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Monthly Archives: March 2008


From WSJ:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America’s lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps — and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.

The median price dropped 8.2% from a year earlier to $195,900, the biggest drop recorded by the Realtors in the current slump.

http://online.wsj.com/article/SB120640573882561087.html?mod=RealEstateMain_1

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NEW YORK, March 17, 2008 (PRIME NEWSWIRE) — The recurring waves of news about the housing downturn, job losses, the ongoing credit crunch and general slowing in the U.S. economy have begun to overflow into the commercial real estate sector, according to the 1Q 2008 edition of PricewaterhouseCoopers Korpacz Real Estate Investor Survey.

The survey found telltale signs of weakness in office, retail, lodging and leasing activity, while areas less affected by the broad economy, such as industrial and warehouse properties, remain stable. Rental apartments are the only area of commercial real estate benefiting as supply tightens, homeownership rates decline and the number of renters grows.

“Unexpected job losses in January and February — particularly in the financial industries — are beginning to have an impact on office space demand in a number of markets,” said Tim Conlon, U.S. real estate leader for PricewaterhouseCoopers. “At the same time, widespread cutbacks in consumer spending are causing more pain for the nation’s retail sector.”

“Even though the underlying fundamentals of commercial real estate are still sound, there are noticeable cracks forming in the foundation,” said Susan M. Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) and manager in PwC’s real estate business advisory services group. “As a result, there is a palpable sense of uncertainty among investors we spoke with and surveyed this quarter,” she said.

The report reviews comments by analysts forecasting declines in commercial real estate values of 20 percent or more, and questions how much of today’s uncertainty is grounded in reality and how much is simply psychological: “Such (analyst) reports capture the attention of newsrooms and quickly filter to the industry. Has the economic prognosis for 2008 infected analysts such that commercial real estate values are really at such risk? Theoretically, it is possible for commercial real estate values to drop to the degree forecasted by these analysts. Practically, it may not be.”

“(The) relationship between economics and real estate is not always clear cut. Both are cyclical and need to be looked at jointly, as well as independently, especially during fragile times of economic uncertainty,” the report notes.

Additional findings by sector include:

Retail

Declining consumer confidence, a sharp rise in personal bankruptcy filings and a drop-off in consumer spending are taking their toll in the regional mall market. In December, 2007, comparable same-store retail sales posted a 0.10 percent year-over-year decrease, compared to a year-over-year growth rate of 3.8 percent in the prior month and 3.1 percent a year earlier. At the same time, the Consumer Confidence Index fell from 90.6 in December 2007 to 75.0 in February 2008 — the lowest in 12 months, and well below the 103 average throughout much of 2007.

Lackluster retail sales growth and weaker consumer spending are also causing would-be investors in the national power center market to exercise much more scrutiny and more conservative underwriting, with big-box retailers maintaining a significant role in the sector. According to investors surveyed, overall cap rates (OARs) continue to vary based on a power center’s percentage of big-box space, averaging 7.13 percent for properties with 100.0 percent big-box space, compared to 7.27 percent for properties where 85.0 percent of the gross leasable area (GLA) is occupied by big-box tenants and 7.38 percent for properties where 75.0 percent of the GLA is occupied by big-box tenants.

Rising vacancy rates continue to impact community/neighborhood shopping centers — the result of a slowdown in tenant expansions and constant additions to supply. In the fourth quarter of 2007, approximately 12.0 million square feet were completed in the U.S. community/neighborhood shopping center sector — the highest quarterly total in three years. Even so, regions with significant population growth report relatively strong results, including West Coast markets such as Orange County, Los Angeles, Seattle, San Francisco and San Diego, as well as certain infill areas such as Suburban Maryland and Northern Virginia. In addition, soaring population growth in Georgia has led to strong demand for retail goods and services, making Atlanta a top pick for institutional investors looking to acquire strip shopping center assets.

Office

In the face of declining absorption levels in many major central business districts (CBDs) during the past several months, the recently released U.S. employment figures showing reconfigured job losses of 22,000 in January and 63,000 in February added a new concern for landlords and investors. Among the hardest hit were office-using employment sectors such as financial services and professional-and-business service entities. Individual CBDs that reported sharp declines in overall absorption in 2007 included Chicago, midtown and downtown Manhattan, Houston and Washington, D.C. In contrast, CBDs that reported strong gains in overall absorption in 2007 included Los Angeles, Atlanta, Bellevue, WA and Baltimore.

In the national suburban office market, leasing activity slowed noticeably thanks to a continuing sluggish economy. Even so, the pace of new construction, much of it speculative space, continued to increase — leading to growing investor concerns about the long-term effects of oversupply. Suburban office markets posting some of the highest additions to supply in the fourth quarter of 2007 included Phoenix (4.0 million square feet), Northern Virginia (3.2 million square feet) and Dallas (2.7 million square feet).

Industrial

Although individual market performances vary, overall, the national flex/R&D market is seeing a steady increase in demand, thanks to steady growth in the high-tech sector and higher rental rates in comparable office building locations. The tightest markets tend to be located along the West Coast and include long-standing favorites like Silicon Valley, La Jolla and Los Angeles/Orange County. During the past quarter, the average overall cap rate for the national flex/R&D market stood at 7.47 percent, 100 basis points above that for the national warehouse market. Even though investments in flex/R&D can run “hot and cold,” the potential for higher returns is quite appealing to investors, the report says.

Warehouse

Favorable supply-demand fundamentals and the sector’s minimal sensitivity to changing consumer spending habits or job growth are helping to reinforce the warehouse sector’s image as a “safe haven” for many investors. And while the credit crunch did affect would-be buyers’ ability to acquire debt toward the end of 2007 (resulting in a 22.0 percent decline in sales of significant properties in the fourth quarter), huge portfolios in the first half of 2007 made it a record year in terms of sales volume. All told, more than $46.0 billion of industrial properties changed hands in 2007, a 7.0 percent increase over 2006. Warehouse markets that attracted the most dollars from investors in 2007 were Los Angles ($2.9 billion), Chicago ($2.2 billion), Seattle ($1.1 billion), Dallas ($1.1 billion), and Atlanta ($1.0 billion). Warehouse markets reporting the highest average prices per square foot included the New York City boroughs ($152.00 per square foot), San Diego ($149.00 per square foot), Los Angeles ($140.00 per square foot) and Orange County ($131.00 per square foot).

Apartments

Growth in the number of renters — due in part to residential owners, hard-pressed by the subprime mortgage fallout, returning to the market, and also to the inability of existing renters to afford to become homebuyers — is actually helping to spur demand in the national apartment market. At the same time, apartment developers nationwide have exercised a continued restraint on new building, thereby holding down additions to supply. At year-end 2007, the top five apartment markets in terms of lowest vacancy rates were New York (2.1 percent), Long Island (3.0 percent), Northern New Jersey (3.2 percent), Fairfield County, CT (3.3 percent) and Central New Jersey (3.4 percent). The top five apartment markets for total sales volume in 2007 were Manhattan ($8.0 billion), Washington D.C./Northern Virginia ($3.7 billion), New York City boroughs ($2.0 billion), Chicago ($1.9 billion) and Los Angeles ($1.6 billion).

Net Lease

The old saying that “cash is king” became especially evident in the national net lease market as transaction activity plunged during the fourth quarter of 2007 — a sharp response to the ongoing credit crisis. Between the third and fourth quarters of 2007 the number of net lease assets sold fell 73.0 percent — down from 12,266 in the third quarter to a mere 3,290 in the fourth quarter of 2007. The greatest drop in transactions (77.6 percent) occurred in the office sector, where a total of 18,164 net lease assets were available for sale at year-end 2007, down about 25 percent from the third quarter. Retail assets led the offerings (9,558 assets), followed by office (5,082 assets) and industrial (3,528 assets).

National Lodging

The slowdown in the U.S. economy, combined with increasing consumer restraint in discretionary spending are being felt in the U.S. lodging industry, which experienced a slowing in the growth of two key industry averages, average daily rate (ADR) and revenue per available room (RevPAR) in 2007. Even so, industry profits are forecast to rise steadily — from $28.0 billion in 2007 to $29.6 billion in 2008 and $32.5 billion in 2009.

At the same time, growth in new supply has accelerated over the past two years, with room starts rising from 139,700 in 2006 to 141,500 in 2007. These numbers compare favorably to the construction levels recorded between 2001 and 2005, when new room starts ranged from 68,400 in 2002 to 90,500 in 2001 and averaged 80,220. Even though no immediate threat of an oversupply exists, many investors express concern about the timing of many new projects, although their fears seem to be eased somewhat by the fact that stricter underwriting guidelines from lenders, high land prices, and higher construction costs for material and labor will likely lead to the delay, postponement or cancellation of some projects.

The survey found telltale signs of weakness in office, retail, lodging and leasing activity, while areas less affected by the broad economy, such as industrial and warehouse properties, remain stable. Rental apartments are the only area of commercial real estate benefiting as supply tightens, homeownership rates decline and the number of renters grows.

“Unexpected job losses in January and February — particularly in the financial industries — are beginning to have an impact on office space demand in a number of markets,” said Tim Conlon, U.S. real estate leader for PricewaterhouseCoopers. “At the same time, widespread cutbacks in consumer spending are causing more pain for the nation’s retail sector.”

“Even though the underlying fundamentals of commercial real estate are still sound, there are noticeable cracks forming in the foundation,” said Susan M. Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) and manager in PwC’s real estate business advisory services group. “As a result, there is a palpable sense of uncertainty among investors we spoke with and surveyed this quarter,” she said.

The report reviews comments by analysts forecasting declines in commercial real estate values of 20 percent or more, and questions how much of today’s uncertainty is grounded in reality and how much is simply psychological: “Such (analyst) reports capture the attention of newsrooms and quickly filter to the industry. Has the economic prognosis for 2008 infected analysts such that commercial real estate values are really at such risk? Theoretically, it is possible for commercial real estate values to drop to the degree forecasted by these analysts. Practically, it may not be.”

“(The) relationship between economics and real estate is not always clear cut. Both are cyclical and need to be looked at jointly, as well as independently, especially during fragile times of economic uncertainty,” the report notes.

Read full article here: http://www.primenewswire.com/newsroom/news.html?d=138252


Market Watch Podcast – Despite Fed cuts, mortgages still elusive

Even with rates falling, borrowers may be out of luck getting a loan as underwriting standards have tightened, Steve Kerch says.

http://www.marketwatch.com/personalfinance/realestate


From WSJ:

Even optimistic commercial-property developers are stacking sandbags to hold back a financial deluge in the market for office towers, hotels, shopping malls and other commercial real estate.

The consolation is that it looks like commercial property in the U.S. faces a once-every-25-year flood, not the once-a-century inundation facing the nation’s housing market.

In recent weeks, sales of commercial property have nearly hit a standstill. And the market value of such properties — and the mortgages on them — have declined as the spreading fallout from the crisis in risky, or subprime, mortgages has made credit practically evaporate.

Developers are putting the brakes on new projects, cutting deals with tenants to keep space occupied and, if possible, extending the terms of their existing debt when it comes due. Some owners, like New York’s Harry Macklowe and Centro Properties of Australia, a big investor in U.S. shopping malls, are under siege by creditors, forcing them to put properties on the block.

On the bright side, however, the commercial-property downturn isn’t expected to be nearly as steep as the current slump in the housing market, where recent data showed foreclosures rising to the highest level on record in the fourth quarter of 2007.

Losses by commercial-building owners, lenders and investors are likely to be tempered by the lack of overbuilding in recent years and the ability of most office buildings and other commercial ventures to keep current on their mortgages.

That’s partly because commercial properties typically produce income. While millions of American homes are under water because their value has fallen below the amount owed on them, most commercial buildings are generating enough cash to pay off their loans.

“Fundamentally the markets are in pretty good shape,” says James Duca, managing director of Moody’s Investors Service.

So far, most of the pain from the downturn has been borne by banks and other institutions that hold debt or securities collateralized by commercial-real-estate loans. These loans have fallen in value as the market has struggled to reappraise their risks.

The outlook could worsen if the U.S. falls into a deep recession, driving rents down and vacancies up. But even without a deep dive, it isn’t going to be pretty.

J.P. Morgan Securities, which says the economy has entered a recession, projected last week that commercial-property losses over the next five to eight years will be about $120 billion, or roughly 4% of the sector’s $3.2 trillion in debt outstanding. But that’s far short of the $200 billion in losses that J.P. Morgan is projecting from the subprime debacle, a 15% loss rate.

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