REO Solutions-Gary Watson, CCIM

I came across this article on Mortgage Orb  and wanted to share.

The combined default rate on banks’ commercial and multifamily mortgage loans fell to 3.75% in the third quarter, down 19 basis points (bps) from the previous quarter’s 3.94% default rate and down 67 bps from the cyclical peak of 4.42% recorded in the third quarter of 2010, according to new data released by New York-based Chandan Economics.

The related dollar volume of multifamily and commercial real estate (CRE) loans in delinquency and default declined by $2.4 billion during the third quarter to $59 billion, which is $15.4 billion below its first quarter 2010 peak of $74.4 billion. The default rate on construction loans fell by 47 bps during the third quarter, but remains high at 14.57%.

Chandan Economics warns that the “management of distress remains a serious challenge, particularly in smaller markets where property values and lending by banks and commercial mortgage-backed securities conduits have been slow to recover. As a result, banks are still not resolving real estate owned (REO) as quickly as loans are being transferred onto their balance sheets.”

Chandan Economics found that banks’ CRE REO increased to $13.5 billion in the third quarter, a new cyclical high. Between nonperforming balances and REO, there is $72.4 billion in distressed multifamily and CRE loans in the domestic banking system as of the third quarter. With the inclusion of construction loans, that total rises to over $110 billion.

Furthermore, Chandan Economics warns that the nation’s smaller financial institutions “face some of the most significant challenges in managing distress. The portfolios of these institutions are more heavily weighted to the secondary and tertiary markets where pricing has been slower to recover. Refinancing in these markets remains difficult, even for properties with stable cashflow, because of an absence of lenders seeking to expand their commercial real estate balance sheets. As a result, CRE REO held by banks with less than $1 billion in net loans and lease is on par with the largest institutions.

Here is another informative article from Randyl Drummer with CoStar.com. The holidays are coming and the retail spending can play a big role in commercial real estate.  Check out the article below:

With the holiday shopping season getting under way in earnest this month, recession-weary American consumers are setting aside their worries about stagnant U.S. employment, a soft housing picture and the debt crisis in Europe to go shopping. That’s providing fuel for the slow-but-steady improvement in retail property fundamentals that has emerged in recent quarters.

Consumers rode out a slow-but-not-stalled economic expansion during the spring, and annualized GDP growth edged up in the third quarter, with lower interest rates beginning to have their intended effect — encouraging purchases of durable goods like autos and stronger spending by consumers on home improvements, food and beverage and electronics, furniture and appliances, according to data presented at CoStar Group’s Third-Quarter 2011 Retail Review and Outlook.

“Retail spending started out with ‘needs’-based items like health care and general merchandise at Target and Wal-Mart, and it’s now widened to include more of the ‘wants’ by consumers,” said Senior Real Estate Strategist Suzanne Mulvee, who co-presented the quarterly review with Real Estate Economist Ryan McCullough.

Even as shopping centers and malls logged their ninth consecutive quarter of positive absorption nationally at 17 million square feet, the pace of increase in the third quarter remained muted compared with absorption during the market peak back in 2007. Cautious retailers are leasing space at a much slower rate than they did at the height of the housing boom, and many have weeded-out underperforming stores.

“We’re seeing very light absorption given this period of the recovery, especially considering the retail sales volume,” said McCullough. But those retailers that survived the downturn are performing well, reporting higher sales per square foot, he added.

Other chains, such as Best Buy, are shrinking their footprints at existing properties, Mulvee noted.

“They’re looking at demographics and trends like online shopping and wondering how they’re going to grow their top line, and they haven’t quite figured it out yet. Until they do, I don’t think we’ll see a major ratcheting up in demand for physical space,” Mulvee said.

CoStar sent questions to retail webinar respondents prior to the event last week to sample their views on the economic forces shaping their local markets, along with which types of product are hot and which are not. Predictably, participants representing core markets were fairly bullish, while many of those doing business in secondary and tertiary locations continued to be discouraged by the retail real estate environment.

“Gyrations in sales volume appears to be driven primarily from discounting and bargains offered by retailers and are not a reflection of any true improvement,” with confidence-lacking consumers still buying what they need and not their desires, said Michael Berube of Berube Company in San Mateo, CA, a view expressed by several other respondents.

Some retailers such as Wal-Mart are rolling out smaller format stores in urban centers to reach out to new customers. As suburban housing expansion has come to a standstill and urban core centers enjoy a rebirth, especially among renters in their 20s and 30s, retailers are finding an tapped market in undersupplied areas.

Restaurant growth is reported as especially strong, with residents eating fewer meals at home, a trend reflected in Census figures that show declining sales of food consumed at home. Sit-down and fast-food restaurants are taking an increasing role on large retail leases, and not just in urban locations, McCullough said.

Wal-Mart and other retailers are adding food to their offerings to take advantage of these shoppers, a trend noted by several e-mail respondents.

“Food has become more prominent at a variety of chains as it brings shoppers in more frequently, driving sales gains. For example, Target at The Pavilions at Talking Stick added fresh foods,” said Linda Whitlow, director of public relations, De Rito Partners, Inc. in Phoenix. Whitlow added that unemployment in the area is still high and consumers have fewer discretionary dollars to spend, and are looking for more value for those dollars spent.

“My experience as of late is that retail leasing is very slow, with two distinct exceptions. Restaurant activity has been and continues to be very strong. Also, leasing activity for general retail is very active for large, over 10,000-square-foot, very well situated spaces that have all the other important attributes such as parking and visibility,” added Norman Lotstein, vice president, Pyramid Real Estate Group, a retail specialist working primarily in southern Fairfield County, CT.

“Target just added grocery and expanded their stores in this region while Wal-Mart seems to be opening a new SuperCenter every 3-6 months,” said David Doerr of Realty USA Commercial Division in Buffalo, NY.

Strip centers and neighborhood centers have been the slowest to see absorption gains, while power centers have performed strongly, with competition and tightening vacancies in some core markets for larger floor plates, CoStar’s McCullough said.

Respondents reported that many of the abandoned Circuit City and Borders stores are being replaced by such tenants as fitness centers, seasonal Halloween and Christmas stores and in one case in the San Francisco area, a 10-year lease of a Circuit City store to the Peninsula Ballet Theatre and Conservatory.

However, “I have yet to see any abandoned big box stores replaced by like-kind credit worthy tenants, which was perceived of Borders, Circuit City, etc.,” said Jeff Rigg, assistant vice president, Wells Fargo Bank – RETECHS, in Columbus, OH. “A number are temporary season tenants … but very few national retailers have filled these spaces, most likely due to market overlap.”

Denver, a metro at the intersection of technology and energy employment, has seen especially strong gains in absorption, leading the country with 1.3% of total retail inventory, with other strong markets including Seattle/Puget Sound, Boston, Washington, D.C., Houston and South Florida, the CoStar economists said.

In contrast, several metros plagued by large amounts of vacant “zombie” retail space such as Phoenix and Atlanta are plodding along with 25-35% vacancies.

While the national vacancy rate has ticked down slightly in recent quarters from its peak in early 2010, the availability rate — space being marketed by landlords in anticipation of a tenant’s departure — is improving at a slower pace, which is not encouraging given that some national chains are still announcing they will close more stores, Mulvee said.

Power centers are the only retail category where vacancies are continuing to edge down, with strip centers, neighborhood center and even community centers, many populated by mom-and-pop businesses, grappling with stubbornly higher vacancy rates.

That said, while the vacancy improvements are modest, they’re also broad-based. About two-thirds of the thousands of submarkets that CoStar tracks saw declining vacancies in the third quarter.

In one interesting exception to the lack of strength in non-core markets, Doerr said the strength of the Canadian dollar and loonie-toting tourists is providing an extraordinary boost to tourism and malls in his area, which includes Niagara Falls.

“In the Buffalo and Western New York retail market, we are uniquely positioned at the Canadian border and have approximately 6 million people within a 90-minute drive which includes the greater Toronto area,” Doerr said. “We closely watch the value of the Canadian dollar against ours.”

“I think retailers tend to only look at demographics and fail to know how strong our retail sector actually is beyond straight demos,” he said.

In fact, in one of the largest investment sales of the third quarter, AWE Talisman sold Fashion Outlets of Niagara Falls to The Macerich Company for $200 million, or $377 per square foot. The 530,000-square-foot center right on the border is 95% leased, taking advantage of the strong cross-border trade.

I found this article on CoStar.  Thanks to Randyl Drummer for such quality material.  Below is the article:

With the construction pipeline all but shut down and reduced rents prompting many tenants to trade up for better or more efficient space, the U.S. office market absorbed a strong 19 million square feet in the third quarter, according to data presented this week at CoStar Group’s Third-Quarter 2011 Office Review & Outlook.

The leasing activity helped lower the national office vacancy rate slightly to about 13.1% — down nearly a half percentage point since hitting its peak a year ago. Should leasing activity remain at the level seen this past quarter, it would set the stage for future rent increases, since little to no new supply is being added. CoStar’s analysis found office rents firming or already trending up in some key metros, and more increases are expected to spread across the country by 2013.

Leasing activity, which bottomed out in early 2009, increased in the third quarter as tenants signed long-term commitments to lock in low rents for higher-quality Class A and B buildings. Gross leasing is now approaching levels not seen since the first Internet company boom a decade ago.

“If you know your corporation or group will have a long-term demand for space, there’s never been a better time to sign a 10-year deal,” stated Andrew Florance, Costar Group founder and CEO, who led the presentation Tuesday of the latest quarterly data. “You can feel pretty comfortable, as long as your broker negotiated a reasonable cap on escalation, that you’re going to love the rents you’re paying seven years from now.”

During the downturn, corporate downsizing emptied out office desks faster than companies could shed excess space. The market is still in the process of absorbing this “shadow” inventory, noted Jay Spivey, CoStar director of analytics.

With overall rents 11% below the long-term average, the market would normally expect elastic demand from tenants who take a larger amount of space per employee because it’s cheaper. However, tenants are being more conservative in assessing their space needs in the current economic environment.

Net absorption, which has been muted at under 10 million square feet for the last few quarters, jumped to 19 million square feet in the most recent three months and is finally beginning to reflect modest job growth generated during a volatile recovery.

The San Francisco Bay area, which has seen some of the most heavily discounted rental rates among office markets, led the country with 4.4 million square feet of net absorption in the third quarter. Similar net absorption strength was found in markets with heavy presence of technology and energy firms. The top five metros for absorption included Seattle/Puget Sound (2.5 million square feet absorbed) Boston (2.1 million square feet), Philadelphia (1.9 million), Houston (1.9 million) and Washington, D.C. (1.7 million). Northern New Jersey led a handful of markets that experienced negative absorption, also including Atlanta, Los Angeles, Westchester/So Connecticut, and Minneapolis.

One key indicator, the percentage of office submarkets with declining vacancy rates, rose again in the third quarter after dipping in the second quarter. CoStar economists track this number carefully because it has proven to be a solid leading indicator of both downturn and recovery. Current numbers suggest that tightening local markets should soon begin to see effective rent growth, noted Walter Page, director of research and office specialist for Property & Portfolio Research (PPR), CoStar’s forecasting and analytics subsidiary.

More than two-thirds of the 20 largest markets are seeing year-over-year occupancy improvements, according to CoStar data. Leading the charge is Orange County, CA, which is now recovering after being staggered by the mortgage and financial market meltdown.

Orange County’s recovery might be an indication that the distressed housing is no longer holding back office demand, and could provide hope for other housing-based markets such as Atlanta or Phoenix, Page said.  ”Once we get housing going it will help lift the broader economy,” Page said.

The biggest caution sign facing the U.S. office market is the risk from federal cutbacks in certain metros, especially Washington, D.C. If Congress opts for the harshest federal cuts and job losses of the order of magnitude that the United Kingdom is experiencing, it would translate to an equivalent over the next five years of 8 million additional U.S. jobs lost.

Markets like Seattle, Dallas-Fort Worth and Houston are seats of the technology or energy industries with less exposure to federal spending, which could be a good bet for investors diversifying their portfolios, Page said.

Ultimately, recovering corporate profits should spark companies to reinvest and hire people to work in shopping centers and office buildings, he said.

“From a relative prospective, the business sector of the economy has strength,” Page said. “We don’t expect another recession, but rather a slow, volatile recovery that will take time.”

Great article by Hessam Nadji of Marcus and Millichap Real Estate Investment Services:

• Following a flurry of weak economic readings over the last two months, several recent figures reiterate that another recession remains unlikely. A strong gain by a leading manufacturing index offered an encouraging trend this week, while consumer sentiment gained footing. Further, a promising drop in first-time jobless claims helped bolster confidence that unemployment will at least remain flat. Nonetheless, caution and uncertainty remains elevated as stock market volatility, yet flattened job growth and GDP trends have largely disappointed. Anticipating continued stagnation, the Fed launched “Operation Twist” to keep long-term Treasuries at record lows and to spur lending, a plan that could offer commercial real estate investors unique opportunities.
• U.S. GDP grew 1.3 percent in the second quarter led by contributions from nonresidential fixed investment, exports and federal government spending, though budget-strapped state and local governments remained a drag on growth. New claims for unemployment, meanwhile, dropped to 391,000, bringing the four-week moving average to 417,000. However, weekly jobless claims need to remain below 400,000 for an extended period to lower unemployment from 9.1 percent.
• As Fed measures such as “Operation Twist” sustain downward pressure on the 10-year Treasury through 2013, investors with longer-term hold horizons will continue to deploy capital into commercial real estate. Despite recent price surges and cap rate recompression in top assets, overall commercial real estate cap rates averaged more than 600 basis points above the record-low 10-year Treasury at the close of the third quarter. This spread provides long-term investors with a buffer against limited NOI growth in the first few of years of pro forma, which will encourage modest risk tolerance. Though investors will continue to concentrate on best-in-class deals, many will pursue yields in B class properties in primary markets or top-tier properties in well-performing, secondary markets.

Impact on Commercial Real Estate

• Increased caution among prospective homebuyers, together with steep financing hurdles, will continue to slow home sales, a trend that will strengthen apartment operations. In addition, the apartment sector is benefiting from tight supply conditions; stock additions over the first two quarters of 2011 marked one of the lowest 6-month totals on record. As a result, U.S. apartment vacancy retreated below the 10-year annual average of 5.9 percent in the second quarter. Although more projects are starting to move forward, the supply/demand balance will remain favorable, with vacancy to close 2011 at 5.6 percent.
• Meager GDP growth and a slowdown in hiring will present challenges for the U.S. office market this year. Occupied stock rose for the third consecutive quarter during the April-June period, though net absorption of 1.2 million square feet was insufficient to reduce the U.S. vacancy rate, which held firm at 17.5 percent. Despite the national slowdown in absorption, demand growth in major metros such as Seattle, Washington, D.C., and Chicago continued to make headway. Assuming some level of sustainable job creation takes shape in the second half and business angst subsides, corporate expansions in major gateway cities will contribute to rising absorption, translating into vacancies in the low-17-percent range by year end.

Things are looking up for Commercial Real Estate these days.  Thanks toCoStar.com for keeping us updated on the trends.  This article is by Randyl Drummer:

Investors surveyed by PricewaterhouseCoopers (PwC) continue to see commercial real estate as a relative bright spot in the gloomy investment landscape. At the same time, stubbornly high unemployment and economic volatility has clearly dampened their enthusiasm for the asset class since the start of 2011, even as rents, values, absorption and occupancy levels have slowly improved.

Meanwhile, a different study of commercial property net operating income (NOI) by Fitch Ratings showed that the sector still has quite a ways to go before it completely shakes off the effects of the Great Recession. Overall NOI was still down by 1% from year-end 2009 to year-end 2010, but has shown an improvement from the prior year-of-year decline of 5%, and “one year of greater NOI stability does not mean a recovery,” Fitch Senior Director Adam Fox noted.

Responses from the more than 200 institutional investors surveyed by PwC during the third quarter reflected the volatility in the financial markets, the global sovereign debt crisis, the U.S. rating downgrade, and fears by some economists of a possible double-dip recession.  ”There is little doubt that we have entered a period of slower growth and greater uncertainty,” leading to concerns that continued business and consumer insecurity will disrupt the slow-but-steady real estate recovery, said a respondent. “Today, many investors are less confident in the industry’s future than they were six months ago,” another respondent said.

Even as rent growth remains frustratingly feeble for most landlords, owners find overly aggressive rent growth assumptions by both buyers and lenders even more vexing.

“We are very worried about the prospects of rent growth, especially in the office sector,” said an investor, while another fretted that “buyers are underwriting recovery whether justified or not.” Another respondent chimed in that rent expectations “have gone from realistic to futuristic.”

However, respondents overwhelmingly agreed that debt remains available for qualified buyers, especially for well-located core assets with reliable rent rolls.  ”I feel good about the capital markets in that there is still debt available to do deals,” said an investor. Overall, loan-to-value (LTV) ratios for the survey’s 35 markets showed an average of 59.4%.

Others, however, believe that financing is more problematic for some office deals, especially where distressed remains an issue. The opposite is true for apartment investors, which has some of the highest LTVs of the quarter.

Average overall capitalization rates dropped in 26 of 35 markets during the third quarter, and respondents said they expect overall cap rates to either hold steady or decline in most markets over the next six months.

Competition among buyers is strong, with sellers are beginning to get the upper hand pricing in certain sub-sectors. About 31.4% of respondents indicated that they believe market conditions favor buyers, down from 58.6% a year ago in 2010 and 80% in 2009. More than one-quarter of survey participants view the market as favoring sellers, up from 12.3% in 2010 and 7% in 2009.

In its two-year study, Fitch Ratings analyzed the performance of 21,334 commercial properties from 2008 to 2010, which secure its current $270.4 billion fixed-rate CMBS portfolio. Just over one-third of the portfolio is secured by office, another 33% by retail, 14% multifamily, 7% hotel, 6% industrial/warehouse, and 6% other property types.

Hotels have seen the largest performance declines over the last two years, with NOI dropping 25% between 2008 and 2010, Fitch said. While overall hotel performance may have begun to show signs of improvement with one year of positive growth, many hotel properties, especially limited-service hotels located in secondary and tertiary markets, continued to report a lower NOI in 2010 than in 2008.

“The daily reset of overnight rates make hotel properties the most vulnerable to performance declines,” said Fox.

On the other end of the extreme, apartment properties performed better, declining only 1% over the same two-year period, Fitch said. Property managers had been maintaining lower rents and offering concessions in an attempt to bolster occupancy, but some of these concessions are slowly going away.

Office and retail properties, which benefit from longer-term leases, experienced modest NOI declines of 4% and 3%, respectively, from year-end 2008 to 2010.

Another great article by Mark Heschmeyer via CoStar.com.  These folks produce such great material.  Thanks, All, for keeping us informed!  Here’s the article:

Marty Busekrus, a senior associate investment properties for CB Richard Ellis | Capital Markets in Boca Raton, FL, got a call this past Monday morning from a potential office building buyer as mania struck the stock markets. The buyer, who has been trying to buy an office building from one of Busekrus’ clients, said his seller better sell quick as the stock markets were tanking.

Busekrus contacted the seller who responded with a different take, saying instead that everyone is shifting to hard assets so he’s thinking about raising the price.

What’s a broker to do? From the range of responses we received for this article, Busekrus’ experience is not an isolated incident.

Jared Williams, asset manager for Acquired Asset Group of the BB&T Asset Resolution Division in Palm Beach Gardens, FL, said he has halted the search for buying commercial property for now, saying he plans to remain liquid and start to evaluate more international investments.

Luke Wood, partner with Haverwood Management in Austin, TX, was glad to see the markets recover on Tuesday and said his strategy on commercial real estate investments has not changed. He expects to continue acquiring properties for the remainder of 2011.

Those dichotomies pretty much sum up the disarray in commercial real estate markets this week following Standard and Poor’s expected but nevertheless staggering move to downgrade the U.S. debt ratings. For a related discussion of the impact on commercial real estate of S&P’s downgrade, see related article by CoStar Senior Real Estate Strategist Chris Macke.

“There is no doubt that we have entered into a period of uncertainty, as the S&P downgrade of U.S. debt ignites a new round of confidence crisis globally,” Tim Wang, Ph.D., senior vice president of Clarion Partners in New York told CoStar Group. “This news couldn’t have come at a worse time after the recent GDP downward revisions, indicating a much deeper recession in 2008-2009 and softer recovery from 2010 through Q2 2011 than originally anticipated.”

“Although the long-term impacts of U.S. debt downgrade are unclear at this moment, investment risks have elevated substantially over the past few weeks,” Wang said. “A double-dip recession would widen risk spreads, shrink capital availability, discourage consumer spending, and reduce demand for commercial space.”

“While we always use sensitivity analysis in our underwriting process, today we are paying particular attention to the downside scenarios in our investment selections,” Wang added.

Based on the Federal Reserve Board’s words this week, it sounds like real estate as a business could be in for a bumpy ride over the near term.

The Federal Reserve’s Federal Open Market Committee met this week and issued a statement saying “economic growth so far this year has been considerably slower than the committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.”

The FOMC now expects a somewhat slower pace of recovery over coming quarters than it did just a month ago. Moreover, downside risks to the economic outlook have increased, it said.

The FOMC said it decided to keep the target range for the federal funds rate at 0% to 0.25% at least through mid-2013.

“The U.S. faces multiple challenges including tepid economic growth, gridlock in Washington, and an unsustainable debt trajectory. The inability to enact a comprehensive solution to the economic and debt concerns led Standard & Poor’s to lower the long-term rating of the U.S. debt from AAA to AA+,” said Asieh Mansour, PhD, CBRE’s head of Americas Research. “While we anticipate continued stock market volatility, commercial real estate will not fare as poorly because it remains a preferred asset class, within a well-diversified multi-asset institutional portfolio.”

Andrew Little, an investment banker with John B. Levy & Co. in Richmond, VA, said that although the downgrade has made market participants more anxious, and the immediate impact is widening spreads, the cost of capital for better quality commercial real estate has not gone up.

“The bond market certainly doesn’t believe there will be any U.S. Treasury default, but prospects of continued political gridlock and further downgrades has investors of all kinds trying to figure out where to put money,” Little said. “Commercial real estate doesn’t look too shabby when compared to many of the alternatives.”

However, Little added, “The unfortunate reality, double dip recession or not, is the U.S. economy is weak. That means we will continue to see weakness in commercial real estate related to corporate belt-tightening, consumer pull back and tenants failing.”

CoStar contacted commercial real estate professionals across the country this week to assess how the week’s dramatic financial developments are impacting the CRE markets.

Consumer Confidence Can’t Afford Another Hit

Garrick Brown, Northern California Research Director, Cassidy Turley BT Commercial, San Francisco, CA

The destructive nature of the debt ceiling debate was already playing out in the stock market before Standard & Poor’s downgrade. This just adds another piece of bad news into the mix and it is hard to tell how much of an impact this will eventually have on interest rates.

My big fear now is about confidence — investor confidence and consumer confidence. A month ago, I would have discounted the possibility of a double-dip recession. Today, I would have to assume the chances are somewhere between one in two and one in three.

The real question in the days ahead is when the stock market will stabilize. If not soon, it is bound to take its toll on consumer confidence (and eventually) consumer spending.

There is no doubt that consumer confidence is already taking a hit. The question is whether sentiment will sour to the point where consumers finally pull back on spending… and make no mistake about it, consumer spending has been one of the few bright spots of the economy. All I know is that if consumer spending drops off a cliff that we will go into that double-dip.

We All Know the Problem

Michael Louis DiFede, Director of Acquisitions, Bergman Real Estate Group, Iselin, NJ

The S&P downgrade is just the latest bit of bad news for the economy. This only adds yet another element to the uncertainty that has stifled job growth and investment and stifled space absorption in New Jersey. It is really just recognition of the problem that we all know we have – we need to reform entitlements (Medicare, Medicaid and Social Security) to insure long term viability and we need to get the government out of the way of business to create jobs.

Further Slowing of the Economy

Randy A. Rauch, President, Rauch Realty Group, Pompano Beach, FL

A lot of my clients as well as me are not sure yet what impact this will have since this situation is new and new financial crisis the U.S. will have to deal with. This compounded with the financial difficulties we are already dealing with is very concerning. I believe the business climate will continue to be cautious in investing in the U.S. market and will slow the economy further. I don’t believe that we ever were out of a recession, going on now for four to five years as it began in the Bush administration. A serious financial depression is unfortunately more likely.

Washington Didn’t Do CRE Any Favors

Mac McCall, Regional Managing Director, Franklin Street Real Estate Services, Atlanta, GA

Many clients felt we were at or near the bottom as some good news from retailers and company financial reports were indicating a slight recovery. Washington didn’t do Americans any favors with their latest political sparring and this has led to shaky consumer confidence and kind of ended any momentum we had built up.

I don’t think any specific changes have been made by the private investment community. There is still a tremendous amount of capital ready to be deployed for sensible investment opportunities. Many investors predict more product from lenders and special servicers to come to market as early as the fourth quarter as there is visible bottom in NOIs and more loans being foreclosed, forcing REO owners to liquidate some assets.

I envision good commercial real estate being a great substitute for other investment options. With yields for bonds and equities in the low single digits, the real estate market should see continued high demand as investors thirst for a reasonable yield. Class A product and net leased investments to strong corporations should see continued demand.

Acting in Advance of Rate Hikes

Ray Turchi, Senior Investment Associate, Marcus & Millichap, Orlando, FL

Clients who were thinking of holding property now and selling to a better market down the road are giving more thought to selling now due to a prolonged market recovery, and also, the potential rise in the capital gains tax rate when the Bush tax cuts expire. In addition, clients are getting commitments on loans ASAP in case of a significant rise in long term interest rates.

The “Crowding Out” Effect

Brent Tharp, Senior Vice President, GE Healthcare Financial Services, San Diego

I’m more concerned about employment and end demand for space than I am about the U.S. debt rating, as I have been for the last couple of years.

The only worry I have is that the U.S. cost of debt issuance will increase and thus the total debt, including interest payments, will increase further and faster. As a result, the “crowding out” effect on private spending will be even greater than it already is.

Last week, U.S. credit default swaps were priced where BBB is, which indicates that future auctions may have to give a yield that is more in line with that type of rating, but from week to week, it’s not possible to know for sure.

Could Bring More Product to Market

Brian Merzlock, Valuation Manager, Williams & Williams Real Estate Auction, Tulsa, OK

Clients seem to have anticipated this well ahead of the actual events. Some of them have been waiting for this knowing that it would eventually come to fruition. Most clients are holding their cash and seeking only lucrative markets with extremely strong NOI.

Concerns over the actual cost of recent commercial real estate are major topic – some of the commercial buildings are the most appealing structures in our cities… This cost is transferred to the consumer and we know consumer spending has been reduced significantly. Consumers will eventually determine whether emotion is enough to separate with their cash but eventually they end up spending less and less in the retail markets regardless of the setting. Only in the USA do you find every marketplace air conditioned and decorated with marble tiles.

We hope for the best but anticipate that the continual credit crunch will bring actual ‘market value’ to a very realistic band of price action instead of the ‘hype’ that commercial real estate has brought in previous years. You will see more partnerships formed to limit risk and increase transparency.

Foaming at the Mouth

Howard Applebaum, President, Corporate America Realty & Advisors, Rutherford, NJ

The biggest fear that I would have is for lenders to maintain or tighten credit restrictions for businesses and real estate operators that don’t have access to “major capital markets” and for “disinflation, and stagnation to occur in our economy. Today’s Federal Reserve / Bernacke announcement not to raise interest rate until 2013, in my opinion was similar to the “foam” that emergency crews spread on a runway to try and prevent a plane that is making an “emergency landing” from catching fire… and we know the possible results that can happen.

Thank you to Co-Star.com and Tim Trainor for this article:

Three more of the country’s biggest owners of office buildings — Boston Properties, Cornerstone Properties and Shorenstein Co. — are getting into the telecommunications business.

But don’t look for them to join fellow landlords Equity Office, CarrAmerica, Mack-Cali and the other big names in the Broadband Office venture announced last month. Instead, they have decided to take their money (and their combined 65 million square feet of office space) to invest in Cypress Communications, an existing telecom service provider based in Atlanta.

The deal will give the three landlords ownership stakes in Cypress through a combination of direct equity investment and stock warrants. They also signed revenue sharing agreements under which the owners stand to profit from any communications services Cypress provides to their respective tenants.

This isn’t the first time the three real estate companies have banded together to gain leverage in a deal with a telecom service provider. The agreement with Cypress Communications is patterned after a similar one struck between the three property owners and Allied Riser Communications Corp., shortly before Allied Riser went public on October 29th, providing a nice windfall for the property owners.

It also marks the latest effort by developers to participate directly in the provision of services to tenants in their properties and expand revenue opportunities beyond simply collecting a rent check each month. Building owners are no longer content to negotiate fixed “access agreements” with Internet and telecommunication service providers. They want a piece of the action.

The three owners are among the largest in the country. Boston Properties, a real estate investment trust (REIT) with more than 33 million square feet of commercial properties including office and industrial properties and hotels, primarily invests in the Boston; Washington, DC; and New York regions, although the company entered the San Francisco market in a big way last year by acquiring the 3.5 million sq. ft. Embarcadero Center for $1.2 billion. It was formed by publishing and real estate magnate Mortimer Zuckerman and partner Edward Linde.

New York-based Cornerstone Properties is also a publicly traded realty trust. It owns more than 100 office properties in 11 major metropolitan areas and provides construction and development, management, and leasing services on a third-party basis for other owners and investors.

San Francisco-based Shorenstein Company is one of the nation’s largest and oldest privately owned real estate firms. It owns or manages almost 25 million sq. ft. of office space and is the largest office space landlord in Oakland and San Francisco.

Cornerstone Vice President Steve Elliott said the agreement with Cypress Communications will enable them to deliver high quality service to their tenants. “Our primary goal is to provide our tenants with the best selection of telecom service providers and let them choose,” said Elliott. “If we can also benefit our shareholders through such an arrangement, so much the better.”

Elliott said Cypress Communication and Allied Riser will be the preferred, but not exclusive, telecom service providers for the three property owners. Tenants will be free to select whomever they think offers the best service and price. However, being the preferred providers, Cypress and Allied Riser will be able to install their network connections and have their infrastructure in place and ready to connect tenants quickly. They also stand to benefit from co-marketing efforts by the property owners, Elliott said.

Broadband Office was an Option

The agreement with Cypress comes one month after eight other major office building owners announced plans to form their own telecommunications company, Broadband Office Inc. Real estate participants include Equity Office Properties, CarrAmerica Realty, Crescent Real Estate Equities, Duke-Weeks Realty, Highwoods Properties, Hines, Mack-Cali Realty and Spieker Properties. They cast their lot with Kleiner Perkins Caufield and Byers, a venture capital firm that created Broadband Office to deliver high-bandwidth voice and data communication services to small- and midsize corporate tenants.

Noticeably absent from the Broadband lineup were Boston Properties, Cornerstone Properties and Shorenstein. Cornerstone’s Elliott said they chose to invest in experienced telecom providers rather than a start-up operation.

“We looked very hard at Broadband Office,” Elliottt said. “But after careful consideration we decided to go with Allied Riser and Cypress because they had an established track record. We’ve seen their service in action. Cypress has wired about 50 buildings and has their network in place. I’m sure Broadband Office will be very successful. We were just more comfortable going in this direction.”

Who is Cypress Communications?

Like Allied Riser, Cypress Communications is in the business of enhancing the old copper wire network throughout the nation’s stock of office buildings with fiber optic and coaxial cable. Over its network, Cypress delivers high speed Internet access as well as local and long distance phone service, voice mail, digital satellite business television, and other services to office tenants (small and midsize businesses).

Cypress delivers its products via high-bandwidth fiber optic, copper and coaxial cable infrastructure installed by the company in multi-tenant, Class A and Class B office buildings. It then links its building “hub” to the local telephone network and Internet backbone serving the area. It offers services only in buildings that it has under license agreements. Cypress provides local customer service and technical support in each of the buildings it serves. Customers receive a single bill for all services.

The Cypress-owned and -operated networks are connected to regional hubs, usually through lines leased from other carriers, and the hubs are connected to ISPs and to Cypress’ national operating center. It currently has operations in Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New Orleans,Orange County and San Diego and Washington DC.

A Real Estate Pedigree

Cypress Communications has many ties to real estate. Both of the company’s founders have real estate backgrounds. CEO Stanley Allen was manager of real estate consulting for Coopers & Lybrand and an analyst for the Wellington Real Estate subsidiary of Boston-based Wellington Management before embarking on an extensive career in wireless cable and communications investments. And Executive Vice President Ward C. Bourdeaux, Jr., spent more than nine years in the commercial real estate industry with Cushman & Wakefield and Carter & Associates before heading development efforts for RealCom Office Communications.

In addition to Boston Properties, Cornerstone Properties and Shorenstein, Cypress has attracted several other major players in commercial real estate as investors. Last month, the company raised $53.5 million in a third round of private-equity financing to be used for national expansion.

Among those real estate firms throwing money in the hat were Boston-based Beacon Ventures, a wholly owned subsidiary of Beacon Capital Partners which owns a portfolio of 3.3 million square feet of commercial real estate and has an additional 550,000 square feet under development; Nassau Capital, which invests in private equity and real estate on behalf of Princeton University’s $6.3 billion endowment; AEW Partners III, an investment partnership managed by AEW Capital Management, the big investment advisor to institutional and private investors which currently manages approximately $6 billion of capital invested in more than $9 billion of real estate nationwide; and Transwestern Commercial Services, the Houston-based brokerage firm which provides corporate advisory, investment services, development, research, management and leasing services for office, industrial and retail projects.

Other investors in Cypress include Centennial Funds, Alta Communications, Gramercy Communications Partners and Latona Cycom Investment, LLC.

SOURCE: Cypress Communications, Cornerstone Properties

This article has a lot to say about the American Dream and the spirit of those who embrace it.  Thank you to CoStar.com  and Mark Heschmeyer  for such relevant and informative content.  Here’s the article:

Wanda Rapp is living the American Dream. She has a patio for grilling, a pool outside her front door and a huge recreation room for parties. She lives in a condominium and doesn’t have to worry about mowing the lawn or cleaning the pool.

Wanda Rapp doesn’t own her home, and doesn’t want to. Her job makes her painfully aware of why she doesn’t. Rapp manages repossessed and foreclosed assets for a bank in Los Angeles. Assets. Not homes where families once lived. Not offices where people made their livelihoods. Just assets to be counted and accounted.

“My American Dream is not, and really never has been, home ownership. I’m pretty sure that if I had bought a home, I would have already lost it to foreclosure, even though I have been in the real estate business for 20 years,” Rapp said. “It’s my personality; I would have mortgaged it to the hilt!”

Julia P. Farris, a legal assistant for a law firm in Nashville, TN, is trying to get out from under the American Dream. ”I say all the time that owning real estate for us is not a blessing,” Farris said. “My husband and I have struggled through three job losses, going back to school, age discrimination in trying to find a job, and keeping our mortgage paid. Although we own our home, (or are trying to own it,) we have been unable to properly keep it up. It is slowly deteriorating, much to my distress. There’s nothing to be done for it – there’s just no money left at the end of the month to even save toward it.” Farris said.

Rapp and Farris are at one end of the spectrum of Americans most familiar with the impact from the huge run up in commercial and residential property values four to six years ago, and the huge debt incurred to acquire or refinance those properties that ultimately brought on the Great Recession.

A Castle, Not a Bank Account

Historically, shelter has been one of the most basic of human needs, providing protection from the elements and a secure place for one’s belongings. In the years leading up to 2007 for more and more people, shelter became a savings account, a retirement plan or worse yet, a spending account.

And that concept of “having a place to live that is ‘mine, and mine only,’ is usually the first step taken in the path to wealth creation,” says Doug Rittermann, a senior associate with ECP Commercial in San Diego, CA. “It provides an important building block psychologically, practically, and economically, to achieve more.”

“During the boom years of the past decade, the American Dream was distorted by easy credit to where it meant having a great big house with two expensive SUVs, and a vacation home, as everyone ‘one-upped.’ People lost sight of what truly is important,” Ritterman said. “Now folks are starting to realize that having a fancy home and fancy toys doesn’t mean much when you are teetering on the edge of financial ruin. And buying these things with dangerous amounts of debt doesn’t create much of a sense of achievement either.”

Stephen P. Bye, executive vice president and senior managing director at NorthMarq Capital in Centennial, CO, worked in the risk management area for a large mortgage insurance company back in the mid-1970s. ”Back then, we triple-checked everything regarding employment verification, salary, source of down-payments, appraisal values, etc.,” Bye recalled. “Of course, that was prior to securitization, when portfolio lenders were the originators, while Fannie Mae or Freddie Mac were the only investors for mortgages. It’s hard to fathom how things changed over the next 30 years. In the end, homeowners actually became speculators.”

Securitization is often singled out as a key component of what went awry leading up to 2007. Mortgages were bundled into billion-dollar pools, turned into bonds and sold on Wall Street. Risk was spread across many different investors and around the world, in the belief that packaging and spreading the risk would contain the downside to an acceptable level of default.

However, the real fault lies not so much in securitization, which provided an efficient and valuable secondary market for mortgage money, but rather with a more basic root cause — greed. Ultimately, the temptation to make more money resulted in the almost complete absence of requirements and the acceptance of greater and greater risk, and in some cases outright fraud, to meet demand.

Debt is debt and risk is risk and that combination was the ultimate reckoning that awoke the country from American Dream to own a home. By some reliable estimates, one in four homeowners is underwater on their mortgages. They owe more than the real estate is worth.

And the Great Recession has deepened the divide between either ends of the spectrum.

“America’s middle class hasn’t been living beyond its means. Its means haven’t grown even though the economy has. The dollars went to the top instead,” tweeted former U.S. Secretary of Labor Robert Reich, now a University of California at Berkeley professor and author of the upcoming book, Aftershock.

“When $7 trillion is sucked out of the system and ends up who knows where, it is going to dash a lot of dreams, whether they involve real estate, stocks or retirement pensions,” said William Crowe, president of Regent Asset Management Inc. in Honolulu, HI.

Rethinking the American Dream

The suffering and losses stemming from the Great Recession has prompted a rethinking of whether homeownership was ever Americans’ shared dream, or rather was a vision sold to Americans since the Great Depression of the late 1930s.

Founded in 1938 as The National Mortgage Association of Washington, today’s Fannie Mae (the Federal National Mortgage Association) was chartered to provide a financial boost to the nation’s depressed housing market. It evolved over the years to begin buying and selling loans guaranteed by the Veterans Administration, then by other government-sponsored mortgage enterprises (GSE), and finally to conventional mortgages. It purchased mortgages from lenders, returning money to the lenders to be loaned to another borrower. The enterprise proved very successfuly, ultimately stoking one of the greatest housing building booms in history.

Fannie Mae makes no bones about its mission: “At Fannie Mae, we are in the American Dream business. Our mission is to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable rental housing for all Americans. Because having a safe place to call home strengthens families, communities, and our nation as a whole,” its website proclaims.

But Fannie Mae may well also fall victim to the Great Recession. Congressional efforts have been launched this year to overhaul Fannie Mae and other GSE firms. Even the National Association of Realtors concedes that “Fannie Mae and Freddie Mac are going away.” However, the NAR advocates that key elements of their role must remain in order for the U.S. to have an efficient and affordable reformed mortgage finance system.

The National Multi Housing Council and the National Apartment Association recently produced a new pro-apartment ad with the theme “Sometimes Living the Dream Means Rethinking It.”

The ad uses visuals contrasting suburban sprawl with a pedestrian-friendly apartment community to show how the American Dream is changing as a result of changing demographics and a new consumer thinking following the single-family bust.

No Dream, A New Dream or the Same Old Dream?

“There is no American ‘dream’ at this time,” says Art Bruzzone, president of BSI Capital Group in San Francisco. “Pensions are struggling to compensate for losses in the stock market and real estate. Pensions are Americans’ primary retirement ‘dream.’ And without equity lines, and with the underwater state of homes in America, Americans cannot feel as optimistic as prior to 2007.”

“If the American Dream is something else, I’m not quite sure what it is. If anything, the new American Dream is to actually have equity in their home vs. owning an “asset” that has more debt that the underlying value,” says Marty Busekrus, senior sales associate with CB Richard Ellis | Capital Markets in Boca Raton, FL

It’s not at all clear whether the American Dream of yore remains relevant today, or whether it has been supplanted. Some said the American Dream is a quality of life: peace, stability and family. Some said it is freedom: freedom to move or choose your own destiny. For others it was more self determination: to make ourselves and be in charge of our own destiny. For others, it was a storehouse of wealth.

“I believe that the ‘American Dream’ is currently much more focused on personal financial security rather than owning some chunk of real estate. With the job market being stagnant and appearing to be entrenched in that situation for years to come, the average American needs to have flexibility on where they will live,” says Brian Whisnand, president of Henry S. Miller Realty Management in Dallas.

“Our economy is afraid,” Whisnand says. “Baby boomers are worried to death about having enough money to retire and can no longer count on savings or appreciation in their real estate holdings to close the gap between what we have lost in retirement funds. Owning a home is no longer the ‘American Dream.’ Having a safe and secure job with the ability to save money for future retirement is and should be the new American Dream.”

Fred B. Cordova, III, senior vice president / Western Regional Director of Colliers International in Los Angeles, says: “I have always felt that the ‘American Dream’ is having freedom of choice to pursue happiness. It is ‘choice’ with all its craziness, randomness, complexity and simplicity that so often determines who we are and what we become, in effect, our destiny.”

“Real estate ownership, which for most people is owning a home, was and for many still is, an aspiration that ostensibly engenders that sense of freedom of choice over ones domain,” Cordova says. “I believe that with the development of the Internet into a social construct that allows for the same freedom of choice to pursue one’s happiness and the manic morphing of home ownership into an oppressive financial jail that restricts choice in so many ways, many people who are comfortable in “cyberspace” will lose their desire for real estate as a euphemism for the ‘American Dream.’”

Times have changed, says J. Francis Mahoney, director of Cushman & Wakefield of Pa., Inc. in Philadelphia.

“For us baby boomers, home ownership was the all-important first step toward being an adult, right up there with marriage and having kids. I am sure my generation still feels that way,” Mahoney says. “However my children’s generation may have different feelings. Young adults today value freedom and mobility much more than we did. They switch jobs and locations frequently, travel the world with little fanfare and do business globally. They get married later and for shorter periods. Roots are not as important as they used to be. Owning real estate is not necessarily a bad investment. It just might not suit the lifestyle of today’s younger population.”

Too Ingrained To Go Away

In all of our conversations with real estate professionals, there was no getting over the fact that real estate and the American Dream are irrevocably attached. No matter whether it evolves or is supplanted, real estate seems likely be forever attached to success and accomplishment for Americans.

“Optimism springs eternal in America and I believe the great majority of Americans still believe owning a home is highly desirable,” says Paul Spurgeon, president of Nations Media Partners in Kansas City, MO. “And they will get a return on their investment, if only from this point forward after the market has just been ‘reset.’ If I am correct, then the supply-demand inequality will be rectified and home appreciation from this point forward will be a welcome result of this self-fulfilling prophecy.”

Says Alan Burns, a vice president at Old National Bank in Indianapolis, IN: “I hope the ‘Dream’ was never about the real estate but the quality of life, security and comfort symbolized by a home. If the real estate was the ‘Dream,’ it explains how we got into this problem of oversupply and overpaid fueled by the aggressive financing allowing people to not buy real estate — but in fact — buy financing (sometimes beyond their means).”

“The ‘Dream’ should be the quality of life, security and comfort in a home with appreciation achieved by both some market appreciation (after the over and under supply of markets along with upkeep, etc.) plus from equity build-up through amortization or even payoff of debt,” Burns says.

“Is real estate a bad investment,” asks Paul Licausi, president of LS Commercial Real Estate in Overland Park, KS. “No. It will continue to be the largest and best investment for the average consumer (that is those who can afford home ownership on a go forward basis) if we can keep the government out of the game. An investment in a home will allow for equity growth over a long period of time, which is how the system is suppose to work.”

“I believe the American Dream is having a great place to call home, however, owning it may not always be part of that dream,” says Tom Skobo, a commercial real estate broker for Brounell & Kramer Realtors in Union, NJ. “I think people are beginning to realize that the large amount of cash required to own and maintain a primary residence can be better invested elsewhere and the return on that investment could help pay for a very nice rental property to call home without the downside risk homeownership carries in many markets.”

Tweets Jon Morgan, director of acquisitions for Morgan Properties, a multifamily investment firm in King of Prussia, PA: “The American Dream was redefined. No more white picket fences in suburbia. Now it’s rags to renting to riches.”

Even if Amercian society moves away from buying a home to renting, they will, like Wanda Rapp, continue living “in” the American Dream; they just may not be able to afford it, may not want to own it or may want to move from place to place.

CoStar.com has been such a great source for Commercial Real Estate Info.  I found this today and am glad to hear some promising news.  The following article is by Mark Heschmeyer:

Commercial real estate (CRE) fundamentals continued to strengthen in the second quarter of 2011, albeit at a much more moderate pace than the end of last year. The temperate recovery is consistent with global economic trends, which softened in the first half of the year in the face of the Japanese earthquake and the oil-price shock.

While the economy continues to face challenges – including a struggling housing market, anemic job growth, and federal and state fiscal pressures – economic growth is expected to pick up in the second half of the year as energy prices ease and global supply chains are restored. As the economy gathers momentum, the CRE recovery should also accelerate, according to Kevin White, a real estate strategist with CoStar.

Office Market Rebounds

Based on initial quarterly findings, office fundamentals continued to improve during the second quarter. Although demand was not as robust as previous quarters, the fact that supply additions hit a 10-year low helped to support the eight-basis-point decline in vacancy.

As was the case during the first quarter, preliminary second quarter absorption came in short of expectations, as continued macroeconomic uncertainty caused enough uneasiness among business owners for them to delay leasing decisions.

“The office market posted its fifth consecutive quarter of positive net absorption while speculative space under construction reached more than 9.8 million square feet,” noted Chris Macke, senior real estate strategist for CoStar Group, in analyzing preliminary numbers. “Second quarter net absorption increased to more than 12 million square feet, a more than 39% increase from the previous quarter’s net absorption of 8.7 million square feet.”

“However, this level remains down from the robust fourth quarter net absorption rate of more than 24.8 million square feet,” Macke said.

CoStar economists will broadcast full second quarter property reports later this month on www.costar.com.

CoStar utilizes a census methodology basing its national results on changes to the entire population of office buildings as opposed to the commonly used practice of sampling, which generates estimates of national results based on results for a portion of the larger markets. CoStar’s national population of office buildings upon which its results are based includes more than 10 billion square feet of office properties and believes its research methodology presents the most complete picture of property market conditions across the country.

“We remain confident that strong absorption (at par with 2005 levels) awaits in the not-too-distant future,” said Adrian Ponsen, a real estate economist with CoStar. “The most recent job numbers show financial activities employment bottoming out, and professional and business services (60% of office-using employment) growing faster than it did on average during 2005-’07. Combined with today’s relatively cheap rents, this foreshadows rapid acceleration in office demand growth.”

“Macroeconomic concerns (particularly surrounding the U.S. debt limit) may very well continue to weigh on business owner psychology and leasing during the third quarter. But most conditions necessary for an absorption recovery have already fallen into place,” Ponsen said.

Retail: 8 Quarters of Positive Absorption

The recovery continues to push forward, but retailers have throttled back their rate of expansion. Net absorption has slowed to its lowest level since the first quarter of 2010, but weak supply growth has kept vacancies moving in the right direction, according to CoStar economist Ryan McCullough.

“The retail real estate market has now experienced eight quarters of positive net absorption, longer than the office or industrial markets, which have each experienced five consecutive quarters of positive net absorption,” Macke said.

“Second quarter net absorption increased to 11.1 million square feet, 700,000 square feet, more than the previous quarter’s net absorption of 10.4 million square feet,” Macke said. “This however remains well below the robust fourth quarter net absorption rate of more than 26.5 million square feet.”

The two-year average net absorption rate is 12.4 million square feet, he noted

“This slowdown should be no more than a temporary slump; an economic uptick in the second half of the year should be enough to stimulate retail sales and encourage retailers to become more aggressive with expansion plans. The construction pipeline is at its lowest level in many years and poses no immediate threat to fundamentals. Expect to see vacancy compression accelerate over the next several quarters,” McCullough noted.

Industrial Market Held Back Slightly

The warehouse market continued to gradually improve in the second quarter. As modest demand growth met deliveries that are probably at a low for the cycle, vacancies continued to come in for the fifth consecutive quarter, said CoStar economist Shaw Lupton.

While most industrial indicators have improved markedly in the past year, housing starts remain oppressively low, and the economic events that took a bite out of growth in the first half of the year could continue to hold demand back in the near term, Lupton noted.

“Ultimately, economic expansion will result in a quickening of warehouse absorption. Deliveries are expected to inch up in the near term but should remain low relative to history until warehouse rents grow significantly next year, providing developers with the green light to build,” Lupton said.