Zell Says Buy Debt, Not Property

North County Times

Noted distressed asset investor pushes cross-border airport in Otay Mesa

Real estate and newspaper tycoon Sam Zell sees great opportunity in the commercial real estate market, despite other experts' predictions of doom, he said Friday at a conference in San Diego.

Banking analysts warn that the nation could be swept by a wave of foreclosures of apartment buildings, retail outlets, industrial space, and office complexes in the coming year. Zell said some investors expect to score bargains from desperate owners ---- but he doesn't see that happening.

Distressed property markets are Zell's primary expertise. He made his fortune in the 1970s and 1980s investing in discounted properties saddled with debt or other problems, according to a Forbes.com biography.

By 2006, he'd turned his $200 million personal fortune from 1986 into $4.5 billion. In 2007 he became yet richer when he pulled off what his own Web site calls the largest private equity deal in history: At the peak of the commercial property market, he sold his property trust to Blackstone, Inc. for $39 billion.

But this expert in distressed assets, who earned the nickname "Grave Dancer," thinks his preferred strategy won't work this time around.

"There ain't no grave-dancing opportunities, because nobody's got the equity that you can grave-dance," Zell said, speaking at the University of San Diego's 14th annual Real Estate Conference. "If there are opportunities in distressed real estate, it's not in buying the real estate, it's buying the debt."

He said owners with no equity won't bother to sell at any price ---- all the money would go to creditors. Instead, Zell expects to see investors pay off some of the debt in exchange for equity.

And the best place to apply this strategy may be apartment buildings. While he doesn't expect to see any new commercial construction for the next five years, the United States adds roughly 1 million new households a year, which should lead to strong demand, he said.

On other subjects, he said the residential market has hit bottom and is on its way back; he's deeply worried about the debasement of the dollar; and he thinks the health care bill that passed the U.S. Senate is a terrible idea.

But, he said, he's pushing on with a project to build a new airport terminal on land he bought in Otay Mesa. The terminal would allow planes to take on passengers on the American side, but take off and land on the runway in Mexico.

Outside the conference, Zell said he expects to get required presidential permits from both the Obama administration and the Mexican government this year, though he dreads working through the local permitting process.

"San Diego desperately needs more air service and air access," he said. "It's going to take two years to get through the planning process, with each committee waiting for its chance to put another month delay on it."

Homebuilders Turn to Private Equity for Financing

Bloomberg

More than 40 U.S. homebuilders have teamed up with private equity firms to acquire and complete unfinished subdivisions as banks cut construction lending.

The investments will pay off for the builders and their investors if the prices are low enough and the locations are in areas where demand is recovering, said Megan McGrath, a home building industry analyst at Barclays Capital Inc. in New York.

“I’ve been getting the question: Why aren’t housing starts at zero?” McGrath asked. “The answer is, they’re probably as close to zero as they’re going to get and in some cases it still makes sense to build.”

Managers of at least 22 funds raised $12 billion in 2009 for development projects and other residential real estate deals, Bloomberg BusinessWeek magazine reports in its Feb. 1 issue, citing data compiled by Bloomberg, Institutional Real Estate Inc. of San Ramon, California, and Real Estate Alert, an industry newsletter in Hoboken, New Jersey. Those firms have invested with at least 42 builders, the data show.

Hovnanian Enterprises Inc., the nation’s seventh-largest homebuilder by revenue, last year announced joint ventures with two New York-based private equity firms, in which the investors provided at least 80 percent of the money for the developments. GoldenTree Asset Management and Hovnanian are working on 11 projects around Chicago and Palm Beach, Florida, while Angelo Gordon & Co., with $21 billion under management, teamed up for other projects in Florida.

“For every one that we’re doing business with, there are 10 more that we’re talking to,” Ara K. Hovnanian, chief executive officer of the Red Bank, New Jersey, homebuilder, said at a Nov. 17 conference in New York organized by UBS AG.

Building Permits

Home building permits climbed to 653,000 in December, the most since October 2008 and a sign of optimism about demand, the Commerce Department reported yesterday.

Steve McGee, principal of investment firm Developers Financial Solutions Inc. in Rancho Santa Fe, California, said he interviewed 30 builders at this week’s National Association of Home Builders convention in Las Vegas and found six viable partners, whom he declined to name.

“We saw an opportunity to provide financing at this stage of the recovery,” said McGee, whose firm has more than $1 billion to invest in residential and commercial real estate and Atlantic Beach vacation homes.

Slowing Bank Loans

The private equity firms are a new source of funding for the homebuilding industry, which has traditionally relied on bank loans and bond sales. Banks slashed lending to homebuilders because regulators pressured them to reduce real estate assets as defaults on construction loans climbed, said Robert Seiwert, vice president of the American Bankers Association.

“What got us into this situation was people making loans that shouldn’t have happened,” Seiwert said in a telephone interview from the organization’s headquarters in Washington.

Outstanding bank loans for land and new development sank to $113 billion in the quarter ending Sept. 30, down 44 percent from a peak of $203 billion in June 2008, according to Federal Deposit Insurance Corp. data. Loans for all construction and development fell to $492.2 billion from a peak of $629.5 billion in June 2008, the FDIC said Nov. 24.

The supply of new homes on the market rose to 7.9 months in November, compared with the five-year average of 7.2 months, according to the Commerce Department. With unemployment and foreclosures still at quarter-century highs, demand could remain weak for a while, especially with federal tax incentives for home buyers set to phase out in April.

Confidence Drop

Confidence among homebuilders fell this month to the lowest level since June, as traffic hit a 10-month nadir, the National Association of Home Builders said Jan. 19.

U.S. sales of new homes fell to an annual pace of 355,000 in November, down 11 percent from October, the Commerce Department reported Dec. 23. Homebuilders have seen orders and revenue decline since 2005, when 1.28 million new homes sold, according to the Census Bureau.

Grosvenor Investment Management of Philadelphia and KeyBank Real Estate Capital Residential Investment Partners, which raised $100 million in 2007, took almost two years to make their first investment, said John Hay, manager of the fund for KeyBank Real Estate Capital Markets, a private equity unit of Cleveland- based KeyBank NA.

‘Very Challenging’

The managers wanted to buy ready-to-build lots for about 20 cents on the dollar. They wouldn’t invest in markets such as Las Vegas, South Florida, or Southern California. So far, the fund has entered five deals totaling about $30 million each for subdivisions outside Atlanta, Denver, Philadelphia, Portland, Oregon, and Raleigh real estate in North Carolina.

“This investing, while it’s ahead of the game, is still very, very challenging,” Hay said.

Reuben S. Leibowitz, managing director of JEN Partners LLC, a New York-based private equity fund, said he invested $50 million in 2009 for land and construction partnerships in Southern California and Arizona, where he believes the buyers are coming back.

In May, Leibowitz bought Canta Mia, a 600-home “active- adult” community outside of Phoenix that caters to retirees. The original developer, Tousa Inc., filed for bankruptcy and Leibowitz acquired the project -- complete with model homes -- for less than the cost of improvements, such as roads and waterlines. He expects to get his money back in four to seven years, although he doesn’t think there are many other good deals out there. “There won’t be many people who are successful” at bottom-fishing in this market, he said.

At least one private equity fund has pulled up stakes. Rockpoint Group, a Boston investment firm, raised $470 million for a residential real estate fund from investors including a $270 million commitment from the California State Teachers Retirement System. In August, Rockpoint suspended the fund, returning the money to investors, after it failed to find enough workable deals.

Congressman Says Freddie and Fannie Should be Eliminated

The Wall Street Journal

A top House Democrat on Friday said his committee was preparing to recommend "abolishing" mortgage-finance giants Fannie Mae and Freddie Mac and rebuilding the U.S. housing-finance system from scratch.

"The remedy here is...as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee.

His comments initially rippled through bond markets on concerns that the government might pull away from the mortgage market. Many believe that's unlikely and that any revamp would include continued government involvement. The government took over the companies in September 2008 as loan losses mounted.

Some Republicans have argued that the companies should ultimately be reduced in size and privatized, while at other end of the spectrum, some analysts have recommended turning the companies into government agencies. But several industry groups and academics have suggested that the government is likely to continue playing at least some role in the future of the companies.

One such report came from analysts at Standard & Poor's this past week. "It's hard for us to imagine" how enough capital could be attracted to replace Fannie and Freddie with stand-alone private companies that would be able to offer low-cost funding for 30-year fixed-rate mortgages, the analysts wrote.

Some analysts have argued that starting from scratch could create more problems than they would solve, in part because Fannie and Freddie own or guarantee around half of the nation's $11 trillion in home mortgages. "Blue sky ideas are great, but they take a long time to happen," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse, at a conference last month. "When you have $5 trillion of agency mortgages, you can't really orphan them."

Mr. Frank, who didn't elaborate on forthcoming recommendations, said last month that one possible revamp could merge some functions of Fannie and Freddie that overlap with the Federal Housing Administration into the government mortgage-insurance agency.

The Obama administration said it will weigh in on how to revamp the companies—and the entire housing-finance system—when it releases its budget next month. Republicans have increasingly criticized the administration for moving to overhaul the financial sector without spelling out plans for Fannie and Freddie.

In a PBS interview on Thursday, Treasury Secretary Timothy Geithner said the legislative process to overhaul Fannie, Freddie and the housing-finance system was unlikely to begin this year. "It's just a complicated thing to get right," he said. "But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country."

30-Year Loans Now Below 5%

The Washington Post

Rates for 30-year home loans fell below 5 percent this week but remained above last month's record lows.

The average rate on a 30-year, fixed-rate mortgage was 4.99 percent, down from 5.06 percent a week earlier, mortgage company Freddie Mac said Thursday.

It was the third straight weekly decline. The drop comes after interest rates fell in the bond market this week as concerns about the economy increased demand for the safety of government debt, which is closely tied to mortgage rates.

The average rate on 15-year, fixed-rate mortgages fell to 4.4 percent, down from 4.45 percent last week, according to Freddie Mac.

Rates on five-year, adjustable-rate mortgages averaged 4.27 percent, down from 4.32 percent a week earlier. Rates on one-year, adjustable-rate mortgages dropped to 4.32 percent from 4.39 percent.

Borrowers can lower their interest rates by buying points, equal to 1 percent of the total loan amount. The nationwide averages in Freddie Mac's survey were 0.7 points for 30-year loans and 0.6 points for 15-year, five-year and one-year loans.

Falling mortgage rates might help bolster the nation's housing market as borrowing becomes less expensive for consumers. The decline in home-loan rates boosted the number of mortgage applications by more than 9 percent last week, according to data from the Mortgage Bankers Association.

The Mortgage Bankers Association's index of applications to purchase a home or refinance a mortgage rose 9.1 percent in the week ended Jan. 15, led by a surge in refinancing. The group's refinancing gauge gained 11 percent, while the purchase index advanced 4.4 percent.

Tampa Landscaper Offers Cut-Rate Service For Foreclosed Homes

St. Petersburg Times

They arrive midmorning, dressed in matching green work clothes, to earn a few dollars — or maybe even lose a few — for landscaper Ray Rose.

Ernesto Chavez neatens a hedge, then prunes an overgrown oak tree. Juan Hernandez gathers dead branches. Eliasar Vargas takes a blower to the fallen leaves.

Eighty-nine homes in Brandon's Heather Lakes fell into foreclosure in 2009, a figure similar to a lot of Florida neighborhoods. The crew, which works for Rose's commercial U.S. Lawns franchise in Lutz, mows and tends bank-foreclosed lots for $10 each. It's essentially a loss leader that keeps Rose in good graces with the community management company. The idea is catching on, he said: A U.S. Lawns colleague in Pinellas County is offering a similar deal.

Rose, 36, is doing what he can to stay afloat in an industry whose customers — apartment complexes, homeowner and condominium associations — can scarcely afford his services.

Think of him as a 2010 guy in a 1980 world, with a toolbox that includes a playground for his employees' kids and goats that eat the yard waste.

More about the animals later.

Upside-down economy

Nothing says the suburbs like a crisply edged lawn, and nothing distinguishes a subdivision more than rows of rich green shrubs bracketed by patches of perennials.

Hungry for their piece of the housing boom, developers dressed their planned communities with rolling greens and multilayered plantings. Keeping it pretty can consume 30 percent of a community budget. At Tampa Palms, landscape and pond maintenance run close to $1 million a year.

In the good days, when 99 percent of homeowners could be counted on for their monthly dues, there was no problem paying the Roses and the Chavezes.

The recession turned those numbers upside down. The 1 percent delinquencies are 10 or 20 percent, if a neighborhood is lucky. Close to 90 percent of association officers think things will be as bad, or worse, this year, according to a recent statewide study. Almost universally, boards and managers are putting the squeeze on contractors.

"We asked, 'How can we position ourselves to take care of this issue?' " said Rose. "We were trying to find a win-win solution."

Savings, ambitions

A Navy kid who was raised around the world, Rose said he has had a thing for nature as long as he remember. He got involved in landscaping in college, he said. It was either that or Jet Ski rental. James Sciandra, a classmate from Pinellas Park High School, went into business with him 10 years ago, and today they have four franchises.

Rose rejects any suggestion that good business and green business are a contradiction. He sees his responsibilities as threefold: the bottom line, the work force and, well, the world.

His ambitions are many. Already in place are an energy-efficient building with crushed shells instead of asphalt in the parking lot, a workplace child care center, and an elaborate disposal system for his yard waste. Cattle at the Lutz site eat the grass. Goats eat most of the clippings. Machines grind what's left into compost. He estimates he saves $50,000 a year in hauling and dumping costs.

"Nature knows no waste," he said. "Only we create waste."

Still in the planning stage: rooftop photo cells that will harvest enough power to make his operation carbon-neutral, breakfast and lunch service for his crews, maybe biodiesel-powered or electric vehicles someday.

As he sees it, "we're only limited by our creativity."

A stable work force

Chavez, Hernandez and Vargas work efficiently, almost wordlessly. Pay can range from $7.50 to $9 an hour, said Chavez, 23. He said the men knew each other back in Mexico.

Sometimes, he said, they come upon a house with people in it. He doesn't know if they are renters, or owners waiting out the foreclosure. Maybe his crew got the address wrong. If someone objects to their services, they leave without argument.

Rose, who uses both permanent residents and seasonal guest workers, said job protection is one reason for the $10 foreclosed lawn special. He sees it as pragmatic capitalism — a way to have a stable work force when the economy rebounds. It's like his plan to offer ethnic food at that lunch station someday.

"We are taking the long view," he said. "None of the plans we have implemented are rocket science or tree hugging. It's really just getting back to the way we used to be as a society: a society that is more in harmony with itself."

Looking back, he recognizes the folly of developers who dispersed McMansions in landscapes of nonnative grasses and high-maintenance shrubs.

A little bit, anyway.

He likens them to that wild teenager who lived fast and had to grow up, or to the generation that ripped up streetcar lines to make more room for automobiles. That's what people wanted, he said.

"But you can come to a middle ground. People moved to these neighborhoods so they could be someplace nice, so they could know order and uniformity. But we know that we have to change."

Drip irrigation, bahia grass instead of St. Augustine, 50 percent turf cover instead of 80 percent, push reel mowers instead of gas and noise machines, and other Florida-friendly practices are becoming mainstream as both money and water remain scarce.

"We didn't get this way overnight," he said. "And we will not come into balance with nature overnight."

Drop in Construction Could Lead to Apartment Shortage

The Dallas News

A dramatic decline in U.S. apartment construction could lead to a shortage of rental housing in the years ahead.

This year, developers are expected to start about 87,000 units – less than a third of what they build on average each year. And the outlook for 2011 isn't much better.

"We will be facing a severe shortage of apartments in the next few years, which will increase the cost of housing for consumers," Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders, said at this week's convention in Las Vegas. "We believe we should have 300,000 starts every year to have a stable market."

That's not likely in the foreseeable future.

"We have a combination of limited supply coming on and increased demand when the economy recovers," Bell said.

Michael Costa, a partner in McFarlane Costa Housing Partners of California, said, "We know that the demand for housing – especially rental housing – is going to be there. Each month we are not able to get our starts going, we fall further and further behind."

At some point, a lack of rental units will take a bite out of consumers' pocketbooks. "We are predicting now we may see upwards of double-digit rent increases," Costa said.

His firm, which typically starts up to 35 rental communities nationwide each year, has just four projects in the works.

The slowdown has been even sharper for developer Jerry Durkin, whose Wood Partners builds rental units across the country, including several recent projects in the Dallas area.

In 2006, Atlanta-based Wood Partners started about 6,500 units.

"We closed one start in 2009 – a 150-unit deal," Durkin said. "I don't know how 2011 ramps up unless capital frees up."

Over the last couple of years, the Dallas-Fort Worth area has been one of the country's top rental housing construction markets. But startups of new Texas apartments have virtually stopped.

More than 11,000 Houston and Austin apartments were under construction in North Texas at the start of 2010, however, and there are lots of new units on the market, so rents have been falling and vacancies increasing.

The same is true in other U.S. markets, which makes apartment analyst Greg Willett of MPF Research skeptical about a shortage.

"To get back to an essentially full occupancy rate of about 95 percent, we've got to absorb about 600,000 apartments nationally and about 30,000 Dallas-Fort Worth apartments," Willett said.

"The builders are overestimating the number of kids in the basement" who will move out of their parents' homes when the economy rebounds, he said.

Dr. James Gaines of the Real Estate Center at Texas A&M University also says a shortage is a ways off.

"An offsetting factor is the number of foreclosures and other distressed properties being bought by investors and turning into rentals," he said.

Dallas apartments analyst Ron Witten predicts apartment markets around the country could be full by 2012, but that doesn't mean building would start right away.

"Developers have to find and entitle sites, then begin construction," he said. "It could easily be 2014 and possibly later before a meaningful number of new apartments are available for residents."

China Seeks to Temper Housing Boom

The Wall Street Journal

BEIJING—Fresh steps to rein in China's booming housing market—one of the engines that has put the country on the cusp of becoming the world's second-largest economy—triggered an international selloff in stocks, as investors grew concerned about the Asian giant's continued growth.

The Chinese government reported early Thursday that its economy expanded 8.7% in 2009, surpassing the 8% target Beijing had set early last year, when some economists were warning that growth might reach only 5%. Growth in the fourth quarter of 2009 was up 10.7% from a year earlier, reflecting the recent recovery in global trade and a continued surge in domestic property and infrastructure.

Consumer prices in December rose 1.9% from a year earlier, the National Bureau of Statistics said, accelerating sharply from the 0.6% rise in November.

That strong growth brings China closer to overtaking Japan as the No. 2 global economy, though numbers from Tokyo won't be out until next month.

As Japan did in earlier decades, China has grown by rapid industrialization, shifting its rural population into cities where people get better jobs and buy homes and consumer goods.

But there is increasing concern China could be headed for some of the same pitfalls Japan encountered leading up to the early 1990s, when its real-estate bubble burst, curtailing growth for years.

Wang Shi, head of China's biggest property developer, China Vanke Co., said last month his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities.

The latest evidence of Beijing's concern came Wednesday, as the government set further controls on the state bank lending that helped fuel the boom by funding new building.

Bank of China Ltd. will stop making new loans for the rest of the month, while several smaller banks will have to hold more funds in reserve, according to people familiar with the situation

The moves followed others in the past week aimed at curbing new loans, spooking investors in China. Shanghai's main stock index fell 2.9% Wednesday, with large declines in banking stocks.

These jitters spilled over into other major markets, contributing to a fall of 122.28 points in the Dow Jones Industrial Average, which closed at 10603.15.

Loans from state banks are the cornerstone of the stimulus programs China put in place amid global slowdown more than a year ago.

As the government gradually withdraws that stimulus, private businesses will need to spend more if growth is to stay robust.

Housing is the best hope for sustaining the gains: According to the World Bank, construction has been the main driver of private-sector investment in the past year.

Other businesses remain reluctant to expand given weakness in the global economy and excess capacity in domestic industries.

"With exports facing hard times, real estate has become an important pillar of China's economic growth," said Ji Zhu, professor of economics at Beijing Technological and Business University. "No one wants to see housing prices fall," he argued.

Prices of new residential property are now rising at an annualized rate of more than 20% nationwide.

High-end apartments in big cities have gained much more.

So far, higher prices have encouraged developers to build more housing, boosting demand for construction workers and raw materials and supporting the overall economy.

Both November and December saw a record volume of construction starts, which are up 75% from a year earlier for the quarter.

Koyo Ozeki, the Tokyo-based head of Asian credit research for bond-fund manager Pacific Investment Management Co., says that comparisons of China's real-estate boom with Japan's speculative bubble are overdone, in part because Japan's economy was much more mature in the 1980s than China's is today.

China is still far behind developed-world living standards, and with its cities expanding and incomes rising, Mr. Ozeki says, plenty of genuine demand for new housing will remain.

But that doesn't mean speculation isn't also a factor in the housing market, especially with wealthy Chinese investing much of their savings in property.

"You do have a secular trend of increasing demand over time. But on the other hand, you could still get a bubble," said Wang Tao, China economist for UBS. "On the ground, there is a certainly a bubbly feeling: People are waiting to buy luxury apartments like they are waiting in line for cabbage."

The risk is that too much new housing is being built at prices too high to ever find buyers, resulting in wasted investments and bad debts that would weaken the economy in later years.

Even without a crash, a housing market that serves only a narrow slice of the urban elite could turn into a political problem for the rulers in Beijing.

The less affluent, like Huang Haiying, a 28-year-old who works for a hospital in Chengdu, have been watching the steady upward march of housing prices with dismay.

She'd like to buy a place downtown near her work, but can't make the math work.

Prices in the center city have already surged past $110 a square foot, which would require her to spend more than half her salary on mortgage payments.

"Some of my friends and former classmates have bought houses here, but I am still watching," Ms. Huang said.

Housing prices in Beijing and Shanghai are now largely out of reach for middle- and low-income families.

Current prices are affordable for the top 20% of the cities' populations, estimates Beijing investment bank China International Capital Corp.

The upper crust is a sizable market—roughly 120 million nationwide—but there are worries the rest are being left behind.

London Grabs Big Lead As Commercial Property Choice

Reuters

London surged as the top destination for commercial real estate investment, beating out Washington D.C. and leaving New York in the dust, according to a recent survey by the Association of Foreign Investors in Real Estate (AFIRE).

London's score was 31 points higher than second-place Washington and 40 points ahead of third-place New York. Last year, London was in second place, four points behind Washington and only two ahead of New York.

Investors believe that commercial real estate prices in London already have bottomed out. However, prices in the U.S. have not because of differences in accounting practices.

"London currently offers investors the advantage of a "re-priced" market," James Fetgatter, AFIRE chief executive, said. "The re-pricing began sooner than it did in other cities."

The survey of the association's nearly 200 members was conducted in the fourth quarter 2009. Survey respondents own more than $842 billion of real estate globally including $304 billion in the U.S.

The United States remained the country selected as the "most stable and secure real estate investment environment," although only 44 percent of the respondents said so. It was the first time the United State fell below 50 percent in the survey. That's down from 53 percent in 2008 and 57 percent in 2007.

Germany was second with 21 percent.

"The financial crisis of the past year has obviously affected investors' perceptions of U.S. real estate as 'stable and secure,'" Fetgatter said. "However, it is also apparent that opportunity lies within this instability since the U.S., along with the UK, show substantially higher scoring for expected capital appreciation."

Fifty-one percent of respondents said the United States provided the best opportunity for price appreciation. According to various research firms, prices have fallen from their 2007 peaks by more than 40 percent.

Respondents saw the UK as the second-best country for capital appreciation, and China came in third.

Two-third of the respondents said they planned to raise their U.S. investment in 2010, increasing equity investment by 62 percent and debt investment by 83 percent over 2009 levels.

Meanwhile, The Real Estate Round Table, which represents U.S. commercial real estate property owners, investors and professionals has been lobbying Congress to change the rules that subject some foreign owners to double taxation.

As for global investment, respondents said this year's equity investment would be 46 percent higher than in 2009 but 20 percent lower for debt investment.

Among U.S. cities respondents chose Washington and New York, with San Francisco running a distant third. Boston made significant headway into fourth place, with Los Angeles falling one spot into fifth place.

Survey respondents said they favored investing in multifamily real estate as their preferred property type followed by office, industrial, retail and hotel properties trailing significantly.

"More notably, the gap between the top preference and the least-favored product, hotels, has not been this wide since 2000," Fetgatter said.

Half the survey respondents said they expect the U.S. commercial real estate market recovery by or before the fourth quarter, six months later than they projected in AFIRE's mid-year 2009 survey.

About a third of those surveyed said they were more optimistic about the U.S. real estate market than they were in June; 63 percent say their perspective has not changed and 6 percent say they are more pessimistic.

Respondents said their top favorite emerging markets are China, Brazil, India, Mexico, and Turkey. Brazil and India, which were the first- and second-ranked emerging markets in the 2009 survey, each receive half the votes of China.

U.S. Now A Renter's Market

The Wall Street Journal

Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones.

The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.

Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.

Gains in home sales have been driven by government stimulus, leading some to wonder if the nascent housing recovery needs federal assistance to sustain, Nick Timiraos reports.

In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents -- which include concessions such as one month of free rent -- fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.

Landlords now must entice tenants to renew leases. "We'll shampoo their carpets. We'll paint accent walls. We'll add Starbucks cards," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns 63,000 units. He said the first half of 2010 should be "pretty ugly," but was optimistic the sector would pick up later in the year.

Few markets have been spared. During the fourth quarter, vacancies increased in 52 markets, while they improved in 17 and stayed flat in 10. Vacancies increased most sharply for the year in Tucson, Ariz.; Charlotte, N.C.; and Lexington, Ky.

Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn. Apartments have been squeezed because younger workers, who are more likely to rent, have experienced the brunt of job losses during the downturn.

Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.

Many of those developments had secured financing before credit markets seized up. The credit crunch has frozen most new development, which means that new apartment completions should fall by half in 2011. That's one potential silver lining for apartment owners: The limited new supply should give them the ability to boost rents quickly whenever job growth returns.

"If you are renting a place, now might be a good time to renegotiate that lease," said Victor Calanog, director of research for Reis, who added that the sector could see a recovery in the second half of the year, buoyed by either job growth or at least the perception that the economy was turning around.

Such oversupplied markets as Florida, Phoenix and Las Vegas are hurting, even though housing sales have picked up. "Landlords aren't benefiting because jobs aren't recovering," said Hessam Nadji, managing director at Marcus & Millichap, a real-estate firm.

Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months. The report forecasts Washington, D.C., will be the healthiest rental market in 2010 for the second straight year.

Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes. Around 13% of Camden Property's move-outs last summer left to buy homes, up from 11% at the beginning of the year. But that is still roughly half of the rate seen during the housing boom, when mortgage standards were much looser. "During the housing boom days, you had people who weren't qualified to rent but could buy a half-million-dollar home," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis. But falling rents are expected to offset some of the recent improvement in affordability, making renting more attractive than owning in some markets.

After Months Of Declines, Foreclosures Jump In December

USA Today

Foreclosure filings increased 14% in December from November, the first monthly increase since foreclosure activity peaked in July, according to a RealtyTrac report out Thursday.

Foreclosure filings were reported on 349,519 properties in December, which were also 15% higher than in December 2008, RealtyTrac said.

"It's somewhat startling to see these kind of numbers," says Brian Bethune at IHS Global Insight. "There are a few areas that are improving. New York has had no further deterioration. But the problem states, like Florida, California and Arizona, are still suffering."

After peaking at more than 361,000 homes in July, foreclosure filings had been falling because of trial loan modifications, state legislation extending the foreclosure process and a large volume of homes in the foreclosure pipeline, RealtyTrac CEO James Saccacio said in a statement.

Foreclosure activity in the fourth quarter decreased 7% from the third quarter, although it was still up 18% from the fourth quarter of 2008.

And after four consecutive month-over-month declines in California, foreclosure activity there in December increased nearly 9% from November. California's fourth-quarter foreclosure activity was still down 17% from the third quarter.

About 2.4 million homes are expected to be lost through foreclosure, auction and other means in 2010, according to Moody's Economy.com. That's despite the Obama administration's efforts to get banks to rework strapped borrowers' home loans into lower monthly payments. The goal is to prevent foreclosures by providing homeowners with more-affordable mortgages.

As of early December, more than 700,000 homeowners had received trial modifications. The Treasury Department will release updated numbers on Friday. "The foreclosure crisis continues on. I don't see any stabilization," says Mark Zandi at Moody's Economy.com. "The foreclosure crisis is in full swing, and the (mortgage) modification efforts aren't working that well."

The ongoing foreclosure crisis, he says, will continue to lead to falling home prices in spring and summer.

Filings were reported on 2.8 million properties in 2009, a 21% increase in total properties from 2008 and up 120% from 2007, according to RealtyTrac.

Some states did see foreclosure numbers continue to decline. In North Carolina, holders of Raleigh real estate saw a further decline in bank foreclosures, with a drop of 16.1% over 2008.

Foreclosure filings could ease as more banks agree to short sales, allowing delinquent homeowners to sell homes for less than the balance of their mortgage. The Obama administration is attempting to encourage short sales.

"We should also see more short sales, because lenders are becoming more comfortable with it, and it costs them less" than a foreclosure, Zandi says.

Foreclosure filings reached a record high in 2009, touching one of every 45 homes, according to RealtyTrac.
State	Total properties w/ filings	Change from 2008
California	632,573	20.8%
Florida	516,711	34.1%
Arizona	163,210	39.6%
Illinois	131,132	31.8%
Michigan	118,302	11.5%
Nevada	112,097	44.3%
Georgia	106,110	24.5%
Ohio	101,614	-10.5%
Texas	100,045	4.0%
New Jersey	63,208	1.1%
Virginia	52,127	6.4%
Colorado	50,514	0.2%
New York	50,369	0.7%
Pennsylvania	44,732	20.2%
Maryland	43,248	33.7%
Indiana	41,405	-9.9%
Tennessee	40,733	-7.8%
Massachusetts	36,119	-18.5%
Washington	35,268	35.3%
Wisconsin	35,252	79.0%
Oregon	34,121	89.6%
Minnesota	31,697	56.3%
Missouri	28,519	-8.8%
North Carolina	28,384	-16.1%
Utah	27,140	82.9%
South Carolina	25,163	67.8%
Alabama	19,896	156.3%
Connecticut	19,679	-10.2%
Idaho	17,161	101.6%
Arkansas	16,547	15.9%
Oklahoma	12,937	3.8%
Louisiana	11,750	64.8%
Kentucky	9,682	33.7%
Kansas	9,056	45.6%
Hawaii	9,002	182.6%
New Mexico	7,212	93.5%
New Hampshire	7,210	8.7%
Iowa	5,681	5.5%
Mississippi	5,402	135.6%
Rhode Island	5,065	-23.1%
District of Columbia	3,235	-22.6%
Maine	3,178	11.5%
Delaware	3,034	20.6%
Alaska	2,442	25.5%
Nebraska	1,845	-42.2%
West Virginia	1,479	115.9%
Montana	1,373	10.2%
South Dakota	765	90.3%
Wyoming	717	5.9%
North Dakota	390	5.1%
Vermont	143	4.4%
U.S. total	2.8 million	21.2%
Source: RealtyTrac