Real Estate News from Homes101™

[Note: To follow is an excerpt of a radio show interview conducted by Peter L. Mosca, host of Income Property Investment Talk dot com, with members of the editorial team at GlobeSt.com: John Salustri, editorial director, ALM's Real Estate Media Group, Ian Ritter, editor of GlobeSt.com, Sule Aygoren Carranza, editor, Real Estate Forum and Danielle Douglas, editor and distressed assets investor. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/121609.]

Mosca: John, can you to start out by giving us an overview of the commercial market?

Salustri: Ten million dollars is the new 100 million. Throughout the year those were the deals we were tracking on Globe Street. Your audience knows as well as we do that equity and debt have been sidelined essentially since the Wall Street meltdown. On the leasing side, which speaks directly to building values, the lease is done this year with downsizing, consolidations or flights to quality. The good news is that we're starting to see a little bit of activity happening in recent days. Raytheon cut a 75,000 square foot lease in Aberdeen, Maryland. Samsung signed for 190,000 square feet in Ridgefield Park, New Jersey. Plus, Globe Street's going to be reporting that Tishman Speyer has announced that law firm Gibson, Dunn, and Krutcher signed a lease renewal and expansion at 200 Park Avenue with more than 260,000 square feet. On the acquisitions and positions side, according to Real Capital Analytics 2009, unlisted REITs became the second largest net investor group next to public trusts among all property types and they're steadily attracting investor dollars as well. It's a mixed bag but we're starting to see a bit more activity.

Mosca: Do you think this is a blip or are we turning the corner and 2010 might actually show a rate of increase? If so, what quarter in 2010 do you think this might happen?

Salustri: I'm not one to rush on the recovery bandwagon. I want to see what happens to the blip and how long it sustains into January. If it continues and the positivism continues then maybe I'll start waving the flag that we're in the start of some kind of recovery. Don't forget this all comes down to jobs -- if there's no jobs, there is no office leases or the office leases are going to be contracting rather than expanding. There is no retail, which means that there is no industrial because there's no warehouse need. The condo market without jobs isn't going to grow. Hotels forget about it, and hotels are really the poster children for this recession. Best-case scenario that I've heard is that jobs are going to start coming back by mid- year. I personally don't really believe that. We're talking about an actual unemployment rate of about 17%, almost double what official rate is. The bulk of the opinions that I've been hearing put it closer to the end of 2010 when we start to really see confidence come back into the market and we start to see some sort of real recovery in 2011.

Mosca: Can you give our audience a sneak peak as to media content GlobeSt.com might deliver to its subscribers in 2010?

Salustri: Absolutely. We've actually been doing videos now for just about a year. In the first quarter it will be a year ago that we launched Globe Street TV and it's been exceedingly successful given market conditions. We're creating a buzz with people who are actually doing things and breaking the mold. That's what we do throughout our whole editorial calendar, which by the way is now available on REforum.com.

Mosca: Ian, can you give us an overview of the commercial retail market?

Ritter: It's taking of a beating in the media. Everyone's read about all the store closings that have taken place and how we've had weak retailer sales over the last year now. Lately, things have started to heat up. Simon Property Group, the largest mall owner in the country, bought prime outlets for 2.33 billion giving it a total of 63 outlet malls now making it by far the biggest outlet mall owner of the country. Then there's also the question of General Growth Properties, the bankrupt mall owner out of Chicago that has two hundred malls, the second largest mall owner in the country. There are a lot of people who are buying them apparently -- Simon always comes up, as does the Westfield Group out of Australia. General Growth owns such properties as Faneuil Hall in Boston and Water Tower Place in Chicago and the Grand Canal shops in Vegas but they've just restructured 10.25 billion in debt, so there's talk that they might not have to sell their assets or may not want to. Occupancy is looking good for all the major shopping center owners. Simons' at 91.4 %, even General Growth, which is bankrupt, is at 91.3%, which is pretty good. Kimco Realty, which is the largest strip center owner in the country is at 92.4%. We're hearing Staples opening 50 stores a year and Costco's upped its expansion plan into at least the 20's.

Mosca: As a New Jersey resident it's sort of a running gag here that any time you jump in your car and you go for a ride there's a new strip mall popping up. John had mentioned in the first segment how important jobs are. Do you see small business entrepreneurs filling more of this space and maybe taking advantage of some of these more positive numbers as we move through 2010?

Ritter: Independents are getting hurt pretty badly right now. A lot of the expansion we are seeing is from people who are already established. I think the problem with the independents is it's hard to start a new retail business right now because it is hard to get money from a bank to do something like that. We have had a couple IPOs' lately that are kind of interesting. Vitamin Shoppe just had an IPO that was received pretty well by Wall Street. As did Rue 21, which is an apparel chain. And they both have pretty big expansion plans.

Mosca: What's your take on investors who are still high on retail and are looking at local markets?

Ritter: It is a market-by-market decision. It's more of a game of patience. Once the housing market and the employment pictures improve, and I want to stress as well is obviously a major problem with retail sales, you can look at markets that are the most logical where your going to follow the rooftops and that's where the retail is probably going to be succeeding in the future.

Mosca: Sule, can you give us an overview of the multifamily market?

Carranza: Multifamily is interesting. It was one of the harder hit property types when, before the downturn hit and the housing market was so vibrant, a lot of people moved out of rental properties and into single family homes. Multifamily has turned around as the economy has worsened as folks can't afford their mortgage payments or that housing prices are getting a little too expensive. Particularly in the costal markets, they chose to stay in the rental pool. Over the past year as the layoffs have gone into the millions, they can't afford renting either, so a lot of them are doubling up and moving back in with their parents. They are not going to move into single-family apartments. They are not necessarily getting foreclosed upon. They are working out their mortgages especially over the past several months and looking forward at least through the first half of next year. They are working out their loans and modifying things and restructuring. Chances are you are not going to find them in the traditional rental pool. It's kind of an up and down for the apartment market. Interestingly however, compared to its counterparts in other property segments, it is doing pretty well.

Mosca: Sule, in a recent blog you wrote, Apartment development has slowed down significantly over the past several quarters and perhaps it has gotten to a point where some in the industry are wondering how much lower things can go. Can you expand on that?

Carranza: In October, when the development numbers came in we found that starts in multifamily units, which is generally five or more units in one property, fell more that 33% to 48,000 units -- the lowest start figure since 1963 when the government started tracking that information. Actually, the lowest unit figure before then was 72,000, which was in July, August and September of this year. That's a big decrease in terms of a low. It basically comes down to finance. The lenders are not providing capital. Fannie and Freddie are out there, but they are there to give you money if you need to refinance or want to buy a new property. Nobody is starting a development right now and if they do, they're funding it on their own because you'll be hard pressed to find a lender that will provide you construction financing. The people that are in the middle of construction and need capital, those projects are getting done. We are talking about a small handful of units across the country that won't get finished. In that case if the developer walks away or the lender has to take it back, somebody will step in. It is still one of the top investment classes so every type of investor wants to get into apartments.

Mosca: This one might be a bit unfair, but can you look into your crystal ball and tell us when you expect the long awaited multifamily recovery to occur?

Carranza: Oh, that's tough.

Mosca: Yeah, that's what I figured but...

Carranza: Here's why it's tough. A lot of the experts, the economists, think we are officially out of the recession and things are starting to look up. I think numbers looked a little bit better than they have been the last time it was reported but it's still bad. Everybody I know is experiencing a layoff. Not one market has not been affected and the fact that it looks like this recovery is still going to be a jobless recovery in that companies are going to look to get more productivity out of the few employees they have, they are going to curtail hiring. Everything is based on job growth. If people don't have jobs, they are not going to move out of their parents' houses or they are not going to move out of their roommates' and rent units of their own. Until we see the jobs, which really isn't expected until 2012 at the earliest, it's not going to happen. But, in terms of performance and revenues, owners are doing a pretty good job of keeping occupancies high and maintaining rental revenues.

Mosca: Danielle, can give us an overview from the capital markets perspective or would you prefer to give us an overview of distressed assets or a combination thereof?

Douglas: I'll blend all of them since they all are interrelated. In terms of distressed assets, between now and 2012, roughly more than 1.4 trillion worth of commercial real estate loans will come due according to ING Clarion and most traditional sources of lending as you guys know have dried up, meaning that much of that debt will probably be defaulted upon. There is roughly $100 billion worth of assets already in special servicing as of this year and I guess one of the biggest things right now is paying attention to what the special services do with those loans. The Financial Accounting Standards Board for instance relaxed some of its accounting standards mainly market to market, which affects whether or not banks trade some of the assets on their balance sheets. Earlier in the last month or so the Federal Reserve decided to offer guidance on how banks can go about doing their workouts and how special services can also go about doing their workouts easing some of the restrictions that were previously in place as well as being a bit more permissive as to how people could deal with bad loans and repackaging some of that bad debt into new offerings.

Mosca: Is this a great time to get into distressed assets, build a strategy and take advantage of what for many is a once in a lifetime investment opportunity?

Douglas: Certainly. In a lot of ways we can look at this current distressed situation as similar to the distressed situation for the days of the Resolution Trust Corporation back in the early '90s. Granted the circumstances that got us into this situation aren't the same. There are a lot of opportunities to be had just like there were during that time. If you think about the people who became top owners as a result of the amount of assets that were on the market, like Sam Zell for instance, a smart savvy investor could do the same in this market. The only thing is that we're not seeing the wealth of deals coming onto the market as you did that time around. Activity has been with a lot of FDIC sales and auctions, FDIC auctions as well as private auctions, but there is a lot of private equity and REITs that are gearing up to try to buy this stuff once it gets onto the market. There are generally two strategies that are being employed now. There is the loan to own strategies where they are buying the debt in hopes of owning the underlying assets, which despite what's going on in the market still has great value. Some people are also employing the loan to loan strategy where they are buying the debt in hopes of trading the debt possibly to the borrower who has defaulted, trading it back to them or trading it onto someone else who is interested in loan sales.

Mosca: Sule, are you seeing distressed assets making their way into the multifamily sector?

Carranza: Up until now we haven't seen too much multifamily distressed but the recent report by Moody showed that at least in the CNBS delinquency, the multifamily properties saw the second largest increase among all property types. It was more than 90 basis points, almost a full percentage point to 7.4% over the past month so the delinquency rate is going up and I do expect the more distressed properties coming on the market.

Mosca: Danielle, do you see the commercial distressed market having a major negative impact like the subprime on the residential side or do you think that because of government intervention, because of the industry working itself out, that the commercial distress won't have as negative an impact as the residential subprime fiasco?

Douglas: It's hard to compare. Capital needs to be flowing again in order for a lot of this debt to be refinanced and for commercial real estate not to implode. I want to touch on one of the earlier things you mentioned about where distressed is in terms of the different property types. Hotels actually hold the highest level of distressed at $32 billion worth of hotel properties. Office is at 28 billion. Apartment is about 27.9 billion and industrial, which was never really highly leveraged, is just about $5 billion, according to Real Capital Analytics. That might be important for your investors to know if they are interested in looking at these property types.

Mosca: Is the Obama administration mindset any different than the prior Bush administration's mindset or is it basically all the same no matter what political party might be holding the White House at a particular time?

Douglas: There are a lot of intelligent and sophisticated people who are part of Obama administration but they are not necessarily business people. They don't necessarily understand how free markets totally work but at the same time they are trying their best to do whatever they can in order to save the economy. While I agree that there was some TARP money needed in order to save us from further peril, I don't know necessarily if the policies put in place will help. With Bush, in some circles he was considered more so of a friend of the business community. The financial crisis was already there when the Obama administration took office and they had to do as much as they could in order to address it.

Mosca: What is your golden nugget?

Carranza: Go after cash flow. Don't be afraid of taking your time in the market and looking for the right property. They are out there.

Douglas: Investors interested in getting into distressed assets should look at distressed loans. If you are interested in a loan to own strategy, pay attention to the underlying problems of the property that you are hoping to own.