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Investment Sales Nationally—Where To?
Real Capital Analytics reported last week that national multifamily and commercial real estate sales spiked in June, rising to $9.7 billion in the month. This was the highest volume of significant commercial property sales since September 2008. The latest closings pushed sales for the first half of 2010 to $36.2 billion, up 67 percent from the cyclical low during the same period one year earlier.
The increase in activity-over the year, from the first to the second quarter and over the second quarter itself-suggests that investors remain largely undeterred by downward revisions to the economic outlook and shots across stability's bow from Europe's debt markets. The current tally of properties in contract suggests that prevailing levels of activity will be sustained into the third quarter.
The rise in sales coincides with tentative improvements in national pricing trends as well. The Moody's/REAL Commercial Property Price Index, based on repeat sales data from Real Capital, shows a 3.6 percent increase in its all-property-types index for May. Like headline measures of transaction volume, prices have come off their lows, rising by 8.6 percent since their nadir in October 2009. Across the sectors and for all transactions, cap rates were consistently lower at midyear as compared to late-2009 highs. In the office sector, in particular, average cap rates for closed sales in June were just below 8 percent, almost 100 basis points lower than in January.
Dodd-Frank on the Books, will Commercial Real Estate come out Unscathed?
Real Capital’s Executive Vice President and Global Chief Economist, Dr. Sam Chandan, describes the immediately apparent implications of the recently-passed Dodd-Frank Act on capital sectors in this article for the Commercial Observer.
On the passing of the controversial financial reform act, Dr. Chandan states that, “Ongoing disagreements over how to preclude another crisis will persist, as do disagreements over what triggered the crisis. There is the potential for reform and improvement in every aspect of the financial system. The characterization of the crisis, however, still suggests an unwillingness to acknowledge systemic failures, indicating shortsightedness on the part of policy makers and consumers in addition to the nation's financial engineers.”
Dr. Chandan points out that the government feels as though it has identified what precipitated the most recent economic crisis and, in the Dodd-Frank Act, created a law that will prevent these problems in the future. He also states, however, that to the extent that world economies are more integrated than ever, so too must be the response to financial reform. For more on Dr. Chandan’s opinions of the Bank of International Settlements’ Basel Committee on Banking Supervision and how he sees the Dodd-Frank Act effecting the US, please see the original article on the Commercial Observer’s website.
CALSTRS to Sell Stake in Downtown NYC Office 120 Broadway
The California State Teachers’ Retirement System (Calstrs) plans to sell its majority stake in a lower Manhattan 40-story skyscraper co-owned by developer Larry Silverstein.
Calstrs, the second-biggest U.S. public pension fund, is seeking to profit from its 2004 investment in the national historic landmark office tower at 120 Broadway, according to a statement from its adviser, CB Richard Ellis Investors. Silverstein will hold on to his interest, according to two people with knowledge of his plan who asked not to be named.
In the emailed statement, Ryan Gill, a CBRE Investors spokesman, said the tower “has proven to be an excellent investment. Calstrs has a continuing good relationship with the Silverstein organization, but has decided to harvest some of the gains through the disposition of its interest in 120 Broadway.”
The offering may test the market for properties in downtown New York City, where only five office buildings have traded since the credit crisis deepened in the third quarter of 2008, according to Real Capital Analytics. Those deals include American International Group Inc.’s headquarters at 70 Pine Street and 72 Wall Street, and JPMorgan Chase's tower at 4 New York Plaza, data from the real estate research firm show.
At 120 Broadway, “a lot of the tenants there are pretty high quality, and the state has a lot of space,” said Ben Thypin, an analyst with commercial property research firm Real Capital Analytics. That will help it fetch a premium to deals such as 70 Pine Street, which traded at a discounted price of $103 per square foot because AIG was planning to vacate the property, he said.
The NY state attorney general has seven floors in the building. Other tenants include Bank of New York Mellon Corp., New York Life Insurance Co. and the Alliance for Downtown New York.
The tower, also known as the Equitable Building, was valued at about $300 million, or $173 per rentable square foot, when Calstrs bought its stake through CBRE Investors in 2004, according to Real Capital data.
Aussie I-Bank Taking offers over $3.5 bn for Commercial REIT Spirit Finance
According to recent report on Bloomberg.com, a buyout deal is unfolding that, if completed, would be the largest sale of a U.S. real estate investment trust (REIT) since Tishman Speyer took over Archstone-Smith Trust in 2007. Australian Investment Bank Macquarie Group Ltd. is taking offers starting at $3.5 billion to sell Scottsdale, AZ-based Spirit Finance Corp. Spirit is a publicly traded REIT, with $3.5 billion in assets and $2.9 billion of debt as of year-end 2009.
Asked to weigh in on the potential sale, Real Capital's analyst Ben Thypin stated that, “REITs and private-equity firms would have a lot of interest in a company like Spirit because their tenant quality makes cash flows predictable in an uncertain market.” Spirit’s current portfolio holdings include 1,200 retail assets across 45 states, with concentrations of sale-leaseback and single-tenant properties.
Thypin added that the sale of Spirit to a potential buyer has broader implications for other major REIT and commercial real estate investors. A successful sale would give property traders the “…confidence that they can unload their boom-era investments.”
Fortress Buys CWCapital
CWCapital has been acquired by New York-based Fortress Investment Group in the third major acquisition of a special servicer in the past year.
While CWCapital’s mortgage origination business has been steadily growing, it’s the company’s special servicing division, the nation’s second largest, that primarily attracted Fortress. And as the amount of distressed CMBS loans continues to grow, it’s a business that should continue to expand.
“This is a once in a generational opportunity for these servicers to sell their businesses at valuations they could only dream of 10 years ago,” says Dan Fasulo, managing director of global commercial property research firm Real Capital Analytics. “It makes sense that a player like [Fortress] would be interested, not only in the income generated, but also by having the first crack at any opportunities that may arise on the real estate side.”
The acquisition brings to Fortress a wealth of data that will inform the company’s strategy for capitalizing on distress, according to a source close the transaction (Fortress executives were not available for interview at press time). Fortress was also attracted by the breadth of CWCapital—the mortgage origination, prime servicing and investment advisory businesses give CWCapital pro-cyclical growth opportunities as well.
Much like the Centerline and Capmark acquisitions, CWCapital’s growth aspirations had been hampered by its parent company’s financial problems. CWCapital’s former owner, Canadian pension fund Caisse de Depot et Placement du Quebec, has been saddled with losses and announced earlier this year that it would be slashing its investments in real estate. So, CWCapital asked Caisse if it could be sold: If the company couldn’t get the support it needed, it hoped to find a more supportive parent, according to a source within CWCapital that spoke on the condition of anonymity.
Will Commercial Property Lending Survive as Federal Stimulus is Rolled Back?
In a recent article titled "On Our Own", Newsweek's interactive online edition explored what will become of the US economy's nascent recovery as stimulus funds provided by the US Federal Government dry up. A primary thesis stated, “If American businesses and consumers want to avoid a slowdown, they’re going to have to do it themselves…expansion can continue if the U.S. economy taps into…a capacity for innovation, resilience, and, most of all, an ability to ride the continuing wave of global growth.”
The field of commercial real estate was one of the largest beneficiaries of stimulus dollars, as the Treasury bolstered lenders and credit markets, which investors depend on, during the recession. As stimulus programs begin winding down, investors have less to fear than they think, believes Real Capital’s Global Chief Economic Dr. Sam Chandan. In the article, he stated as proof of the author’s thesis that several other major players are currently waiting on the sidelines, ready to pick up wherever the Feds leave off.
As American banks become more conservative lenders without the Treasury behind their checks, foreign banks are becoming more active. “Many of the largest loans, the large property financings that we’ve observed over the last few quarters, have depended on the extension of credit by international lenders that are active in the U.S.,” says Dr. Chandan. He went on to provide select information from Real Capital’s recent publications on Top US Lenders, including the share of loans currently being underwritten by foreign banks from Asia, Latin America, and Europe.
Commercial Property Sales Fall to One-Quarter of Prevailing Six-Year Average
According to Real Capital Analytics, the volume of commercial property sales for the first six months of 2010 totaled $34.2 billion. This represented 26 percent of the average first-half total for the past six years (since 2004), and just 12 percent of 2007’s first-half total. Compared to the inertia of 2009, however, this year’s $34.2 billion was 58 percent higher than the total volume for the same period last year.
Contrary to intuition, the slow recovery in commercial sales is not due to a lack of capital or demand on part of investors. In particular, private equity funds and REITs amassed large pools of equity over the second half of 2009 in preparation for foreclosure fire sales that were predicted to come en masse in 2010. Real Capital’s Global Chief Economist, Dr. Sam Chandan, provided the following explanation for the disconnect between capital, demand, and the slow pace of commercial sales: “…owners who owe more than their properties are worth are instead finding new sources of equity and lenders are willing to restructure their loans…In less attractive markets, banks have been extending loans, waiting for higher prices so they don’t record losses.”
He also added that distressed assets have played a much smaller role in recent sales than was originally forecast during the darkest hours of 2009. However, sales are not down uniformly. Using specific property transactions from the first half of 2010, Dr. Chandan pointed out which of the US markets are actually seeing acceleration in sales and stability in asset pricing.
Florida Bulk Condo Sales Accelerate
Commercial real estate research firm Real Capital Analytics, which follows condo sales nationwide, tracked 27 bulk condo deals valued at $850 million, or $250,000 per unit, in 2007. Transaction volume dipped the following year, then rose to 82 deals valued at $839 million in 2009.
Dan Fasulo, managing director at Real Capital Analytics says "I would think we're on pace to have a record year for these types of transactions."
It isn't just Florida. Brokers say bulk-sale transactions are becoming more widespread in San Diego, Phoenix, Las Vegas and other markets in which condo projects mushroomed during the housing boom.
Mixed Signals in CRE Market
Despite tentative signs of recovery in the US and global real-estate markets, enormous challenges remain that will test both the housing market and the banks according to Richard Yorke, the UK Managing Director at global commercial property research firm Real Capital Analytics.
"There are something like 180 billion dollars worth of loans which are secured against troubled assets," Yorke told CNBC Tuesday. "Clearly those banks need to try to work out those loans over the next few years, something like two thirds of all loans that are due to mature over the next three years are currently underwater, so clearly that’s a huge tasks for banks."
That is going to affect lending practices and will have a significant impact on general economic growth, Yorke said.
"Yes there may be some green shoots of recovery but they are very specific to certain types of property and certain types of location," he said. "Many properties are still underwater. I think commercial property in general is about 42 percent below it s October '07 high."
The property market, like the bond and stock markets has seen a flight to quality, he said.
"Investors are being very selective about what types of property their looking at," he added. "It has to be institutional grade, grade-A prime location. Anything that’s secondary, anything that isn’t quite as good as an institutional grade property is going to struggle in this environment."
The market is giving mixed signals, but there are opportunities for those with cash, he said.
“Clearly there are contradictory signals and messages," he said. "In terms of the residential markets in the US it's not in a healthy sate. Something like $10 billion worth of mortgages defaulted in this year which indicates that there are still significant problems."
“There are potential bargains to be had for cash-rich investors, but the market is generally still pretty moribund," he said. "With other types of assets you will naturally see a flight to quality so better quality assets in a better location where supply and demand dynamics are better, clearly you’ll see a better performance there."
Dr. Sam Chandan Delivering Keynote Presentation at Cityscape Global Real Estate Investment Conference
Global opportunities, investment security and regional growth provide the theme for this year's three-day Cityscape Global Real Estate Investment Conference, which takes place at the Dubai International Convention and Exhibition Centre on 4-6 October 2010.
The keynote address will be given by Thomas J Barrack Jr, Founder, Chairman and CEO of Colony Capital a private equity real estate company headquartered in Los Angeles, California. During his time as chairman, Barrack has invested approximately $45 billion in assets. He will be speaking about 'Driving international investment in challenging times'.
Following Barrack, delivering the keynote presentation will be Sam Chandan, Global Chief Economist, Real Capital Analytics and Adjunct Professor of Real Estate from the US-based Wharton School, who will assess the prospects for sustainable global economic recovery and forecast economic trends for 2011 and beyond.
"In real estate markets, in particular, constraints on the availability of credit, certain government policies, and finite opportunities for liquid investors to acquire high quality, performing assets have delayed the process of price discovery that is a necessary condition for the global real estate market's return to its full measure of health," he said.
Regulatory Reform: What Impact Will It Have On Commercial Real Estate?
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week, is a cornerstone of Congress and the Administration’s financial regulatory reform agenda, creating the most sweeping changes in U.S. financial...
Retail Leasing Continues to Strengthen, But Investment Activity Remains Sluggish
Retailers, consumers and the general economy are clearly better off than they were a year ago -- and that’s translating into an increase in leasing acyivity and overall occupancy together with a deceleration in rent declines for retail property owners...
Former Brookfield Pres. Named CFO at General Growth
Steven J. Douglas, the former president of Brookfield Properties, was named executive vice president and chief financial officer/director of accounting and finance at General Growth Properties. He will head the firm’s finance operations as it emerges...
True Value Renews 1.2 Million SF in Harvard, IL
True Value Co. renewed 1.19 million square feet of warehouse space for 10 years in Harvard, IL. The distribution center, one of 12 the retailer-owned hardware cooperative owns in the U.S., will continue to ship products from this location to its stores...
Pritzker, Bozzuto Form $75M Multifamily Joint Venture
Pritzker Realty Group has partnered with The Bozzuto Group to establish a multifamily equity fund with an initial investment of $75 million. The fund will purchase and develop apartment communities in the Mid-Atlantic and Northeast with a primary focus...
Lease Up/Lease Down (July 25-31): Major NYC Deals for CBS, NFL & Healthfirst
CoStar compiles news of company expansions and relocations, as well as consolidations, closures and layoffs. Look for Lease Up and Lease Down every week, to stay updated on major corporate moves affecting commercial real estate.
In this week's issue...
SL Green Signs CBS & Healthfirst to Major Office Deals
It was another landmark week for SL Green. The office REIT inked long-term deals for CBS Broadcasting and Healthfirst in Manhattan, while one of its subsidiaries closed two leases for PepsiCo and Citigroup in the Westchester/Southern Connecticut region...
Study Finds Commercial Retrofits Could Save $41B Annually In Energy Costs
Although energy-efficient retrofitting of commercial buildings has the potential to return twice as much in savings to owners and tenants as they require in investments, interest in pursuing retrofits has remained relatively low, dampened by the financial...
NFL Relocates, Cuts Back on Space
The National Football League (NFL) officially announced Tuesday that it is relocating its headquarters to 345 Park Ave. in Manhattan. But although the nation's most popular sports league inked one of the New York's largest office leases this year, it...
CoStar to Introduce the First Comprehensive Repeat Sales Index for Commercial Real Estate
CoStar announced it is launching the CoStar Commercial Repeat Sales Index (CCRSI), the first comprehensive repeat sales index for commercial real estate. The index is intended to provide consistent and timely information to help answer some of the fundamental...
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