A Tale of Two Property Markets

While commercial property owners are worried about property market, much of the commercial property market remains stable or strong. In contrast, the residential market is still spiraling down and take lots of people and companies with it.

First up, the summary of REIT earning reports show that most of the public real estate companies are still hitting their earnings targets: REITs Cautious Despite Strong Quarter.

Given fears that a sagging economy and a crippled credit market might wreak havoc on the commercial property market, real-estate investment trusts delivered surprisingly strong earnings for the first quarter, with many companies beating analysts' estimates.

The implosion of the residential markets is taking down builders: Falling Prices Hit Builder Horton - Home Cancellations, Write-Downs Spur $1.31 Billion Loss.

The implosion is also showing the weakness in the underwriting and origination processes for mortgage lender. It was apparently bad enough at Countrywide that it is giving Bank of America second thoughts about its takeover: Acquisition of Lender Is Possibly in Jeopardy. According to an older WSJ.com story, Loan Data Focus of Probe:

The investigators are finding that Countrywide's loan documents often were marked by dubious or erroneous information about its mortgage clients, according to people involved in the matter. The company packaged many of those mortgages into securities and sold them to investors, raising the additional question of whether Countrywide understated the risks such investments carried.

Many of these companies mentioned are clients of The Firm. I have no knowledge of the background except what was in these stories.

Cities are Enacting Green Building Requirements

On Earth Day, the City of Los Angeles enacted a green building ordinance. According to the Sheppard Mullin Real Estate and Construction Law Blog:

The program sets mandatory standards of sustainability for large projects. In essence, the program provides that no building permit shall be issued for projects at or above 50,000 gross square feet of floor area unless “[t]he project applicant…demonstrates that the Project meets the intent [emphasis added] of the criteria for certification at the LEED certified level.” See LAMC, Section 16.10 D.1. Formal LEED certification, however, is not required.

Boston enacted its green building ordinance last year. In January of 2007, the Boston Zoning Commission approved several amendments to the Boston Zoning Code to require all projects over 50,000 SF to be designed to meet the “certified” level.

• Green Building presentation to the Boston Zoning Commission. (.pdf file)
  
• Boston Zoning Code Green Building Amendments. (.pdf file)

REITs still have a Buy Rating

In another sign that the commercial real estate sector is not in the same trouble as the residential sector, many REITs still have good ratings from S&P.

According to Business week in the first quarter of 2008, the group posted a 0.8% total return, at a time when the S&P 500 index fell 9.4%. (REITs Show Strength)

Business Week put together a list of 17 REITs that have a 4- (buy) or 5-STARS (strong buy) rankings from S&P Equity Research:

Alexandria	ARE
AMB Property	AMB
Annaly Capital Management	NLY
Developers Diversified Realty	DDR
Essex Property	ESS
Federal Realty	FRT
First Industrial Realty	FR
General Growth Properties	GGP
Macerich	MAC
Mack-Cali	CLI
National Retail Properties	NNN
ProLogis	PLD
PS Business Parks	PSB
Regency Centers	REG
Simon Property Group	SPG
Taubman Centers	TCO
Weingarten Realty	WRI

(Disclaimer: Some of these REITs are clients of my employer.)

Commercial Properties Are Not Selling

Yesterday, I posted that commercial property prices are still increasing. Of course that does not mean there are many properties selling at these prices. As the Boston Business Journal reported, commercial real estate sales have ground to a halt in downtown Boston:

The city saw $57.3 million in office-building sales during the three-month period, compared to $4.3 billion a year ago. Total commercial sales -- which included offices, retail, apartments, industrial and hotel properties -- fell 97 percent to $152.6 million during the quarter, compared to $5.2 billion in the same period in 2007, according to figures from Real Capital Analytics, a real estate research firm in New York.

Sellers are sitting on the sidelines waiting for the debt markets to get back to some normalcy. Buyers are still thirsting for deals, but can't line up the debt to get the deals done. If the debt markets do not come back soon and sellers get tired of waiting, then prices will start dropping .

Commercial Property Prices are Still Increasing

Even though residential property prices are dropping like rocks around most of the country, commercial properties are still holding their value.

The press release on the S&P/GRA Commercial Real Estate Index shows that prices are up from a year ago.

The National composite reported annual price appreciation of 7.0%, versus January of 2007, up from the +6.7% reported in December's data, but still significantly below from this cycle’s peak of +14.5%, reported in June of 2006. . . The Northeast had the highest return over the month and has the highest annual return over the past 12 months. Each of the regions reported lower monthly returns in January December/November returns.

The raw data for the Index Values is in this Excel spreadsheet.

Triple-A Failure

There is a great article by Roger Lowenstein appearing in the Sunday New York Times Magazine: Triple-A Failure. It runs through the process for converting mortgage loans into mortgage securities.

In one example, the author is taken through the rating and structure process for a pool of 2,393 mortgages with a face value of $430 million. All of the loans were sub-prime loans originated in the early spring of 2006 by a non-bank lender. Seventy-five percent of the loans were adjustable-rate.

What I found it staggering was that 43 percent of the loan were no-doc loans. The borrowers did not provide written verification of their income. No-doc loans were originally intended as an alternative loan for small business owners (especially cash businesses) where it is difficult to put together the paperwork for showing their income. But when you here no-doc loans, you should think mortgage fraud.

Banks Are Keeping More Loans on Their Books

Mark Gongloff reports in WSJ.com that U.S. commercial banks are keeping more of the loans they make on their balance sheets.

Total assets at U.S. commercial banks swelled to $11.12 trillion in early April, up from $9.94 trillion a year ago, according to Federal Reserve data that are updated every Friday. Last month, the growth rate of bank assets hit its fastest growth pace in 28 years.

As Mark states, one of the problems that occurred in the CMBS market was that lenders were not keeping an interest in the loans they originated. They were just producing the paper to package into a stream of CMBS offerings. Banks forgot that they were making loans and that the loans would have to be managed.

Prior to the CMBS, when negotiating documents, the "no" response was that the change would reduce the value of the paper. I was not hearing that it would affect the lender's ability to manage the loan.

W Midtown Atlanta

In August of 2006, I represented an investor working with the Noble Investment Group with their acquisition of the Sheraton Colony Square in Atlanta. The plan was to renovate the hotel and convert it to the W Hotel Midtown Atlanta.

Noble has a link to a virtual tour of the hotel on the home page of the Noble website. (The link is on the top right corner of the picture). Noble also has a case study on Major Renovation of the Sheraton Colony Square to W Hotel Midtown - Atlanta, GA.

Proposed New Tax Requirement on Real Estate Sales

The current draft of the Fiscal Year 2009 Massachusetts House Budget proposes a new obligation on real estate sales. Section 11 of H4000 Outside Sections (7L Sections) would impose a new requirement on non-resident taxpayers being obligated to make an estimated tax payment at the time of the sale of real estate in Massachusetts.

SECTION 11. Chapter 62B of the General Laws is hereby amended by inserting after section 13 the following section:-

Section 13A. The commissioner may require a taxpayer, or a person paying, crediting or allocating an amount to a taxpayer, to make estimated tax payments on amounts the taxpayer is reasonably likely to receive. The commissioner may require a minimum estimated tax payment and may require payment on or before the date of receipt of income. The commissioner may, for example, exercise this authority to require a nonresident taxpayer to estimate and pay, on or before the time of sale, the income tax liability on the gain from the sale or transfer of real property in the commonwealth. The commissioner may issue regulations governing the administration of this section. In the event of a sale, transfer or disposition of property, a lien in the amount of any required estimated payment shall arise with regard to the property, to the extent provided by regulation, if such a required estimated tax payment is not timely made.

It is strange that Massachusetts is setting this up as a payment of estimated taxes, rather than a withholding requirement. Many other states have withholding requirements: California, Maine, Oregon, South Carolina, Vermont, (This was not meant to be an exhaustive list; just some examples that came up in a Google search.)

Martin Kimmel

I was sad to hear that Matin Kimmel passed away. He was the "Kim" of Kimco Realty and Milton Copper was the "co".

According to the New York Times, Martin S. Kimmel, 92, Co-Founder of Retail Real Estate Firm, Dies:

Starting with a “mundane pedestrian strip” on Coral Way in Miami with a Zayre discount store and two other stores, Mr. Cooper said, the company has built a portfolio that now includes about 1,900 properties in the United States, Canada, Mexico, Chile and Brazil — approximately 1,100 of them strip shopping centers. The value of the common stock of Kimco, based in New Hyde Park, N.Y., was $286 million in 1991; today it is about $10.2 billion.

With that first shopping strip under construction, “Cooper and Kimmel quickly learned the tricks of the local real estate game,” a 1998 article in Institutional Investor magazine said. “Kimmel would follow utility trucks to find out where new power lines were being laid,” an early sign of new residential development.

Kimco Realty is a client of The Firm.