Detroit, Flint may be Diamonds in the Rough, real estate Investors say

Crain's Detroit Business

Commercial real estate executives put some perspective on a national report tagging the Detroit market as one of the worst in the country, saying there are bright spots and opportunities in the local real estate market.

The national Emerging Trends commercial real estate report was presented during the University of Michigan and Urban Land Institute's 24th annual Real Estate Forum today.

The study, by ULI and PricewaterhouseCoopers put the Detroit market at the bottom of markets to invest in.

The report was presented during the first day of the two-day event. Today's forum focused on Flint's efforts to re-invent its downtown.

"Sparking Reinvention: The Evolution of a Factory Town," today's opening panel, featured investors and developers who have leveraged private money against public money to develop and redevelop many of the city's downtown buildings.

But the dose of reality today came from the annual ULI Emerging Trends report, presented by Tom Murphy, former mayor of Pittsburgh and a senior resident fellow with ULI.

In a national context, Detroit ranked at the bottom of the list for markets to watch for commercial and multi-family real estate investment as well as the bottom for markets to watch for new development and for for-sale homebuilding.

All three of those lists were topped by Washington followed by New York, San Francisco, Boston and Seattle.

The report predicted a continued "bifurcated market" nationally where the trophy and trash properties are most popular. It said investors are looking for either highly sought-after buildings or bargain-basement deals expected to bring a high return.

It also called for tempered expectations from investors. While prices are low and opportunities plenty, it said "don't try to shoot the lights out and expect outsized returns."

Other best bets for 2011, the report said, are locking in debt at historically low rates, focused investment in global gateways and 24-hour markets, as well as favoring in-fill development over fringe development.

Following the report's presentation, local real estate executives said that while there are fewer national investors interested in the Detroit market, it makes for more opportunities for local investors.

In addition, the low point in the market is forcing communities and investors to make the hard decisions to put properties in position for the future.

"This is forcing us to do the right things," said Jim Becker, international managing director of the Detroit office of Jones Lang LaSalle.

"Cities, such as Detroit and Flint, are looking at ways to revitalize and retract into manageable zones."

On the retail side, everything changed in 2008, said Chris Brochert, a partner with the Lormax Stern Development Co.

"We went from calling ourselves developers to calling ourselves investors and property managers," he said.

And as the national investors leave, Brochert said there are more and more opportunities for local firms.

"Those who stay here have the ability to make a tremendous amount of money," he said. "They have the chance to get in on the ground floor."

Later in the day, the Real Estate Excellence Awards were presented for Lease of the Year, Development of the Year along with the overall Real Estate Excellence Award.

Crain's Detroit Business is a sponsor of the awards and of the Real Estate Forum.

• Lease of the Year was given to the 465,000-square-foot lease signed by Blue Cross Blue Shield of Michigan at the Renaissance Center in Detroit. Mark Wallace, leasing director for the Renaissance Center accepted the award.

• Development of the Year was given to the BAE Systems facility in Sterling Heights, the defense company making use of the vacant TRW manufacturing facility. Accepting the award was Brandon Podolski, a project manager with Southfield-based Plante Moran Cresa, the firm which has represented BAE on the project.

• The overall Real Estate Excellence Award was given to David Friedman, president and CEO of the Friedman Real Estate Group.

During a panel discussion of the winners following the event, Friedman said there is increasing demand in the city of Detroit as companies such as Quicken Loans Inc. want to use a city location as a recruiting tool.

"The reality is that the younger generation pool wants to be in an urban setting," said Friedman.

Podolski pointed out that there are more and more examples of the local economy diversifying into new industries such as defense.

"And as Michigan continues to diversify, the talent pool here remains tremendous, and is a draw for the companies interested in locating here," he said. "BAE came here for the engineers that are available."

Wallace said the key to new developments and business growth will be for the private sector and local governments to work together in public-private partnerships.

"I expect to see more collaboration in the future," he said. "It has to happen."

Earlier in the day, panelists gave presentations on the strategies needed to redevelop the Flint's downtown.

Calling themselves the "Uptown Six" a group of investors and developers gave specific examples of the disciplined approach to investing downtown.

"This morphed out of a few business leaders who had enough with the boarded-up buildings in town, who had done well for themselves and wanted to do the right thing and give back," said Tim Herman, president of the Uptown Reinvestment Corp., an umbrella group made up of public and private executives and leaders.

Asked how the private sector members got involved, Phil Shaltz, a member of the group, quipped "beyond stupidity?"

"So many times, you have seen the investors, the so-called carpetbaggers who aren't from the city," said Shaltz, president of Shaltz Automation. "They want to build casinos and other projects that a community doesn't really need.

"Our return on investment is different from what an outside investor would see as an ROI. We want to salvage downtown Flint, and that's part of our ROI."

The Uptown Six started with three rules:

• They would invest $167,000 each, and no more.

• There would be no personal guarantees on loans.

• And third, they vowed to never give up.

"Fortunately, we have only violated the first two," Shaltz said, noting there are more than $20 million in personal guarantees on their loans, meaning that if projects fail, the group members will be personally responsible for repaying the money.

The Flint panel was moderated by Scott Whipple, development manager for Uptown Developments LLC, the for-profit investment group which has overseen development and investment in the city.

Herman said the for-profit corporation was used to collect the private money, acquire loans and purchase properties.

It now has control over 12 properties representing $64 million in investment.

The process involved a series of bank loans which were paid off with a combination of grants from non-profit organizations and the Michigan Economic Development Corp.

"So what started with an $800,000 loan has now become nearly $70 million on the books," Herman said.

Troy Farah, co-managing partner of Flint-based development company West Second Street Associates said another key was to work on office projects that bring in the anchor tenant as a partner in the development.

"We've used a lot of investment tools," he said. "But the most important parts have been patient capital and sweat equity."

The use of façade grants have been used, as well as brownfield tax credits and new market tax credits, as well as leveraged loans from groups such as the Flint-based C.S. Mott Foundation.

Shaltz added that as investors, this group has nowhere to go.

During a welcome address, Flint Mayor Dayne Walling gave a positive take on the city's progress, pointing to the crucial aspect of private participation from the business leaders in the city.

The keys to investment, he said, are collaboration, grassroots involvement, imagination, smart planning and preservation of culture.

Seeing the city's population drop from 200,000 at its peak in 1955 to the current level of nearly 100,000 shouldn't be a cause of concern, he said, choosing to focus on the recent redevelopment of buildings in the city's downtown.

"We truly are sparking a reinvention here," he said. "We are evolving from a factory town to a more diverse economy. And I'm fired up about our progress."

The event continues Thursday with guided bus tours of Flint and closing with a keynote address by Toni Griffin, the consultant hired to guide Detroit in its efforts to reconfigure the city.

Brookfield Refinances Tower With Chinese Loan

The Wall Street Journal

Bank of China Ltd. is lending $800 million to Brookfield Office Properties to refinance a Manhattan office building in the latest sign that well-capitalized Chinese investors are helping to fuel a commercial real-estate recovery in U.S. cities.

The loan on the office building, a 44-floor, block-long office tower in midtown Manhattan majority-owned by Brookfield, is one of the biggest made on a single building since the economic downturn began. It also is the biggest commercial real-estate loan ever made by the Bank of China's New York branch, which has helped fill a void in the commercial real-estate market for loans valued at hundreds of millions of dollars.

Brookfield confirmed the Bank of China loan but declined to comment further. A mortgage loan on the building comes due in February, according to a regulatory filing.

"Our standards are conservative and they haven't changed," said Bill Smith, chief lending officer of the Bank of China's New York branch. "It's just that now, for the moment, there's no other competition."

The loan for the building at 245 Park Ave. near Grand Central Terminal, whose tenants include J.P. Morgan Chase & Co. and Major League Baseball, comes as the commercial real-estate industry is becoming divided into two markets: one mostly of property in New York, Washington and other big cities where values are recovering; and one of less-attractive properties in the suburbs and in smaller cities that is continuing to languish. The industry also continues to struggle with billions of dollars of properties that are valued at less than their mortgages.

Both foreign and domestic lenders are returning, but Chinese institutions have been more aggressive than many. Chinese banks had $1.8 billion in commercial real-estate loans outstanding in U.S. branches in the second quarter, according to data firm Foresight Analytics, more than double the level a year before.

Bank of China in the last year and a half made at least two other large loans on Manhattan skyscrapers.

Industrial & Commercial Bank of China Ltd., China's largest bank by assets, said this year that it was rolling out a "large-loan" program aimed at U.S. commercial real-estate owners in need of loans that exceed $100 million. China Investment Corp., the $300 billion sovereign-wealth fund, also is looking to pile cash into U.S. real estate through investing with U.S. property-fund managers.

"The bank was interested in this asset because it was a stabilized, safe, secure asset with good ownership," said Robert Martin, a Jones Lang LaSalle Inc. broker who helped arrange the 245 Park deal.

Vornado Bids for ING Real-Estate Unit

The Wall Street Journal

Frustrated with the shortage of U.S. properties for sale, some of America's biggest publicly traded landlords are going global.

The Macquarie Bank Building in Sydney is part of an Australian real-estate portfolio recently acquired by Brookfield Office Properties.

Vornado Realty Trust, which until now mostly has focused on investing in the U.S., has entered a bid for the global private-equity real-estate investment platform of Dutch financial company ING Groep NV, people familiar with the matter said. The ING business could offer Vornado teams in Europe and Asia, as well as the U.S., to manage property and scout for deals.

An ING spokeswoman declined to comment on Vornado's involvement, but said the Dutch bank is "conducting an evaluation" of the real-estate investment-management business, which has about $100 billion in assets under management, and that "a sale is not ruled out." Along with Vornado, private-equity firm Kohlberg Kravis Roberts & Co. and affiliates of real-estate brokerages CB Richard Ellis Group Inc. and Jones Lang LaSalle Inc. are among the firms still pursuing the business, people familiar with the matter said, with final bids due Dec. 1.

Other U.S. office landlords including Brookfield Office Properties and SL Green Realty Corp. in recent months did deals overseas or raised the possibility of doing them.

"London is, in our view, a gateway city and a global financial capital," Marc Holliday, chief executive of SL Green, one of Manhattan's biggest office landlords, said in an interview. "It's more parallel and akin to New York than almost any other domestic U.S. market."

But overseas acquisitions have stirred controversy. Some investors and analysts wonder whether there still are good deals to be had for U.S. real-estate investment trusts. Many overseas markets already are well-traveled both by local companies and U.S. firms that pursue private-equity strategies, such as the real-estate units of Goldman Sachs Group Inc. and Morgan Stanley. In the U.K., an index of office-building values is up 24% in the last year, according to CB Richard Ellis, and London property prices in particular have been bid up by a flood of foreign buyers.

REITs pursuing global strategies also have been criticized for straying beyond their expertise and possibly confusing Wall Street with a hodgepodge of properties. Publicly traded real-estate investment trusts generally have attracted investors by more targeted deal making: allowing people to invest in, say, shopping centers in the Northeast.

"For most REITs, investing overseas is not a core competency," said UBS analyst Ross Nussbaum. After SL Green disclosed last month that it had bought the debt backing an office building in London, Mr. Nussbaum dubbed it "the head scratcher of the week" because the company has made its name focusing on New York City.

The new appetite for overseas investments is partly fueled by the enormous amount of cash public real-estate companies have raised in the past two years for acquisitions. Real-estate investment trusts sold $34.6 billion in debt and equity in 2009 and more than $35.3 billion this year partly for investments. Relatively few properties have been put on the block because values still are well below their peak and banks are trying to avoid fire sales.

Also underlying the trend: Emerging similarities in global hubs such as London, Paris, New York, and Washington that some U.S. landlords believe they can exploit. Big banks and other multinational companies have offices in major financial centers around the world, and many may be interested in having the same landlords in New York and in Tokyo, some company executives believe.

These "global cities" have performed much better in the economic recovery than second-tier cities, drawing an influx of big real-estate investors looking for a stable place to put their money.

"We own modern office properties in the world's largest, most dynamic, business-forward cities," said Brookfield Office Properties Chief Executive Ric Clark. "The tenants that we deal with are in every one of those cities."

Brookfield Office, which owns 70 million square feet of property in North American cities, this year paid $64 million for a 50% interest in a London development project and shelled out $1.4 billion to buy 16 Australian office properties from its controlling shareholder, Brookfield Asset Management Inc.

Office landlords aren't the first to come up with the idea of establishing a global brand for multinational tenants. Warehouse companies ProLogis and AMB Property Corp. became Wall Street darlings during the economic boom by becoming one-stop real-estate shops for companies with global logistics needs.

While warehouse developers can offer global companies uniform construction and warehouse technology, the market demand for a certain office building usually is driven primarily by location, not by the landlord.

For Vornado, a REIT that owns 35 million square feet of office space in New York and Washington, the bid for ING's real-estate-investment business comes as company executives have expressed frustration with the dearth of good deals available in the U.S. real-estate market. The company has explored off-the-beaten-track ways of making money from the downturn, including a $600 million investment in J.C. Penney Co. stock. "We're going around the margins trying to find value," Vornado Chief Executive Michael Fascitelli said at a conference last month.

General Growth Exits Biggest Real Estate Bankruptcy

Bloomberg

General Growth Properties Inc., the second-largest U.S. mall owner, exited from the biggest real estate bankruptcy in the country’s history and split itself into two companies.

The landlord has spun off Howard Hughes Corp., an owner of master-planned communities and other properties, Chicago-based General Growth said today in a statement. The shares of the newly separate General Growth will begin trading tomorrow on the New York Stock Exchange.

General Growth filed for Chapter 11 protection in April 2009 after weighing itself down with $27 billion in debt that it was unable to refinance because of the financial crisis and collapse of the commercial mortgage-backed securities market. The company’s restructuring plan provided a full recovery for creditors and a recovery for shareholders, which is rare in a bankruptcy reorganization.

General Growth last month hired Sandeep Mathrani of Vornado Realty Trust as its new chief executive officer. Mathrani will assume the position at the beginning of 2011 after serving for more than eight years as executive vice president of retail real estate at New York-based Vornado.

Adam Metz has been General Growth’s CEO since October 2008, when he replaced John Bucksbaum, a member of the company’s founding family. Metz and Thomas Nolan, president and chief operating officer, agreed to stay in their positions for as long as a year after the restructuring while the company searched for a new management team.

Takeover Fight

After filing for bankruptcy, General Growth first focused on restructuring about $15 billion in mortgage debt tied to about 140 properties, an effort it completed earlier this year. It then turned to its corporate-level debt and became the subject of a takeover battle between rival Simon Property Group Inc. and an investor group. Indianapolis-based Simon is the largest U.S. mall company.

The investor group -- Brookfield Asset Management Inc., Bill Ackman’s Pershing Square Capital Management LP and Bruce Berkowitz’s Fairholme Capital Management LLC -- prevailed, committing more than $8 billion to bring General Growth out of Chapter 11.

General Growth began a public offering of 135 million shares of the new company to replace some of the financing commitments from the Brookfield, Fairholme and Pershing group, as well as the Teacher Retirement System of Texas, the company said in a separate statement.

The stock closed today at $17.39. Its closing price was 59 cents on April 16, 2009, the day the company filed for bankruptcy.

General Growth owns and operates more than 183 retail centers in 43 states. The company reported a loss in core funds from operations on Oct. 29 of $29.3 million in the third quarter, compared with a profit of $88.9 million, or 28 cents, a year earlier because of restructuring costs.

U.S. Commercial Property `Substantially' Off Bottom, Roth Says

Bloomberg

U.S. commercial property prices are rising in desirable investment markets like New York and Washington while office vacancies are beginning to fall more broadly, according to top real estate executives.

Values are “substantially” off the bottom after more than a year of decline, said Steven Roth, chairman of Vornado Realty Trust. Hotels and multifamily properties are leading the rebound, with South American investors purchasing condominiums in Miami, according to Barry Sternlicht, chairman of Starwood Capital Group LLC in Greenwich, Connecticut.

“The recovery has been more rapid than anybody expected,” Roth, 68, said during a panel discussion at the Bloomberg Link Real Estate Briefing today in New York. His New York-based company hasn’t purchased as many properties as it would like. “We’ve been trying, but apparently not hard enough,” Roth said.

U.S. property deals probably will double next year and may account for almost a quarter of global transactions, according to a forecast by New York-based research firm Real Capital Analytics Inc. Although high-quality buildings will be in demand, they will be leased at lower rental rates than the 2007 peak, according to billionaire investor Sam Zell.

“Over the next 18 months I think we’re going to see little or no new construction and we’re going to see all the institutional-quality assets be full,” Zell, 69, chairman of Chicago-based Equity Residential, said on a separate panel. “The bad news is they’re going to be full at 20 or 30 percent rates less than the peak.”

Little Construction

The U.S. economy expanded at a 2 percent rate in the three months ended in September, the fifth consecutive quarterly increase. The growth followed 12 months of contraction as the economy weathered the worst financial crisis since the Great Depression.

As the recovery builds, rents are poised to rise in 2011 after reaching a low this year, Bruce Mosler, 53, co-chairman of broker Cushman & Wakefield Inc., said at the conference.

Office vacancies in U.S. central business districts declined for the second straight time in the third quarter as tenants signed leases for additional space, according to Cushman & Wakefield. The average vacancy rate fell to 14.7 percent from 14.8 percent in the second quarter, the broker said Oct. 14. Vacancies dropped in half of the 30 cities tracked by Cushman.

‘World Cities’

International investors seek real estate in “world cities” such as New York, Washington and San Francisco, Roth said. Rising office rents in New York and Washington helped Vornado’s third-quarter revenue climb 5 percent from a year earlier, the company said this week.

Those cities are “desperately important to investors” outside the U.S., according to Roth. Foreign institutions would rather invest in New York properties, with a 4 percent capitalization rate, than in Cleveland buildings, where the cap rate may be 8 percent, Sternlicht said. The cap rate, a measure of a property’s investment yield, is calculated by dividing net operating income by purchase price.

For fully occupied buildings, demand from investors is similar to what it was at the peak of the market, with bidding competitive for those properties, Zell said.

805 Third Ave.

“Capital feels safest investing in New York and D.C.,” Jonathan L. Mechanic, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP in New York, said during his panel with Mosler.

Investor capital available to purchase real estate in the Americas rose by 54 percent since December, London-based broker DTZ Group Plc said.

Charles S. Cohen, chief executive of Cohen Brothers Realty Corp., said the pace of leasing has increased in the last six month from “five miles an hour” to “15 to 20 miles” an hour.

Cohen’s New York-based firm signed a lease with publisher Meredith Corp. for nine floors comprising 212,594 square feet of space for its new corporate headquarters at 805 Third Ave. in Manhattan, he said today without disclosing terms.

Manhattan’s East Side is benefiting from renewed leasing, with Newsweek magazine, the New York Daily News and AT&T Inc. announcing plans to relocate there, William C. Rudin, co- chairman of Rudin Management Co. in New York, said during the panel with Roth and Sternlicht.

Miami condominiums acquired in Starwood’s purchase of Corus Bankshares Inc. are “selling like hotcakes,” Sternlicht, 49, said. Starwood in October 2009 led a group including TPG, Perry Capital and WLR Lefrak that paid 60 cents on the dollar for the failed Chicago-based lender.

“The whole country is being driven by a search for yield,” Sternlicht said. “Real estate is a proxy for the bond market.”

U.S. Commercial Real Estate Rents to Rise in 2011, Cushman's Mosler Says

Bloomberg

Commercial real estate rents are poised to rise in 2011 after reaching a low this year, according to Bruce Mosler, co-chairman of Cushman & Wakefield Inc., the largest closely held property services company.

“The market has bottomed,” Mosler said today at the Real Estate Briefing hosted by Bloomberg Link in New York. “We can expect to see rental appreciation next year.”

U.S. economic growth is beginning to stimulate demand for office space, Daniel Neidich, chief executive officer of New York-based Dune Real Estate Partners, said during a panel discussion that also featured Howard Michaels, chairman of the Carlton Group Ltd. Manhattan office leasing by square footage increased 66 percent in the first nine months from a year earlier, though rents have fallen for eight straight quarters, New York-based Cushman & Wakefield reported last month.

“Real estate market fundamentals are improving,” Neidich said.

The U.S. economy expanded at a 2 percent rate in the three months ended in September, the fifth consecutive quarterly increase. The growth followed 12 months of contraction as the economy weathered the worst financial crisis since the Great Depression.

805 Third Ave.

Office vacancies in U.S. central business districts declined for the second straight time in the third quarter as tenants signed leases for additional space, according to Cushman & Wakefield. The average vacancy rate fell to 14.7 percent from 14.8 percent in the second quarter, the broker said Oct. 14. Vacancies dropped in half of the 30 cities tracked by Cushman.

“About a year ago we were going one mile an hour,” Charles S. Cohen, chief executive of Cohen Brothers Realty Corp. in New York, said during a separate panel discussion. “Six months ago we were going five miles an hour. Maybe we’re going about 15 to 20 miles an hour now.”

Cohen said today that his New York-based firm signed a lease with Meredith Corp. for nine floors comprising 212,594 square feet of space for its new corporate headquarters at 805 Third Ave. in Manhattan. He declined to disclose terms.

Meredith, the publisher whose magazines include Better Homes and Gardens, plans to consolidate its 125 Park Ave. and 375 Lexington Ave. offices in the new space.

New York, Washington

The New York and Washington markets are in most demand from real estate investors, said Jonathan L. Mechanic, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP in New York.

“Capital feels safest investing in New York and D.C.,” he said.

Mechanic doesn’t expect the changes in Congress from the election will have big impact on vacancies in Washington.

“I don’t think people are concerned that the Washington market is going to fall off a cliff because the Republicans have come back.”

Dune’s Neidich said there is a lot of pressure on landlords to keep rents down even though the number of deals has increased.

“It’s clearly a little bit of a race to the bottom,” he said.

Dubai Home Prices Fall 6% While Developers, Builder Suffer

Bloomberg / BusinessWeek

Dubai home prices declined 6 percent in the third quarter while the United Arab Emirates’ biggest construction firm, Arabtec Holding PJSC, reported 96 percent drop in profit and Deyaar Development PJSC suffered a loss.

The Dubai House Price Index dropped 6 percent in the third quarter compared with the previous one, reaching its lowest level since the second quarter of 2009 on a summer slowdown and as banks continued to restrict lending, Colliers International, a brokerage, property and asset management company said today.

The deepest global financial crisis since the 1930s led Dubai property prices to drop by more than 50 percent from the 2008 peak and forced builders to cancel half of their projects in the emirate. Property prices in Dubai will continue to drop due to an oversupply of housing units and offices over the next 20 months, said Mohamed Alabbar, chairman of Emaar Properties PJSC, the U.A.E.’s largest developer.

Deyaar, a property developer partly owned by Dubai Islamic Bank PJSC, tumbled 7.8 percent today after reporting a third- quarter loss of 145 million dirhams. Arabtec dropped the most since May 25 after it reported a profit plunge.

“After a period of stable prices we are beginning to witness a shallow but lengthening slide in overall average prices,” said Ian Albert, regional director at Colliers. Prices had been hovering around the same values since the third quarter of 2009, he said in the report.

The average price per square foot of residential real estate fell to 951 dirhams ($258.90) in the third quarter from 1,015 dirhams in the second quarter. The number of transactions also declined 4 percent, according to the report.

Townhouses suffered the biggest price decline, falling 8 percent in the third quarter, Colliers said. Apartment prices slid 7 percent, while those of villas dropped by 5 percent.

Colliers estimate that 33,000 new housing units will be added to Dubai’s market by the end of this year, down from an earlier estimate of 41,000 units.

“We are witnessing a slow but protracted decline in asset values,” Albert wrote. “This reflects the reality on the ground as occupancy rates fall to 80 percent and the market is unable to absorb the additional supply without a growth in the population or a slowdown in the release of stock.”

Fannie, Freddie want Servicers to assume Risk

Reuters

 

Fannie Mae and Freddie Mac are in talks with U.S. title insurers to require mortgage servicers to assume insurers' liabilities if there are legal challenges to foreclosures on homes whose mortgages Fannie and Freddie underwrote, a source familiar with the matter said.

Fannie Mae and Freddie Mac, which are controlled by the U.S. government, together own or guarantee more than half of the $11 trillion of U.S. home mortgages.

Allegations that some banks used shoddy paperwork in processing foreclosures has sparked a wave of lawsuits, and more borrowers are expected to challenge foreclosures in court.

The disputed foreclosures could create a headache for title insurance companies, which protect homeowners against the risk of a prior owner claiming to still have a legal right to the property.

Fannie Mae and Freddie Mac are negotiating with the American Land Title Association, the trade group for title insurers, to ensure that any legal costs associated with faulty foreclosure paperwork by loan servicers are borne by the servicers, the source said. Both Fannie and Freddie declined to comment.

The biggest loan servicers are owned by banks.

"Fannie and Freddie are interested in (servicers agreeing to provide warranties) because they want to make sure that the market for foreclosed properties opens up," said Peter Sadowski, spokesman for the largest U.S. title insurer, Fidelity National Financial Inc.

Fannie Mae and Freddie Mac buy up pools of mortgages from lenders in order to free them to make new loans and then package some of the mortgages into securities that are sold to investors.

If an improperly foreclosed home is sold, the owner who defaulted could sue the current owner. The title insurer would have to defend the current owner in court, and if unsuccessful, have to pay the owner back.

ALTA chief lobbyist Justin Ailes said title insurers hope lenders and servicers will reassure insurance companies that the insurers would not be on the hook for liabilities and costs if home ownership transfer is challenged because of banks' mistakes.

Title insurance is virtually a required step in a foreclosure sale and provides extra footing for a security.

Fidelity National as of Wednesday requires such an assurance from lenders as they have to assume any liabilities that the title insurer might incur in foreclosure sales closed on or after Nov. 1 if owners who lose their homes challenge the foreclosures.

Fidelity National reached a similar agreement with the Bank of America earlier this month.

Sadowski said his company is working toward similar indemnity agreements with three other large lenders, JPMorgan Chase, Citigroup and Wells Fargo.

The four largest national title insurers -- Fidelity National Title, First American Financial Corp, Stewart Information Services and Old Republic International Corp -- control 90 percent of the market.

Commercial Real Estate's Uneven Rebound

Bloomberg / BusinessWeek

Commercial real estate deals can be found around the U.S., but only a handful of markets interest big investors

In October, an investment group that included Blackstone Group (BX), Paulson & Co., and Centerbridge Partners purchased Extended Stay, a bankrupt U.S. hotel owner, for more than $3.9 billion, less than half what previous owner Lightstone Group paid for it at the peak of the real estate boom in 2007. While it is the biggest commercial real estate sale so far this year, according to CoStar Group (CSGP), a Washington (D.C.) real estate information and analytics company, it is also a reflection of the current U.S. commercial property market: distressed assets and struggling owners selling at a loss to investors with plenty of cash who can afford to wait for the economy to rebound.

Extended Stay was the victim of overleveraging by Lightstone and a drop in demand as the economic downturn dried up business for the midprice chain, which is based in Spartanburg, S.C."Nothing is wrong with the properties," says Bruce Ostly, an analyst in Portland, Ore., for Integra Realty Resources, a commercial real estate valuation and consulting firm. "The ownership got in trouble," Ostly says, "by buying and financing at the peak of the market based on inflated price."

In order for the market to pick up again, new owners must buy the properties and "make [them] work at today's price," says Brian Glanville, Integra's managing director and chairman of the real property board of RICS (Royal Institute of Chartered Surveyors) Americas. "What you're seeing is an opportunity to buy properties for less than what you can build them for today."

Obstinate Gap

In real estate, "you take risks, and you're rewarded if you're right," Glanville says. In the boom period from 2005 to 2007, many investors such as Lightstone bought at the wrong time and at the wrong price. The problem, he says, is that the market has not been allowed to function.

Commercial real estate values have fallen—by as much as 20 percent to 30 percent from peak levels in some markets—and a gap persists in most of the U.S. between what commercial real estate sellers want and what the buyers are willing to pay, says Glanville.

Banks have modified loans, through a practice called "extend and pretend," to prevent owners from defaulting, but "the banks are no longer willing to carry them," he says. Owners "have to face reality now and see what they can get."

In August 2010 more than one in four sales involved distressed real estate, according to Moody's. During that month, U.S. commercial property prices also fell to their lowest level since June 2002, according to the Moody's/REAL Commercial Property Price Index.

Looking Up: Trophy Buildings

The situation is expected to get worse: More than one-third of the $270 billion in U.S. commercial real estate loans maturing in 2010 will be under water (or have mortgages greater than the value of the property), reported trade publication National Real Estate Investor. It expects the rate to grow to 63 percent by 2012.

Among the most stable segments: trophy buildings, whose prices have increased by 23 percent from their 2009 trough in such major cities as New York, San Francisco, Boston, Los Angeles, and Chicago as buyers and lenders seek secure investments, according to an Oct. 19 report on Bloomberg.com.

New data from Los Angeles-based commercial property giant CB Richard Ellis (CBG) show the national vacancy and availability rates for office, industrial, and retail space all exceeded 10 percent in the third quarter. The company predicts vacancies will decrease next year, although rents are expected to remain low due to the high availability of space.

Rental Demand

"We are starting to see the first signs of demand as tenants see more stability in their businesses and are now looking to take advantage of low rents and a wide array of occupancy choices," stated Jon Southard, director of forecasting for CBRE Econometric Advisors, in a release.

This is good news for some of the country's biggest commercial landlords, such as Indianapolis mall owner Simon Property Group (SPG) and industrial real estate company Prologis (PLD) in Denver. "The bigger owners are those who own core or premium properties, and those are generally the ones that recover first," says Raymond Torto, global chief economist at CB Richard Ellis.

Even in the slowdown, the largest commercial real estate owners have been acquiring properties. Data from Real Capital Analytics, a commercial real estate research and consulting firm based in Manhattan, show that Blackstone Group, with more than $4.2 billion in acquisitions, is the top buyer of U.S. commercial real estate over past 12 months, followed by Simon Property Group with $2.8 billion.

"We're seeing a turn for the better," says Torto, "But once you've turned, it doesn't mean you go straight up."

Tishman Speyer grabs $380M Bargain in Chicago

Crain's NY

Developer agrees to buy year-old, 45-story tower for less than the cost of construction; deal seen as stark warning for those considering building or financing new office towers.

Tishman Speyer Properties has agreed to purchase a new office tower in downtown Chicago for less than it cost to build it, according to sources. The developer will pay owner Mesirow Financial $380 million for its headquarters at 353 North Clark St., marking the first time in more than a decade that a building has been sold for below its cost of construction in Chicago.

The agreement came as an affiliate of Mesirow was running up against a deadline to pay off its construction loans on the building, according to people familiar with the transaction. Those sources say the price is a little less than the debt on the nearly 1.2-million-square-foot tower, which opened about a year ago.

The sale sidesteps an ugly foreclosure suit that might have been filed by Munich, Germany-based Hypo Real Estate Holding, which financed the project with a construction loan that comes due Monday.

The sale would wipe out tens of millions of dollars in equity invested in the 45-story tower, built by a venture led by veteran Chicago developer Richard Stein, a Mesirow senior managing director. Mr. Stein did not return calls requesting comment.

Chicago’s office market hasn't seen a new skyscraper sold for less than the construction cost since the collapse of the commercial real estate market in the 1990s, when billionaire investor Sam Zell scooped up 161 N. Clark St. and 1 N. Franklin St. at bargain prices.

Now, as developers start pushing plans for another round of new office buildings, the woes of 353 N. Clark could serve as a warning to investors and lenders that might back those future projects.

“A lender would be out of their mind to provide financing for new construction when prices are depressed as much as they are, and the (leasing) market is still in the early stages of recovery,” says Zaya Younan, chairman and chief executive of Woodland Hills, Calif.-based Younan Properties, which has a 1.6-million-square-foot office portfolio in Chicago.

Initially leasing at 353 N. Clark went well, with Mesirow and law firm Jenner & Block agreeing to take more than 60% of the building before construction started in 2007. But the leasing effort subsequently stalled at about 80% occupancy, according to real estate data provider CoStar Group Inc.

The price Tishman has agreed to pay for the building, about $324 a square foot, stands in sharp contrast to the record-breaking $503 a foot that a Southern California investment firm paid this summer for the nearby skyscraper at 300 N. LaSalle St. That building also was completed last year but it is 95% leased.

The Hypo loan has an outstanding balance of roughly $330 million and has been extended until Tishman closes on the purchase, sometime before the end of the year, sources say.

The project was also financed with a $44-million mezzanine loan from Chicago-based real estate firm Transwestern Investment Co.

Transwestern could recoup as much as 90% of its loan, which is similar to a second mortgage. A Transwestern representative declined to comment.

How much equity was used to finance the project could not be determined, but most of that money is probably lost. The project is a joint venture between Mesirow and Chicago-based Friedman Properties Ltd., which originally controlled the site.

Albert Friedman, CEO of Friedman Properties, did not return a call requesting comment.

The Mesirow venture also put up a multimillion-dollar letter of credit that would have become payable in the event of a loan default.

As part of the deal, Tishman is paying a couple million dollars to the development venture, sources say. And the venture avoids the costly expense of surrendering the letter of credit, sources add.

Tishman already is one of the largest landlords in downtown Chicago, with a portfolio that includes 10 and 30 S. Wacker Drive and Franklin Center in the West Loop. Tishman's financial partner in the deal for 353 N. Clark could not be determined.

A Tishman spokesman declines to comment. The deal was previously reported by Real Estate Finance & Investment, a trade publication.

Freddie Mac Reports $2.5 Billion Loss, Warns of Weak Housing Market

The Wall Street Journal

 

Freddie Mac reported a narrower $2.5 billion third-quarter loss, the smallest shortfall in more than a year amid signs that mortgage delinquencies are slowing. But the company warned that delays in the foreclosure process could raise costs "significantly" and that losses also could rise amid a faltering housing recovery.

The third-quarter loss compared with a year-earlier net loss of $5.4 billion. While gains in the value of certain securities and derivatives left Freddie with a small cash surplus at the end of the quarter, it was forced to ask the Treasury for $100 million, in part to cover the cost of $1.6 billion in interest payments made to the government.

The government took over Freddie and its larger sibling, Fannie Mae, two years ago through a legal process known as conservatorship, and the taxpayer tab for the firms stands at about $134 billion.

While there were signs that mortgage delinquencies eased at Freddie during the third quarter, the company warned that any improvements could be offset by a worsening outlook for losses on homes that go into foreclosure.

Home prices fell 1.8% during the third quarter, according to the company's estimates, as sales declined following the expiration of the home-buyer tax credit.

"We believe that it will be a considerable time until the housing market has a sustained recovery," said Charles E. Haldeman Jr., Freddie's chief executive, in a statement.

Delays in the foreclosure process are the latest unwelcome development for the mortgage-finance company. Fannie and Freddie were forced to suspend the foreclosure process on homes in certain states this fall after paperwork errors prompted several mortgage servicers, including units of Bank of America Corp. and J.P. Morgan Chase & Co., to halt repossessions.

Tuesday, concerns over improper filings prompted the company to terminate its relationship with one of its top Florida foreclosure attorneys, and it had previously suspended foreclosures that had been referred to that firm.

In filings Wednesday, Freddie warned that expenses resulting from the foreclosure delays and the costs to correct paperwork errors could be "significant."

Freddie has taken back more homes as delinquencies have risen, and it owned nearly 75,000 homes at the end of September, up more than 20% over the previous three months. The costs of repairing and maintaining those properties totaled $840 million for the first nine months of the year, compared with $480 million during the year-ago period.

Freddie said it would seek to force banks to pay for costs of any delays that they were responsible for but warned that those efforts could be "difficult, expensive and time consuming." Freddie relies on the same big banks that sell mortgages to the company, its main source of income, to also handle servicing, or day-to-day loan management.

Three banks account for more than half of all loans sold to Freddie and also half of all loans serviced on behalf of Freddie: Bank of America, J.P. Morgan Chase and Wells Fargo & Co.

Fannie and Freddie already have locked horns with its lender-partners over demands to buy back soured loans that the mortgage companies say fell short of the firms' standards.

During the third quarter, Freddie collected $1.7 billion as a result of repurchase demands. Freddie had $5.6 billion in buyback requests during the quarter, and one-third of those demands had been outstanding for more than four months.

Even if Freddie is able to stem its losses, it is unlikely to ever pay down debt that has amassed as a result of the government's bailout. The company must pay the government a 10% annual dividend on its infusions from the Treasury, which totals $63 billion.

The cost of those interest payments exceeds the company's annual earnings from even its most profitable years. A new fee designed to help recoup the government's bailout of the companies is set to kick in next year.

Last month, a series of estimates by the firms' federal regulator, the Federal Housing Finance Agency, said that the taxpayer tab for the companies could run as high as $154 billion under the current home-price forecast. If the economy enters a double-dip recession and home prices fall more than 20%, the cost to taxpayers could reach $259 billion.

HomeServices buys North Carolina Real Estate Firm

Greensboro News-Record

 

HomeServices of America Inc. said today it has acquired Greensboro-based Yost & Little Realty.

Financial terms of the deal were not disclosed in a news release.

HomeServices will merge Yost & Little with its existing residential real estate firm, Prudential Carolinas Realty. The new company in the Greensboro market will be re-branded Prudential Yost & Little Realty.

Prudential Carolinas Realty will continue to operate as the HomeServices brand in the Winston-Salem, Kernersville and Charlotte markets.

Yost & Little currently has three offices and more than 140 real estate workers in Greensboro and High Point. The company’s volume of closings in 2009 was $230 million.

“We are combining two strong firms within the Triad into an even stronger organization," Yost & Little president Eddie Yost stated in a news release. "Our commitment is to make this merger seamless for our customers, who will continue to be served by their existing agents.”

Yost will serve as chairman of Prudential Yost & Little Realty and will be joined by managing brokers Dean Little and Mark Yost. Tommy Camp, Prudential Carolinas Realty’s president and CEO, will continue to oversee HomeServices’ operations in the Triad, Charlotte and Triangle regions.

HomeServices of America, based in Minneapolis, Minn., is a subsidiary of Berkshire Hathaway Inc.