Schaumburg and Chicagoland Office Space

EXPERTS SAY STIMULUS PACKAGE WILL BENEFIT COMMERCIAL RE

Lawrence White, professor of economics at New York University, says: “I think the stimulus bill will have a positive effect on the economy, and a positive effect on the economy is going to have a positive effect on commercial real restate.” Job growth is a key to recovery, White says. The bill provides for an infusion of spending that will create jobs to modernize the country’s electric grid, clean up nuclear sites, and improve government facilities such as the National Oceanic and Atmospheric Administration research labs, among other properties. “The whole point of the stimulus is to get extra spending and thereby create extra jobs that would not otherwise be created,” White says. Job creation, in turn, could have a beneficial effect on the occupancy of office buildings and on development in the retail sector, which has slumped along with the economy.

REIT EXECUTIVES ARE LOOKING AHEAD TO MARKET REBIRTH

“The greatest opportunity in our lifetime to buy things extraordinarily cheap will soon be in sight,” according to Steven Roth, CEO of Vorando Realty Trust, a REIT that owns a diverse mix of New York City office buildings and retail properties in the Northeast. “If people have the liquidity and the smarts and intelligence to navigate, I think there are going to be some incredible buys whether in the public or private markets. There’s going to be more good quality assets available than we all combined have the capital for. There’s going to be three or four years of investing – there’s that much product available. There’s more product than there is capital now, and that will continue for years,” Roth said. He made these comments at a meeting of analysts and real estate investment trust executives gathered at Citigroup’s Global Property CEO Conference in Naples Florida. Citicorp research analyst Michael Bileman conjectured that the industry may have entered the last of the “five stages of grief” – acceptance – after the REIT sector’s initial reactions of denial, anger, bargaining and then depression following the financial crisis that first gripped the industry last fall. “I think we’ve now gotten to the acceptance phase,” he said.

COMMERCIAL MORTGAGE DELINQUENCIES ON RISE ACCORDING TO THE URBAN LAND INSTITUTE

After holding relatively firm over the past year as residential mortgage delinquencies climbed steadily, default rates on commercial mortgages are beginning to head higher as well. That spells more trouble ahead for banks and other lenders, although not to the scale seen in subprime residential mortgage lending. The Urban Land Institute reports that “although commercial mortgage delinquencies remain near historic lows, the eroding fundamentals in the commercial real estate market and continued weakness in the overall economy mean more commercial mortgage holders will have difficulty meeting their obligations, according to experts.” Overly aggressive commercial mortgage underwriting and deteriorating commercial real estate values mean some commercial real estate mortgages may be worth more than their underlying properties, but contracting credit markets and lenders’ risk aversion have put an end to easy refinancing. Commercial real estate values have declined progressively this year, a trend expected to continue through 2009. Sixty-eight percent of senior real estate executives surveyed by the Real Estate Roundtable said commercial values will be lower next year, and 27 percent believe the values will be “much lower.” An Urban Land Institute report said commercial real estate will bottom out in 2009, flounder in 2010 and begin a slow recovery in 2011.

BOMA INTERNATIONAL APPLAUDS TREASURY’S ACTION TO STABILIZE FINANCIAL MARKETS

The Building Owners and Managers Association (BOMA) International commends the U.S. Treasury for taking decisive action to restore liquidity to the financial system and create a functioning credit market for commercial real estate. Treasury Secretary Timothy Geitner announced a plan to unlock the nation’s frozen credit markets that includes expanding the Fed’s Term Asset-Backed Securities Loan Facility to include newly originated AAA commercial real estate securities. The Treasury’s new plan is a significant and positive step that will thwart potential mass foreclosures in the commercial real estate industry that many experts fear, BOMA said. In a letter BOMA sent in collaboration with 11 other national real estate organizations to the Treasury, it was estimated that more than $400 billion of secured and unsecured debt will mature before the end of 2009. The strategy that was announced will go a long way to foil the widespread detrimental effects on local communities that would have resulted without the plan, BOMA said.

AFTER A MONUMENTAL SHOCK TO THE SYSTEM, WHERE DO WE GO FROM HERE?

Amid what’s been a crippling credit crisis, real estate investors look toward 2009 with marked conservatism and caution, believing a bounce-back should not be expected until well into next year – according to a survey conducted by Colliers Investment Services Group, a division of Colliers International, a global real estate services firm. Colliers’ survey and resulting 2009 outlook indicates that 22 percent of investors foresee being active buyers in the first half of 2009, but an overwhelming 78 percent said they wouldn’t venture back into the market until the latter half of the year. A number of concerns govern this majority mindset. Deflation is a major issue, and many investors believe values will continue to trend downward well into the coming year. The frozen credit markets are an ongoing stressor, as well, and have left many investors “sitting on the sidelines” and carefully guarding capital, effectively in a state of avoidance until the debt markets reopen. On the flip side, sellers are also relatively non-participatory, being quite resistant to sell at today’s prices. So what will prompt participants’ re-entry into the market? Colliers’ survey respondents cite available debt, some semblance of stability in the job market, and a sense that we’ve hit bottom and that there is a pick-up in sales volume – which would provide the comparables so sought-after by investors.

MORTGAGE BANKERS SAY JOBS IS THE ANSWER

Commercial and multifamily mortgage bankers gathered in San Diego in February were in a “show-me” state of mind when it came to talk of U.S. economic recovery. “Until the job-loss picture reaches bottom and starts to come back, it’s going to be tough on the real estate fundamentals – the rents, the occupancies, the fundamental metrics that drive real estate,” said David Twardock, president of Prudential Mortgage Capital. The jobs outlook is expected to worsen before it improves. The national unemployment rate will peak at about 9.6 percent in mid-2010; at the earliest, forecasts Jay Brinkmann, chief economist for the Mortgage Bankers Association. The current unemployment rate is above 8 percent nationally. Among college-educated workers, the unemployment rate has risen from 2 percent in 2008 to nearly 4 percent today. “That affects demand for office space,” emphasized Brinkman.

COMMERCIAL REAL ESTATE ACTIVITY CONTINUING TO DECLINE, SAYS NAR

A sustained lack of credit and the economic slump will depress the commercial real estate market this year, according to a forward-looking index and forecast for the commercial real estate sectors published by the National Association of Realtors. Lawrence Yun, NAR chief economist, said all components of the index declined. “The credit crunch has especially hammered down some components of NAR’s commercial leading indicator,” he said. “A lack of commercial credit is a serious threat to the overall economy. The Federal Reserve needs to use the Term Asset-Backed Loan Facility (TALF) to provide liquidity and support for commercial mortgage-backed securities.” The Commercial Leading Indicator for Brokerage Activity fell 6.0 percent to an index of 109.2 in the fourth quarter of 2008 from a downwardly revised reading of 116.1 in the third quarter, and is 9.1 percent lower than an index of 120.1 in the fourth quarter of 2007. The slowing index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, is likely to weaken further over the near future. All sectors are down except for multifamily. The apartment rental market is more stable simply because home sales are depressed.

INSTITUTIONS HOLD KEY TO COMMERCIAL RE RECOVERY

The question of what’s next is prominent when it comes to institutional investors who saw the value of the investment portfolios drop by 31 percent in 2008. A story in National Real Estate Investor says that a new study by Greenwich Associates, a consulting and research firm, finds that when it comes to future real estate investing, “the news is good.” Burned by the wild gyrations of publicly traded stocks, most institutional investors are rightfully pulling back from the equity markets. Of the 154 public funds making predictions for the survey, 25 percent said they expect to increase their real estate allocations. Only 3 percent said they would decrease their real estate allocations. The survey responses confirm what many advisors already know – real estate will continue to be an integral part of diversified portfolios. Greenwich Associates conducted in-person interviews from July through October 2008 with fund professionals from 578 corporate funds, 229 public funds, and 241 endowments and foundations.

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