Zell’s Firm Raising $500 Million for Brazil Property

Bloomberg / Business Week

 

Billionaire investor Sam Zell’s Equity International is seeking to raise about $500 million to step up investment in Brazilian real estate, betting interest rate increases will fail to stem demand as the economy grows at the fastest pace in two decades.

The firm will invest as much as two-thirds of the money in Brazilian companies tied to the residential and commercial property industries and the rest in other countries outside the U.S., Chief Executive Officer Gary Garrabrant said. The new funds will bring the Chicago-based company’s total invested capital to about $2 billion.

“Our enthusiasm for Brazil could not be higher,” Garrabrant, who co-founded Equity International with Zell in 1999, said in a May 18 interview in Sao Paulo. “You’ve got this local demand that’s unparalleled.”

Rising incomes among Brazil’s burgeoning middle class will ensure that a cycle of rate increases won’t suppress housing demand, Garrabrant, 53, said. The economy will grow 6.3 percent this year, according to a central bank survey published this week. Brazilians’ average monthly income has risen close to 40 percent in the past five years to about 1,400 reais, according to the census bureau.

Zell is expanding in Brazil after Equity International sold part of its stake in Gafisa SA, the country’s second-largest homebuilder by revenue, last week. The BM&FBovespa Real Estate index tumbled 23 percent this year through yesterday as policy makers lifted the benchmark interest rate in April for the first time since 2008.

Gafisa Stake

Selling Gafisa shares doesn’t signal that Equity International is bearish on Brazilian real estate, Garrabrant said. The firm sold the equivalent of about 18 million Gafisa common shares, worth $123 million based on May 12 closing prices, and now holds 30.1 million, or 7.2 percent of the total, according to a May 13 statement from Gafisa.

Equity International bought a 32 percent stake in the builder for $50 million in 2005 and Garrabrant remains the Sao Paulo-based company’s chairman.

“This is, for 10 years, what we do: we invest in businesses,” he said. “And then at appropriate points in time we’ll monetize our position. It doesn’t mean we have any less enthusiasm for Gafisa.”

Brazilian homebuilders rallied today in Sao Paulo trading for the first time in six days. MRV Engenharia & Participacoes SA led gains, surging 7.6 percent to 10.79 reais while Gafisa rose 3.1 percent to 10.26 reais.

‘Battle-Tested’

Garrabrant said Equity International is not concerned about growth prospects in “battle-tested” Brazil as Europe’s debt crisis stokes speculation the global recovery will falter.

“This is nothing compared to what took place in past decades,” he said. Brazilian inflation peaked at more than 6,800 percent in 1990, while in mid-May this year it was at 5.26 percent, the government’s statistics agency said today.

Brazilian builders are inexpensive compared with “overvalued” U.S. real-estate companies, Garrabrant said. The BM&FBovespa Real Estate gauge traded at nine times earnings yesterday, according to data compiled by Bloomberg.

“There are no constraints to growth for the homebuilding sector,” he said. “Fundamentals are way ahead of share prices. It’s natural that interest rates will rise in the short term.”

Higher Rates

The Selic rate was increased to 9.5 percent on April 28 and policy makers may push it to 10.25 percent next month, according to the median estimate in a central bank survey.

Garrabrant said Brazil’s real-estate industry will benefit from economic and political changes. President Luiz Inacio Lula da Silva has helped lift 19 million people out of poverty and more than doubled the monthly minimum wage to 510 reais since taking office in 2003. The government’s “My House My Life” program is funding the construction of 2 million homes for low- income families by 2014.

The nation’s middle class last year increased to 53 percent of the population of 200 million from 42 percent in 2002, Finance Minister Guido Mantega said last month.

At least 1.5 million new households are formed in Brazil each year while builders produce about half that number of housing units, Garrabrant said.

Equity International may invest in Colombia for the first time with its new $500 million fund, the firm’s fifth, Garrabrant said. President Alvaro Uribe has boosted investor confidence, he said, by cutting the murder and kidnapping rates since taking office in 2002.

Demand in Colombia

Colombia has “great demand” for affordable and middle- income housing, he said.

The firm is also looking at opportunities in China and “frontier markets” including Vietnam, Indonesia and Morocco. Equity International sold its investments in Ukraine and Venezuela because of political risk, Garrabrant said. In 2008, it sold its holding in Desarrolladora Homex SAB, now Mexico’s largest homebuilder.

Garrabrant, who began his career in the real-estate division at First Chicago Bank, and Zell created their company to invest in real-estate businesses outside the U.S. Zell three years ago sold his Equity Office Properties Trust for $39 billion just as commercial property prices were peaking. He also orchestrated a buyout of media company Tribune Co.

Beyond Gafisa, Equity International holds a stake in BR Malls Participacoes SA, Brazil’s biggest owner of shopping malls, and bought an 8.5 percent stake in Brazilian Finance & Real Estate Participacoes SA last year to develop the country’s mortgage market.

“There are less than 400,000 mortgages in Brazil -- I think there are 400,000 mortgages on the Upper East Side of Manhattan,” Garrabrant said. “Will the Brazilians catch up? No question.”

Toxic CDOs Beset FDIC as Banks Fail

The Wall Street Journal

The FDIC has inherited hundreds of potentially worthless bonds that have come back to haunt the Wall Street firms that sold them, the credit-rating firms that graded them and the hundreds of small banks that bought them.

The Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more than 250 collateralized debt obligations that were purchased by small institutions that later failed. Although the bonds have a book value of more than $400 million, they are a headache for the agency as it grapples with the toxic assets flowing from many banks around the country.

"We're getting more of [the CDOs] all the time," said Miguel Browne, an assistant director in the FDIC's division of resolutions and receiverships. The agency has inherited such securities from about two dozen banks that have failed in the current crisis, including Omni National Bank in Atlanta, Venture Bank in Lacey, Wash., and San Diego National Bank.

The FDIC's mountain of bad securities has grown even bigger in recent weeks following the failure of Riverside National Bank of Florida, a small firm that had stuffed its investment portfolio with 27 CDOs known as trust preferred securities. Although it was a community bank with 58 branches in Florida, its pile of CDOs has almost doubled the notional value of bonds owned by the federal agency.

Now, in an unusual move, the FDIC may be preparing battle back directly. It has asked a New York court for permission to replace Riverside as plaintiff in a six-month-old lawsuit in which the bank accused more than a dozen financial firms of misrepresenting the value of the CDOs.

The FDIC's focus on CDOs comes at a time when the financial instruments are being scrutinized by regulators and prosecutors. Several Wall Street firms, including Goldman Sachs Group Inc. and Morgan Stanley, have attracted particular attention in recent weeks for what they told investors about the nature of the CDOs when the initially sold them.

The problem is that it is difficult to pin down the value of something for which there may be no market. According to FDIC estimates, that the book value of the CDOs that the agency now holds is more than $400 million. But "a lot of these things will have little or no market value," Mr. Browne said.

The agency hopes to auction off any CDOs that have value this summer. If it can't unload them, the FDIC could be forced to write off their value, saddling taxpayers with the losses.

Many of the 200 bank failures since the beginning of 2009 have been accelerated by losses in trust preferred securities, which are a hybrid between debt and equity. More than 1,500 banks issued such securities between 2000 and 2008 after regulators ruled that they could be counted as capital, making their balance sheets appear healthier.

Wall Street brokerage firms then bought the securities from individual banks that had issued them and packaged them into CDOs. The brokerage firms then sold slices of the CDOs to other small banks. Community banks bought roughly $12 billion of these trust preferred CDOs between 2000 and 2008, according to Red Pine Advisors LLC, a New York firm that values illiquid investments.

Riverside, based in Fort Pierce, Fla., bought 27 trust preferred CDOs with a book value of $211 million between 2005 and 2007. Only two of those CDOs revealed the underlying collateral the investments relied upon, according to a lawsuit that Riverside filed last year in New York Supreme Court. It bought the securities from Wall Street firms, including Merrill Lynch, which is now owned by Bank of America Corp., FTN Financial, a unit of First Horizon National Corp., and boutique financial-services firm Keefe, Bruyette & Woods Inc. Defendants also include McGraw-Hill Cos., which owns credit-ratings firm Standard & Poor's, and Moody's Corp.'s Moody's Investor Service; the suit says that the credit raters determined the CDOs to be investment grade when they weren't.

When the financial crisis struck, the banks that issued CDOs couldn't afford to make interest payments on them. Credit-rating firms then downgraded the securities, battering their value.

That dealt a blow to Riverside, which was already stumbling under the weight of soured loans. Its CDOs dropped an average of 11 rating levels within four years. Its portfolio of trust preferred securities dropped more than 60% to $79 million by the end of 2009, according to the lawsuit.

Riverside has sued more than a dozen firms that sold it the trust preferred securities, saying they were "based on inflated investment-grade ratings, undisclosed material conflicts of interest," among other misrepresentations, according to the lawsuit.

"We believe we have meritorious defenses in this matter and intend to defend ourselves vigorously," said a spokesman for First Horizon. Representatives of KBW and Merrill declined to comment.

"We believe the claim has no legal or factual merit," said an S&P spokesman. A Moody's representative declined to comment.

But in a motion to dismiss the case, the defendants said Riverside's losses "result from the risks it knowingly assumed and from the unprecedented market cataclysm, rather than any flaw in the specific CDOs at issue here."

When Riverside failed last month, Toronto-Dominion Bank of Canada acquired the most valuable pieces, including its branches, $2.76 billion in deposits and most of its $3.42 billion of assets. The Canadian bank left the trust preferred securities to the FDIC, which also inherited Riverside's lawsuit.

Earlier this month, the FDIC filed a motion to replace Riverside as plaintiff in the case. The agency also is seeking a 90-day stay in the case as it tries to determine what the CDOs are worth.

Dubai House Prices Rise; Oversupply Remains an Issue

Bloomberg / Business Week

The completion of a “significant” number of new homes in Dubai later year will further pressure prices that rose 2 percent in the first quarter, Colliers International said.

Colliers, a global real-estate-services firm, estimates that 41,000 residential units will enter the market by the end of 2010, mostly in the low- to mid-income segments. House prices in the first quarter were on par with 2007 levels, rising on average to 1,061 dirhams ($289) a square foot from 1,037 dirhams a year earlier, Colliers said in an e-mailed report today.

“There will be significant oversupply in the market by the end of the year, so it is anticipated the index will experience fluctuations in value going forward,” Colliers’ regional Director Ian Albert said in the report. “Demand is not expected to match the growth in supply, creating downward pressure on property prices,” according to the document.

Dubai’s property prices have slumped more than 50 percent since their peak in mid-2008 as the financial crisis forced companies to dismiss workers. The market’s collapse followed a construction boom that created thousands of homes just as demand began to evaporate.

Apartment prices in the emirate gained 6 percent in the first quarter compared with the previous three months and villa prices rose 2 percent while the cost of townhouses was down 4 percent, Colliers’ house-price index showed.

Banks ‘Selective’

“Numerous” banks and mortgage providers increased the loan-to-value ratio to between 75 percent and 90 percent in the first quarter, according to Colliers. Some also lowered interest rates on mortgages to between 6.5 percent and 8.5 percent.

“Banks remain selective in offering finance, providing it against specific projects, mainly completed or near completion, and only to borrowers who can meet the strict lending criteria adopted by most banks,” Colliers said in the report.

The change of demand from speculative investors to end- users places more importance on the “liveability” aspect and there will be better demand and greater stability for projects that offer a “community lifestyle,” according to the report.

Single Women Outpace Single Men in Real-Estate Market

Market Watch

For Mother's Day, flowers and chocolate are nice, but watching your single daughter take the lead in the real-estate market may be even nicer.

Unmarried women accounted for 21% of home purchases in 2009, while unwed males were 10% of the buyers, according to a National Association of Realtors report in November. It's a dramatic shift from 1981, the first year the numbers were tracked, when single women and men each accounted for 10% of home sales.

Still, some industry professionals have been slow to take note of females' robust activity. Single women have held steady at the 20 % mark for more than five years, yet when the Urban Land Institute hosted its annual real-estate conference in late April, analysts had to remind the audience to expect big numbers from young, single female buyers.

"I've given some of my [home-building] clients lessons on how to be gender friendly," said Brooke Warrick, president of the market research firm American Lives. He reminded sellers to treat young women as viable buyers, not bystanders, by doing something as simple as handing them a brochure when they enter a for-sale home.

His advice to real-estate developers: "Make sure to pay enough attention to these women. You want these women."

These women tend to stake their claim on homes in the 1,700-square-foot range predominantly in the Washington, D.C., California and Texas markets, Warrick said.

After segmenting the market, Warrick noticed that young women, especially those rooted in secure industries like health care, make more money than their male peers.

Though not quite rooted in a stable industry, freelance video producer Sara Barger, 26, pursues buying homes as a way to safeguard her net worth.

26-year-old owns three homes

Earning roughly $90,000 a year, the American University graduate bought her third Washington property in three years in January when she closed on a four-bedroom $350,000 foreclosed townhouse in Columbia Heights. Barger rents out three of the bedrooms as well as her two condominiums to supplement her income and subsidize her monthly $5,866 mortgage, condo and tax expenses. After her rental income, she ends up owing about $625 a month, including utilities.

"I think people put way too much emphasis on the long term," Barger said of the ease with which she approaches purchasing. "You have to look at it the same way as a 401(k). It's a gamble, but it's something tangible. At least I can get some utility."

Relatives contributed $5,000 to Barger's first two purchases. Her father loaned her $50,000 for the third and she repays him in $1,000 monthly installments. She said that buying properties that needed work was one of her strategies, as was working a full-time job throughout college.

Barger's broker, David Bediz of Coldwell Banker subsidiary Dwight & David, began to see women taking a more active role in real estate five years ago. But he said the company's 20-something clients are still pretty much split evenly down the gender line.

From the 1920s almost through to the present, the predominant female homeowners were widowed seniors, according to Richard Sylla, financial historian at New York University's Stern School of Business.

Although pop culture tends to portray women as eager shoppers, women may have taken the lead in home purchases in recent years because of their thrifty habits, some say.

"Men are much more interested in consumption," said Walter Molony, a spokesman for the National Association of Realtors.

Barger said she observed such indiscretion in spending among her male friends, noting that quite a few who have hit 30 are now reeling in the debt they racked up in their early 20s.

"The last three boyfriends I had, I've broken up with because they were dirt broke," Barger said. "I don't need you to pay for me. I need you to go out and do things."

Inspired by women's interest in personal finance, in January 2009 Amanda Steinberg established DailyWorth.com, a free newsletter tailored to teaching women how to manage their money. Steinberg said her readership doubled to 20,000 in the last three months and that their interests lie mostly in protecting their assets. Of the eight topics offered in a recent preference poll, 79% of 500 respondents checked off "saving" as one they would like to read more about, whereas 45% chose "frugal shopping."

Steinberg said she's pretty sure she knows why her readers are swiping less and budgeting more. "I think it's the fact that more and more women realize that a man is no longer the financial plan."

New Home Construction in U.S. Probably Rose as Tax Credit Boosted Sales

Bloomberg

Home construction probably picked up in April, the growth outlook improved and the cost of living was little changed, showing the U.S. economy is expanding without stoking inflation, economists said before reports this week.

Work began on 650,000 houses at an annual pace last month, the most since November 2008, according to the median forecast of 62 economists surveyed by Bloomberg News before Commerce Department figures on May 18. Other reports may show the index of leading indicators climbed for a 13th straight month, while consumer prices rose 0.1 percent.

A government tax credit worth as much as $8,000 helped sales of new houses surge in March by the most in five decades, which may lead to a rebound in construction in coming months after builders trimmed inventories. Minutes of the Federal Reserve’s April meeting, also due this week, may shed more light on policy makers’ assessment of the economy.

The tax incentive “gave a boost to developers too,” said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. “The economy is growing at a modest pace, and in the short run, there’s no reason to worry about inflation.”

The Conference Board’s measure of the economy’s outlook for the next three to six months climbed 0.2 percent last month, according to the survey median. The figures, due on May 20, would follow a 1.4 percent gain in March that was the most since a similar rise in May 2009.

The Commerce Department’s housing report may show building permits, a sign of future construction, grew at a 680,000 rate, matching the pace of the prior month that was the highest since October 2008.

Tax Credit

The tax incentive for first-time homebuyers, which was extended in November to include some current owners, required contracts be signed by April 30 and settled by June 30. Sales of new homes surged in March by the most since 1963, and purchases of existing homes rose for the first time in four months as the deadline approached.

The jump in sales in March brought the number of new houses on the market down to 228,000, the fewest since March 1971, one reason builders may keep taking on projects even as they compete with foreclosed homes coming back on the market.

The rebound in demand also lifted builder confidence this month to the highest level since April 2008, a report may show tomorrow. The National Association of Home Builders/Wells Fargo’s index rose to 20 from 19 in April, according to the Bloomberg survey median. Even so, readings below 50 mean a majority of respondents said conditions remained poor.

Foreclosure Filings

Home repossessions rose to a record level in April while foreclosure filings dropped in a sign mortgage lenders are working off a backlog of seized properties, according to RealtyTrac Inc. data released last week.

A sustained recovery in housing and the economy will depend on faster job creation. Employment increased in April by the most in four years, and the economy has added jobs for four consecutive months. At the same time, economists project the unemployment rate will end the year above 9 percent, according to a Bloomberg survey taken this month.

Pulte Group Inc., the largest U.S. homebuilder by revenue, is among companies waiting for signs the improvement in housing will last beyond the end of the government assistance. Bloomfield Hills, Michigan-based Pulte said its first-quarter net loss narrowed from a year earlier. The number of houses it sold fell even as it combined operations with rival Centex Corp.

Bottom, Not Recovery

“The U.S. housing industry is finding, and may have already found, a bottom, but that’s different from saying that a recovery is at hand,” Richard J. Dugas, Pulte’s chairman and chief executive officer, said on a conference call with analysts on May 5. “Any meaningful sustained improvement will require employment gains, and in turn, better consumer confidence.”

The Standard & Poor’s Homebuilder Supercomposite Index has climbed 14 percent this year, compared with a 1.9 percent gain in the broader S&P 500.

Price pressures are limited, a pair of reports from the Labor Department may show. The producer price index, due on May 18, rose 0.1 percent in April from the prior month, according to the Bloomberg survey median.

Consumer costs are also forecast to rise 0.1 percent, the same as in March, economists projected. Excluding food and fuel, the so-called core rate probably also rose 0.1 percent.

“Inflation is likely to be subdued for some time,” Fed policy makers said in a statement after their April 28 meeting, when they signaled the main interest rate will remain near zero for an “extended period.” Minutes of that gathering will be released on May 19.

Regional Fed reports may show manufacturing kept driving the economy’s recovery from the worst recession since the 1930s. The Fed Bank of Philadelphia’s general economic index, due on May 21, rose in May for the fourth straight month, while the Fed Bank of New York’s gauge expanded for the 10th month, economists projected.

Building Is Booming in a City of Empty Houses

NY Times

 

Josh Snider and Cindy Rojas visited the lot for their home at Coronado Ranch in Las Vegas, developed by America West.

LAS VEGAS — In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.

The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.

“There’s a surprising rebound in the hardest-hit markets,” said Brad Hunter, chief economist with the consultant Metrostudy. “People are buying again.” From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.

Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.

Land and labor costs have fallen significantly, so the newest homes are competitively priced. Some of the boom-era homes, meanwhile, are in developments that feel like ghost towns. And many Americans will always believe the latest model of something is their only option, an attitude builders are doing their utmost to reinforce.

In Phoenix, a billboard for Fulton Homes summed up the builders’ marketing approach. “Does your foreclosure have tenants?” it asks, next to a picture of a mammoth cockroach.

Brent Anderson, a marketing executive with another Southwest builder, Meritage Homes, said it bought 713 lots in stricken Arizona last year, and was on the verge of starting construction in a new Phoenix community called Lyon’s Gate.

“We’re building them because we’re selling them,” Mr. Anderson said. “Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?”

All of this goes contrary to the conventional wisdom, which suggests an improved market for builders is years away. Nationwide, new home sales at the beginning of this year plunged to a level below any recorded since 1963, when the figures were first officially tabulated.

Simply put, the country already has too many houses, the legacy of wide-scale overbuilding during the boom. The Census Bureau says there are two million vacant homes for sale, about double the historical level. Fewer new households, moreover, are being formed as families double up for economic reasons, putting a further brake on demand.

Even some builders agree with the pessimists when it comes to Las Vegas. Meritage Homes, for example, has largely withdrawn from the city. “We don’t think it will come back for a long time,” Mr. Anderson said.

American West is betting the opposite is true. The developer, which is privately held and is based here, builds nowhere else.

The evening under the tent with Mr. Lee was the official start of American West’s new community, called Reserve at Coronado Ranch. Before it opened, buyers began putting down money for the houses, which sell for under $300,000. “For the first time in three or four years, we have pent-up demand,” said American West’s vice president for sales, Jeff Canarelli.

Disregard what you may have heard about how hard times may usher in an era of restraint. “With our buyers, they always want bigger,” Mr. Canarelli said. An American West home introduced during the recession comes equipped with an elevator.

One of the initial buyers at Reserve is Josh Snider, a surgical technologist who decided a year ago he wanted to buy his first home. He sought out a foreclosure, deals that were supposedly plentiful and cheap. “What a nightmare that was,” recalled Mr. Snider, 38. “I put in five or six offers and was always outbid.”

He didn’t see any homes that were being sold by buyers in the traditional way. The price declines in Las Vegas have been so brutal that most homeowners with a mortgage owe more than their home is worth. If they must sell, their only option is a so-called short sale done with the approval of the lender, which can be a lengthy and frustrating process for all concerned.

Worried the market was going to turn around before he bought, Mr. Snider started checking out the new developments. He liked the floor plan, size and price of Reserve, which ultimately will have 310 houses.

A final incentive sealed the deal, this one courtesy of the United States government: he got a loan insured by the Federal Housing Administration, which meant his down payment was much smaller than a private lender would require.

The house, to be done in September, cost $273,500. “It’s not a bargain for everyone,” Mr. Snider said, “but it’s a bargain for me.”

He plans to live in the house with his girlfriend, Cindy Rojas, and his 12-year-old daughter.

Another early buyer is Irving Hallman, an investor from Hawaii. “I understand Vegas has its ups and downs, but we did the numbers and this house will hold its value,” Mr. Hallman said.

There is a benefit to the seeming madness in places like Las Vegas. Building homes is the traditional fuel of a recovery.

“Housing is construction. It’s tables. It’s paint. It’s couches. It’s toilets,” said Sally Taylor, a specialist in liquor and gambling establishments who attended the American West festivities. “If we build more houses, we’re creating more jobs.”

Across the street from Reserve’s three model homes is a new strip mall. Only one building is occupied, a gambling parlor. Others will start to be filled when more buyers join Mr. Snider and Mr. Hallman finds a renter.

Analysts have calculated that it could take as long as a decade for inventories to return to their precrash levels and for demand to once again exceed supply. That is a grim prospect for any owner who hopes to accrue equity through rising prices.

A few experts, however, are starting to think the path to a better market will be much shorter. Stephen F. Auth, chief investment officer at the financial services company Federated Investors, is a housing bull. He says he does not believe that many extended families will end up all living in one place, like the Waltons in the 1930s.

“That’s an unsustainable environment — Grandma coming home, Johnny moving back in with his new wife,” Mr. Auth said. “They’re going to move back out. The great housing depression is nearly over.”

New-home sales in March rose 27 percent. But most analysts attributed the jump to the pending expiration of yet another government incentive, a tax credit for buyers, and said sales would quickly slump again.

Even in Las Vegas, a community built on the willingness to be lucky, belief in a housing turnaround — and Mr. Lee’s portrait of a resilient city on its way to being a global “meetspace” — is provisional. Agents at the party said they had their hopes but were chastened by the horrors of the last three years.

Afterward, packing up his video equipment, Mr. Lee said the party itself heralded a recovery. “We used to do this every two weeks, starting in the 1990s,” he said. “But this is the first time in 18 months. Believe me, it’s been famine around here.”

Luxury Homes Falling Prey to Foreclosure

USA Today

Heated pools, ocean views and media rooms are not what most people would expect to find in a foreclosed property, but more high-end homes — priced at more than a million dollars — have been falling into the hands of banks this year.

Foreclosures of homes worth more than $1 million began increasing at the end of 2009, according to data provided to CNBC.com by foreclosure tracking website RealtyTrac.

Foreclosures reached a high in February 2010, the last month data were available, when 4,169 high-end homes were somewhere in the foreclosure process; having received a foreclosure notice, had an auction scheduled or had ownership taken over by the lender. That's a 121% increase from a year ago.

The deterioration comes just as housing experts say that foreclosures in the low and middle ends of the housing market are showing signs of stabilization.

Owners of expensive homes "were able to stave off foreclosure longer," says independent real estate analyst Jack McCabe, CEO of McCabe Research and Consulting in South Florida. "Lower-end homeowners were the first ones to see the escalating foreclosures, because they generally do not have the cash reserves or credit available that the luxury homeowners do. They had the ability to take their credit cards and pull out thousands of dollars, while the lower-end buyers were already tapped out."

McCabe expects foreclosures in the high-end market will increase into 2011.

Though the RealtyTrac data on high-end homes are not available on a regional or metropolitan basis, anecdotal evidence indicates the problem is cropping up across the country. High-end and luxury categories vary widely from market to market. In some suburban areas, in the Northeast and California, for instance, million-dollar homes are fairly common, but nationwide, they represent 1.1% of overall housing stock.

"We have seen an increase, in the million-plus range, of the number of foreclosures and short sales in the greater Chicago area," says Jim Kinney, vice president of luxury home sales at Baird & Warner.

He says that of the 295 million-dollar, single-family properties sold in the first quarter this year, 37 were either a foreclosure or short sale, when a bank and homeowner agree to sell the home for less than the loan is worth. During the same period a year ago, 10 of 231 fell into those categories.

In the Fort Myers, Fla., area, Mike McMurray of McMurray and Nette and the VIP Realty Group says he has seen a few foreclosed high-end homes on the market compared with none last year. He's currently showing a 4,800-square-foot, $3.65 million home on Captiva Island, where foreclosures are usually rare. The bank-owned home has five bedrooms and access to 150 feet of Gulf Coast beachfront.

"There are more we see coming down the pipeline," McMurray says.

Data show that may be the case around the country. The 90-day delinquency rate on home loans worth more than a million dollars hit a high in February at 13.3%, above the overall rate of 8.6%, according to real estate data firm First American CoreLogic. Foreclosure proceedings generally start after a homeowner has been at least 90 days late on a mortgage payment, experts say.

One difference in the high-end market is that lenders are willing to do more to head off foreclosure by renegotiating the loan or accepting a short-sale transaction, which is essentially a last-ditch effort.

"Lenders are far more likely to go the short-sale route," says Andrew LePage, an analyst at real estate research firm DataQuick. "There's a lot more money at stake, and maintenance can be high if a foreclosure just sits there."

A $1.15 million condominium in Chicago in the landmark Palmolive Building was initially offered as a short sale, but after a buyer did not materialize, it's now owned by the bank, says Janice Corley, founder of Sudler Sotheby's International Realty, which is currently listing it. The condo has lake views and a long list of luxury-building amenities, including a steam room, doorman and gym.

The rise in luxury foreclosures has one Las Vegas real estate agent flying prospective buyers into the city via private jet. Luxury Homes of Las Vegas and JetSuite Air teamed to offer the complimentary trip for buyers flying from Los Angeles to view three foreclosed homes priced between $4.9 million and $6.1 million.

Agent Ken Lowman says he gave three tours over a one-week period and hopes to expand the offer to buyers from other West Coast cities.

There's just too much competition, Lowman says. "It takes an innovative approach like this to get results."

Median Home Prices Up in 60% of U.S. Cities

USA Today

Home prices rose in nearly 60% of U.S. cities in the first quarter of this year, the National Association of Realtors says.

The median sales price for previously occupied homes rose in 91 out of 152 metropolitan areas tracked in the January-March quarter versus a year ago. There were double-digit price increases in 29 cities.

That's a sharp improvement from the fourth quarter of last year, when prices rose in about 40% of cities. The national median price was $166,100, or 0.7% below the first quarter of last year.

Sales of foreclosures and other distressed properties made up 36% of all sales in the first quarter.

The largest percentage price increase was in Saginaw, Mich., where the median price doubled to nearly $61,000. Prices in Akron, Ohio were up 95% to about $95,000. Prices in Cleveland were up 54% to $106,400.

The largest price decline was in Orlando, where they dropped 15% to nearly $132,000. Prices in Ocala, Fla., fell 14.5% to a median of nearly $93,000. Prices in Cumberland, Md., fell 14.4% to $98,300.

Cashing in on a Real Estate Boom

The Wall Street Journal

Most Commercial Properties Are Slumping, But 'Triple Net Lease' Deals Are Hot

 

 

Are you overlooking a commercial real-estate boom?

If your definition of the category is limited to splashy office parks and shopping malls, both of which took a pounding during the financial crisis and haven't fully recovered, then you probably are.

But think a little smaller—like fast food-restaurants, convenience stores and gas stations—and the returns get bigger. Such ventures, known as triple-net-lease properties, are "the best-performing sector of the commercial real estate marketplace," says David Bailin, head of global managed investments for Citi Private Bank, which serves ultra-high-net-worth clients. "It is the sector that lost the least value [during the recession] and rallied the quickest."

Triple-net-lease properties are usually freestanding buildings in which a tenant agrees to take responsibility for maintenance, taxes and insurance during a long lease—leaving the investor with little to do but collect checks. Investors typically buy individual properties through commercial real-estate brokers like Marcus & Millichap, CB Richard Ellis Group or others, either alone or in limited partnerships with a few other investors, and then lease them out to occupants such as drug store chains, quick-serve restaurants, convenience and dollar stores, medical outfits, and in some cases big-box retailers like Costco.

Triple-net-lease properties are generating annual returns of as much as 12% these days, estimates Bernard J. Haddigan, managing director of Marcus & Millichap Real Estate Investment Services' National Retail Group. Individual investors and small groups of partners generally invest $300,000 to $5 million per building.

Some publicly traded real-estate investment trusts concentrate on triple-net-lease properties, too. They returned 16.9% during the first quarter—compared with 11.1% for Dow Jones Equity All REIT Index, which includes all types of commercial and residential property.

Triple-net properties suffered during the recession, but less than other types of real estate. Whereas overall commercial prices fell by about 40% during 2007-09, prices for triple-net properties fell by about 15%, according to Mr. Haddigan.

Like all kinds of investing, triple-net-lease plays are based on risk: the more you're willing to take, the greater the potential returns. There are several important factors that determine a triple net deal's riskiness: the creditworthiness of the tenant, the location, physical condition and functionality of the property, and the remaining term on a lease (shorter is riskier). Also important: the "occupancy cost" or "health ratio," defined as the percentage that the tenant pays in rent relative to store sales. (The lower the ratio, the better.)

Besides overall economic risk, there's the risk of picking a tenant whose product or service might fall out of favor. Changing consumer trends can wipe out cash cows, as happened with some video-rental stores during the last decade.

"You need a good tenant," says Jeffrey Rogers, president and chief operating officer of Integra Realty Resources, a commercial real-estate appraisal and consulting firm that doesn't own or broker real estate. "Then you need an optimal location and to know what the market rent is. That is absolutely key."

Investors who lack the time or inclination to invest in triple-net-lease properties directly can get into the category via REITs such as the publicly traded Realty Income Corp. and Lexington Realty Trust in New York, as well as American Realty Capital Trust in Jenkintown, Pa., which is not traded on a stock exchange. These REITs invest mainly in triple-net properties, and they're generally sold through broker-dealers. They sometimes have minimum-net-worth and other requirements.

As with most income properties, investors can come out ahead—or behind—on triple-net properties in two ways: through price appreciation and income. The best measure of income potential is the so-called capitalization rate, or the net operating income divided by the purchase price of a property.

In recent months, cap rates have been falling because property prices nationally are rebounding. More investors are going after fewer high-quality properties, driving prices up. This is considered a positive sign for the broader commercial real estate market—but it means the easy money in triple-net-lease properties might be coming to an end.

But there is still opportunity for savvy investors. Michael K. Federman, 38 years old, is an attorney in New York who began investing in triple-net properties in 2004, during the previous recession. His first acquisitions were fried-chicken restaurants in upstate New York, followed by a Circle K convenience store in Arizona. He later sold the Circle K and purchased more buildings, and currently owns a portfolio of 15 properties.

A self-professed "conservative" investor, Mr. Federman now concentrates primarily on single-tenant properties, he says. Most recently, he and a business partner in March purchased a long-term lease property for about $4 million housing a Chipotle Mexican Grill in Lower Manhattan with a cap rate of 8.5%. That return was in line with the national average for casual dining restaurants in 2009, according to Marcus & Millichap.

"For me it was a perfect deal," he says, "because it combined prime real estate, stellar credit and minimal management responsibilities."

Real Estate Boom Phrases that went Bust

San Francisco Chronicle

 

 

The way we talk about real estate has changed dramatically in the last few years as the collective sentiment has shifted from euphoria to panic. No one would dare to say "the only way is up" or "the easy money is in flipping" anymore. Here are a few other phrases that once seemed just as true.

"Location doesn't matter."
Housing was appreciating so rapidly in seemingly every market that some people thought that no matter where you bought, you'd soon make a fortune.

It's hard now to believe that anyone was promoting such a myth. After all, even people who claim to know nothing about real estate can rattle off the famous adage, "location, location, location." More than anything else, where a home is located determines its long-term value. A state-of-the-art kitchen can quickly become outdated, but a nice part of town can remain that way for generations.

Even some places that seemed like great locations turned out to be terrible bets. Stephen Smith reported in an American RadioWorks documentary that Las Vegas went from having job growth four times the national average and attracting 4,000 to 5,000 new residents a month to being dubbed "Foreclosure City." (For more on why location matters, check out The 5 Factors Of A "Good" Location.)

"You don't need a down payment."
Traditionally, the purpose of a down payment is to reduce the bank's lending risk. It shows that the borrower has enough self-discipline to save up 20% of the purchase price of a home.

More importantly, it means that the borrower is likely to keep making his mortgage payments even when times are tough because he has already put a lot of his own money into the house.

When banks started giving people mortgages that didn't require a down payment, buying a home started to feel more like leasing an apartment. Even owners with fixed-rate mortgages had little home equity since most of the mortgage payment for the first few years is interest.

When housing prices dropped, owners started sending jingle mail to their lenders. So what if they could still afford the monthly payments? It didn't make logical sense to keep paying for a depreciating asset that they owned so little of, borrowers reasoned. The sting of a credit score ruined by foreclosure wouldn't last as long as the burn of paying $500,000 for a $300,000 home.

The lack of down payment is also one reason why so many homeowners ended up underwater. If you purchase a home for $200,000 with no down payment and the market value of your house drops to $160,000, you can't sell the house because you can't pay off the mortgage (unless you have $40,000 sitting in the bank). If you purchase a home for $200,000 with a 20% down payment and the market value drops to $160,000, you still have the option to sell at a loss. Most people who didn't make down payments didn't have money in the bank, though, and when they needed to get out of their homes, they were forced into credit-damaging short sales and foreclosures instead of having the option to sell. (Learn more in Short Sales And Foreclosures: When It's Time To Move On.)

"You can refinance before your rate goes up."
How many people who took out adjustable-rate mortgages (ARMs) heard this line? But since prices were headed nowhere but up, many people, especially subprime borrowers, assumed that in the three or five years before their ARMs reset, they would be able to improve their credit enough to qualify for a fixed-rate mortgage or see their home appreciate so much that they would have no trouble refinancing. Another reason many people took out ARMs and other risky mortgages was because they planned to flip the house and wanted to spend as little as possible on mortgage payments in the meantime.

When the real estate market crashed, people went underwater and couldn't sell their homes for enough to pay back the money they owed on the mortgage. Not only did they become trapped with the home, they became trapped with an unpredictable and generally much higher housing payment. Because of the poor economy, many of these people also lost their jobs, making it nearly impossible to pay the mortgage.
 

"Just get a home-equity loan."
During the boom, money trees were suddenly sprouting up in people's backyards in the form of home equity loans (also known as second mortgages) and home equity lines of credit. Homeowners were able to take advantage of the appreciation in their home's value to borrow money - lots of money. Whatever you wanted to pay for, whether it was your kids' college educations or a new kitchen, the home equity loan was the answer.

Unfortunately, the collateral for these loans is the home itself. Even people who bought homes at reasonable prices and had affordable mortgage payments got sucked into the housing crisis when they borrowed money based on what would soon become unrealistic values for their homes. The loans they took out reduced the equity they had built up and increased their monthly payments. Many people who borrowed against their home equity ended up in the same position as people who took out bad mortgages or mortgages they couldn't really afford.

The Bottom Line
The next time we find ourselves in an asset bubble - and there will be a next time - perhaps the lessons we've learned from the housing crisis will cause us to consider what we hear and say a little more carefully.

Jersey Shore Housing Market Suffering

Courier-Post

n 2005, when Wildwood's Marina Bay was still on the blueprints, the opening bid for a slice of the Jersey Shore was $495,000.

Since then, the market for Atlantic Beach vacation homes has wilted like cotton candy dropped on this resort's celebrated boardwalk on a hot afternoon.

Last year, Marina Bay's developer filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

On May 23, the bank will auction off 28 three-bedroom condominiums at the bay-view complex, which once had price tags as high as $699,000.

The minimum opening bid: $95,000.

Clinton-based auctioneer Max Spann is midway through a 44-day whirlwind, selling 146 homes in four states in seven different auctions. The week before the Marina Bay sale, he will wield the gavel on 25 condos in Wildwood Crest.

"Our business has increased dramatically for higher-quality properties," he said.

This year, Spann has auctioned waterfront condos on Maryland's Eastern Shore, luxury lofts with views of the Manhattan skyline and a 133-acre horse farm in Hamilton.

The Marina Bay condos are each 1,560 square feet with nine-foot tray ceilings; large, private balconies; and a heated pool. Kitchens are outfitted with stainless steel appliances and granite countertops.

In terms of individual ownership in Wildwood, one of every 431 residences was in some stage of foreclosure in March, according to Irvine, Calif.-based RealtyTrac. That rate is classified at the top of the high range.

By comparison, the rate in Cherry Hill is one in 899 homes.

"Wildwood is an overbuilt market with too much product and is likely to struggle for a very long time," said Jeffrey Otteau of Otteau Valuation Group, an East Brunswick-based real estate analyst.

While New Jersey currently has a nine-month inventory of unsold homes, the backlog in Cape May County is 22 months. In Wildwood, it is expected to take 29 months to find buyers for the glut of properties. RealtyTrac said prices have declined 20 percent in the town in the past 12 months.

"Cape May County is the weakest and worst market in the state," Otteau said. "And prices are not done declining."

He attributes that to cooling demand among baby boomers, who represent 75 percent of second-home buyers. This year, 110,000 baby boomers will turn 65 in New Jersey, and Otteau said their priorities are changing.

"In 2000, they had rising income and were not overly concerned about retirement," he explained. "Now baby boomers are recalibrating their spending and vacation homes aren't in their plans."

Nationwide, foreclosure auctions are scheduled for 369,491 properties, the highest quarterly total in the history of the RealtyTrac report. The number of homes slated to go on the block is up 12 percent from the previous quarter and 21 percent from the first quarter of 2009.

The increase is a sign that banks are increasingly eager to get properties off the books, said James J. Saccacio, RealtyTrac CEO.

"Lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline," he added.

Royal Bank America, which owns Marina Bay, brought in Spann to auction the condos after the developer, Gary Papa of Pennsylvania, went bankrupt.

But not all auctions are due to foreclosure. In Philadelphia and Wilmington, Del., developers recently have auctioned condos to generate cash flow and jumpstart interest in buildings with high vacancy rates.

In Wildwood Crest, 25 condos carved out of the former Nassau Inn will be auctioned May 16.

"No distress here, just nice people who are getting older and want to sell their properties and get on with their lives," Spann said.

Nassau Inn on the Beach features ocean views, furnished one-bedroom, one-bath units, a heated pool and a game room.

"There is a management company that changes the sheets and takes care of things," Spann added. "We think that will appeal to buyers who want to stay there a couple of weeks a year and rent it out the rest of the time to help pay the mortgage."

The minimum bid for the units, previously priced at $256,000, is $55,000.

Real Estate Group Pushes to Soften ‘Carried Interest’ Tax Rise

Bloomberg / Business Week

 

 

A real-estate executives’ trade group is seeking to soften the impact as Congress moves this month to increase the tax on managers of investment partnerships.

The Washington-based Real Estate Roundtable is proposing alternatives to a tax increase lawmakers are considering to help fund a jobs bill that may be voted on before the May 31 Memorial Day holiday, said David Pearce Jr., the group’s vice president and counsel.

“We are resigned to the fact that they need revenue,” Pearce said in an interview yesterday.

The roundtable represents senior executives of public and private commercial real estate companies. They are the largest group that would be affected by the proposed tax increase on so- called carried interest, the share of profits that is paid to fund managers. That share is taxed at the 15 percent capital gains rate; some lawmakers want to more than double the rate.

For the past several years, the real-estate group has lobbied successfully against raising the tax, joined by others who would be affected -- executives of private equity firms, hedge funds and venture capital funds.

House Ways and Means Committee Chairman Sander Levin, a Michigan Democrat, said yesterday a tax increase on the profits paid to fund managers will probably be included in the jobs measure. The bill would extend unemployment benefits, the Build America Bonds program, subsidies to help the jobless buy health insurance, and a series of business tax cuts that expire every year.

20 Percent of Profit

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit is taxed at the lower capital gains rate. The rate is slated to rise in 2011 to 20 percent from the current 15 percent.

Levin previously proposed legislation to classify carried interest as ordinary income, subject to a top rate of 35 percent. Levin’s proposal has been approved by the House three times in recent years and died each time in the Senate.

Pearce said his group would prefer either a blended tax rate that combines the capital gains and ordinary income tax rates, or keeping the capital gains rate for profits from long- term investments of between two and five years.

“We’ve been talking about a holding period or a blended rate,” Pearce said. “We think that’s the direction to move in.”

Obama’s Position

Senate Democratic leaders are being pressed to approve a carried-interest tax increase by President Barack Obama’s administration, which has twice sought the higher taxes in budget requests.

Senator Charles Schumer, a New York Democrat, said last month the chamber was considering adopting the House provision. A jobs measure containing the provision likely would require 60 votes to pass the Senate. An earlier version of the jobs bill that didn’t contain the tax increase on fund managers passed the Senate 62-36 in March, with four Republicans joining all the entire Democratic caucus in favor.

Pearce said his group’s chief concern is persuading lawmakers to continue classifying the profits interest as capital income rather than ordinary earnings, even if the rate is higher. The group is pointing out that current law already sets different rates for different types of capital income, he said. For example: Gains on securities qualify for a 15 percent tax rate, while collectibles such as art and antiques are taxed at 28 percent.

Colorado Professor

Victor Fleischer, a University of Colorado at Boulder law professor whose 2006 paper on the issue inspired the initial congressional action, said he expected lawmakers may be receptive to the industry’s arguments.

“Congress should consider all the options,” Flesicher said. “Conceptually, I think it ought to be treated as ordinary income, but if a blended rate is what it takes to get change through, then that’s what it takes.”

Lobbying groups for some other industries said they were continuing to fight the higher levy outright.

“We’re not accepting this as a fait accompli,” said Emily Mandell, vice president of strategic affairs for the National Venture Capital Association. “We continue to put forth the same message, we have not waived from our position. There are a number of proposals being floated by different constituencies. Our proposal is that venture capital investment or investments in start-ups should continue to receive the capital gains rate.”

Robert Stewart, a spokesman for the Private Equity Council, a Washington trade group representing firms such as KKR & Co. LP and the Blackstone Group LP, has declined to comment this month as the issue gained steam in Congress. He was unavailable for comment yesterday.

Steve Hinkson, a spokesman for the Washington-based Managed Funds Association, which represents hedge funds, declined to comment.

Simon Ends Bid for General Growth Properties

Indy Star

Simon Property Group's vision of expanding its shopping mall empire by 50 percent in one deal faded Friday when the Indianapolis developer pulled out of the bidding for bankrupt rival General Growth Properties.

Simon's withdrawal, after nearly three months of bidding, came after General Growth snubbed Simon's "best and final" offer during a bankruptcy court hearing in New York and got the judge to agree to a competing recapitalization plan that leaves General Growth independent.

The hearing left Indianapolis-based Simon, the nation's largest retail landlord, thwarted in its bid to control its next-biggest rival, despite dangling several sweetened offers before its board and creditors.

"They made a valiant effort to buy the No. 2 player in the industry. This was the big fish that got away," said Benjamin Yang, a retail analyst with the San Francisco investment firm of Keefe, Bruyette & Woods.

Simon's final offer, made Thursday with partner Blackstone Group, had a value of $33 billion. That included taking over about $20 billion in mortgages on General Growth's properties.

Fears that Simon would have grown too big by swallowing General Growth, thereby triggering federal antitrust objections to the deal, may have been the undoing for Simon. Its bid was worth $5 more per share than the $15-a-share competing recapitalization plan by a group led by Toronto-based Brookfield Asset Management.

"Given antitrust concerns, General Growth decided the premium price wasn't enough to go with Simon," Yang said.

U.S. Bankruptcy Judge Allan Gropper approved the Brookfield plan, which would give it, Fairholme Capital Management and Pershing Square Capital Management warrants to buy stock in the reorganized company in exchange for financing it needs.

In comments tinged with disappointment, Simon Chairman and Chief Executive David Simon said General Growth's decision to reject Simon's bid in favor of Brookfield's plan "is a truly unfortunate result for all GGP stakeholders."

"We are disappointed that the GGP board hastily decided in less than 24 hours to accept substantially less value, rather than take more time to fully assess the benefits of (Simon's) offer," he said in a statement.

The judge-approved plan should enable General Growth to emerge from Chapter 11 bankruptcy protection as a standalone company using $6.5 billion from Brookfield and the other investors.

The Brookfield deal includes a break-up fee that would give it and its partners hundreds of millions in stock warrants if General Growth went with another bidder.

With 382 shopping center properties, Simon could have gained control of up to 200 more with its bid for General Growth. Some retail experts say the combination would have given Simon unparalleled leasing clout in the retail industry that could have put it in a position to dictate financial terms to department stores and smaller retailers.

General Growth's properties are among the most desirable in the industry. They include Water Tower Place in downtown Chicago; Tysons Galleria in McLean, Va.; Faneuil Hall in Boston; and the Ala Moana Center in Honolulu.

General Growth got deeply into debt, which it couldn't make payments on, by buying festival marketplace developer Rouse Co. for $11 billion in 2004.

Simon's pullback leaves a cash-rich company looking for a way to grow at a time when commercial real estate values are still falling.

The publicly owned company reported last week it has $3.6 billion in cash on hand and $3.2 billion available on its credit facility.

"Simon has a lot of liquidity they have to address," Yang said. "Simon certainly will be well-positioned to take advantage of those opportunities" to make future acquisitions, he said.

But none will be the size of General Growth. Simon told stock analysts and others in a teleconference last week that the General Growth bidding had taken up the majority of his time in the past several months.

With that bid now off the table, "we will continue to focus on our business and evaluate other opportunities in the marketplace," he said in a statement.

Fed Planning to Sell MBS

The Wall Street Journal

Fed Officials Develop Plan to Shrink Central Bank's Mortgage Portfolio

 

 

Federal Reserve officials have agreed to sell some of the central bank's $1.1 trillion of mortgage-backed securities at some point, but have been unable to reach a firm consensus on how soon or how aggressively to do that, according to several people familiar with the matter.

Many Fed officials want to wait until after the central bank has started to raise short-term interest rates and tighten financial conditions, which could be many months away, but a minority is eager to move sooner.

The internal debate about the Fed's mortgage portfolio is important to households and investors because sales of mortgage securities could push down prices of the securities and push up mortgage borrowing costs.

Fed officials have been debating asset sales for months. Minutes of the Fed's late April meeting, due out in two weeks, are likely to show the debate has intensified but hasn't been completely resolved. The Fed started buying the securities in early 2009 as part of an effort to drive down long-term interest rates to speed an economic recovery. But now, most officials are uncomfortable holding them.

One issue underlying the debate is inflation expectations. Some Fed officials worry that holding such a large portfolio—which entails pumping money into the financial system to fund the purchases—fuels fears that the Fed will allow inflation to take hold in the future.

Sale proponents also are averse to holding instruments that seem to favor housing over other parts of the economy. But many officials worry that markets would interpret even a program of modest sales as a sign that the Fed wants to tighten credit, before it is actually prepared to do so or before the economy could bear it.

The Fed's conventional way of tightening credit is to raise a short-term interest rate called the federal-funds rate, which is what banks charge each other on overnight loans. Many officials are inclined to maintain that as their main mechanism for tightening policy when the time comes, and to put mortgage sales on a slow track at first.

One approach attracting a following within the Fed: After the economy improves enough, the Fed would change the way it communicates to the market, no longer saying rates would stay low for an "extended period." Then, it would pull some cash out of the financial system with operations called reverse repos and term deposits. Next, it would raise short-term rates by increasing the rate the Fed pays banks to keep money on reserve at the central bank. Then it would announce a modest asset-sales program that it might ratchet up after six to nine months as recovery gains steam.

"The best argument for this sequence is that the Fed and markets have lots of experience analyzing the effects of rate hikes and should be able to gauge their effects with reasonable accuracy," economists at Goldman Sachs said in a commentary on the Fed's debate earlier this week.

The goal would be to substantially reduce the Fed's mortgage holdings within four or five years after tightening starts. Fed officials believe they will need to sell substantially less than their overall holdings of $1.1 trillion because many of the securities will retire on their own as borrowers refinance mortgages and the securities mature.

The idea of ratcheting up sales later is one that is gaining support at the Fed and could be a compromise to allay the worries of the officials most eager to dispose of the securities. The Fed would also have the option of tapering down the sales if the economy responded poorly.

"I would start slow and then move based on the economy," James Bullard, President of the St. Louis Fed, said in an interview with the Wall Street Journal last week. "I would want to ensure markets that you would do it slowly over a longer period of time."

The process of just getting started could take as much as a year or more to unfold, depending on how the economy performs. Though the Fed's anti-inflation hawks want to get going soon, many officials are still comfortable with their assurance to the public that rates will stay low for an extended period because inflation might still be slowing and unemployment is high.

"With inflation expectations stable, core inflation rates declining, and significant excess capacity in the economy, accommodative monetary policy remains appropriate," Federal Reserve Bank of Boston President Eric Rosengren told a gathering in New York Wednesday night.

An added reason for caution: Rising concern about financial risks in Europe related to Greece's debt woes. Though Greece is small relative to the U.S., Fed officials are concerned that turmoil in European markets could spill into U.S. markets and hurt the recovery here.

Canadian Investors Pay Premiums for 'Green' Buildings

Toronto Sun

 

Almost two-thirds of professional Canadian real estate investors are planning to add to their portfolios over the next 12 months and are willing to pay a premium for green buildings, a global survey of the commercial property market found.

The majority of investors, or 85%, favoured making acquisitions in Canada, with Toronto the preferred location, followed by Vancouver and Montreal, the Colliers International Global Sentiment Survey said.

Canadian investors were greener than their U.S. counterparts, with 50% saying they were prepared to pay a premium for sustainable buildings compared with just 30% of U.S. investors.

The survey polled 240 major institutional investors around the globe, with 26 in Canada. Their combined portfolios were worth more than $300 billion. Worldwide confidence in the commercial real estate market is also returning, with 64% of investors planning purchases in the coming year.

Most respondents said the commercial market hasn’t yet hit bottom, but are confident of a strong recovery starting later this year.

In Canada, the gap between what sellers expect for their property and what buyers are prepared to pay is likely to start to narrow towards the end of this year, helping transactions return to more normal levels.

About 54% of respondents said they were looking to sell off underperforming assets, though 42% of them were unwilling to dispose of properties at the bottom of the cycle.

“If there is a lesson to be learned from this recent recession it would be about the importance of proper assessment of investment opportunities in the context of market cycles,” said Milton Lamb, chair, national investment team, with Colliers International in Canada. “The commercial real estate market is not a stock market where one can enter and exit so easily, which means proper research and analysis become more important than ever."

'Pause' is over for Commercial Real Estate in Calgary, Canada

Calgary Herald

 

 

Commercial real estate investors are returning to the Calgary market following a lull in transactions a year ago.

"It's a very different world today than it was a year ago," said Joe Binfet, managing director for Colliers International in Calgary.

"Last year there was a pause in the decision-making processes. Investors were looking for a bottom to the downturn. But right now we're seeing a lot of transactions and a lot of activity. There's a lot of capital available to both private and institutional investors and they're looking for quality product."

Binfet said there is strong demand for retail and industrial real estate properties, and land is also coming back into favour.

"Developers are showing interest which we haven't seen for quite some time," said Binfet. "We are encouraged. We have done more transactions (this year) than we did all of last year basically."

On Tuesday, Colliers International's 2010 Global Investor Sentiment Survey was released. It said Canadian real estate investors are cautiously optimistic that a fast recovery is on the horizon, even though the market has yet to reach its lowest point.

The report said 65 per cent of Canadian institutional and private real estate investors are considering acquisitions over the next 12 months, mirroring the global trend (64 per cent).

The global survey, of more than 244 major real estate investors (including 26 large Canadian institutional property investors) with a total investment portfolio of over $300 billion, also found a strong appetite for domestic investments.

The vast majority (85 per cent) of Canadian respondents who indicated acquisition plans intend to focus on the domestic market, especially Toronto (27.8 per cent), Vancouver and Montreal (16.7 per cent each), Edmonton and Calgary (14.8 per cent and 11.1 per cent respectively).

An improvement in economic fundamentals and an even larger improvement in the optimism and confidence of business people and investors is evident in the Calgary market, said Richard Pootmans, senior business development manager for real estate for Calgary Economic Development.

"Investors have taken their positions in our market and its potential," said Pootmans. "It is important to recognize that investors seek project-based opportunities and we know that as opportunities emerge in Calgary, that there will be investor interest."

The Colliers survey said a lack of appetite for foreign investments is reflected globally, with eight out of 10 respondents having no offshore portfolio or intentions to invest overseas.

"On a risk-adjusted basis, Canadian investors still see Canada as a preferred investment destination that offers a higher return on investment compared to the U.S., in part because of the turmoil that still lingers south of the border," said Milton Lamb, chair, national investment team, with Colliers International in Canada.

"Additional reasons respondents gave for focusing on domestic investments range from the quality of assets to diversification of income stream, availability of capital or better valuation matching income."

Retail Project Taking Shape in Leeds, Alabama

St. Clair Times

 

LEEDS — More than six months after receiving approval from multiple governing bodies, the Grand River retail district is “starting to take shape,” according to officials.

The project — officially approved in September of 2009 — is seeing a rapid advance in construction just off U.S. 78 near Exit 140 in Leeds. Doug Neil, vice president for development and marketing of Daniel Corp., said the retail outlet mall is tentatively scheduled to open in late October or early November.

“It’s going to be an upscale, pedestrian-friendly shopping experience,” Neil said. “We really believe this is going to be the catalyst for growth and development of the region along I-20.”

Some of the buildings on the concrete construction site already are recognizable to prospective shoppers. The shopping center will feature a fountain at its entrance, concrete walking areas and a food court.

According to the Web site for the mall, www.shopsofgrandriver.com, a number of name brands already have committed to the site, including Banana Republic, Gap, Van Heusen and Nine West.

John Knutsson, vice president for construction and Alabama concrete contractor noted that the center is committed to preserving the surrounding environment: Efforts have been made to craft natural areas around the center and make use of the storm-water runoff.

“There’s a lot to it,” Knutsson said. “But it’s not that complicated.”

Grand River is located in the Leeds General and Leeds-Moody Cooperative Districts, and revenue sharing is in place between Leeds, Moody and St. Clair County, all of which agreed to help foot the bill for the project.

Neil said the project is “twice the size and scope” of Bass Pro Shop, which opened in November 2008.

“This is the definition of what happens when people pull together,” he said.