matisse capital management

Shopping Center Vacancies Approach New Highs

Closing in on 1991's record rate of 11.1%.  From REIS, Commercial Real Estate Performance and Analysis: "Vacancies at U.S. neighborhood and community shopping centers moved closer to the highest on record in the second quarter amid signs the economic recovery is losing steam and consumer confidence remains subdued...The vacancy rate at shopping centers rose to 10.9 percent from 10 percent a year earlier and 10.8 percent in the first quarter, the New York-based real estate research firm said in a report today...'There are really very few reasons to believe that performance deterioration won’t continue for another 18 to 24 months for retail properties, although there are some signs that the pace of decline is moderating,' Victor Calanog, director of research, said in the report."  Full report here.

Moody's: Commercial Real Estate Prices Rise in April

 Up 1.7% for the month.  Moody's publishes an index known as the REAL Commercial Property Price Index (CPPI).  It is calculated using data from apartment, industrial, office and retail resales over $2.5 million, and can be found here.  The national commercial property index hit a low in October 2009, and then prices increased in November, December and January, rising 6.3%.  In February, prices were down 2.6% for the month, followed by March with -0.5%.  It looked like we were having a double dip, but now April marks a change in direction, although I have heard the pool of available sales data remains small.  At any rate it is too early to decide that any trend is emerging.  At the October 2009 trough, prices were down 43.7% from the October 2007 peak.  Per Moody's,they are now down 41.0% from the peak.  Below, from January 2005 through present:

 

Investors to Default on Another Major Apartment Complex

Parkmerced is the latest to fall.  There have been several notable defaults on major apartment complexes over the last year: two in New York and now one in San Francisco.  Each of the complexes was subject to rent control or rent stabilization laws, and the buyers thought they could renovate and bring a large percentage of units closer to market rent, presumably as leases rolled over.  Riverton House in New York ran into trouble after it was acquired near the peak of the market. According to the NYT, at Riverton, the "rents covered less than a third of the monthly debt payments."  Although the owners defaulted in 2008, according to Mother Jones, "Minus the down payment, the partners (Laurence Gluck, Rockpoint Group et al.) walk away with nearly $42 million..." This number makes me wonder whether it mattered if the projects succeeded, or not.  Below are the details of the three major apartment casualties:

• Parkmerced, San Francisco: 3,221 apartments.  Owners Laurence Gluck of Stellar Management and Rockpoint Group have a $550 million first mortgage plus a $52 million second.  This combined debt equals $186,898 per unit.  The complex was bought in 2005 for $700 million, or $217,324 per unit.  The owners recently announced they will have to default on the $550 million mortgage.

• Stuyvesant Town and Peter Cooper Village, New York: 11,227 apartments.  Tishman Speyer and Partners acquired the property for $5.4 billion, or $480,983 per unit, in 2006.  The apartments were returned to the lenders (deed in lieu) in January 2010.  At that time the value was estimated at $1.8 billion, or $160,328 per unit, a 67% decline from the peak.  Full story here.

• Riverton Houses, New York: 1,228 units. Acquired by Laurence Gluck and Rockpoint in 2005 for $131 million.  $250 million was borrowed against the complex for upgrades.  Total cost per unit with upgrades = $310,261.  The average rent in the complex was $894 per month.  Riverton later went into default and was sold to Wells Fargo for $125 million, or $101,792 per unit, in March 2010.

US Commercial Real Estate Declines (Again) in March

A 0.5% drop for the month.  Moody's publishes an index known as the REAL Commercial Property Price Index (CPPI).  It is calculated using data from apartment, industrial, office and retail sales over $2.5 million, and can be found here.  The biggest decline over the last quarter was in retail, which was down 4.7%.  The commercial property index hit a low in October 2009, and then prices increased in November, December and January, rising 6.3%.  In February, prices were down 2.6% for the month, now followed by March with -0.5%.  Does this mark the beginning of a double dip, like we are seeing in housing?  The trough for commercial prices was October 2007, when they were down 43.7% from the October 2007 peak.  Per Moody's,they are now down 42.1% from the peak.

 

 

US Commercial Real Estate Prices Down in February

A 2.6% drop for the month.  Moody's publishes an index known as the REAL Commercial Property Price Index (CPPI).  It is calculated using data from apartment, industrial, office and retail sales over $2.5 million, and can be found here.  The commercial property index hit a low in October 2009, and then prices increased in November, December and January, rising 6.3%.  Now, in February, prices are down 2.6% for the month.  Does this mark the beginning of a double dip, like we are seeing in housing?  Click the chart, left to enlarge.

US Office Vacancies at Highest Level since 1994

National office vacancy hits 17.2% in first quarter.  This is 2.0% above last year's Q1 rate.  The data is from a report by property research firm Reis, and it indicates that 11.6 million SF of office space were vacated during the first quarter 2009.  As reported by Reuters, Reis director of research said that "We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise...This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income."  The Q1 office vacancy rate in New York was reported as 11.7%, DC at 10.4%, Phoenix at 21.2%, Detroit at 26.2%.  More at WSJ.

Warren on the State of Commercial Real Estate

2010 will be a tough year.  Elizabeth Warren, head of Congressional oversight for TARP, as quoted in the NYT:  “'By the end of the year, about half of all commercial real estate loans are gonna be underwater, and they are concentrated in the midsize banks...We now have 2,988 banks that have these dangerous concentrations of commercial real estate lending.'  (This) would have two upshots: 1)...already suffering since the subprime crisis, their stability might be affected; and 2) the midsize banks 'are the banks that are supposed to be doing small business lending, and when they’re getting a sock in the teeth over over commercial real estate loans, they’re not in a position to be lending to small business.'"

Japan's Commerical Land Prices at Record Low

Prices declined 6.1% in 2009.  And in 2008, they fell 4.7%.  According to the Ministry of Land, Infrastructure, Transport and Tourism, in a recent report, and as reported in BusinessWeek, "Values are at their lowest since the ministry began collecting comparable data in 1974."  Part of the trouble is that credit markets are tighter and Japan is still in recession.  But as BusinessWeek notes, commercial land prices "are about a third of what they were in 1991 after Japan’s bubble economy peaked."  You can read about Japan's banking crisis and its aftermath here.  Perhaps part of the price problem is deflation?  Below is a chart of Japan's Urban Land Price Index, produced by the Japan Real Estate Institute. The base year is 2000, when the index was set at 100 (where the three lines cross).  It plots the percentage change in nominal prices. The top line is commercial land, the middle residential and the dashed line industrial.

Moodys Commercial Property Price Index Rises (Again)

A 1% price increase  in  January.  And Moodys REAL Commercial Property Price Index (CPPI) has risen for the last three months.  The index has tracked commercial property prices since 2000.  According to BusinessWeek, however, prices are still "40% lower than the peak in October 2007" and 24% below a year ago.  I find this price increase perplexing when the default rate on commercial property more than doubled from Q4 2008 to Q4 2009.  Defaults, now 3.8% of all commercial mortgages "may reach a peak of 5.4% at the end of next year, according to Real Capital Analytics" here.  Chart, click to enlarge.

Predictions of a Commercial Property Crash

Wilbur Ross, billionaire investor and member of the Committee on Capital Markets Regulation, believes the US is at the beginning of a "huge crash in commercial real estate."  Will this necessitate the creation of another Resolution Trust Corporation by the government (RTC)?  You have to wonder.  From Bloomberg:

 “All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate - the return that investors are demanding to buy a property - are going up.”

To anyone in the industry, this news comes as no surprise.  Also weighing in on this issue today was  George Soros: