Goldman's Hatzius: How Much Risk to Homebuilding?

Summary: Housing starts will be a key component to economic growth over the mid-term.

--(CalculatedRiskBlog)--

Goldman Sach chief economist Jan Hatzius wrote today (research note): How Much Risk to Homebuilding? A few excerpts:

The housing news has deteriorated recently across a broad set of indicators, and the FOMC accordingly downgraded its assessment of the housing market in Wednesday's post-meeting statement. How much should we worry about our forecast that residential investment will continue to grow 10-15% and directly contribute 1/2 percentage point to real GDP growth next year?

The risks to our housing forecast are on the downside in the near term, but there are three reasons why we still take a positive view beyond the next 1-2 quarters. First, there is a clearly identifiable reason for the recent weakness, namely the sharp increase in mortgage rates. Some of this increase has reversed recently, and barring another shock the impact should be mostly complete by early 2014.

Second, the fundamental supply-demand picture for housing still looks positive. If the population grows at the rates projected by the Census Bureau and the size of the average household trends sideways to slightly lower--in line with historical trends--we estimate that household formation should climb to 1-1.3 million and steady-state housing demand to 1.3-1.6 million. This implies significant upside for housing starts from the current 900,000 level once the remaining excess supply has been eliminated

Third, while home sales and starts have disappointed recently, house prices have continued to rise at double-digit rates, with few signs of deceleration. This suggests that the supply/demand balance in the housing market still looks favorable. That said, we continue to expect that home price appreciation will slow over the next year.

Clearly housing has slowed recently. This has shown up in housing starts and new home sales, and the slowdown is also evident in home builder reports. However I think this slowdown is temporary, and I expect the housing recovery to continue in 2014.

This graph shows single and total housing starts through August (the September and October reports will be both released on November 26th).

There has been a dip in housing starts recently, but I think starts are still closer to the bottom than the next cycle top. I agree with Hatzius that starts will continue to increase over the next several years - and this will be a key driver for economic growth.

Deloitte Forecasts Moderating Growth in 2014 Real Estate Market

Summary:  Commercial real estate prices are expected to grow at a slower pace next year, according to Deloitte.  While rents are low, so is development across property types, and fundamentals in multifamily properties are beginning to peak.  Regulation, says Deloitte, will also stifle growth, referring to the Dodd-Frank Act and the Terrorism Risk Insurance Act.




Protracted economic growth, combined with uncertainty regarding pending regulations and fiscal policy issues, will likely moderate the pace of recovery in the commercial real estate industry in the near future, according to a report on the 2014 industry outlook from consulting firm Deloitte.

The anticipated moderation in 2014 would follow a year in which asset prices, transactions and capital availability all saw a continued recovery. So far in 2013, asset prices have moved close to their 2007 peaks in major metropolitan markets and transaction activity has improved in secondary markets, the Deloitte report stated.

“We expect that the recovery will continue, we just expect that the pace of it will slow down in 2014,” said Bob O’Brien, U.S. real estate services leader at Deloitte.

Private equity and international investors have shown increased interest in U.S. commercial real estate, according to the outlook. The region is considered to be the most stable globally and to offer the best returns relative to risk, Deloitte said.

Rents and occupancy levels have strengthened since the downturn across property types, the report noted. However, in historical terms, rents and occupancies are trending below their averages in most sectors, excluding multifamily and hotels, according to Deloitte. Furthermore, the report speculated that fundamentals in the multifamily sector are beginning to peak.

Development activity, meanwhile, remains subdued for most property types, Deloitte observed, again with the exception of multifamily and hotels. Lending standards for construction loans also remain stringent.

Turning to regulatory developments, Deloitte is forecasting that the uncertainty associated with measures such as the financial reforms of the Dodd-Frank Act and the Terrorism Risk Insurance Act (TRIA) will likely promote caution in the real estate industry. Deloitte noted, for example, that the “effects of a looming expiration would be felt long before TRIA’s actual demise.”

Meanwhile, the Deloitte report also highlighted that the commercial real estate industry is undergoing fundamental changes in business practices, including redesigning existing space to suit new tenant demands and the growing use of automation. Deloitte warned management teams and boards to factor in the influence of these new developments in order to achieve above-average growth and position themselves for the long term.

“We think real estate owners and investors would be well served to focus on operations and profitability and to look at making the necessary investments in their properties to respond to changes in the way tenants are using properties,” O’Brien said.

http://www.reit.com/Articles/Deloitte-Forecasts-Moderating-Growth-in-2014-Commercial-Real-Estate-Market.aspx

No Taper

Summary:  FOMC will not taper their current quantitative easing measures.



New York --(Federal Reserve Press Release)--
Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

http://www.federalreserve.gov/newsevents/press/monetary/20131030a.htm

Rep. Frank: Revamped Mortgage Rules a ‘Grave Error”

Summary:  The Federal Reserve and the Federal Deposit Insurance Corp. are against a new rule in the Dodd-Frank law requiring those underwriting mortgage securities to retain 5% of the credit risk on their books.  Barney Frank, an author of the bill, believes this to be an error.

Washington, D.C.  --(WSJ Developments)--
An architect of the 2010 Dodd-Frank law is accusing federal regulators of watering down new mortgage rules in the face of opposition from the housing industry.

Former Rep. Barney Frank (D., Mass.) slammed federal regulators for their decision to dial back a proposal to impose new rules on the mortgage-securities market–a key piece of the Dodd-Frank law that bears Mr. Frank’s name.

“This is a grave error, and contrary to the assertion that it would best carry out the statutory intent, significantly repudiates it,” Mr. Frank wrote in a comment letter being sent to regulators Tuesday.

At issue is a proposal from August by six regulators — including the Federal Reserve and Federal Deposit Insurance Corp. — to revamp proposed rules requiring issuers of mortgage securities to retain 5% of the credit risk on their books. Supporters of this requirement, including Mr. Frank, argue it will force Wall Street to be more cautious when packaging assets such as mortgages into securities.

The regulators’ original proposal from 2011 contained a narrow exemption focusing on only high-quality loans, where the borrower brings a 20% down payment and meets other stringent criteria. But a proposal released in August for the so-called “qualified residential mortgage” exemption is much broader and covers most loans being made today.

Mr. Frank castigated the regulators, saying they are heeding a fierce lobbying campaign from the real-estate industry. Mortgage lenders, real-estate agents, home builders, civil-rights groups and consumer advocates formed a group, called the Coalition for Sensible Housing Policy, that lobbied heavily against the original proposal for tighter rules.

“If all of these people were correct in their collective judgment, we would not have had the crisis that we had,” Mr. Frank wrote. “More importantly, what their arguments reflect, and what I believe unfortunately is carried over in proposal, is the view that things must always be exactly as they are today.”

Lawmakers have offered competing interpretations about what they intended in drafting this piece of Dodd-Frank. Several Senators, including Sen. Johnny Isakson (R., Ga.) and Kay Hagan (D., N.C.) have argued the law calls for a broad exemption and were key players in a push to eliminate a 20% down-payment requirement from the original proposal.

Speaking on the Senate floor this month, Mr. Isakson said banking regulators “did a great job” in revamping the rule.

The new proposal largely adopts a separate mortgage definition put forward earlier this year by the Consumer Financial Protection Bureau that outlines steps banks must take to demonstrate that a borrower has the ability to repay a mortgage. Regulators also asked for comment on an alternative definition that would add a 30% down payment to the exemption requirement.

Some regulators also have been critical of the new proposal. Daniel Gallagher, a Republican member of the Securities and Exchange Commission, issued a 3,000-word dissent to his agency’s August vote, saying the proposed exemption was “unrealistic and dangerously broad.”

Mr. Frank argues regulators are ignoring the essential purpose of Dodd-Frank — to force changes in the financial market.

“I understand that since risk retention is a new concept, people in various phases of the business of housing are unused to it, and do not like the changes it will force in their operation,” he wrote, “But the very purpose of the statute was in fact to bring about changes in a number of areas in our financial life, residential mortgages foremost among them.”

Shares of Blackstone-Backed Real Estate Trust Rise in Debut

Summary:  Blackstone owned REIT, Brixmor Property Group, oversold in its IPO.

New York --(New York Times DealBook)--

Stock market investors continue to show an appetite for real estate.

The Brixmor Property Group, a real estate investment trust owned by the Blackstone Group, sold more shares than it had expected in its initial public offering on Tuesday evening, reflecting strong demand from investors. The shares were priced at $20 each, the middle of an expected range, raising $825 million and giving the company a market value of about $5.9 billion.

The stock rose on Wednesday in the company’s trading debut on the New York Stock Exchange. After opening at $20.65, shares of Brixmor were up as much as 4 percent during the day before closing at $20.40.

“Our story really resonated with investors, and that led to more demand that allowed us to upsize,” Michael A. Carroll, the chief executive of Brixmor, said in an interview.

Investors are looking to gain exposure to the strengthening commercial real estate market in the United States. Vacancy rates are expected to decline for commercial properties and rents are expected to grow modestly, the National Association of Realtors said in a forecast released in August.

In October, the Empire State Realty Trust raised $929.5 million in an initial public offering. Its shares, through Tuesday, have risen 9 percent from the I.P.O. price.

Investors are betting that Brixmor, which has 522 shopping centers across the country, is poised to benefit from the improving property market. The company says it has the nation’s largest wholly owned portfolio of shopping centers anchored by grocery stores.

The company, formerly known as the Centro Properties Group, was in need of capital before Blackstone bought it in 2011. Since then, Brixmor has invested $339 million to improve its assets, the company said in a regulatory filing.

Brixmor said it planned to use the proceeds from the offering to reduce its debt. As of June 30, its total debt was about $6.7 billion, according to the filing.

The company sold 41.3 million shares in the offering, more than the 37.5 million shares it had expected to sell. The deal’s underwriters have the option to purchase an additional 6.2 million shares.

Blackstone will remain the majority owner, with about 73 percent of the company’s shares, according to a filing.

The offering was led by Bank of America Merrill Lynch, Citigroup, JPMorgan Chase and Wells Fargo Securities.

http://dealbook.nytimes.com/2013/10/30/shares-of-blackstone-backed-real-estate-trust-rise-in-debut/?_r=0

Chinese Investors Seeing Bargains Rescue Distressed Commercial Real Estate In The U.S.

Summary: Chinese investors are investing in distressed commercial properties in cities like Detroit.  Dongdu International paid $13.6 million for two Detroit office buildings, with plans to convert one into apartments.  (The replacement price of these two buildings is $80 to $100 million each.)  New York's Cassa Hotel was bailed out of bankruptcy by a Chinese firm.  Chinese property deals in the U.S. grew to $1.7 billion this year from $1.1 billion in 2011.  These buildings, by Shanghai comparisons, are incredibly cheap.


New York --(International Business Times)--

Chinese investors have found a new place to park their cash: increasingly they snapping up distressed commercial properties in American cities like Detroit, where despite the risk steeply discounted prices are appealing to investors used to China's highly inflated real estate prices.

Wealthy Chinese have been buying residential properties for years in popular destinations like California and New York but now they are also bailing out office buildings, hotels and other commercial properties overleveraged from the boom years in the U.S., the Wall Street Journal reported this week.

Earlier this month Chinese firm Dongdu International (DDI) paid $13.6 million for two well-known Detroit buildings with plans to convert one into an apartment complex, while the other building will be remain an office. Other Chinese purchases include New York’s Cassa Hotel whose previous owners sought bankruptcy protection, and a vacant office park in Silicon Valley.

The new Chinese administration has encouraged companies to diversify their holdings and spend foreign capital reserves, which prompted an overall rise in Chinese U.S. property investment this year. Chinese property deals in the U.S stand at $1.7 billion so far in 2013, up from the $1.1 billion 2011, according to research firm Real Capital Analytics Inc..

While some Chinese companies like Dalian Wanda Group, owned by China’s richest man Wang Jianlin’s , have bought high-profile landmark buildings others are more attracted distressed properties needing further investment and management. Other foreign investors generally shun projects requiring such secondary investment.

These properties are often in default and suffering high vacancy rates or facing other turnaround challenges. Experts say these deals suggest the Chinese are both more willing to take risks than other real estate investors and patient enough to hold properties until values rebound.

Four of the 15 largest Chinese property investments in the U.S in the past year have “resolved a troubled situation,” Real Capital said. In just the past few months, the Chinese have made 23 direct bids for properties on sale through Auction.com LLC, many of which would be distressed, said the company’s Executive Vice President Rick Sharga said.

Steeply discounted prices account for much of the recently-purchased properties' appeal according to the Wall Street Journal. Each of the two Detroit buildings, for example, would have cost between $80 million and $100 million to replace, said Ryan Snoek, a consultant for Luke Investments, the seller of the Detroit properties.

"People from China look at the price at which you can buy these buildings and think that's the cost of one apartment in Shanghai," said Goodwin Gaw, founder of the Hong Kong-based Gaw Capital Partners.

http://www.ibtimes.com/chinese-investors-seeing-bargains-rescue-distressed-commercial-real-estate-us-1445528

Commercial real estate loan prices rose in September

Summary:  With limited supply and increasing demand, commercial mortgage prices improved in September for both performing and non-performing loans.  The values on September 30, 2013 relative to earlier values are as follows:

Performing September 2013: 91.5/100 par September 2012: 88.7/100 par

Impaired

• September 2013: 79.2/100 par
• August 2013: 79/100 par
• September 2012: 88.7/100 par

Non-performing

• September 2013: 52.8/100 par
• August 2013: 51/100 par
• September 2013: 50.9/100 par

Boston --(Boston Business Journal)--
Prices for commercial mortgages traded higher in September, while market values for non-performing and impaired CRE loans also improved, according to DebtX, a third-party provider of loan valuation services.

“CRE loans continue to sustain pricing gains from the significant rally last year,” said DebtX Managing Director Will Mercer in a statement. “We don’t see any weakening of demand from the buy side, and supply is still limited.”

The estimated price of loans backing commercial mortgage-backed securities increased to 91.5 cents on the dollar as of September 30, up from 88.7 in the year-earlier period.

Among impaired performing loan prices, the average price was 79.2 percent of face value as of September 2013, up from 79 percent in August 2013. Prices were 78 percent in September 2012.

The weighted average monthly price of non-performing CRE loans traded through DebtX’s was 52.8 percent of face value as of September 2013, up from 51 percent in August 2013. Prices were 50.9 percent in September 2012.

Meanwhile, the Loan Liquidity Index, a monthly barometer of liquidity for pools of loans sold at DebtX, was 103.4, up from 99.7 in August 2013.

http://www.bizjournals.com/boston/real_estate/2013/10/cre-loan-prices-up-in-september.html

Standard & Poor's Credit Ratings and Additions

RPT-Fitch: 3Q defaults stabilize for U.S. CMBS

Summary:  Fixed rate US CMBS defaults fell in 3Q'13

• 3Q'13: 93 newly defaulted loans totaling $1.1 billion
• 2Q'13: 97 newly defaulted loans totaling $1.4 billion
• 3Q'12: 119 newly defaulted loans totaling $2.2 billion

New York --(Reuters/Fitch)--
Cumulative defaults for fixed-rate U.S. CMBS fell slightly last quarter, according to Fitch Ratings in its latest weekly CMBS newsletter.

Fitch reports that 93 loans totaling $1.1 billion newly defaulted in third quarter-2013 (3Q'13), down slightly from 97 loans and $1.4 billion 2Q'13. More encouraging signs for the sector are the year-over-year comparison (119 loans totaling $2.2 billion defaulted in 3Q'12) and the decreasing incidence of defaulted large loans (82 of the 93 newly defaulted loans under $20 million).

An additional 56 loans (original securitized loan balance of $390 million) did not refinance at their 3Q'13 maturity date. Of that amount, 15 of the loans (totaling $102 million) had paid in full by the end of the quarter.

http://www.reuters.com/article/2013/10/28/fitch-3q-defaults-stabilize-for-us-cmbs-idUSFit67438620131028

Sustaining Growth in New Urbanism

Summary:  This is a worthwhile video series for development professionals to heed.  

1 2 3 4 5 6 7 8 9

The Fed’s predicament in three paragraphs (Be the Fed)

Summary:  The Fed has few options in driving mortgage rates back down when not tapering hasn't done enough.  Lowering the Fed Funds Rate is pointless when you're virtually at 0%, forward guidance has little effect on long term rates, false, negative forecast may bring rates down, but will also stall economic activity, false positive forecast could bring rates up, which is self-defeating.  Basically, the Fed is out of options.

St. Croix --(CreditWritedowns.com and The Center of the Universe)--


So imagine you are a moderate FOMC number.

Mortgage apps are down, new home sales marginal, and private sector job creation sagging. And you keep revising your GDP forecast lower at each meeting. Likewise inflation remains low, and you believe the risks are asymmetrical. That is, you know you can stop inflation and growth with rate hikes, but you’re not so sure about fighting deflation.

And so, as an FOMC member, you’d like to see mortgage rates back down. So how do you get them there? You might not like QE, and at least highly suspect it doesn’t have any first order effects, and you fear there are unknown costs, but you know tapering, for whatever reason- almost to the point the reason doesn't matter- causes rates to go higher. And you know not tapering brought them down some, but not enough. Fed funds are already close to 0% so there’s no room there. Forward guidance, etc. has kept the short end low but not the long end. You are afraid to simply peg long rates with an unlimited bid for securities at your target rate. You know a weaker economic forecast will bring long rates down but that it would be intellectually dishonest to manipulate a forecast.

And maybe worst of all, if you do something that causes markets to believe the economy will do a lot better, mortgage rates go higher, presuming Fed rate hikes will accompany growth, and thereby make things worse instead of better.

http://www.creditwritedowns.com/2013/10/the-feds-predicament-in-three-paragraphs.html

http://moslereconomics.com/2013/10/25/be-the-fed/

A couple of facts about small bank failures in the US

Summary: Commercial mortgages were the leading cause of bank failures in the latest financial crisis, which was also small, by bank failures, than the S&L crisis of the late 80s.

New York --(SoberLook.com)
There are still a number of misconceptions with regard to the volume and the causes of most commercial bank failures in the US after the financial crisis. Here are a couple of facts that some may find helpful:

1. Although 2008 saw some spectacular bank failures such as Citi, WaMu, and Wachovia (note that Bear, Lehman, Merrill, and AIG were not banks), the actual number was dwarfed by the Savings and Loan Crisis in the late 80s. Nevertheless there were nearly 500 small and regional banks that failed over the last 5 years.



Number of US bank failures per year



2. Contrary to popular belief, the biggest reason for bank failures was not the losses associated with bad small business loans, derivatives, or even residential mortgages. Just like during the Savings and Loan Crisis, it was the overexposure to commercial real estate loans that brought many banks down. And it was the commercial real estate loans that saw the worst default rates. The chart below shows the delinquency rates by major loan type for smaller and regional banks (ex top 100).



Source: FRB



Some argue that smaller banks did more relationship-driven lending than their larger cousins. True, but that type of lending was exactly what often ended up in an FDIC takeover. Bankers' cozy relationships with local developers were prevalent and often ignored by the regulators.

http://soberlook.com/2013/10/a-couple-of-facts-about-small-bank.html

Summary:  The Consumer Financial Protection Bureau sued small Kentucky real estate law firm Borders & Borders PLC for allegedly paying illegal kickbacks to RE agents and mortgage brokers in exchange for work, the third of such lawsuits for the regulator.  This comes across as busy work for the fledgling regulator.

New York --(Wall Street Journal Developments Blog)--
A small Kentucky real estate law firm has found itself the latest target in renewed federal scrutiny of referrals in the housing industry.

The Consumer Financial Protection Bureau on Thursday sued Louisville-based law firm Borders & Borders PLC, accusing it of paying illegal kickbacks to real-estate agents and mortgage brokers in exchange for work.

The lawsuit is the agency’s third enforcement case involving alleged kickbacks in the real-estate industry, highlighting how the new regulator is stepping up its oversight.

The lawsuit accuses Borders & Borders of operating nine joint venture title insurance companies with local real-estate agents and mortgage brokers and splitting the profits with them. The lawsuit says the joint ventures, which were shut down in 2011, did little actual work, existing as a way to pay for referrals.

Borders & Borders adamantly disputed the regulator’s allegations, saying that the business relationships were legitimate, disclosed to consumers and complied with federal real-estate law.

“The CFPB is out on a limb with this lawsuit,” said Morgan Ward, a lawyer with Stites & Harbison PLLC, who represents Borders & Borders. “It has made allegations that are simply not true from a factual standpoint, and its interpretation of the law is incorrect.”

Mr. Ward also faulted the CFPB for not waiting for a federal appeals court to rule on a case involving the constitutionality of a 1996 Department of Housing and Urban Development policy governing such relationships.

The Dodd-Frank financial law of 2010 gave the CFPB authority over the federal law that bars payments to refer real-estate services. In April, the regulator reached a $15.4 million settlement with four mortgage insurance companies over such referrals. And in May, the CFPB reached a $118,000 settlement with a Dallas home builder over the referral of mortgage-lending business. In both cases, the companies did not admit or deny the allegations made by the regulator.

The regulator “will continue to pursue companies that seek to profit from convoluted arrangements that limit competition and hurt honest businesses,” said Richard Cordray, the CFPB’s director.

http://blogs.wsj.com/developments/2013/10/24/consumer-bureau-sues-kentucky-real-estate-law-firm/

Fitch: Penney Stress Could Pressure U.S. Malls But Not CMBS

Summary:  A J.C. Penney default could mean more to malls than it does to CMBS holders because J.C. Penney makes up such a small part of these CMBS deals.  Malls, however, that do not have other anchor tenants, are likely to suffer substantially.  J.C. Penney was downgraded to CCC earlier this month.

New York --(Fitch Ratings)--
If J.C. Penney's financial challenges result in the closure of a portion of its stores, some malls would likely struggle to replace the retailer, Fitch Ratings says. We do not expect the potential closure of the company's stores to impact rated CMBS deals because they represent relatively small amounts of those transactions.

One mall that could struggle if its J.C. Penney anchor were to close is Riverbirch Corner Shopping Center in Sanford NC. The mall's other anchor tenants are Belk and Goody's. Riverbirch could have difficulty finding find another retailer to take over the large space currently held by J.C. Penney. Riverbirch is approximately 20 miles from Raleigh, NC and 30 miles from Fayetteville and Fort Bragg. The loan on that shopping center is just $12 million, 0.3% of CGCMT 2007-C6.

Other malls would have less difficulty in replacing a J.C. Penney store. Fitch believes for example, that Aventura Mall in Miami, Florida could manage a closure of its J.C. Penney anchor promptly. The mall has several stronger anchor tenants including Nordstrom and Bloomingdales and a favorable location in the northern Miami suburb. Should the J.C. Penney store in that mall close, we believe it would be possible for the mall to find another tenant. The loan on that mall is in LBUBS 2007-C7.

Loans on many properties with J.C. Penney stores are in conduit deals with vintages back to 2001. Two large single borrower mall transactions also contain JC Penney as an anchor, the QCMT 2013-QC at $600 million and JPMCC 2011-PLSD. Both of these malls are located in strong locations at or above 95% occupancy.

J.C. Penney's real estate portfolio has been appraised at over $4 billion and includes properties it owns and leases. According to the company's most recent corporate filings, it owns 306 stores, operates 123 ground leased stores, and leases 675 stores. It also owns nine distribution centers and leases another six. Earlier this month, Fitch downgraded J.C. Penney's Issuer Default Rating to 'CCC' from 'B-'.

GROUNDFLOOR Emerges To Disrupt $240 Billion Commercial Real Estate Finance Market

Summary:  North Carolina crowd-sourcing startup GROUNDFLOOR closed round one funding.  This new company connects real estate entrepreneurs directly to otherwise depositors, who are looking for a better return on their savings.

Battle-Tested Team Closes Initial Seed Funding to Open Access to Direct Real Estate Investing

Raleigh --(Digital Journal)--
GROUNDFLOOR, a progressive real estate crowdfunding startup based in the Triangle, announces the initial close of its first round of funding led by investors Bandwidth Labs and the American Underground. Harnessing the breadth and scale of the Web, the company connects independent real estate entrepreneurs with early-stage loans funded online by mass-market savers and investors. The seed capital will allow GROUNDFLOOR to bring a series of pilot projects to market in late 2013 and early 2014.

"The Web has a message for Wall Street," says Brian Dally, Co-Founder and CEO of GROUNDFLOOR. "Real estate innovators and doers frustrated with the bank underwriting status quo are ready to be unleashed. Banding together, depositors and self-directed investors can do everything traditional lenders do, but better—to the benefit of a broader base of people well beyond accredited investors and powerful incumbent financial institutions."

Leadership and Advisory Board
Co-founders Dally and Nick Bhargava built GROUNDFLOOR on a common interest in commercializing radical technologies designed to disrupt entrenched incumbents. John Austin introduced the duo in October 2012 through NC IDEA's Groundwork Labs. Dally, a 15-year veteran of technology startups based in Silicon Valley, Boston and London, most recently engineered the launch of Bandwidth.com's Republic Wireless, a provider that successfully battled the big four cellphone carriers to enter the smartphone service market. Bhargava lends expertise in securities law innovation earned during his role in developing Title III of the JOBS Act, in which he fought to ease securities regulations for unaccredited investors and bring the concept of equity crowdfunding to the mainstream.

The company also announces the addition of new advisory board members including Michael Goodmon, Vice President of Real Estate for Capitol Broadcasting; Jason Widen, a real estate developer and Executive Director and Co-Founder of HQ Raleigh; and Chris Matton, a prominent figure in the Triangle angel investor community and General Counsel at Bandwidth.com.

"Bandwidth has a culture of taking on big challenges and supporting people we believe in," says Scott Barstow, Head of Bandwidth Labs. "GROUNDFLOOR is a huge idea and we are proud to back Brian and his team, as well as creating opportunities for entrepreneurship to grow here in the Triangle."

About GROUNDFLOOR
Based in the North Carolina Triangle, GROUNDFLOOR champions democracy, transparency, speed, efficiency and freedom as the path to building a new kind of finance. The company harnesses the breadth and scale of the Web to disrupt antiquated black-box models of financing asset-backed transactions. The innovative GROUNDFLOOR platform reduces dependence upon large financial institutions and accredited investors, while making direct real estate investing a viable addition to any savings and investment portfolio.
http://www.groundfloor.us/press

2 Commercial Property Giants to Combine in $7.2 Billion Deal

Summary:  Cole Real Estate Investments has agreed to be acquired (along with $4 billion of Cole's debt) by American Realty Capital Properties in a $7.2 billion cash and stock deal that will combine two of the largest commercial real estate owners in the the US, after nearly seven months of negotiations.  This comes after American Realty spent the summer acquiring companies to increase its capitalization.


New York --(New York Times DealBook)--
American Realty Capital Properties and Cole Real Estate Investments, two of the largest commercial property owners in the country, are finally seeing eye to eye.

The two real estate investment trusts agreed to a $7.2 billion deal on Wednesday in which American Realty will buy Cole with a mix of cash and stock, bringing an end to tensions between the companies that have simmered much of the last yearThe combined company will be one of the biggest commercial landlords in the country, leasing space to companies including FedEx, AT&T, CVS, Walgreens and Home Depot. American Realty will also take on about $4 billion in debt from Cole.

The origins of the deal date to March, when American Realty made an unsolicited offer for Cole that would have derailed Cole’s move to go public. Cole rejected the offer and went on to list on the New York Stock Exchange. Since the listing in June, Cole shares have climbed more than 17 percent.

Nonetheless, American Realty still wanted to make a deal. It will pay 14 percent above Cole’s closing stock price on Tuesday of $12.82, and assume significant new debt in taking over the larger company.

“These two companies were meant to be together,” American Realty’s chief executive Nicholas S. Schorsch said in an interview. “This is a one plus one equals four or five scenario.”

Under the terms of the deal, Cole stockholders can choose either 1.0929 shares of American Realty stock, valued at $14.59, or $13.82 cash for each Cole share.

Commercial real estate investment trusts are in vogue right now because they pay almost no corporate taxes and return most earnings to investors through dividends, making them attractive stocks for investors to own.

Both American Realty and Cole operate in the lucrative “net lease” market, meaning they offer large and stable commercial customers long-term leases, and leave the maintenance and operations of the properties up to the tenants.

Over the summer, as Cole’s shares debuted on the public market, American Realty, which had been the smaller of the two companies, went on a shopping spree, acquiring several billion dollars in assets.

“These are two comparably sized companies now,” Cole’s chief executive Marc Nemer said in an interview. “The discussions this go round were friendly and were all about maximizing value for shareholders.”

As part of the deal, American Realty plans to increase its dividend to $1. And despite taking on additional debt, it expects its overall leverage ratio will come down by the end of next year.

American Realty shares were down 1.5 percent at midday on Wednesday.

“This was a once in a life time moment when you actually have a perfect storm for these two companies to come together,” said an ebullient Mr. Schorsch. “You can say put Ford and General Motors together, but it doesn’t always work. This really is a phenomenal union in a moment in time that may never come again.”

Barclays and RCS Capital advised American Realty, and Proskauer Rose provided legal advice. Goldman Sachs advised Cole, and three law firms — Wachtell, Lipton, Rosen & Katz; Venable; and Morris, Manning and Martin — provided legal advice. Christopher H. Cole, the chief executive of Cole, and other executives received legal advice from Sullivan & Cromwell.http://dealbook.nytimes.com/2013/10/23/2-big-commercial-property-owners-to-combine-in-11-2-billion-deal/

Small firms discover buying beats renting

Summary:  Rents, apparently, have reached parity with ownership.  Many are incentivized by stabilizing rents and increasing mortgage rates.

Fort Lauderdale --(Sun Sentinel)--
Some small businesses in South Florida are finding it's better to buy than to rent. Entrepreneurs, law firms and marketing companies are becoming their own landlords, locking in occupancy costs before expected increases in mortgage and rental rates, brokers say.

"I think it's indicative of restored confidence in the economy that firms are willing to make longer-term commitments," said George Sacks, managing principal at Commercial Florida Realty Services in Boca Raton.

Commercial Florida has completed a handful of office condominium sales recently at Sanctuary Centre, a 187,000-square-foot complex in Boca Raton. Tenants also are buying at The Exchange, a six-building Fort Lauderdale complex.

PeytonBolin, a seven-attorney law firm in Tamarac, signed a lease in 2008 — during the height of the recession when office rents "were dirt cheap," founding partner Mauri Peyton said.

When it came time to renew, Peyton couldn't get as good of a deal in his building — or anywhere else. The more he looked at the firm's costs, the more he realized it could probably buy space for as much as it could rent it.

PeytonBolin, which represents condo and homeowner associations through Florida, agreed to buy a 6,240-square-foot office suite at The Exchange. Peyton said the monthly ownership costs will be about the same as renting, but the tax benefits make buying the much better bargain.

"Rather than just throwing money away on rent, we're building equity," he said. "We don't have to worry about a landlord or losing our build-out money when we leave."

PeytonBolin and other firms want to act now before mortgage rates inch up further. And commercial rents are due to increase as well, given the lack of construction over the past few years, Sacks said.

Another advantage to buying: A more favorable lending environment, brokers say. Businesses can get up to 90 percent financing on loans backed by the Small Business Administration.

For some, renting is the smarter option for many larger firms and those that crave flexibility.

"If you are uncertain about whether your space needs are going to change, it may not make sense for you to buy," said John McQueston, a broker associate with Campbell & Rosemurgy in Pompano Beach.

http://www.sun-sentinel.com/business/realestate/fl-office-tenants-buying-20131015,0,1342980.story

CMBS.com redesign plus CMBS.com Mobile

Summary:  CMBS.com redesigned their website to include improved free searches by point and radius, and a new mobile site.


Sausalito --(CMBS.com and Backshop)--
We redesigned the www.CMBS.com web site and added some great new features. Check ‘em out:

First, we have improved our free searches to include more data than ever and a map-based interface for more intuitive searches.

The deal searches now feature a “radius” query allowing the user to filter CMBS deals around a specific address. If you have a property and want to see what CMBS deals are nearby, it is a great tool.


My favorite part of the new site is the mobile version of CMBS.com. If you go to www.CMBS.com on a mobile device, the site will ask your browser for its location, and the deal search will default to a five-mile radius around your location.



Tweak your search filters as appropriate, hit SEARCH DEALS, and browse the available deal data. I was in New York City last week and had fun walking around learning about all the different buildings.

For CMBS investors, the securitization search tools are better than ever. Now you can search by specific CUSIPS. When you sign up for a free account, you can set up your Investor Dashboard and model loan loss and bond loss scenarios.



The last thing to point out on CMBS.com is the introduction of the CMBS borrower reporting tool. This new feature is designed for existing CMBS borrowers to track and standardize their quarterly reporting obligations. The reporting includes an XML version (of course!). We will be working with the servicers and borrowers to promote adoption of the service.

http://cmbs2point0.com/cmbscom-redesign-plus-cmbscom-mobile/

Fitch: Canadian CMBS Market Stable, Losses Rare

Summary:  Canadian CMBS returns, specifically office and retail, are expected to be positive, though tempered by comparison to recent years.  Conservative lending, recourse loans, and low volume issuance have contributed to low default rates for Canadian CMBS (1.9% default rate in Canada compared to 13.7% in US).  Stable employment, low vacancy rates, rent growth in Montreal and Vancouver, oversupply of condos in Toronto and Montreal, and economic growth stemming from the oil and gas industry in Alberta, Manitoba, and Saskatchewan are expected.


New York --(Business Wire)--
Canadian CMBS will likely perform positively in the near term, Fitch Ratings says. We expect retail and office properties to be positive but slightly lower than they have in recent years. Also, Canadian transactions have had extremely low default rates over the past 15 years. In 2Q13, we calculate a cumulative default rate of 1.9% of issuance by balance. The U.S. rate for the same period was 13.7%. In our view, more conservative lending, the commonality of recourse loans, and the relatively small amount of Canadian CMBS issuance and lending explain much of the difference.

Our view of the office market is rooted in our expectation that Canadian unemployment will remain stable through 2015 at approximately 7%. Nationwide the average vacancy rate in the second quarter was 8.7%. Rents have been growing in Montreal (4.2%) and Vancouver (3.0%) over the prior year.

Over the longer term, we observe some trends in multifamily housing that could slow its growth. The vacancy rate at the end of the second quarter was under 3%. But an oversupply of condominiums in Vancouver and Toronto may be forming. Those markets also have higher youth unemployment rates than the rest of Canada.

We expect the Canadian economy to grow 2% annually from 2013 to 2015. Much of the strongest growth has been in Alberta, Manitoba, and Saskatchewan and is partially attributable to the expansion of the oil and gas industry in those provinces.
http://www.businesswire.com/news/home/20131014006126/en/Fitch-Canadian-CMBS-Market-Stable-Losses-Rare

Bridging the financing gap: New funds could inject $220M to spur commercial development

Summary: Foreclosure- and repossession-ridden Michigan has been left with little access to liquidity from banks and investors.  In response, the Michigan State Housing Development Authority (MSHDA) is launching a $100 million mezzanine fund for multi-family, mixed-used and residential projects throughout the state.  Similarly, Great Lakes Capital Fund is working toward a $120 million fund allocated to underwriting loans to Michigan developers.  Meanwhile, regional banks have used the real estate rebound to clear foreclosed and repossessed houses from their balance sheets.  Developers and entrepreneurs are hoping that these funds will help with second tier funding to close the gap between <60% LTV and equity investors who are looking for more leverage.

Grand Rapids --(MiBiz)--
Commercial real estate developers in West Michigan could soon get some much needed relief from their struggles to access bank financing.

Still smarting from the millions in losses they incurred from foreclosed and repossessed properties, banks are keeping the purse strings tight on loans for commercial real estate projects. That has developers facing a financing gap in the market as the economy improves.

“There is a (financing) gap out there,” said Michael Price, chief executive officer of Grand Rapids-based Mercantile Bank Corp. “There are lots of good ideas that have come not only in the real estate market, but in manufacturing and other commercial opportunities where there just needs to be that level of debt that has a bit of higher risk profile than what a traditional bank financing package looks like.”

With developers and banks finding it difficult to work the numbers on many potential projects, that’s left some in development limbo, Price said.

There may be some help on the horizon. Two new funds expected to hit Michigan markets next year with up to $220 million in project financing could help close the financing gap.

The Michigan State Housing Development Authority (MSHDA) announced on Sept. 25 that it is launching a possible $100 million mezzanine fund with a focus on providing financing to urban multi-family, mixed-used residential projects across the state.

Also in September, MiBiz reported Lansing-based Great Lakes Capital Fund, via its Develop Michigan Inc. economic development arm, is working to close a $120 million offering for its Develop Michigan Real Estate Fund LP. Company officials say they plan to use the fund to provide capital for a program that would offer loans to commercial developers across the state.

It’s often the case that developers and entrepreneurs just don’t have access to the necessary equity that would make banks comfortable in extending the financing needed to push a project forward, Price said. Banks also just went through an intense period of trying to shed foreclosed assets from their balance sheets and salvage the losses from collapsed deals. In essence, they’re not in any hurry to risk adding more bad debt, he said.

Developers say they can typically get a bank loan for 50 percent to 60 percent of the total cost of a deal, but while they’re willing to put some equity into the projects, they’re still often left with a 30-percent funding gap. That’s created a need for a funding source that’s willing to come in and be last piece of capital that fits between senior debt and equity so that deals can move forward, said Chris LaGrand, chief housing investment officer at MSHDA.

With the availability of these funds, owners and developers have more financing options in structuring a difficult deal and more investors would have reason to invest in Michigan, LaGrand said.

Kalamazoo-based developer Tom Huff, owner of Peregrine Realty LLC, said the new funds could help fill a lending gap that’s been making it difficult to finance projects.

“It seems like these are great ideas that just open more options for developers,” Huff said. “Right now, the banks are timid and the appraisal market is also timid, so (these funds) make some sense.”

It’s no surprise that banks tightened their underwriting standards for property developments after the recession.

Local banks accumulated millions in foreclosed and repossessed real estate on their books in the recession. Deals with just one Holland-based developer, Scott Bosgraaf, left banks holding roughly $24 million in unpaid real estate loans and bad debt.

But Dan Yeomans, whose turnaround firm has been involved in the sale of $12.6 million of those foreclosed assets, doesn’t think developers should bear all the blame for the banks’ losses. Bad lending practices were often just as much to blame as over-extended developers, he said.

“I don’t even know how some of those loans were given,” said Yeomans, president of Amicus Management.

As the economy has improved, banks have gotten rid of foreclosed or repossessed properties, what’s known as “other real estate owned” or OREO. Locally, Mercantile Bank Corp., Macatawa Bank Corp. and Independent Bank Corp. combined have cleared their balance sheets of $17.1 million in OREO between Dec. 31, 2012 and June 30 of this year.

But because banks are reluctant to lend even as the economy has picked up, developers can’t assemble enough project financing to be able to meet the demands of the market. That’s where the new mezzanine financing could help, even if it’s at a higher interest rate and adds complexity to the deals, sources said.

While the new funds could make deals more complex in terms of layering different financing mechanisms and necessary paperwork, Price said the extra due diligence is worth it for a good project.

“In working a little with these types of funds and entities, they’ve made it fairly easy to work with, but of course, that’s always in eye of the beholder,” he said. “I’m not going to sugarcoat it, but every time you have another entity involved, that always includes another layer of paperwork and additional triggers and holds that need to be put in place. But all things considered, we think it’s eminently worth it for the entrepreneur or project team to spend the time.”

The process shouldn’t be so onerous that project managers will have to go out and hire a tremendous legal team to tackle the work, he said.

In the current market, many projects rely on the ability to secure building incentives primarily from state and local governments. At the same time, some incentives such as Renaissance Zones are retiring. Other incentives like the Michigan Economic Development Corp.’s Community Revitalization Program can help deals get off the ground, but the funds are always distributed on the back end of a deal when the project is complete.

Huff said his experience is that banks are reluctant to loan any more than 70 percent loan to value for projects despite the demand for urban residential development in many communities across the state. Those communities “need this kind of injection,” he said.

“This kind of keeps the momentum going,” Huff said. “There is definitely risk involved, but there is demand.”

Working in partnership with banks, MSHDA wants to identify a pipeline of deals that could unlock with the help of mezzanine debt, LaGrand said.

Given MSHDA’s strong portfolio of past successful projects, LaGrand believes the organization can convince investors to get involved in the Michigan market.

“We believe we have the history and market intelligence of doing deals in the state since 1960 that investors will find useful and attractive,” he said. “We’re thinking that we can offer investors an 8- to 10-percent yield, and the cost of the funds is around 14, 15, 16 percent. We think deals would pencil at those numbers.”

Right now, mezzanine debt is offered at around a 25-percent interest rate in some markets, which LaGrand said is a “go-away price.” Investors know deals don’t pencil at that rate, but initial conversations with investors have been positive, LaGrand said, noting the experience and market knowledge MSHDA can bring to the table.

The mezzanine fund is seeded with $25 million of non-taxpayer MSHDA reserve funds.

“We obviously believe this fund is going to provide a good return, which is why we’re moving the money,” LaGrand said. “We’re probably looking at the middle of next year for the first closing.”

The fund’s target investment is mixed-used multifamily housing in urban cores, the cost of which can range widely. LaGrand hopes to unlock primarily large-scale multi-million dollar developments. One stipulation to access the financing: Projects must have at least 50 percent of their units set at market-rate values.

“We want to get as many strong deals into the pipeline as possible,” he said. “Ideally, we want to be 10 to 30 percent of the investment cost of the deal. So if our target investment might be $10 to $20 million — depending on what percentage of the deal we are — you’re talking a $50 million real estate investment. That’s sort of the base level, and we can go higher.”

Given the potential returns for investors and MSHDA’s track record, Price of Mercantile Bank said he thinks the fund makes sense. He expects investors are really going to kick the tires on projects because of it.

“It all depends on the risk profile of projects,” he said. “(Investors) are clearly going to demand a higher return, but they are going to fill that gap that we think is going to allow some ideas and projects to go that may not have come to fruition — and hopefully provide a lot of job growth.”

http://mibiz.com/news/real-estate/item/20998-bridging-the-financing-gap-new-funds-could-inject-

Moody's Publishes Request for Comment on CMBS Methodology Update

Summary: Moody's is soliciting feedback on a proposed updated approach to rating CMBS in Europe, the Middle East and Africa.  The proposed change will include the assessment of a minimum yield in analyzing the underlying collateral, to allow for greater stability of Moody's property values throughout the market cycles.  While vague, Moody's also aims to align global default correlation assumptions with those used in the synthetic corporate synthetic CDO methodology.  Moody's projects that the proposed changes will have no impact on current ratings.  The report can be viewed via the link below.

Frankfurt --(Moody's Investor Services)--
Moody's Investors Service has today published a Request for Comment (RFC) seeking market participants' feedback on a proposed update to its approach for rating commercial mortgage-backed securities (CMBS) in Europe, the Middle East and Africa (EMEA).

The report, "Moody's Updated Approach to Rating EMEA CMBS Transactions", is now available on www.moodys.com and can be accessed via the link provided at the end of this press release.

The first part of the report outlines the proposed changes to the methodology, while the second summarises  the complete EMEA CMBS methodology and consolidates the existing methodology reports.

Under Moody's proposed approach, the rating agency will introduce minimum yields into its property value analysis. The minimum yields allow for greater stability of Moody's property values throughout market cycles to mitigate the market value volatility associated with commercial real estate (CRE) prices. Minimum yields will effectively cap Moody's value assessment for a given property cash flow, during peak market situations with low property yields.

Moody's intends to amend the property value stresses implied in its model to consider the increased value buffer that it expects as a consequence of the minimum yield application in peak market situations. The rating agency also seeks to align its global default correlations to assumptions used in its corporate synthetic collateralised debt obligation methodology.

If adopted as proposed, Moody's expects that the implementation of the outlined changes to its methodology will have no rating impact on currently outstanding ratings.

We invite market participants to provide feedback on (1) the proposed use of minimum yields in our approach and (2) the levels of minimum yields that we suggest to use, and make other suggestions for consideration by sending comments before 14 November 2013. Comments should be sent to RFC@moodys.com using the RFC Response Form available on the Request for Comment Topic Page on www.moodys.com.

https://www.moodys.com/research/Moodys-Publishes-Request-for-Comment-on-CMBS-Methodology-Update--PR_284281?WT.mc_id=NLTITLE_YYYYMMDD_PR_284281%3C%2fp%3E

D.C. area commercial real estate market was flat in the third quarter

Summary: Federal inactivity, and a policy preventing federal agencies from increasing their office space square footage, has taken its toll on the lackluster commercial real estate market in greater D.C.  With 1,122 buildings with at least 10,000 square feet of available space in September (Delta Associates) and office leasing down 33% from this quarter last year (CBRE), companies are looking to use the leverage to negotiate better rents or upgrading office space.

This highlights the role of federal activity on the local economy in D.C.  Other metropolitan areas, however, are experiencing growth in the commercial market.


Washington, D.C. --(Washington Post)--


Listless. Subdued. Tepid. Those were just a few of the adjectives used to describe the state of the Washington region’s commercial real estate market in the third quarter.

The federal government has played a large role in the lackluster market. Sequestration, the shutdown and the impasse over the federal budget are all exerting a drag. The Office of Management and Budget’s “Freeze the Footprint” policy, which prevents federal agencies from increasing the total square footage of their office space, isn’t helping either.

But until the federal government makes some decisions, the wait-and-see approach is likely to continue.


“We need to get straight at a government level,” said Mike Ellis, mid-Atlantic market director of Jones Lang LaSalle, “and then hopefully the corporate level will start expanding their wings.”

Vacancies are going up across the region. According to Delta Associates, 1,122 buildings had at least 10,000 square feet of available space in contiguous blocks last month. That’s an increase of 51 buildings from September 2012. Half of that vacant space is located in Northern Virginia.

CBRE reported that office leasing velocity throughout the entire region was one-third less than the third-quarter average for the past three years.

Delta Associates predicts that rents will edge down slightly in the fourth quarter and stay soft in the coming year as vacancies remain elevated. Tenants who can afford it are capitalizing on the weak demand by upgrading to newer spaces and negotiating lower rents. Budget-minded companies are looking to renew their leases and consolidate their spaces rather than moving to a new space and incurring moving costs.

Jones Lang LaSalle believes the lack of new construction on the horizon as well as the number of leases expiring will likely rebalance the office market in the next two years.

“We’re seeing a demand issue in the commercial office space area,” Ellis said, “but most of the other [commercial real estate] areas are doing pretty well.”

Here’s a look at three areas in this region and how they fared:

Suburban Maryland

Total vacancy rates surged to their highest level in 14 quarters, according to a report by Jones Lang LaSalle. The 18.5 percent vacancy rate was driven by continued government renewals and weak private sector demand.

“It’s been very, very, very slow in terms of overall activity,” Homa said.

Increasing vacancies and declining rental rates are forcing landlords to re-brand their buildings to make them more attractive. An example of this trend is MRP Realty and Rockpoint Group, which bought the Air Rights Center in Bethesda earlier this year. Last month, the company said it would rename the building Bethesda Crossing, add a fitness center, redo the lobbies and improve energy efficiency.

No new development entered the market during the third quarter, and market conditions are limiting new projects. An inability to pre-lease sufficient space is preventing developers from obtaining financing.

CBRE predicts the vacancy rate in Montgomery County is likely to rise through 2014-15 because of federal lease consolidations.

Northern Virginia

Vacancy soared to its highest level in more than a decade, according to a report by Jones Lang LaSalle. The 18.7 percent vacancy rate was a result of a confluence of factors. After two consecutive quarters with no deliveries, eight buildings opened, totaling more than 1.5 million square feet. However, less than 18 percent of the space was pre-leased. 1812 N. Moore, a building in Rosslyn that’s the tallest in the region, was built without any pre-leasing. Meanwhile, sequestration’s impact continued to be felt as government contractors braced for the possibility of more spending cuts.

High vacancy rates were especially prevalent in Arlington County where the federal base relocation and closure process and the arrival of several new buildings have led the vacancy rate to balloon to 20.3 percent, its highest level in more than 20 years.

“Virginia was hit a lot harder than other markets throughout the region in terms of ill-timed deliveries,” Homa said.

The District

Vacancies were flat in the third quarter at 12 percent. Several federal leases were signed; however, all but one were short-term extensions. Private leasing was concentrated mostly among mid-size tenants. The higher education sector continues to be active as universities search for places to meet their growing need for space.

Although there are plentiful choices at 30,000 square feet or less, large spaces are in short supply. This has prompted large tenants, especially law firms, to enter the market well before their current lease expires, and they are downsizing in the process.

For instance, Keller Heckman, whose lease at 1001 G St. NW was set to expire in 2016, signed a renewal in the third quarter that reduced its footprint at that location by 18,000 square feet.

http://www.washingtonpost.com/business/capitalbusiness/dc-area-commercial-real-estate-market-was-flat-in-the-third-quarter/2013/10/12/323f3dd2-3064-11e3-8906-3daa2bcde110_story.html

Langley emerges as hot prospect for business developers

Summary: Vancouver based Madison Pacific Properties purchased 12 office/industrial properties for $60 million, including three in Langley, where Madison hopes to capitalize off of the otherwise expensive real estate for regional industrial manufacturers who want to shift eastward toward lower leasing costs, but are stifled by the Agricultural Land Reserves surrounding Vancouver.  Specifically, the Langley neighborhoods of Clayton Heights and Willoughby are growing at "unbelievable rates" according to Cushman Wakefield Senior VP of Industrial RE.  (He projects future growth in Pitt Meadows, Abbotsford, and Mission.)

The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus development cost charges and site preparation.Photo by: Handout, Cushman Wakefield

Vancouver --(Vancouver Sun)--

In a blockbuster cross-Canada deal of more than $60 million, Madison Pacific has bought 12 office/industrial properties, including three in Langley. With the Agricultural Land Reserve severely limiting development closer to Vancouver, the Fraser Valley township is fast emerging as a B.C. commercial real estate hotspot, according to industry experts.

“The Langley site in particular is strategic in that it represents 21 contiguous acres of land with over a kilometre of frontage on the Trans-Canada Highway,” says Robert Gritten, principal at Avison Young, which led the 12 deals for Madison Pacific. “As Madison Pacific invests for the long term, the opportunity this site offers for redevelopment is dramatic.”

Like all properties in the deal – to a total of 540,000 square feet of office/warehouse/enclosed storage space on 98 acres of land – the Langley ones have only 13-per-cent site coverage, compared to traditional industrial averages of 40-50 per cent. All are tenanted by Burnaby-based Taiga Building Products.

Referring to “the stifling effect” on Metro Vancouver of the ALR restrictions established by the Barrett NDP government starting in 1973, Gritten says: “As a result of this supply-demand imbalance, yes, we are more expensive than most, if not all, markets in North America. The geographic advantages that make this city such a great place to live actually work to a disadvantage when we attempt to meet the demand of our industrial manufacturers and distributors. They want and need to be here. We are the gateway for Canada to Asia, but it is so difficult to secure suitable premises for most of our user clients.”

No surprise, then, that developers are turning hungry eyes to Langley, with “its good supply of vacant land,” Gritten says. “It’s a natural extension.”

“In looking at demand in the Lower Mainland, we’re seeing a substantial eastward shift,” says Bill Hobbs, senior vice president, Industrial, with Cushman Wakefield. “Based on the tight supply, one looks farther out in valley. Port Kells [in northeast Surrey] has been substantially eroded in terms of available product. There’s significant eastern migration into Langley Township.”

Hobbs sees the Langley neighbourhoods of Clayton Heights and Willoughby “growing at unbelievable rates” as businesses shift east. The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus DCCs (development cost charges) and site preparation.

For Madison Pacific, the nation-wide deal through Avison Young “was an opportunity for us to acquire a geographically diverse portfolio with good leveraged returns in properties that have long-term additional development potential,” says President and CEO Marvin Haasen. “One of our objectives has been to expand beyond the Lower Mainland where the majority of our assets are located. We have achieved this objective with the purchase of this portfolio, as 60 per cent of the properties are located outside the Lower Mainland.”

Still, Haasen says, “there continues to be strong investor interest for Lower Mainland properties. Demand is high while the supply of available properties is limited, so pricing is more aggressive.” He likes the three Langley properties for their “strong fundamentals.”

For Hobbs, the increasing strength of Langley was inevitable from the moment politicians completed their “tightly drawn” ALR lines in 1975. “I’ve been calling this one for 26 years” – his time in the business to date. “Now we’re seeing a doubling of the population. Now all of a sudden we’re going to see continued growth in the next one to two decades.”

According to a Cushman Wakefield document, Langley’s economy is not only fast-growing but increasingly diverse, with a favourable tax base, skilled labour force, state-of-the-art manufacturing industries, a strong retail and service sector, and many internationally operating and export-oriented companies moving in. These factors, plus “the proximity of Langley to Vancouver, Seattle and overseas markets have made the Langley area attractive for investment and development.”

But the migration isn’t stopping at Langley. Watch for a surge into Pitt Meadows and Abbotsford, and even north into Mission, Hobbs predicts.

The other properties acquired in the mammoth Madison Pacific deal are in: Kelowna; Edmonton (two); Calgary; Sudbury, Milton and Monetville, Ontario; Boucherville and St. Augustine, Quebec.

The transaction, which closed Sept. 12, involved eight Avison Young offices across Canada. Avison Young also represented Taiga Building Products in 2006 when the portfolio was sold to Argo Ventures.

http://www.vancouversun.com/business/commercial-real-estate/Langley+prospect+commercial+real+estate/9027569/story.html

Foreign buyers boost commercial real estate investment

Summary:  Canadian, European, and Middle Eastern investors, ushered by the hospitable lending environment, are looking to make real estate investments in the U.S.  The new wave of foreign investors have focused on the East and West Coasts. but are projected to move inland toward Dallas and Houston, which have the attractive job growth and population growth foreign real estate investors find attractive.  The asset class is itself an attractive alternative to volatile securities markets.  Foreign investment is expected to reach $350 billion this year, up 30% from last year, though still below the 2007 record of $570 billion.  It is a sellers market as commercial real estate supply is low.

Dallas --(U.S. Dallas News)--
The commercial real estate market is quickly making up ground lost in the recession.

And so far higher interest rates haven’t rained on the parade of investors looking to take advantage of the market.

A surge in foreign investment in this county’s property markets is also underway.

“The amount of capital that is coming from foreign investors in the U.S. is going to accelerate pretty dramatically,” Mark Gibson, executive managing director of HFF LP, told real estate executives meeting in Dallas on Friday.

Gibson said most of the offshore investors looking to boost their U.S. real estate holdings are coming from Canada, Europe and the Middle East.

Increasingly these buyers are spreading out from the large East and West Coast markets to buy in other cities, including Houston and Dallas.

Commercial property investors are focused on locations with the best long-term growth prospects, Gibson told members of the Commercial Real Estate Women Network at the Omni Dallas Hotel.

“They are looking at markets with job and population growth,” he said. “And they are looking for the infrastructure that is going to support jobs and population growth.”

Dallas-Fort Worth and Houston are near the top of the list of the country’s fastest employment growth markets. All of Texas’ major markets are seeing huge population increases — due in part to migration of people and business from other states.

“There are more corporate headquarters moves happening in the U.S. now than we’ve seen ever,” Gibson said. “A stunning amount of corporate America is relocating out of California to other places.”

Gibson said HFF — one of the country’s largest commercial real estate investment banking and property marketing firms — is forecasting about $350 billion in commercial real estate investment in the U.S. this year.

That’s up about 30 percent from last year, but it’s still well below the record $570 billion in 2007.

Gibson said many of the commercial property problems created by the recession have been solved. “Distressed asset problems — that’s yesterday,” he said.

Most of the big bank lenders “have worked through all their [problem properties] for the most part,” Gibson said. “They are on offense instead of defense — they are deploying capital into real estate.”

Even with this year’s higher interest rates, investors are pumping billions into commercial property, Gibson said.

“They are very tired of volatility in the public securities market,” he said. “They think it’s been hijacked by traders.”

Gibson doesn’t see any of the commercial property pricing and construction excesses that were apparent before the recession.

“There is discipline in the market, which there wasn’t in 2007,” he said. “Commercial real estate supply is still modest.”

In fact, he said, “It’s the lowest percentage supply of commercial real estate as a percentage of GDP in U.S. history.”

http://www.dallasnews.com/business/commercial-real-estate/headlines/20131011-foreign-buyers-boost-commercial-real-estate-investment.ece

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Troubled CMBS Debt to Get Permanent Homes

Summary:  CWCapital Asset Management LLC, a loan servicer, is eager to unload troubled mortgages from their book.  It would seem they fear on missing out on an easy lending environment (rising property values, low interest rates).

--(WSJ Blog)--

Firms overseeing troubled commercial real estate mortgages may suddenly be in a hurry to sell the debt after years of trying to find a better solution for investors.

The $2.57 billion sale of mortgage loans and commercial properties from CWCapital Asset Management LLC in coming months suggests the loan servicing firm may want to take advantage of rising prices and investor demand before they fade, perhaps at the hands of higher interest rates, said Harris Trifon, head of commercial and asset-backed bond research at Deutsche Bank.

The Moody’s/RCA national all-property composite index has increased 42.1% from the trough in December 2009 to July this year, a period largely accompanied by falling interest rates. Lower interest rates can make buildings more valuable because it takes less revenue to support debt.

“Values (of commercial properties) have increased throughout the year, especially for core central business district markets, Mr. Trifon said. Rising interest rates, such as the jump seen in May and June, are “not going to be conducive to higher property values,” meantime, he added.

In aggregate, the sale of mostly office properties is the largest of its kind and only the third that has exceeded $1 billion in the last few years, Mr. Trifon says.

The source of such sales has already been declining as CWCapital and other “special servicers” have made significant headway in resolving loans in properties overburdened with debt. In September, about $53 billion of loans sat with the servicers, down from the peak of nearly $90 billion in late 2010, according to Trepp, a CMBS data provider.

CWCapital decided to sell the portfolio based on its recent transactions, and to capitalize on improvements in debt funding as well as the real estate recovery, David Iannarone, CWCapital’s president, said in a statement.

Some of the buildings in the CWCapital portfolio may have been held in a distressed state for years as the servicer sought ways to reduce losses to bondholders. A sale too soon could mean a fire-sale price, but fees and other expenses to bondholders can rack up as a defaulted loan goes unresolved.

CWCapital won’t publicly identify the properties, but the list probably includes some of the most storied commercial real estate assets financed at the peak of the real estate boom, Mr. Trifon says. Among them could be Two California Plaza, a Los Angeles office tower dogged by low occupancy and part of one of the largest commercial mortgage-backed securities ever sold.

As the default specialist, CWCapital began servicing the building’s $470 million loan in December of 2010, and foreclosed on behalf of investors a year ago, according to servicing notes posted on Trepp’s website. A January appraisal put the building value at $343 million, about 54% of the estimate when the loan was packaged into CMBS in 2007.

In addition to losses dealt to riskier slices of the bond, senior investors may also take a hit, warned Mr. Trifon. That’s because principal is repaid to the senior bondholders at face value, below the current premium price that accounts for the bond’s higher interest rate.

Atlanta office market: more momentum, but vacancy still high

Summary:  Though total vacancies are high (19.8% downtown, 20.9% in the burbs), with the drive, according to Jones Lang LaSalle attributing the improvement to an increase in employment (up 57,100 since last year, unemployment claims down almost 26%).  Improvements are expected through 2014.

Atlanta --(Atlanta Business Chronicle)--
Atlanta’s building owners are seeing better leasing volumes and more tours from corporate tenants, according to a new report from Jones Lang LaSalle Inc.

“Atlanta’s economy continues to recover and since this time last year, the metro has gained 57,100 jobs,” the commercial real estate services company said in its third-quarter report on the office market.

“Layoffs have abated and unemployment claims are down [almost 26 percent] since July.

This year, State Farm announced at least 800 new jobs for the Perimeter and PulteGroup relocated its headquarters from Detroit to Buckhead, one of the city’s most affluent districts.

Total vacancy remains high, at 19.8 percent in urban office markets and 20.9 percent in suburban areas. The Perimeter, Atlanta’s largest office market at than 17 million square feet, saw vacancy fall to 14.6 percent among its class A towers. Older buildings farther away from amenities fared much worse, as vacancy stood at roughly 37 percent.

Trophy buildings in Buckhead are largely filled, according to Jones Lang LaSalle. Leasing activity in Midtown, the Perimeter and along the northwest side of the city in the Cumberland Galleria remain strong.

Employers are focused on intown or Perimeter office markets with access to transit and major transportation corridors like Ga. 400 and Interstate 285.

“We expect momentum through 2014, with Atlanta demand firmly back in growth mode,” the report said.

Total office vacancy:

Intown

Buckhead — 18.5 percent

Downtown — 23.5 percent

Midtown — 17.5 percent

Suburbs

Perimeter — 19.5 percent

North Fulton — 18.4 percent

Northlake — 19.1 percent

Northeast — 27 percent

Northwest — 20 percent

South Atlanta — 19.9 percent

Source: Jones Lang LaSalle

German Mall Valued at $371 Million May Be Sold in Debt Reshuffle

Summary: Upscale shopping mall Koe Galerie in Dusseldorf, Germany was valued at $371 million, a bit more than half of the $678 million loan underlying a CMBS.  Creditors Commerzbank AG unit and Hypothekenbank Frankfurt, as of today, have increased power over servicing the loan due to a special servicing status that was filed with the Irish Stock Exchange.  Other properties backing the same loan may be sold before April next year if the borrowers cannot refinance the loan.  Despite these problems, sales of CMBS in Europe are the highest since 2009.


London --(Businessweek.com)--
Koe Galerie, an upscale shopping center in Dusseldorf, may be sold in the next six months after attracting bids at an undisclosed price.

Further offers are expected, Koe Galerie Duesseldorf GmbH (GmbH is a company with limited liability) said at an Oct. 2 meeting, according to a filing today by a Commerzbank AG unit that manages commercial mortgage-backed securities linked to the property. Borrowers including Koe Galerie Duesseldorf won’t be able to repay a 500.4 million-euro ($678 million) loan tied to the CMBS by the Oct. 15 due date, according to the filing.

The Opera Germany (No. 2) Plc commercial-mortgage bonds, issued in December 2006 and maturing in October 2014, depend on the underlying loan for interest payments. CMBS pool cash flows from loans linked to offices, shopping centers and warehouses and package the payments into notes sold to investors. The Koe Galerie mall was valued at 274.1 million euros in March 2012, according to a filing last month.

The senior loan has been put into a process known as special servicing, according to today’s filing to the Irish Stock Exchange. That gives the Commerzbank unit, Hypothekenbank Frankfurt, increased powers to try to ensure the loan is paid so the bonds would pay out when they mature.

Other properties backing the loan may also be sold before April next year, according to today’s filing. The borrowers are seeking to refinance the loans in the first quarter of 2014.

Sales of CMBS in Europe are the highest since 2009 at more than 7 billion euros, according to data compiled by JPMorgan Chase & Co.

To contact the reporter on this story: Neil Callanan in London at ncallanan@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.nethttp://www.businessweek.com/news/2013-10-10/german-mall-valued-at-371-million-may-be-sold-in-debt-reshuffle

CNL Commercial Real Estate Launches $300 Million Development and Investment Platform

Summary: CNL Commercial Real Estate, based out of Florida, will be investing $300 million over the next year and a half on commercial real estate acquisitions and development projects, targeting retail, industrial and office, with particular focus on the South and Central Florida.  Led by Managing Director Moses Salcido, the firm believes growth in retail and industrial sectors in this geographic area will outpace other commercial real estate sectors.


Florida -- (REIT.com) --
CNL Commercial Real Estate is launching a development and investment arm that plans to invest $300 million in the next 18 months on new acquisitions and development projects. CNL plans for the fund to target the retail, industrial and office sectors across the Southeast and Texas.

Based in Orlando, Fla., CNL Commercial Real Estate is part of CNL, the private global real estate investment management firm. The group’s $300 million in new investment is being made in addition to more than $50 million in real estate projects currently being developed throughout the Southeast and more than $100 million committed to development projects on which the company has yet to break ground.

Moses Salcido, CNL Commercial Real Estate’s new managing director, says he is optimistic that the current business cycle will present continued opportunities in the company’s core markets. “We’re pretty excited about where we are right now in the cycle,” Salcido said in an interview with REIT.com. In fact, CNL Commercial Real Estate is calling the $300 million outlay Fund 1 “because we think there will be a Fund 2, 3 and 4,” he explained. “We firmly believe that this next cycle will have steady growth. It may not have the spikes that we saw in the last cycle, which I think is good, and I think the steady growth means it will have longer legs than what we saw in the past.”

Salcido sees particularly good momentum in South and Central Florida industrial markets, noting that in Orlando “absorption numbers continue to increase quarter to quarter” while vacancies continue to drop “significantly.”  Salcido described the area as “probably more of a build market than a buy market.” Class-A assets have “pretty much been picked over,” according to Salcido, which means that now the focus is on producing and delivering more inventory.

As for other industrial markets, Salcido noted that although demand exists in Dallas and Atlanta, they are not showing the same kind of rent growth as in Florida. “I don’t know how much we’ll do industrial-wise in Dallas, but we’ll certainly keep our eye on it,” he said.

Looking at other sectors, Salcido said the office market is a “distant third” compared to retail and industrial in terms of rebounding from the economic slowdown.  The challenge in investing in the office sector, according to Salcido, is that “capital is going to scrutinize the opportunities significantly more than at the beginning of the prior cycle, meaning there’s going to have to be some really solid fundamentals.”