Treasury to Delay Freddie and Fannie Reform Until 2011

Atlantic Online

Before the House Budget Committee today, Treasury Secretary Timothy Geithner testified that the Obama administration won't reveal its plans for the future of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac until 2011. Given that these two companies were the largest of all bailout recipients, played a major part in the financial crisis and continue to incur massive losses, I'm shocked that there's no sense of urgency for their reform. The news gets worse.

First, how is the Obama administration so detached from the real problems facing the economy that the GSEs won't even hit its radar screen until 2011? Today, Freddie just announced yet another multi-billion dollar quarterly loss, this time $6.5 billion. The GSEs may not have been the only cause of the financial crisis, but they were certainly a central cause. That's part of the reason why I've argued that these institutions should just be wound down. House Financial Services Chairman Barney Frank (D-MA) also wants them abolished.

Yet, today Geithner also implied that the administration has no intention of winding down the entities. The Wall Street Journal reports him saying:

    "It's very important that we make it clear to investors around the world that we will make sure...that those two important government-sponsored enterprises can continue the role they need to play," Mr. Geithner said.

In other words, they're not going anywhere. The administration will just make them work better. Good luck with that. Whenever you've got organizations with the kind of deep inside-Washington connections that Fannie and Freddie have, they're beyond reform.

I'm in the middle of reading former Treasury Secretary Hank Paulson's book about the financial crisis, "On The Brink," where he makes clear that the only way the Bush administration managed to take the GSEs under government control and fire their management was by a very secretive, difficult process that included a lot of regulator arm twisting. Once Paulson realized the problem they posed, he essentially used his signature brute force to make it happen. But he's gone now. And if the GSEs get their way, then it will be back to business as usual before long.

In fact, I'll make a bold prediction right now: we won't get meaningful reform for Fannie and Freddie during President Obama's first term. If the administration is waiting until 2011 to reveal its plans, that means it doesn't intend for them to matter. Republicans will likely have a majority in the House by then and more power in the Senate. 2011-2012 will be a time of profound gridlock. And when it comes to Fannie and Freddie, Republicans are generally pretty outspoken in their criticism of the firms. I find it highly unlikely that their ideas for reform will match up with the Obama administration's plans. That translates to nothing -- or nothing meaningful -- getting done.

GGP Shuns Simon, Picks Canadian Buyer

Indianapolis Star

Bankrupt mall developer General Growth Properties Inc. said today it's agreed to a recapitalization plan with Brookfield Asset Management Inc.

The plan would allow Chicago-based General Growth to sidestep an acquisition by Indianapolis-based Simon Property Group.

General Growth, the nation's No. 2 mall development company after Simon, said Brookfield would invest $2.6 billion in the deal, which would split General Growth into two companies.

The proposed plan would allow General Growth to emerge from bankruptcy "with a diverse portfolio of high-quality income-producing assets, strong cash flow and a solid balance sheet," it said.

Simon, which unveiled its $10 billion offer for General Growth earlier this month, didn't have an immediate comment on the new plan.

The General Growth-Brookfield plan is subject to approval by bankruptcy court, as the Simon takeover would be.

Brookfield is a Toronto-based investment company specializing in commercial real estate properties. It would take a 30 percent ownership stake in General Growth under the proposal.

The new publicly traded company that would be split from General Growth would contain its non-core assets, including its master planned communities and landmark developments such as South Street Seaport in New York that have little or no current income.

The deal with Brookfield offers General Growth shareholders $15 a share in stock. Simon's offer would give General Growth shareholders $9 a share in cash and real estate.

Under the deal with Brookfield, General Growth said it would look to raise up to $5.8 billion in additional capital, through asset sales and other means.

Commercial Sales Jump

The Wall Street Journal

Debate Over Reaching Bottom Follows Two Months of Gains

The number of commercial real-estate sales rose sharply in December, triggering fresh debate about whether the sector has reached bottom.

Property sales, a gauge of market health, rose 75% in December from the prior month, according to Real Capital Analytics. The end of the year traditionally sees an increase in volume. But the recent increase is significant even after adjusting for that, says Neal Elkin, president of REAL, a research firm that analyzed the data.

The Moody's/REAL All Commercial Property Price Indices, or CPPI, which track values, measured a 4.1% increase in December. This followed an increase of 1% in November, which was the first time since 2007 that there were two consecutive months of rising values.

But Moody's and REAL agreed that it is too soon to conclude that the market has hit bottom.

"It makes me feel very confident that the dramatic violent price movement that we saw in the first part of 2009 is over," says Mr. Elkin of REAL. "But I would never be so bold to say that we are going straight up from here."

There were 716 transactions in December, according to the CPPI. That compares with more than 1,600 deals in December 2007.

Sales activity has been in the doldrums for months because of a dearth of financings and sellers' unwillingness to put property on the block when prices are down sharply from a few years ago. That means competition can be fierce when prime buildings are put up for sale.

Earlier this month, an institutional real-estate fund run by J.P. Morgan Asset Management bid on a large $100 million-plus rental-apartment property in Washington. Seventeen other buyers submitted offers, says Kevin Faxon, head of U.S. Real Estate for J.P. Morgan Asset Management.

"We are actively in the market seeking to acquire properties," Mr. Faxon says. "We are not on the sidelines. We're not taking a view that prices are going to be cheaper tomorrow than they are today."

Also, some healthy properties are still commanding decent prices. In Boston, a nearly 200,000-square-foot office and retail property called One Brigham Circle is in contract to sell for $97 million to AEW Capital Management, according to a person with knowledge of the deal. Brokers for Cushman & Wakefield are representing the seller, the Rappaport family's New Boston Fund. 

The cap rate, an industry term for the buyer's nonleveraged yield on the property at current net rents, is less than 6.5%, a return that is comparable to property prices in 2005 and 2006, according to local brokers. The building is fully leased.

The conflicting market signals come at a time when the commercial real-estate sector faces significant challenges. The economic fundamentals, such as anemic hiring, mean that office rents are likely to continue falling while vacancies continue to rise. Meanwhile, apartment rents also are low, driven down by record low home prices and increased supply from investors stuck with unsold properties who have put them on the rental market.

In addition, many top-of-the-market real-estate deals are still expected to go bad, like Peter Cooper Village and Stuyvesant Town, a sprawling Manhattan residential complex that is in default on $4.4 billion in debt.

Market bulls agree that the sector continues to perform badly. But they argue it is doing better than people thought it would. Therefore, real-estate assets are undervalued and prices are going up, they say.

"No one believed me that values were going to go up so soon," says Dan Fasulo, head of research for Real Capital Analytics. "But there's enough anecdotal evidence now that we've come well up off the bottom already."

Firms Lining Up for a Piece of General Growth Properties

DS News

The bankrupt commercial property developer and shopping mall manager General Growth Properties (GGP) has become a hot commodity, with firms lining up to get a piece of the Chicago-based company.

On Tuesday, the nation’s largest mall-operator, Simon Property Group, Inc. made public a $10 billion unsolicited bid to acquire the rival GGP – a deal that would have pulled the company out of bankruptcy. After meeting with General Growth executives the week before and receiving no communication since, Simon’s CEO sent a pointed letter to the company’s board of directors and published it to the masses.

Having received no “indication that you are prepared to enter into serious discussions,” David Simon, chief of Simon Property, wrote to GGP that his intention was “to make our offer available to your shareholders and creditors.”

The deal was backed by GGP’s committee of unsecured creditors and would have paid them off in full, as well as provided partial debt recovery to private equity bondholders, with $7 billion of the total offering. The other $3 billion would have gone to shareholders, equaling about $9 a share. But according to Bloomberg News, it was a lowball bid as far as shareholders were concerned, since fund manager William Ackman of Pershing Square Capital Management LP estimated in December that the stock was worth $24 to $43, although shares have been trading around the $9 mark until shooting up 28 percent after Simon’s offer.

General Growth fired back a response to Simon on Wednesday, which it also made public, saying that the rival firm’s interest was “not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the company’s stakeholders.”

Simon’s offer came just a week before GGP’s scheduled bankruptcy court hearing, in which the company is planning to request additional time to submit its own plan for coming out of bankruptcy.

But General Growth also indicated in the letter that in addition to a stand-alone restructuring, it was also considering potential business combinations, and invited Simon to participate in the process – leaving the door open for a possible buy-out, and fueling speculation about other property management firms that may soon come knocking.

The Wall Street Journal says GGP has been in talks with Canadian real estate investor Brookfield Asset Management, which recently purchased $1 billion of General Growth’s debt in a move that suggested to some analysts that the company was jockeying for control of some of the bankrupt company’s properties.

The Journal also throws Vornado Realty Trust into the mix, a real estate investment trust (REIT) that has been raising cash to scoop up distressed commercial real estate assets.

The Sydney, Australia-based shopping center owner Westfield Group also has its eye on GGP, according to Bloomberg. Westfield has stakes in 55 malls in the United States. The news agency quoted the company’s managing director as saying Westfield was always on the lookout for acquisition opportunities and is “watching the situation” at GGP.

Bloomberg called General Growth’s bankruptcy filing last April “the biggest real estate bankruptcy in U.S. history,” after the company racked up $27 billion in debt in a property acquisition spree.

Bank to Take Prime Commercial Property in Beverly Hills

LA Times

British developers had paid $500-million for the site of the former Robinsons-May on Wilshire Boulevard in 2007. They had planned to develop condominiums and a hotel on the eight-acre parcel.

 The Candy Brothers

Jet-setting British developers are set to lose their prized real estate on a prime stretch of Wilshire Boulevard in Beverly Hills on Friday as a bank controlled by Mexican billionaire Carlos Slim completes a foreclosure.

The property slipping away from brothers Nicholas and Christian Candy is the site of the former Robinsons-May department store at 9900 Wilshire Blvd., next door to the Beverly Hilton Hotel at the boulevard's intersection with Santa Monica Boulevard.

The Candy brothers, who planned to develop condominiums and a hotel, made headlines in 2007 when they bought the eight-acre parcel for $500 million. The jaw-dropping sum made the transaction one of the largest in the history of Los Angeles County.

Local real estate observers had trouble making sense of the price because the seller, Beverly Hills-based New Pacific Realty Corp., had paid $33.5 million for the property three years earlier. The Candys, though, had a track record of building super-premium residences for the mega wealthy.

"Candy & Candy in the U.K. is what Tiffany is to jewelry here," Laurie Lustig-Bower of brokerage CB Richard Ellis said at the time. "Therefore, they believe they will achieve record prices for their condos."

But the real estate market has changed dramatically for the worse in recent years, Lustig-Bower said Thursday. "2007 was a whole different world."

Now, Christian Candy's CPC Group is in default on a $365.5-million loan from lenders controlled by Slim's Banco Inbursa, according to court documents.

A subsidiary of CPC Group is expected to transfer title to the lenders Friday, sources told Bloomberg News.

Nicholas Candy confirmed in an e-mail that he expected to relinquish title to the site Friday.

CPC Group is best known for One Hyde Park in Central London, where buyers of the expensive flats included Russian oligarchs, oil barons, Saudia princes and A-list movie stars, according to the English press.

When they bought the Beverly Hills property, the Candys said they would proceed with the previous owner's plans to raze the empty department store and build a condominium and retail complex designed by Richard Meier, architect of the Getty Center.

The city approved the project in 2008. Later that year, with condo sales stalling and financing sources drying up, the Candys said they hoped to incorporate a five-star hotel into the design by eliminating some of the development's 235 approved condos.

Home Prices Recover in Some Metro Areas

The Wall Street Journal

Home prices rose in more than a third of U.S. metropolitan areas in the fourth quarter, the National Association of Realtors said Thursday as it pointed to a "broad stabilization" in values.

The median price for single-family home resales was up from a year earlier in 67 of the 151 U.S. metropolitan areas included in the trade group's quarterly survey. But other housing analysts say the home-price trend depends heavily on any recovery in the job market and on the pace of foreclosures.

The national median price for single-family homes was $172,900 in the fourth quarter, down 4.1% from a year earlier. That was the smallest decline in more than two years.

Among metro areas showing the biggest gains from a year earlier were Cleveland (25%), Akron, Ohio, (23%) and San Francisco (13%). Those increases don't denote a general surge in home values but rather show that sales of foreclosed homes at fire-sale prices made up a smaller percentage of overall sales than they did a year earlier.

Foreclosures dominated some markets a year ago. Nationwide, "distressed property," including foreclosures and homes at risk of foreclosure, accounted for 32% of fourth-quarter transactions, down from 37% a year earlier, the Realtors estimated.

Metro areas showing big price declines included Las Vegas and Ocala, Fla., (both down 23%) and Orlando (down 20%).

For condominiums, the median resale price in the quarter for 54 metro areas surveyed was $177,300, down 4.8% from a year earlier. Eleven of the metro areas showed higher condo prices, and the rest showed declines.

One major worry is that price drops have left many households without any equity in their homes. Homeowners who are "underwater"—owing more than the value of their homes—are more likely to abandon their houses if their incomes fall or they lose their jobs. That would create more foreclosures, weighing on home prices.

At the end of 2009, 21% of households with mortgages on single-family homes owed more than the current value of their homes, according to a new estimate from Zillow.com, a real-estate data provider.

State and federal efforts to avert or delay foreclosures by offering borrowers easier terms have created a huge backlog of unresolved cases, likely to lead to an eventual bulge in the supply of foreclosed homes. As of Dec. 31, about 3.9% of first-lien home mortgages were 120 days or more overdue but still not in the foreclosure process, according to LPS Applied Analytics. That represents about two million households.

January Foreclosures Up 15% Year-Over-Year

USA Today

The number of U.S. households facing foreclosure in January increased 15% from the same month last year, and a surge in cash-strapped homeowners who've fallen behind on mortgages could be on the way.

More than 315,000 households received a foreclosure-related notice in January, RealtyTrac reported Thursday. That number is down nearly 10% from 349,000 in December, which saw the third highest total since the company began tracking foreclosure data in 2005.

In January, one in 409 homes were sent a filing, which includes default notices, scheduled foreclosure auctions and bank repossessions. Banks repossessed more than 87,000 homes last month, down 5% from December but still up 31% from January 2009.

January marked the 11th straight month with more than 300,000 properties receiving a foreclosure filing. The numbers could stay above that level as unemployed homeowners who have tried to keep up with their mortgages finally start missing monthly payments.

Mortgage financier Fannie Mae reported in late January that the rate of borrowers who have a conventional loan on a house and are seriously delinquent was 5.29% in November, more than doubling the rate of 2.13% in November 2008. Borrowers are considered seriously delinquent if they are past due by three months or more, or are in foreclosure.

"There's a lot of foreclosures in the pipeline, and the number is going to continue to get bigger," said Patrick Newport, an economist with IHS Global Insight.

Last month's foreclosure activity followed a pattern similar to that of a year ago, when a double-digit percentage increase in December was followed by a 10% drop in January.

The dip in January's numbers may be due to processing delays by lenders during the end-of-year holidays, said Rick Sharga, senior vice president of RealtyTrac, which is based in Irvine, Calif.

"I don't think it's an early sign of the coming of the end of the foreclosure crisis," Sharga said.

A record 2.8 million households were threatened with foreclosure last year, and the numbers are expected to rise to between 3 and 3.5 million homes this year, RealtyTrac said.

Slowing the foreclosure rate is a key step in the recovery of the real estate market and the overall economy. The foreclosure crisis forced the federal government and several states to come up with plans to prevent or delay the process to help delinquent borrowers.

Foreclosed homes are usually sold at steep discounts, so they often lower the value of surrounding properties. Cities lose property tax dollars from foreclosure homes that sit empty and from declining home values, straining local economies. Home prices have stabilized in some cities, but are still down 30% nationally from mid-2006.

Economic issues, such as unemployment or reduced income, are expected to be the main catalysts for foreclosures this year. Initially, subprime mortgages were mostly the culprit, but homeowners with good credit who took out conventional, fixed-rate loans are the fastest growing group of foreclosures.

Among states, Nevada posted the nation's highest foreclosure rate, followed by Arizona, California, Florida and Utah. Rounding out the top 10 were Idaho, Michigan, Illinois, Oregon and Georgia.

The metro area with the highest foreclosure rate in January was Las Vegas, with one in every 82 homes receiving a foreclosure filing. It was followed by Phoenix and the California cities of Modesto, Stockton, and Riverside-San Bernardino-Ontario.

Lennar buys distressed loans from FDIC

Builder bets on recovery by purchasing stake in loan portfolios at a discount;

Home builder Lennar Corp. has struck a deal with the Federal Deposit Insurance Corp. that could help the firm replay its success investing in troubled loans during the last major real estate crisis.
 

Market Watch
 

Investors bid up the company's shares Thursday but some experts cautioned it may be harder to make the numbers work in the current downturn.

Lennar has positioned itself to benefit further from a real estate recovery through a distressed-land transaction with the FDIC to purchase a 40% stake in bank loans with a combined unpaid balance of about $3 billion.

Late Wednesday, the Miami-based company said it closed transactions with the FDIC to buy two portfolios of loans for $243 million.

Lennar subsidiary Rialto Capital Advisors will conduct the daily management and workout of the portfolios, the company said.

Lennar has purchased a 40% interest in the loan portfolios, while the FDIC is keeping the remaining 60% equity interest. The FDIC provided $627 million of financing at no interest for seven years.

With FDIC kicking in about $365 million in equity, Wall Street analysts pegged the portfolios' overall purchase price at $1.22 billion, or 40 cents on the dollar.

The portfolios include about 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

"Acquiring and working out distressed real estate loans was a large and extremely profitable part of our business during the last major real estate down cycle in the early 1990s," said Lennar Chief Executive Stuart Miller in a prepared statement.

The builder has been preparing to invest in distressed loans for two years, and it takes "great pride in understanding market cycles and identifying the opportune point of entry," Miller said.

"Our strong cash position and proven track record in this area enables us to capitalize on this market cycle and create long-term value for our shareholders," said the CEO, adding the company expects the deal will be accretive to 2010 earnings.

Deutsche Bank analyst Nishu Sood said Lennar is the first builder to do a major distressed land deal in the housing bust.

"Given Lennar's history of timely strategic decision making, we think investors will give management the benefit of the doubt," the analyst wrote in a note Thursday. "This is appropriate, but at the same time we think there are long-term risks given the unusually severe nature of this cycle."

Shares of Lennar, which in recent years has faced investor worries over its exposure to joint ventures, were up about 8% in afternoon trading Thursday.

"Comparisons abound among both investors and builders between the current period of distress and the early 1990s," Sood said. "If the recovery path of the housing market is similar to the mid- to late-1990s current distressed deals like Lennar/FDIC will look brilliant in hindsight."

However, the analyst worried that the comparison may not be so easy.

"The early 1990s downturn was more typical historically speaking (i.e. V-shaped) and led into an unprecedented 14-year mortgage credit driven upturn," Sood wrote. "This housing downturn by contrast has done nothing but bust historical paradigms. We think this elevates the risk of large distressed deals relative to the early 1990s."

Lennar has purchased a stake in acquisition, development and construction loans, about 70% of which are residential, and the remaining commercial. They are mostly concentrated in Georgia, Nevada and Arizona. In late January, Lennar announced plans to enter the Atlanta market.

J.P. Morgan analyst Michael Rehaut said while 90% of the portfolio is nonperforming, "we believe experience of Lennar's Rialto team managing the portfolio, and the extensive due diligence performed, should result in value creation."

Lennar can achieve this in several ways, "including a discounted payoff, where the borrower pays off the loan balance at a discount but above Lennar's purchase price; foreclosure and liquidation, where Lennar takes back the asset and then sells to a third party; or value add, where Lennar develops or leases the asset and sells at a later date."

Last month, Lennar said it swung to a fourth-quarter profit as the builder was helped by a tax benefit.

In late 2007, the firm sold 11,000 properties to a joint venture with a Morgan Stanley affiliate for $525 million, or a 40% discount to book value. See archived story on the land deal.

Last year, Lennar bought a stake in a joint venture called LandSource. The builder had sold most of its investment in LandSource to Calpers in 2007 at the height of the real estate bubble, before LandSource went bankrupt.

Foreclosure Watch: The Four Seasons Turns Cold in Dallas

The Wall Street Journal

It looks like the gamble taken by commercial-property owner BentleyForbes Holdings LLC last October in defaulting on its mortgage on the Four Seasons Dallas might not pay off. The lenders who hold the 431-room hotel’s mortgage filed this week to foreclose.

BentleyForbes skipped its October payment on the Four Season’s $183 million securitized mortgage in a bid to get the mortgage’s special servicer, CWCapital Asset Management, to revise the loan’s terms. In doing so, BentleyForbes explained that the hotel’s cash flows no longer covered its $10.9 million of annual interest payments.

This week, U.S. Bank, acting on behalf of the mortgage holder, filed a notice with the Dallas County Clerk’s Office to foreclose on the property, according to Foreclosure Listing Service Inc., a foreclosure-research company.  A CWCapital representative didn’t return calls seeking comment.

A lawyer representing BentleyForbes said the owner has “demonstrated its good faith and continued commitment” to the hotel with a $60 million renovation of the property in the past two years.

“The filing of the foreclosure posting is something that BentleyForbes was expecting as it is a standard administrative process required by lenders,” attorney Stephen Meister said in a statement. “Regardless, BentleyForbes remains in proactive discussions with its lenders at the Four Seasons Dallas and is committed to working out a successful financial structure.”

Closely held BentleyForbes, based in Los Angeles, owns several office complexes and hotels across the U.S. It bought the Four Seasons in the Dallas suburb of Irving, Texas, in 2006. The hotel is known nationally as the site of the PGA’s annual EDS Byron Nelson Championship golf tournament.

The Four Seasons Dallas is one of several hotels carrying the Four Seasons brand to run into mortgage difficulty. Millennium Partners LLC, owner of the Four Seasons San Francisco, went delinquent last summer on the hotel’s $90 million securitized mortgage in a bid to get revised terms. Neither Millennium nor the special servicer on the loan, Cerberus Capital Management LP’s LNR Partners Inc., returned calls seeking comment.

Beanie Baby tycoon Ty Warner’s Ty Warner Hotels and Resorts is attempting to get an extension of the due date on its $345 million securitized mortgage on four resorts, including the New York Four Seasons. He had difficulty obtaining an extension beyond the loan’s Jan. 9 due date because the properties weren’t generating enough cash flow to meet the loan’s threshold for qualifying for the extension.

Now, Mr. Warner and the special servicer overseeing the mortgage are in a forbearance pact in which the servicer has pledged not to foreclose as the two sides try to hammer out a long-term extension, according to a person familiar with the talks. A representative of Mr. Warner’s hotel company didn’t return calls seeking comment.

Tucson: Speculators Complete 21 Buildings; Vacancies Hit 11%

AZ Biz

Unlike the office market, speculators were active players in the arena of industrial real estate. Throughout last  year, 21 new buildings totaling 741,175 square feet of product were completed, according to Don Ahee of CB Richard Ellis.

The sector ended 2009 with negative absorption, higher vacancy rates, and falling rents. Those factors made the construction of new space seem contrary and defiant of current market conditions.

However, that was not the case, considering the long lead times to get an industrial building designed, properly zoned and permitted by local governmental authorities, and finally break ground.  

"The year registered strong construction numbers for Tucson’s industrial market,” said Ahee. “This marked the first significant speculative construction in this decade.”

The airport submarket added a large inventory of speculative industrial condominiums and buildings. For example, the 40-dock Rockefeller Distribution Center, at 6855 S. Lisa Frank Ave., added 113,546 square feet of distribution/warehouse space.  

Another significant airport-area project was construction of a two-story, 53,750 square-foot building for Alliance Beverage in Butterfield Business Center, north of Interstate 10 between South Palo Verde Road and South Alvernon Way. The warehouse, distribution and administrative facility, on the northeast corner of South Palo Verde Road and Columbia Street, opens this month. The 5-acre site was purchased for $1.2 million from Butterfield Tucson Limited Partnership.

Overall, new industrial buildings completed in 2009 opened with a 38 percent vacancy rate.

As projects in the pipeline were completed, construction activity slowed considerably in the second half of the year. Looking ahead, Ahee sees a “notable decline in building permits.”

Steve Cohen, of Picor Commercial Real Estate Services, pointed out that once investors saw the market turning down 18 months ago, new construction plans were shelved.

Regarding the sale of existing buildings, one of 2009’s major transactions was the $5.3 million purchase of the former KLA Tencor ADE Phase Shift manufacturing building, 3470 E. Universal Way, by the American Red Cross Arizona Blood Services. The 60,000 square-foot building will be used as an administrative headquarters, blood storage and distribution center. The acquisition was $2.8 million below the original asking price.

Chuck Blacher, industrial specialist with Tucson Realty & Trust, said price reductions of 25 to 40 percent were common in 2009 compared to 2008, and he expects they will remain soft this year. That has sparked “some signs of life” in industrial, warehouses, manufacturing facilities, and contractor yards.

Despite some flickering signs of recovery, owners of troubled industrial properties “will find a final day of reckoning and in some cases, lose their properties,” Blacher said.  “Buyers who can write a check are in the front row.”

He noted, for example, $112 per-square-foot sales prices in 2008 have now dropped to $59 per square foot.

Russ Hall, of Picor, noted that industrial building vacancy rates have risen for two consecutive years. After reaching a record low of 5 percent in mid-2007, their analysis showed Tucson’s overall industrial vacancy rate at 10.8 percent. CB Richard Ellis’ data was slightly higher, at 11.7 percent.

Either way, that’s a 100 percent increase in vacant space over a two-year period. Overall, there is approximately 4.5 million square feet of industrial space in the region in buildings larger than 10,000 square feet.   

For warehouses, Picor and CB Richard Ellis recorded year-end vacancy levels that ranged from 12 to 15 percent.  CB Richard Ellis’ Ahee listed the airport submarket at 14.2 percent vacancy, and both firms had manufacturing buildings at about 9.6 percent vacancy.

Picor listed high-tech buildings having the highest vacancy level at 15.8 percent. Despite the ongoing weak economy, vacancy rates in all geographic submarkets in the region are projected to begin leveling off this year. 

To no one’s surprise, the large negative absorption numbers drove down rental rates. As a result, landlords granted rental concessions to keep tenants and negotiated lease extensions with no rate increases, said Blacher.  

Ahee said the average industrial asking rate ended 2009 at $6.36 per square foot compared to $8.28 per quare foot in 2008. Since 2007, rates have dropped about 25 percent.

Is the Remodeling Slump Over?

The Dallas News

Home remodelers that have been hammered by the recession can look forward to better times in 2010.

Forecasters say the home improvement and fix-up business should pick up this year after a 25 percent slide in activity since 2007.

"The downturn appeared to stabilize in the second half of 2009," Kermit Baker of the Harvard University Joint Center for Housing Studies told builders and remodelers at the National Association of Home Builders' annual meeting last week in Las Vegas.

"We are starting to see some positives in where the market might be headed for handyman services and home remodeling."

The Harvard researchers said nationwide remodeling expenditures are likely to rise about 6 percent in the coming quarters.

Baker said the cutbacks in home improvement and repair activity during the recession were substantial but were less than half what the homebuilding business experienced.

"If you are a remodeler, times have been tough. But it could be worse – you could be a homebuilder," he said. "In this economic environment, households were spending more on home improvements like kitchen remodeling projects last year than they did on the purchase of new homes."

North Texas outlook

The outlook for increased home remodeling is good news for North Texas builders, some of whom have diversified during the downturn.

"Quite a few of our builders have expanded into remodeling," said Bob Morris, executive vice president of the Home Builders Association of Greater Dallas. "Some of our more inventive small custom builders have been doing remodeling.

"There is still work out there. It's a viable market because the economy here wasn't hit nearly as hard."

Even in Dallas-Fort Worth, some homeowners have put sunrooms and other fancy fix-up projects on hold for the last year or so.

"If you think the prices of homes are going down, it makes it hard to argue that outdoor decks or bath remodels will hold their value," said Paul Emrath, a researcher for the builders' association. "People have less equity in their properties to finance remodeling.

"Even if you don't have problems there, sometimes lenders are more reluctant than they have been in the past to finance remodeling or a home addition."

Smaller projects

Homeowners in the market for a redo are taking a more measured approach. The days of over-the-top remodeling and double-size additions are mostly gone, analysts say.

"Of those that are planning to spend money, 52 percent are doing needed repairs or maintenance, as opposed to large-scale home remodeling projects." said Eliot Nusbaum of Better Homes and Gardens, which commissioned a new housing study. "The focus is on smaller projects right now like painting a room or replacing or adding flooring.

"What we are seeing in remodeling as well as new construction is practical considerations."

Energy-conserving or environmentally friendly upgrades are still on many homeowners' must-have lists.

"The focus for future projects really seems to be about saving money," Nusbaum said.

Harvard University research points to the same frugality, Baker said.

"We have seen a pronounced shift over to replacement projects in the last two years," such as energy-efficient windows or heating and cooling systems, he said. "But we are now seeing a little more life in discretionary projects – kitchen and bathroom remodeling."

The majority of fix-it fans are doing the upgrades out of their pockets, Baker said.

"This market is heavily dominated by cash financing," he said. "Households either don't want to take out loans because they are nervous about economic conditions or they can't get loans."

Buying a Condo: Wait or Jump in?

NY Times

AS the residential real estate market in New York City continues to emerge from its deep freeze, sales at new condominium developments are starting to pick up.

But while there are deals to be had on some new condos, buyers must navigate a tricky balance between getting in early — which often means a better price — and avoiding plunking down a deposit on a building plagued by bad construction or shaky financing.

“It’s a buyers’ market and sponsors are making deals,” said Jan B. Geller, a real estate lawyer with Altschul Goldstein & Geller. “But you have to be careful. What seems like a diamond in the rough may be a rhinestone.”

It is not always easy to know how to tell the difference.

When Alison Archibald and her fiancé, Urosh Perishic, started looking for an apartment to buy last fall, they noticed that some of the buildings they were interested in were eerily dark at night.

“We were driving around looking at buildings, seeing how many lights were on,” Mr. Perishic said. “I don’t want to be the only one living there.”

The building they settled on, the 303-unit Oro Condominium at 306 Gold Street in Brooklyn, is 44 percent sold. They bought a two-bedroom two-bath for $740,000. When sales began in the building in 2007, the asking price for that apartment — on the 33rd floor with views of Manhattan and four bridges — was $1.075 million.

“We were in a position where we could buy,” Ms. Archibald said, “so we realized we should just do it.”

If you decide to do it, too, be sure to do it carefully.

There are two major minefields to keep in mind when entering the world of new developments. The first is financial. What happens to your investment if the building doesn’t sell out? The second is bricks and mortar. How can you avoid buying in a place that was poorly constructed?

“You thought you were buying into this beautiful luxury building that was going to be owned by people of substance, and you wind up in a building owned by a bank or being rented out for extended periods of time,” said Steven R. Wagner, a real estate lawyer with Wagner Davis. “This creates problems with financing, refinancing, buying and selling, but it also creates issues in quality of life.”

In any housing boom, some buildings are thrown up hastily. The reports of leaks and inadequate fire-stopping in new construction are enough to make any buyer nervous. And if you’re considering buying in a building that’s still being built, an even more basic question to ask is: Will it ever be finished?

The Money

The median price paid for a Manhattan apartment in a new development fell to $1.19 million at the end of 2009, from $1.54 million at the end of 2008, a difference of 23 percent, according to Corcoran Sunshine, a brokerage that sells only new developments. There was also a drop in Brooklyn, but it was smaller, down to $585,000 from $630,000, a difference of only 7 percent.

Still, as prices have come down, mortgages remain mind-numbingly difficult to get, especially for people buying in new developments. Banks are requiring much higher down payments and credit scores than in years past, and they’re also evaluating liquidity more strictly in some cases.

“It used to be you could have a 660 credit score and the bank didn’t really care,” said Melissa Cohn, the president of Manhattan Mortgage, a mortgage brokerage. “Now they want it to be well over 700.” She added, “But one of the bigger issues we’re having these days is getting the building approved.”

One qualification lenders are sure to look at is what percentage of the building has sold. As more contracts are signed, a greater variety of mortgages become available to buyers.

When a building is 15 percent sold — sold here means contracts signed — a tower of steel and glass can legally become a condominium, and deals can start to close.

At this stage, few lending institutions will give potential buyers a loan. As a result, many of these early deals are all-cash transactions.

Initial sales can also be made with the help of portfolio lenders — so called because they make loans and hold them in a portfolio rather then selling them off. These mortgages tend to be a bit more expensive than standard conforming loans, with interest rates about half a point or a point higher.

Another source for early deals: private banks, which cater to a wealthy clientele. These rarefied buyers must have millions of dollars in liquid assets after the apartment deal goes through.

When a building is 50 percent sold, getting a mortgage becomes a little easier and a little cheaper, but options still tend to be limited to portfolio lenders, private banks and F.H.A.-insured loans. The building can try to get a special waiver from the Federal National Mortgage Association, or Fannie Mae, which would open it up to standard retail banks, but that is not always an easy task.

Without that waiver, Fannie will guarantee mortgages only in buildings that are at least 70 percent sold. But once the 70 percent mark is reached, the field of financing opens up and just about any bank will lend to the building — assuming the project has sufficient insurance and reserves.

At this point, the screening becomes less about the building and more about the buyer.

“The first 30 or 40 percent of buyers are obviously taking a slightly higher risk than someone buying in a well-developed building,” said Rolan Shnayder, the director of new development lending at Home Owners Mortgage, a direct lender. “So sponsors are willing to offer better deals and concessions to those first buyers. Whereas, someone who’s waiting until the building is almost sold out, is going to pay full market price.”

But not every new building is lowering prices. In some cases it simply can’t. Construction loans dictate the lowest price at which an apartment can be sold, and these prices were set years ago in a very different market. Instead of writing down the asset on their balance sheet, some banks would rather the buildings sat empty. This situation may not be sustainable, but for now, some lenders have dug their heels firmly into the ground.

In the meantime, however, there are deals out there.

A condominium in Williamsburg, Brooklyn, called Warehouse 11, is offering low prices to kick-start sales. But the building has a troubled history. It first came to market in 2007, and then a year later, when about 30 percent of the 120 units had sold and the building was almost finished, the bank pulled the plug. The developer gave back all the deposits.

“We were told the financing wasn’t there to complete the building,” said David Maundrell, the president of aptsandlofts.com, the brokerage handling sales in the building.

This winter, the developer worked out a deal with its bank, Capital One, to keep ownership of the property, and then put the apartments back on the market at a steep discount. Some units start at $450 per square foot, about $300 less than their average contract prices three years ago. In its first two week back on the market this month, Warehouse 11 had 35 signed contracts.

“You start at a reasonable number and move your way up,” Mr. Maundrell said of prices. “You need a certain threshold, not just for financing, but because people need to be comfortable that the building is selling well.”

The longer you wait for a building to sell, the less risk there is that you’ll be at the mercy of the sponsor for years. If the sponsor controls the board, he or she may decide to do upkeep on the cheap. If the sponsor decides to rent out the building’s unsold apartments, that means you’ve suddenly invested in a rental building where turnover is high and apartments often take a beating. Another grim possibility is that the sponsor could default, which might send the building into the arms of a bank and then off to some unknown entity.

The Building

“Two years ago, it was completely different,” said Tom Le, a senior vice president of the Corcoran Group. “Buyers were walking through a building that was not even completed yet — like there were no walls — and there were multiple offers on any unit. These days, most people want to see a complete product.”

Buyers who sign before construction is completed have always taken a risk that the building won’t look quite the way they imagined it. But these days, the biggest hazard of the preoccupancy purchase is that the building will lose its construction financing and then languish unfinished, wrapped in tarps — and wallpapered with your down payment — for an indefinite period of time.

If you are determined to buy in an unfinished building, research the construction lender. Many commercial banks are still on shaky footing. See if there has been any coverage in the media about the bank’s solvency. You can also try looking it up on the Web site of the Federal Deposit Insurance Corporation; go to the Enforcement Decisions and Orders page, look up your state, and see if any actions have been taken against that bank.

But even playing it safe and waiting until a building is completed to put down a deposit is not without its pitfalls.

“There’s always an inherent risk when buying new construction,” said Aaron Shmulewitz, a real estate lawyer at Belkin Burden Wenig & Goldman. “There is no track record for that building.”

The first thing you should do when considering a building is to give a close read to the condominium offering plan, a description of the project filed with the state attorney general’s office. If the brochures and brokers promise amenities that aren’t up and running, make sure the plan explicitly mentions them; if it doesn’t, the finished product does not have to offer them. If the building is complete, walk through it and make sure it delivers on the plan’s promises.

Reading the plan is just a start.

Before you sign a contract, ask the real estate broker if you can bring in an engineer or inspector to look the place over. Many sponsors won’t let your expert poke around on the roof, but you should be able to get one into the apartment you wish to buy.

Other factors that speak to the structural integrity of the building are complaints and litigation. You can look up an address on the Department of Buildings Web site and check for violations. You can also inspect court documents to see if the sponsor has been sued in connection with the project and what the judgment was. This can be done online at court Web sites or through a search engine like LexisNexis, though you might want to ask a lawyer for help to be sure you don’t miss anything.

One of the best ways to find out about any major problems is to ask the building’s residents. Stand outside and talk to people coming and going. Ask what it’s like to live there. If there have been problems, ask how the sponsor handled them.

The Developer

If a building has been standing for a only few months, there’s very little history to judge from, so the reputation of the developer becomes extremely important.

“There are some developers who have excellent reputations, do excellent construction and are well funded — and there are some buildings I wouldn’t buy in if you paid for it,” Mr. Wagner of Wagner Davis said. “So would I buy? Yes. But I would be very careful.”

Wayne Hosang recently bought a three-bedroom apartment at 80 Metropolitan in Williamsburg, Brooklyn. He says he was reassured by the fact that the developer, Steiner NYC, had completed many other projects, even though they have all been commercial.

“In a boom, anyone with two dollars and an idea can build a building,” Mr. Hosang said. “I can do anything to the inside of the apartment. What I can’t fix is what’s on the outside.”

To start researching the developer, take a look at the offering plan. It will tell you the name of the organization as well as the individuals behind it, who are called principals.

Do a litigation search for the principals as well as the organization — some developers create a different corporate entity, often using the building’s address, for each project. Look the developer up in newspapers and on real estate blogs. You might also try the Better Business Bureau to see if anybody has lodged a complaint.

Find out what other buildings he or she has built. Search for lawsuits and violations on those properties.

You might find out if the developer has other buildings on the market — look on his or her Web site, do some Web searches, ask around. Too much inventory for sale may put a developer under a financial strain.

Ultimately, no matter how much research you do, there are some things you just cannot know until you live there and until the last apartment in the building sells.

“The longer you wait, the safer it is,” said Mr. Shmulewitz of Belkin Burden Wenig & Goldman. “And if you wait a really, really long time, it becomes a prewar building.”

Look Before You Leap

BUYING a condominium in a new building these days means balancing the risks and benefits. Here are some things to keep in mind and questions to ask before you sign a contract:

• Be wary of buildings that have big blocks of apartments owned by investors. If a single entity owns, say, 20 percent of the building and cannot pay the common charge, the residents may have to make up the difference.

• If possible, get a mortgage contingency written into the contract. That way, if you can’t get financing, you can get your deposit back. If there is a long lag between the signing of the contract and the closing of the deal, this can be difficult to get. If the building is in move-in condition and ready to close, you might have better luck.

• If construction halted as the building was going up, it’s important to ask when and why. The building might have sat open, exposed to the elements for months.

•Before you close, walk through the apartment, ideally with an engineer or home inspector, and make sure everything is in good working order. Try out all the faucets and the appliances, open and close all doors and windows. If there’s a fireplace, test it to make sure it vents.

Commercial Market Bottoming Out?

Atlanta Journal Constitution

One of metro Atlanta’s biggest real estate players predicts more foreclosures of office towers and other commercial real estate this year but not as many as previously had been feared.

Still, 2010 will be a good year for rental rates for tenants amid a continuing glut of office space, according to commercial real estate services firm Jones Lang LaSalle.

Warnings about a commercial real estate loan bubble that could burst as billions of dollars of debt matures this year and next year have left many investors in a “wait and see” position, the company said in its Atlanta Urban Skyline Review released Tuesday. But with many banks and other lenders in trouble, investors are more likely to renegotiate and restructure loans rather than foreclose, the company said.

The Skyline Review analyzes 53 high-profile office buildings in downtown Atlanta, Midtown and Buckhead,  including 191 Peachtree,  SunTrust Plaza, Bank of America Plaza and the big Buckhead office towers.

As new office space continues to outpace demand, the vacancy rate in those submarkets is closing in on 25 percent, the report said.

“Investment activity is likely to remain slow in Atlanta until market fundamentals show sustained growth and confidence returns to the commercial real estate market and overall economy,” Lanie Rea, research manager of Jones Lang LaSalle in Atlanta, said in the report. “So while the commercial real estate market may have bottomed in urban Atlanta, all indications point to a slow and cautious ride back to the top.”

Has the bubble burst,  experts were asked  at the company's Atlanta real estate forecast breakfast on Tuesday.

“We're hoping it's a slow leak,” said Thomas Coakley, regional director of real estate investments for MetLife. “As long as everybody does their part,  and there's no unforeseen occurrences ... we don't see anything that will cause an explosion.”

Builders Reassess the Market

The NY Times

RIVER VIEWS At Henley on Hudson in Weehawken, work continues on a 27-unit building that is scheduled to open this summer. It is the fifth building there; a sixth structure is expected to be built later.

THE number of new-housing permits issued statewide in 2009 did not even reach 12,000. The last year the tally was that low: 1945, when New Jersey was still mostly cow and corn country.

If the housing crisis was finally over and the overall economy was headed toward recovery, it would still take at least two years for housing starts to recoup, according to market analysts.

“Traditionally, after past recessions, housing starts have doubled within two years,” said Jeffrey G. Otteau, whose Otteau Valuation Group provides advice on state real estate trends. “Because of the severity of this recession, though, there may be lingering wounds.”

Yet even in the face of these sobering numbers, several builders of multifamily projects have forged ahead — some actually building, others planning on it as soon as weather permits.

Their reasons are varied, based on interviews with developers of several large projects. Some asserted that their condominium developments held special appeal despite the general slowdown in sales; others said they had used the “down time” of the economic crisis to reconfigure plans and now felt that they understood the changes in buyers’ requirements.

“We paused our construction process,” said Lisa Macchi, an executive vice president of sales and marketing at Millennium Homes, in discussing Vizcaya, a high-end development rising atop a ridge off Northfield Avenue in West Orange.

In late 2008, Millennium was at work on 40 condo flats and 46 town homes at Vizcaya; as the outlook for the housing market grew increasingly grim, the company decided to create just the “shell” for another 41 condos. On the north side of the development’s huge main structure, it simply laid in foundation and put up first-floor walls.

Then, according to Ms. Macchi, sales were surprisingly strong at the first residences despite the slowdown: About 80 percent of them sold, at an average price of $1.2 million. So the decision to wait was revised. Last summer, Millennium decided to build out the last group of condos.

Construction is set to begin in March. Contracts have already been signed for a dozen of the units that won’t be completed until early next year, she said. The average sales price for those units is now $1.4 million.

By contrast, other developers expressed the belief that demand for top-end dwellings with the most elaborate possible finishes and features has diminished for the foreseeable future.

One of them, David Barry, the president of the Ironstate Development Company in Hoboken, said his company was instead focusing on ways to create “efficient” units — “not overly large, with high amenities, but lower price points.”

Mr. Barry, who shocked some fellow developers by pulling out of the condo construction game three years ago even as the market was still booming, said Ironstate would not get back in before the end of the year.

But the company is proceeding with plans to create about 70 condos at its Pier Village rental-and-hotel development in Long Branch. One idea Mr. Barry says he is considering is a condo conversion of one rental building at the complex.

It is still very hard to get construction financing, he noted, and conversion is less expensive than new construction. Also, the move would be in line with his notion of “efficient” apartments. The rental units are 700-square-foot one-bedrooms and 1,000-square-foot two-bedrooms.

“This could allow an entry-price point of something like $349,000, not $500,000,” he said, “which is more in line with today’s market.”

Mr. Barry said he and his brother Michael, the other principal at Ironstate, were also back at work on plans for the next phase of building at Port Liberté, the Hudson Riverfront complex in Jersey City. “I don’t know if we’ll start going in ’10,” he said, “but we are starting to work with architects again.”

At Henley on Hudson in Weehawken— part of the Port Imperial complex, which stretches into three towns along the Hudson — work is under way on a 27-unit building that is to open in July. It will be the fifth structure at Henley, with condos priced from the mid-$500,000s, for an 881-square-foot one-bedroom, to the $700,000s for certain two- and three-bedroom units. A sixth building is to be built later with the same configurations.

Michael Skea, the director of operations for Lennar Urban’s Northeast Division, which is developing Henley on Hudson in partnership with the Roseland Property Company, said that for the last 18 months the complex had had nothing available under $1 million. Penthouses and four-story town houses there go for more than $3 million.

“We get a lot of visitors who are enamored of the finishes and amenities we offer,” Mr. Skea said, “but they cannot pay prices that high. We wanted to press ahead with providing homes that are affordable to more buyers. ”

K. Hovnanian Homes, a large builder of single-family and condo developments, has several projects that continued to sell at a healthy pace over the past couple of years, said Steven Caporaso, an area vice president. As a result, construction has continued.

The final phase at Hunter’s Brook in Hackettstown, consisting of 21 single-family houses, is now under construction, for example. Eighty homes have sold since the project began marketing in late 2007, Mr. Caporaso said. This last group of houses is priced from $400,000 to the low $500,000s, for three- and four-bedroom homes. “We want to get the remaining homes ready for someone to purchase prior to April 30,” he said. That is the deadline for the federal tax-credit program for first-time buyers.

Weak Commercial Market Hides Deals

The Wall Street Journal

Bonds aren't getting a lot of love lately, as high-profile investors such as Warren Buffett say they favor equities right now.

Bill Bemis, portfolio manager for Aviva Investors, a unit of Aviva USA Corp., manages the group's securitized asset portfolio. He believes there are some great bond deals to be had, particularly in securities backed by commercial mortgages--even as expectations for a downturn in that market grow.

Aviva Investors is a global asset manager whose customers are primarily institutional investors. The group had $362 billion in assets under management at June 30, 2009.

Bemis buys securities backed by "seasoned" 2005 and earlier mortgages. After that, underwriting on the loans began to deteriorate, he said, just as it did in the residential market, though not to the same degree.

Aviva Investors' fixed income capabilities can be summarized by comparing the net performance of their Core Aggregate portfolio to the Barclays U.S. Aggregate. In the fourth quarter of 2009, Aviva Investors rose 0.77%, compared with the benchmark's 0.2% rise. Over three years, Aviva Investors rose 7.33%, compared to 6.04% for the benchmark.

The minimum investment required for the Core Aggregate portfolio is $25 million. "We expect higher delinquencies, falling property values and lower rents, and commercial mortgage property values will decline in 2010 as well," Bemis said. Market fear over the performance of commercial mortgage bonds is still high, he said, but "that doesn't necessarily mean there is no value in [commercial mortgage-backed securities]."

Even though he said he expects to see the commercial real estate market continue to deteriorate for at least the next year, Bemis said his group is adding exposure to commercial mortgage-backed securities, but only at the highest credit enhancement level, which typically means the triple-A or most protected of the securities.

Bemis buys securities backed by "seasoned" 2005 and earlier mortgages. After that, underwriting on the loans began to deteriorate, he said, just as it did in the residential market, though not to the same degree.

"Our view is that currently you are getting more than compensated for the risks which lie ahead in the commercial real estate market," Bemis said.

Bemis is more bearish on mortgage-backed securities packaged by Fannie Mae (FNM) and Freddie Mac (FRE), the government sponsored enterprises that ran into trouble as the residential mortgage market imploded over the past two years. Bemis expects those securities to underperform in 2010, as the Federal Reserve pulls back on purchasing.

"That is a general theme for 2010," Bemis said. "What happens as the government starts to pull back on some of the stimulus they have put out there?"