Lewis… Regulators last week ordered Bank of America to come up with $33.9 billion of new capital to help withstand a potentially deep recession, after completion of the government stress test. This shortfall came even after the bank had taken $45 billion of federal bailout funds.

4. Separately, Singapore’s sovereign wealth fund Temasek Holdings said it sold its 3% stake in Bank of America in the 1st quarter, taking a loss of around $3 billion in the process, as it refocuses on emerging markets.

Regulation:

1. The Treasury Department is proposing regulation of the $450 trillion over-the-counter derivatives market, which has been linked to some of the worst losses in the global credit crisis. Although details of Secretary Geithner’s proposal have to be fleshed out, a government statement released said that “standardized’ over-the-counter derivatives would be moved to an exchange… Derivative traders said they assume this implies credit derivatives. These instruments are largely traded on standard 5-year contracts and are used to express a view on a company’s debt and lawmakers have blamed them for causing billion of dollars in losses at insurer AIG.

2. The Federal Deposit Insurance Corp is talking with lawmakers about speedy legislation giving it power to wind down troubled bank holding companies, but not a broader range of financial firms… The Fed and Treasury have some disagreement with the FDIC about exactly what new powers the agency should gain, said a source, speaking anonymously because the meetings were held in private.. The FDIC currently has the power to seize depository banks, but does not have similar authority for non-banks, including bank holding companies such as Citigroup and GMAC, which have both received billions of dollars in government aid.

Economy:

1. New economic data suggests that the 17-month old recession in the U.S. may be nearing an end with April consumer prices unchanged and industrial output declining at a slower pace than in March… The Labor Department said the U.S. Consumer Price Index was flat last month, as expected, after edging 0.1% lower in March. Compared with the same period last year, consumer prices feel 0.7%, the biggest 12-month drop since June 1955… Rising unemployment is eroding household income and undercutting consumer demand. The virtual absence of demand and the general slack in the economy have robbed companies of pricing power, keeping inflation low and increasing concerns of a possible dangerous downward spiral in prices… The Fed, which has pumped more than $1 trillion into the economy in a bid to break this downward spiral, is worried about deflation although it sees the risks as diminishing.

2. U.S. producer prices rose faster than expected in April, driven by a surge in food costs. The Labor Department said the Producer Price Index climbed 0.3% after declining 1.2% in March. Food prices rose 1.5% in April, the biggest increase since January 2008. Food costs rose on a record jump in egg prices, along with soaring prices for vegetables and meat.

Corporate:

1. Sales at U.S. retailers fell for a second straight month in April, pulled down by sluggish gasoline and electronic goods purchases, government data show… The Commerce Department said total retail sales slipped 0.4% after falling by a revised 1.3% in March, previously reported as 1.2% drop.

2. Wal-Mart Stores reported a flat quarterly profit that met Wall Street expectations as the stronger U.S. dollar offset increased sales from shoppers seeking deals in its stores amid a global economic slowdown… Analysts said Wal-Mart’s results were impressive given the tough climate and show it is outpacing competitors like Target and Costco, which have seen profits fall.

3. GM is expected to soon announce details of its U.S. dealer consolidation plans, just weeks before the automaker’s deadline to complete a sweeping restructuring that could include bankruptcy… GM’s dealership count is expected to drop by about 2,000 from the roughly 6,000 it now has… Meanwhile, Chrysler notified all U.S. dealers about its plans to eliminate 25% of its retail showrooms and is seeking permission from a U.S. bankruptcy court to terminate franchise agreements … The automaker sought approval in a bankruptcy court filing to terminate franchise agreements with 789 of 3,181 dealerships as of June 9.

Investing:

1. Cash-rich private equity firms are preparing to deploy newly-raised funds, dispelling some of the gloom in the sector and raising hopes that buy-out deals are in the pipeline… “There are plenty of private equity firms with significant funds available to invest and growing impatience to invest them,” said Michael Berry, head of debt advisory firm Versatus… Distressed funds, secondary funds – which deal in second-hand private equity assets – growth capital and niche buyouts are still attracting interest from investors who still have capital to deploy, Antoine Drean, chairman and CEO of placement agent Triago said.

2. Hedge funds and traditional money management firms, hit hard by last year’s market meltdown, are poised for a surge of mergers and acquisitions to bolster depleted assets and widen sources of revenue… “We’re going to see a massive wave of consolidation across the entire asset management industry over the next 12 to 24 month,” Brian Reilly, Barclays Capital’s head of asset management said… Driving deal activity is rationalization (i.e. distressed firms with same overhead infrastructure in place, but less capital under management) forced to sell; or strategic acquisitions in which larger firms seeking to enhance their offerings acquire other firms that specialize in different regions or markets.

3. Investors’ bets that have fueled the recent rally in corporate bonds and other riskier markets have been made most without the excessive borrowing of the boom years that preceded the Panic of 2008… Traditional buyers such as pension funds and insurers, who are restrained by regulators from borrowing large amounts to make market bets, have propelled corporate bonds to a stellar rally so far this year… Since late March, U.S. investment-grade corporate bond yield spreads over comparable Treasuries have rallied 158 basis points tighter to 442 basis points, according to Merrill Lynch data.

Real Estate:

1. As the market for U.S. office, retail and apartment building loans heads south, investors in commercial mortgage-backed securities and servicers of the loans are feuding over how to best save their skins… Big bondholders including BlackRock and MetLife are collaborating to fend off changes in tax law sought by servicing companies to lessen the impact of the credit crunch on the property values, which are plunging… Servicing companies are lobbying the Treasury for a revision in tax rules that would let buyers of foreclosed properties take on existing loans, greasing the transaction, according to investors. But the holders of top-rated CMBS are balking at extensions of underlying loans after foreclosure, saying they amount to a subsidy and would hurt returns over normal liquidation procedures… The proposal by servicers reflects a desperate market, with needy borrowers faced with a market dormant since early 2008. The lack of funding has “all but eliminated viable refinancing options,” and was a big factoring sending delinquencies of loans in CMBS near record highs at 1.856% last quarter, according to Standard & Poor’s.

2. U.S. foreclosure activity in April jumped 32% from a year ago to a record high, and should mount because temporary freezes on foreclosures ended in March, ReatlyTrac said…One in every 138 homes with mortgages in California got a foreclosure filing in April… The abundance of distressed properties keeps pressuring home prices, thwarting a housing recovery that is critical rejuvenating the U.S. economy…Most of April’s filings, which included notices of default and auctions, were in early stages. Bank repossessions, known as real-estate owned or REOs, fell on a monthly and annual basis to the lowest level since March 2008… “This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria,” RealtyTrac CEO James Saccacio said.

3. Most American homeowners believe their home’s value has declined over the past year, but a majority also think a bottom has been reached, real estate website Zillow.com said…”The perception of American homeowners is finally catching up to reality, which is that 80% of all homes in the country lost value during this past year,” Dr. Stan Humphries, Zillow’s vice president of data and analytics said… “While homeowners are now more realistic when looking backward, they are still pretty starry-eyed when looking forward, with three out of four homeowners believing that their own homes’ prices will increase or be flat over the next six months. Unfortunately, there are few markets we expect to perform this well,” he said.

Mortgages:

1. The agency conforming (< or = $417K) is now available for 4.50%, while the high-balance agency (> $417K, but < or = $626K) is at 4.875%... Please note that rates quoted only apply for primary residences or second homes.

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Regulations - Fed : 3/18 Comments about Today's FOMC Decision

Posted by Jack on 2009/3/18 19:12:55 (722 reads)

The Fed is clearly doing "EVERYTHING" it can to stabilize the housing market and head off a prolonged period of deflation that would be difficult to break.

The Fed is substantially increasing its support of mortgage lending and housing markets. The FOMC committed the Fed to buy an additional $750 billion in agency mortgage-backed securities, bringing its total purchases of these securities to $1.25 trillion this year.

Moreover, the Fed will increase its purchases of agency debt by $100 billion to a total of up to $200 billion. Both measures are designed to increase the ability of Fannie Mae and Freddie Mac to expand their balance sheet and reduce the cost of "conventional" mortgages.

If that wasn't enough to get borrowers' and lenders' blood pumping, the FOMC threw in a kicker: they committed to buying $300 billion worth of long-term Treasury securities, an action they had signaled they were prepared to do at some time.

Gieven the reluctance of foreigners of late to finance our growing federal deficit, this will be a necessary step toward recovery. But the potential costs of this action are increasingly problematic. It is like a cancer patient that is given a heavy dose of chemo and radioactive therapy to cure their cancer, but the patient first appears to get sicker with each passing day. Renewed dollar weakness is likely. Longer-term, the U.S. economy could face higher inflation and higher interest rates down the road.

Bottom-line, these actions by the Fed today certainly increase the chances of a housing bottom sometime this year, and a return to economic growth by year end. Ten-year Treasury yields plunged by a half a percentage point shortly after the statement, which will drive significantly lower mortgage and corporate bond rates across the country.

comments by
Scott A. Anderson, Ph.D.

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National News Wire : Opportunities Mount for Distressed Office Buildings, But Few Are Trading

Posted by Jack on 2009/3/13 9:42:01 (517 reads)

There was much talk last year about the billions of dollars amassed by various investment funds for the purpose of purchasing distressed or value-add office properties. And while it's clear there is no shortage of buildings that fall into that category, there are precious few office building sales of any sort getting done.

Currently there are more than 19,600 distressed office buildings in 50 of the largest U.S. office markets, and that number is growing daily, according buildings analyzed by CoStar Group using the web-based CoStar Property Professional data product. (For the purposes of this analysis, CoStar tallied office buildings in those markets that are currently 40% leased or less.)

That current number of distressed office properties is 8.6% more than it was a year ago. And the it is particularly acute in markets throughout the Sunbelt states, which also not coincidentally happen to be at the epicenter of the housing market collapse.

The amount of office buildings falling under this distressed category has been growing at more than double the national rate in six markets: Austin (35.9% higher than a year ago), Inland Empire (33% higher), Los Angeles (20.7% higher), Phoenix (20.5% higher), Southwest Florida (20.2% higher) and San Antonio (18.3% higher).

In addition, Phoenix led the country by percentage of distressed buildings to the total number of buildings in the market at 11.1% compared to a 6.5% average. Detroit had the second highest percentage at 10.2%, Las Vegas third at 10.1%, Atlanta fourth at 9.8% and Southwest Florida fifth at 9.1%.

While some markets have a higher percentage of distressed office buildings than others, "the pain seems to transcend all markets, which I read to mean that the credit crisis is not discriminating between and among historically strong and not strong markets," said Thomas N. Trkla, chairman and CEO of Brookwood Financial Partners LP in Beverly, MA "And, I think the numbers are going to get worse."

Click here to download the table of number of distressed office properties in 50 of the largest office markets in the country.

The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of bother lenders and investors.

"Although we have been actively looking to acquire commercial real estate assets, whether defined as value-add opportunities or assets from distressed sellers, we have not closed a single transaction in this period," Trkla said. "For most of 2008, the biggest reason for this was the huge bid/ask spread that existed between buyers and sellers. Since the stock market crash of last fall, we have witnessed increasing capitulation on the part of sellers, who are now intent on getting the best price they can for their assets."

"Where we have lost deals is a difference of opinion on what market rate rents will be when currently above-market leases roll," Trkla added. "We think that sellers and especially the brokers who represent them are far too aggressive in this regard. Our belief is that real estate fundamentals will deteriorate further in 2009 and likely into 2010; however, we see transaction volume increasing as more and more sellers own to the new realities of pricing and underwriting assumptions."

What needs to happen for that money to start flowing is obvious, he said.

"Prices need to drop further to reflect not only the degradation in value attributed to loss of leverage, but also less aggressive assumptions on lease rates, lease costs and downtime," Trkla said. "The commercial real estate markets are only in the first year of correction as compared to the residential markets, which are in year three. There is still a long way to go before investor sentiment changes with regard to commercial real estate. Our view is that a recovery in this sector is years away. Opportunist investors can and will invest prior to the inflection point of a recovery, but to do so, they will need to achieve greater price discounts than exist in the market today."

Randolph L. Wile, principal of Wile Interests Inc. in Houston is seeing much of the same.

"Because the impact of the economic turmoil has not been as great here [Houston], I do not believe that risk has been priced into deals - yet," Wile said. "In short, prices haven't dropped substantially and, as such, there seems to be dislocation between bid and asked on office investment pricing. Credit, or rather, the lack thereof, seems to be among the biggest factors driving office investment pricing."

"Appraising in the current market is like trying to drive a car blindfolded while getting instructions from a person looking out of the back window of the car," said James S. Bradley, a real estate appraiser with Axia Real Estate Appraisers in Tucson. "I also believe that many real estate appraisers in the market do not really understand how to provide appropriate valuations in a rapidly changing market. I have seen a number of appraisals from around the country over the past few months and it appears that they are generally out of touch with current realities. Thus, lenders are being given false indications of the market, (which is) not allowing them to make appropriate decisions concerning the disposition of distressed assets, (notes and foreclosed properties)."

"I do not foresee much change in the market for distressed office properties (or notes) until their pricing is adjusted to truly account for the future benefits of their ownership and the changing reality of risks and returns in the market," Bradley added.

Boxer Property in Houston made a name for itself in value-add office properties in the recession years in the early 1990s. Andrew Segal, its CEO, thinks the lack of available financing is the only thing preventing similar opportunities from developing currently.

"The key factor remains the availability of financing before you can get to the virtues of the market," Segal said. "From my point of view, the paralysis that many building ventures are in is like a sugar rush to those who are well-capitalized: All of a sudden, very few landlords are able to fund tenant improvements and leasing commissions. That leaves some easy pickings for buildings that have access to cash. But, like a sugar rush, it will end quickly when these impacted buildings trade hands to owners who can afford to undercut the market. That was me in 1992 when I bought buildings in Dallas for $10 per square foot and started leasing for $4.90 full service. A building that had been a non-factor in the market for five years all of a sudden flooded the market with cheap space."

"There are startling few transactions taking place in Dallas and Houston," Segal added. "Most of them seem to involve either very high seller financing or a lender taking a property back after a default."

For the market to turn, Segal said lenders would have to start making real estate loans at interest rates of less 9%.

"The best bet may be for small and midsize local banks to lead the way. The spreads for them are enormous. If the regulators let them play in that market of $2 million to $20 million office and retail acquisition loans, it could get very busy here in Texas again as the value investors move in," Segal said.

Reluctant Sellers, Conservative Buyers

With little financing available in the market and a lack of consensus, buyers are still approaching the market very conservatively.

"I think it is axiomatic that pretty much all buyers, ourselves included, have become much more cautious and risk-averse," said Steven Sandler, CEO of Crosswind Capital LLC in Rye, NY. "Although few and far between, there are some transactions that are closing, (many with in-place financing), and yes, you could argue that only the premium properties are trading."

"However," Sandler added, "the definition of a 'premium property' isn't what it used to be 24 or even 18 months ago. Clearly, the current trade is not in the assumption of the risk of rental growth. The idea that a building with a tenancy significantly below market rents is a screaming opportunity, is a tale that is two years too old. What qualifies as a premium building now, is predominantly Class A product, with little or no cap ex requirements, with strong occupancy that has plenty of runway. I for one would not want to be in a position of justifying to my investors that I acquired a stabilized building that suddenly became unstabilized due to tenant turnover, no matter how under-market the current rents may appear to be."

Charles G. Cecil, partner of OpIn Partners LLC in New York, is also sticking to the strongest - or most liquid markets.

"We are only interested in the best quality locations and the better quality buildings in San Francisco, Los Angeles and Manhattan. We foresee buying in Miami on a very selective basis," Cecil said. "We are only interested in the distressed story as it plays out in Manhattan, San Francisco, Los Angeles and Miami. Our reasons have to do with our belief that they are the most liquid markets over time. We will consider scenarios where the occupancy may go down in the near future, since we employ a low- or no-leverage strategy. We are buyers at 9-10 cap rates, with low or no leverage, and believe that the good-quality properties need to be bought at this time, rather than wait for some lower valuation moment."

David Taylor, principal with Central Florida Commercial Brokers in Orlando, said some buyers are showing more tolerance for risk if the price is right -- but for the most part he said that is not happening right now, and may not for awhile.

"For any product type - office included - my 'value-add' buyers are actively working their way through potential acquisitions, albeit slowly," Taylor said. "When it comes to financially distressed Class A and B office assets, none of my buyers believe that values have stabilized at this point. For instance, I'm working with an international buyer who wants to acquire a trophy office asset in the Northeast. He was quite definitive about wanting to do so in the first quarter of 2009 until that time arrived and rents and occupancy continued to fall. Now, he has pulled back and won't consider re-addressing that acquisition until the third or fourth quarter. If the U.S. economic climate continues to sour, I'm not sure it will even happen then."

Click here to download the table of number of distressed office properties in 50 of the largest office markets in the country.

For additional comments from readers on office market conditions and distressed office properties in particular, please continue reading.
Perfect Storm

The majority of my investors are standing on the sidelines with few exceptions. Some may choose to follow the Warren Buffet school of investing and "average down" on value properties as they increase portfolios in 2009 and 2010. Once investors see a steady flat line in the Dow and NASDAQ, followed by a slow but steady uptick, I think the tide will turn and money that is standing on the sidelines will start moving on everything for pennies on the dollar. This could be a perfect storm of loan maturities and defaults meeting cash-is-king.

I have one key investor who is pacing himself for a feeding frenzy on bank REO. Most of these properties likely will be "landed banked" to a 5-year horizon and beyond. I think the hardest-hit markets, including Florida, Arizona, California and Nevada, will offer the deepest discounts but may also require the longest holding times. You also have to consider the demographics of these states (many have large populations of retirees who are dealing with wrecked retirement accounts).

For fastest-recovery locales, I am focusing my research on identifying distressed office, residential, retail property opportunities in densely populated urban centers (Boston, New York City and Washington, DC) with larger populations of younger working professionals) in 2009 and 2010.

Rachel K Maman
Principal Broker
Boston Investment Realty LLC
Newton, MA
An Artifact of a Former Economy

We are based in Reno, NV and one of our sub-markets, South Reno, has an office vacancy rate of approximately 30%. This is an area that experienced tremendous growth in the past 10 years and was the location-of-choice for our building-fueled economy. Now that that has all gone away, tenants are leaving, buildings are going vacant and it's beginning to feel like a ghost-town.

At the time that the South Reno market was exploding, the downtown Reno office market was imploding. That balance has now changed and those tenants that are surviving appear to be returning to downtown.

Yet, we are not in the market for, nor are we recommending that clients purchase office buildings in South Reno. That market is an artifact of a former economy, the debt-fueled, pre-sustainability boom that we had through 2006 -2007. It is not coming back to Reno and there is more pain to be had in the outlying area such as it.

Stephen Glenn
President
Commercial Pacific Advisors
Reno, NV
Rethinking

Office vacancies are high with little hope for a decrease in the near-term. Leasing momentum is limited to the "musical-chairs" of tenants moving from one building to another. The only employment sectors that are seeing some growth are education and health care, but as employers have continued to scale-back, we have begun to see even these employers slowing their expansion plans.

Office investors are not willing to take much a risk now. If debt was readily available, we might see an uptick in the transaction level. The limited amount of available capital combined with few financing options for "value-add" office properties in Michigan have caused investors to re-think their strategy and focus on more stable properties or the acquisition of debt.

Anne Galbraith Kohn
Senior Vice President
CB Richard Ellis
Detroit, MI
New & Old Competing

There is a lot of newly built product out there competing with existing properties. Due to price competition, there has been a decrease in rents and an increase in incentives to attract prospective tenants. Lenders see this happening and do not want to make higher LTV loans - that is if they are willing to lend at all. Add in the fact that some loans from 2-3 years ago are re-setting and existing owners are having trouble refinancing them.

Jay Berger
Principal, Broker
SoCal Real Estate Consultants Inc.
Vista, CA
Nothing Fancy

I have a client who buys distressed office nationally. They prefer secondary markets with a 12%-15% leveraged return on current occupancy, and a 20%+ return on stabilization, taking into account carrying costs leasing commissions and any repairs or improvements required. They put debt on the property and will not use creative financing to push the yields (.i.e. interest only) They also prefer that the buildings be at least 50% vacant and of a size large enough to justify maintaining onsite management. If they already own in a market, they can take on smaller properties using management already in place for their other properties. They do need to be in a market that persuades them that the vacancy can be filled up over time.

Henry Schuldinger
Associate
Marcus & Millichap
Bethesda, MD
Only REO Deals Getting Done

I used to be a commercial broker with Grubb & Ellis, but have had a real estate receiver business since the fall of 2008. I know that the office market is soft (12% vacant) and getting weaker (we had most of the sub-prime lenders based here.) The only buildings being sold are: a) out of receiverships or b) after the receivership when the foreclosure is done, sale by the bank OREO dept.

Stan Mullin
Partner
California Real Estate Receiverships
Newport Beach, CA
Why Sell if You Don't Have To?

For the NJ office market, we have had very few trades of office properties; leasing is soft; tenants paying late or downsizing is increasing. I can't find any investors interested in New Jersey office properties at ANY price because of the biggest unknown: "How long will it take to lease up the vacant space?"

Stable deals, "good properties" are not trading unless there is some peculiar reason. Why WOULD you sell if you didn't have to?

So many properties have loans on them based upon values which were pegged too high due to crazy cap rates that I don't see how they will refinance. These may represent the investment "opportunities" in the next two years. Time will tell. I don't see a scenario where things get more active in office acquisitions in NJ before the end of the year.

Michael DiFede
Director of Acquisitions
Bergman Real Estate Group
Iselin, NJ
Overwhelming But Logical

It is pretty overwhelming; but logical. Offices are populated by businesses, and businesses are contracting, laying off personnel or simply shutting down. Except for certain markets that appear somewhat countercyclical, it would appear inevitable that there would be a drop in occupancies/rental rates pending a general turnaround. The good news is that there does not appear to have been the type of overbuilding that has decimated the residential markets. And if Buffett and others are correct (as I suspect they are) about inflation heading our way in the not too distant future, the office market could be a major beneficiary. But, as with life, timing is everything - so for owners facing refinancings in the next year or so without any real prospect to obtaining debt needed to satisfy existing loans, inflation won't be of much use.

Andrew T. Nichols
President
BGK Integrated Group
Santa Fe, NM
Fraught with Artificial Potholes

Real estate people have all dealt with recessions many times as part of the inevitable real estate cycle. It used to be that where we were in The Cycle - commonly thought of as 10 years, give or take -- life was so predictable it was almost comfortable. We all knew what to do and when, and we also knew that there were always going to be people caught without a chair when the music stopped. But this cycle, if that is what you can call it, seems fraught with artificial potholes. No doubt there is going to be a lot of fixing ahead, but as long as the banks can hold off on making decisions over and over again in the hopes that Washington is going to sweeten the pot one more time, there will be no commitment. Until the music stops for the banks, we are all just relegated to watch the dance from the sidelines.

Although the back-to-basics approach gets bandied about quite a bit, what that really means is that we have to stop looking for appreciation to drive values and start focusing on cash. Specifically, making a cash flow that will cover debt service. That's little consolation, of course, for all of those investors who bought based strictly on an appreciation bet, or even a value-add bet.

Given the continuation of the gap between acceptable bid and acceptable ask, it is probably going to take something systemic to break this log jam. Market problems such as increasing vacancies might increase interest among bottom-fisher equity investors, but if the market is to really break loose, more than likely it will have to be the lenders who will eventually insist on cash flow to make their funding decision rather than potential appreciation -- no matter what the potential upside.

Chauncey Mayfield
President and CEO
MayfieldGentry Realty Advisors LLC
Detroit, MI

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