Monday, July 18, 2011
Wednesday, June 1, 2011
Willis Towers Owners Seek Investors
(Reuters) — The owners of North America's tallest building, formerly known as the Sears Tower , are looking for a buyer or an investor to help recapitalize the building that is a staple in the Chicago skyline, two sources familiar with the situation said on Wednesday.
The Willis Tower , the 110-story, 4 million square-foot building on Chicago's South Wacker Drive, carries $780 million of debt on it, said two sources, who asked not to be identified because they were not authorized to speak publicly about the matter.
A group that includes Chicago-based American Landmark Properties Ltd and New York developers Joseph Moinian of the Moinian Group and Joseph Chetrit of the Chetrit Group bought the tower in 2004 for about $900 million.
Representatives of those investors were not available for comment.
Many investors who bought U.S. commercial real estate during the boom years of 2003 through 2007 have needed a loan modification or an infusion of capital to hold on to properties because rents or occupancy did not go as planned.
A recapitalization gives a new investor a percentage of ownership in the building in exchange for the investment. As U.S. capital and investment interest has waned and prices have declined, investors from China, the Middle East and Canada have stepped up as new investors and buyers in U.S. commercial real estate.
Read more: http://www.chicagorealestatedaily.com/article/20110601/CRED03/110609981/willis-tower-owners-seek-investor-or-sale#ixzz1O42AzBpZ
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The Willis Tower , the 110-story, 4 million square-foot building on Chicago's South Wacker Drive, carries $780 million of debt on it, said two sources, who asked not to be identified because they were not authorized to speak publicly about the matter.
A group that includes Chicago-based American Landmark Properties Ltd and New York developers Joseph Moinian of the Moinian Group and Joseph Chetrit of the Chetrit Group bought the tower in 2004 for about $900 million.
Representatives of those investors were not available for comment.
Many investors who bought U.S. commercial real estate during the boom years of 2003 through 2007 have needed a loan modification or an infusion of capital to hold on to properties because rents or occupancy did not go as planned.
A recapitalization gives a new investor a percentage of ownership in the building in exchange for the investment. As U.S. capital and investment interest has waned and prices have declined, investors from China, the Middle East and Canada have stepped up as new investors and buyers in U.S. commercial real estate.
Read more: http://www.chicagorealestatedaily.com/article/20110601/CRED03/110609981/willis-tower-owners-seek-investor-or-sale#ixzz1O42AzBpZ
Stay up-to-date on Chicago real estate with our free, daily e-newsletter
Thursday, March 10, 2011
Investment-Grade Properties See Largest Year-Over-Year Gain Since 2006
CoStar's index tracking repeat sales of investment-grade commercial properties jumped 10.6% in January over the same period last year, the largest year-over-year gain since the height of the real estate boom in 2006.
The increase in the index for higher-quality properties hit a five-year high for January despite dipping slightly from December, a reflection of how hard the index fell a year ago and how strongly it has recovered within 12 months.
"Pricing is all relative," said Chris Macke, CoStar senior real estate strategist. "The fact that January's reading was negative on a monthly basis but the largest gain since 2006 on a year-over-year basis indicates how fast the index was falling a year ago -- and how much it has improved since then."
The volume of investment-grade repeat sales transactions rose 54% in January from a year ago, a significant increase that reflects the appetite of buyers for trophy office, apartment, retail and hotel properties. Sales pairs of general grade properties, which reflect sales of non-investment grade buildings, declined 1% over the year-ago level.
The differences between changes in general sales versus investment-grade sales transaction counts and volumes are significant, Macke said.
"The investment grade pair count volume increase of 54% and the 1% general grade increase reflects the split in the market, which is caused by available financing to a large degree," he said.
Sale pair counts for investment and general grade property likely will both increase slightly when additional closings are recorded.
Meanwhile, the general grade index was down 11.3% in January versus the same period last year, even though general real estate index edged up slightly by 0.4% during the first month of 2011.
After being down 2.4% for the past three months and down 11.3% for the past year, the smaller property index may be approaching the market bottom for the first time in the past three years.
The CoStar National Composite Index, an equal-weighted analysis of both the investment grade and general grade indices reflecting the broad overall market, was flat in the first month of 2011. The composite is down 2.6% and 6.6% for the past three and 12 months, respectively, and down 30.7% from its August 2007 peak.
The March report of the CoStar Commercial Repeat Sales Indices (CCRSI) includes data through January. The CCRSI, a comprehensive and accurate measure of U.S. commercial real estate prices, includes a total of 32 sub-indices in addition to the monthly national composite index, including breakdowns by property sector, region, transaction size and quality, and market size.
CoStar tracked more than $211 billion in total sale transactions in 2010, a 79% increase over 2009. However, sales transaction volume remains 63% below peak market levels, despite the clear recovery taking hold in real estate markets.
In January 2011, CoStar recorded 483 pair sales compared to 434 in the same month of 2010, an increase of 11%. CoStar expects to see pair volume running closer to 20% ahead of January 2010 once additional sales from that period are confirmed and added to the database, in line with the 22% higher volume observed in December 2010 versus December 2009.
Distress sales as a percent of total sales increased in each of the four quarters of 2010, with an increase of just over 20% in the fourth quarter and an increase of 18.5% for all of 2010. By property type, the highest percentage of distress in the fourth quarter was found in the hospitality sector at 36%, followed by multifamily (24%), office (21%) and industrial and retail (both near 19%).
By transaction count, General Grade Index sales accounted for 68% of total transactions in January. By volume, Investment Grade Index sales represented 78% of the total. The average investment grade deal size was $10.5 million in January -- down from nearly $16 million in December but more in line with long-term averages. The average dollar size for general real estate was $1.4 million in January, compared to $1.6 million in December.
Also in the March release, CoStar announced a one-time change in the index methodology effective this month. The monthly numbers are now based on a two-stage/frequency-conversion of rotating quarter procedure, which roughly means the monthly changes will now be anchored to quarterly changes, which results in slightly less noise in changes and movements compared with direct monthly estimates. The quarterly indices methodology and approach have not changed.
The increase in the index for higher-quality properties hit a five-year high for January despite dipping slightly from December, a reflection of how hard the index fell a year ago and how strongly it has recovered within 12 months.
"Pricing is all relative," said Chris Macke, CoStar senior real estate strategist. "The fact that January's reading was negative on a monthly basis but the largest gain since 2006 on a year-over-year basis indicates how fast the index was falling a year ago -- and how much it has improved since then."
The volume of investment-grade repeat sales transactions rose 54% in January from a year ago, a significant increase that reflects the appetite of buyers for trophy office, apartment, retail and hotel properties. Sales pairs of general grade properties, which reflect sales of non-investment grade buildings, declined 1% over the year-ago level.
The differences between changes in general sales versus investment-grade sales transaction counts and volumes are significant, Macke said.
"The investment grade pair count volume increase of 54% and the 1% general grade increase reflects the split in the market, which is caused by available financing to a large degree," he said.
Sale pair counts for investment and general grade property likely will both increase slightly when additional closings are recorded.
Meanwhile, the general grade index was down 11.3% in January versus the same period last year, even though general real estate index edged up slightly by 0.4% during the first month of 2011.
After being down 2.4% for the past three months and down 11.3% for the past year, the smaller property index may be approaching the market bottom for the first time in the past three years.
The CoStar National Composite Index, an equal-weighted analysis of both the investment grade and general grade indices reflecting the broad overall market, was flat in the first month of 2011. The composite is down 2.6% and 6.6% for the past three and 12 months, respectively, and down 30.7% from its August 2007 peak.
The March report of the CoStar Commercial Repeat Sales Indices (CCRSI) includes data through January. The CCRSI, a comprehensive and accurate measure of U.S. commercial real estate prices, includes a total of 32 sub-indices in addition to the monthly national composite index, including breakdowns by property sector, region, transaction size and quality, and market size.
CoStar tracked more than $211 billion in total sale transactions in 2010, a 79% increase over 2009. However, sales transaction volume remains 63% below peak market levels, despite the clear recovery taking hold in real estate markets.
In January 2011, CoStar recorded 483 pair sales compared to 434 in the same month of 2010, an increase of 11%. CoStar expects to see pair volume running closer to 20% ahead of January 2010 once additional sales from that period are confirmed and added to the database, in line with the 22% higher volume observed in December 2010 versus December 2009.
Distress sales as a percent of total sales increased in each of the four quarters of 2010, with an increase of just over 20% in the fourth quarter and an increase of 18.5% for all of 2010. By property type, the highest percentage of distress in the fourth quarter was found in the hospitality sector at 36%, followed by multifamily (24%), office (21%) and industrial and retail (both near 19%).
By transaction count, General Grade Index sales accounted for 68% of total transactions in January. By volume, Investment Grade Index sales represented 78% of the total. The average investment grade deal size was $10.5 million in January -- down from nearly $16 million in December but more in line with long-term averages. The average dollar size for general real estate was $1.4 million in January, compared to $1.6 million in December.
Also in the March release, CoStar announced a one-time change in the index methodology effective this month. The monthly numbers are now based on a two-stage/frequency-conversion of rotating quarter procedure, which roughly means the monthly changes will now be anchored to quarterly changes, which results in slightly less noise in changes and movements compared with direct monthly estimates. The quarterly indices methodology and approach have not changed.
Thursday, March 3, 2011
Health Care Real Estate Mega Deals Show Rebound in Seniors Care Property Sector
Blockbuster transactions this week for seniors housing, skilled nursing and other post-acute care assets by Ventas Inc. and Healthcare REIT Inc. underscore the expansion and growth potential of health-care REITs. The deals also demonstrate that investment in the seniors care subsector has picked up as public companies deploy hundreds of millions in equity capital raised over the last 12-18 months.
Senior care facilities suffered more pain than other health-care properties during the recession as older Americans postponed decisions to move into retirement housing. The sector also endured uncertainty in 2008 and 2009 over the future of government health care legislation and reduced Medicare and Medicaid reimbursements. As baby boomers begin to enter retirement and the population of 85+ -year-old Americans grows, cash-flush real estate investment trusts have scrambled to acquire a diminishing supply of available seniors housing, assisted-living and post-acute facilities.
These factors, combined with a change in REIT tax law that allows health care REITs to own third-party operators to manage and collect income from their facilities similar to hotels, have helped fuel a number of large transactions in recent months, including the two huge deals announced on Monday. As CoStar Group reported last week, . industry executives predict more mergers and acquisitions between both public and private companies.
"These large transactions are a very good sign for the senior housing industry," said Chris Macke, senior real estate strategist for CoStar Group. "It shows that the market, and specifically, health care REITs, is both confident in and capable of transactions that 18 months ago would have been unthinkable. The M&A activity we're seeing is due both to the strong performance of REIT stocks, which provides advantageous capital to acquirers, and the lack of available direct property acquisition opportunities."
Ventas (NYSE: VTN) announced an agreement to acquire Nationwide Health Properties (NYSE:NHP) for $5.8 billion in stock and $1.6 billion in assumed debt, a deal scheduled to close in the third quarter that would make Ventas -- already the largest owner of seniors care property -- the largest health care REIT, with a pro forma value of $17 billion. It's the second massive transaction in the last few months for Chicago-based Ventas, which agreed in October to acquire operator Atria Senior Living Group in a deal valued at $3.1 billion.
"The combination of Ventas and NHP increases the scale and diversification of the combined company, the strength and flexibility of the company's balance sheet and the quality and geography of the assets," said Ventas chairman and CEO Debra A. Cafaro. "With Ventas's successful track record of value-creating transactions and NHP's longstanding history of regional, asset-level acquisitions, taken together with one of the strongest balance sheets in the REIT industry, the combined company will have a unique opportunity for continued external growth."
In the second major deal Monday, privately owned JER Partners and Formation Capital LLC agreed to sell the real estate of Genesis Healthcare, a Kennett Square, PA-based provider of short-term post-acute, rehabilitation, assisted living and long-term care services, to Healthcare REIT Inc. (NYSE: HCN). In the $2.4 billion deal, HCN will acquire 147 facilities in 11 North Atlantic and Northeast states from Genesis, which will continue to operate the senior living facilities through a triple-net lease. In its fourth-quarter 2010 earnings call, HCN announced $2.2 billion of new investments in senior housing assets, on top of $600 million in investment in 19 senior housing facilities, which will continue to be operated by Brandywine Senior Living through a triple net lease.
HCN will have the right to acquire certain facilities at a fixed price that Genesis currently leases from third-party landlords, as well as any facilities that Genesis acquires or develops during the initial 15-year term of the lease. HCN further has the option to acquire a 9.9% ownership interest in Genesis for $47 million throughout the initial lease term. The option will enable HCN to share in the future growth of Genesis, HCN said.
The growth spurt also casts light on a law that went into effect in 2008 allowing health care REITs to both receive rents as landlords and profits from operators through partnership arrangements with operators, under tax treatments similar to hotels. HCN is investing another $1.6 billion in 61 senior housing facilities with Benchmark Senior Living, Silverado Senior Living and Senior Star Living structured as taxable subsidiaries under the law, called the REIT Investment Diversification and Empowerment Act (RIDEA).
Healthcare REIT launched the first RIDEA transaction in the seniors housing industry last year when it announced an $817 million partnership with Merrill Gardens to own and operate 38 seniors housing communities totaling about 4,300 units. The four RIDEA partnerships would boost HCN's senior housing portfolio to 22% of its total portfolio investment. The Genesis deal isn't formed under RIDEA, but HCN hasn't ruled out the possibility of converting it at a later date, said George L. Chapman, HCN chairman, CEO and president, in a conference call discussing the Genesis transaction.
While RIDEAs offer increased operating income, they're also exposed to the economy and property operations turn sour, a risk acknowledged by Chapman.
"We looked hard at whether or not there would be too much exposure given the rewards we would get from engaging in our RIDEA structure," he said. "I think there is some caution. But I could see as we get more color, more clarity on just what exposure there is, going back and talking further with the sellers Formation and JER about perhaps converting into a RIDEA structure. So we’re not against it at all. And the closer we can align without undue risk, the better we feel about it."
Senior care facilities suffered more pain than other health-care properties during the recession as older Americans postponed decisions to move into retirement housing. The sector also endured uncertainty in 2008 and 2009 over the future of government health care legislation and reduced Medicare and Medicaid reimbursements. As baby boomers begin to enter retirement and the population of 85+ -year-old Americans grows, cash-flush real estate investment trusts have scrambled to acquire a diminishing supply of available seniors housing, assisted-living and post-acute facilities.
These factors, combined with a change in REIT tax law that allows health care REITs to own third-party operators to manage and collect income from their facilities similar to hotels, have helped fuel a number of large transactions in recent months, including the two huge deals announced on Monday. As CoStar Group reported last week, . industry executives predict more mergers and acquisitions between both public and private companies.
"These large transactions are a very good sign for the senior housing industry," said Chris Macke, senior real estate strategist for CoStar Group. "It shows that the market, and specifically, health care REITs, is both confident in and capable of transactions that 18 months ago would have been unthinkable. The M&A activity we're seeing is due both to the strong performance of REIT stocks, which provides advantageous capital to acquirers, and the lack of available direct property acquisition opportunities."
Ventas (NYSE: VTN) announced an agreement to acquire Nationwide Health Properties (NYSE:NHP) for $5.8 billion in stock and $1.6 billion in assumed debt, a deal scheduled to close in the third quarter that would make Ventas -- already the largest owner of seniors care property -- the largest health care REIT, with a pro forma value of $17 billion. It's the second massive transaction in the last few months for Chicago-based Ventas, which agreed in October to acquire operator Atria Senior Living Group in a deal valued at $3.1 billion.
"The combination of Ventas and NHP increases the scale and diversification of the combined company, the strength and flexibility of the company's balance sheet and the quality and geography of the assets," said Ventas chairman and CEO Debra A. Cafaro. "With Ventas's successful track record of value-creating transactions and NHP's longstanding history of regional, asset-level acquisitions, taken together with one of the strongest balance sheets in the REIT industry, the combined company will have a unique opportunity for continued external growth."
In the second major deal Monday, privately owned JER Partners and Formation Capital LLC agreed to sell the real estate of Genesis Healthcare, a Kennett Square, PA-based provider of short-term post-acute, rehabilitation, assisted living and long-term care services, to Healthcare REIT Inc. (NYSE: HCN). In the $2.4 billion deal, HCN will acquire 147 facilities in 11 North Atlantic and Northeast states from Genesis, which will continue to operate the senior living facilities through a triple-net lease. In its fourth-quarter 2010 earnings call, HCN announced $2.2 billion of new investments in senior housing assets, on top of $600 million in investment in 19 senior housing facilities, which will continue to be operated by Brandywine Senior Living through a triple net lease.
HCN will have the right to acquire certain facilities at a fixed price that Genesis currently leases from third-party landlords, as well as any facilities that Genesis acquires or develops during the initial 15-year term of the lease. HCN further has the option to acquire a 9.9% ownership interest in Genesis for $47 million throughout the initial lease term. The option will enable HCN to share in the future growth of Genesis, HCN said.
The growth spurt also casts light on a law that went into effect in 2008 allowing health care REITs to both receive rents as landlords and profits from operators through partnership arrangements with operators, under tax treatments similar to hotels. HCN is investing another $1.6 billion in 61 senior housing facilities with Benchmark Senior Living, Silverado Senior Living and Senior Star Living structured as taxable subsidiaries under the law, called the REIT Investment Diversification and Empowerment Act (RIDEA).
Healthcare REIT launched the first RIDEA transaction in the seniors housing industry last year when it announced an $817 million partnership with Merrill Gardens to own and operate 38 seniors housing communities totaling about 4,300 units. The four RIDEA partnerships would boost HCN's senior housing portfolio to 22% of its total portfolio investment. The Genesis deal isn't formed under RIDEA, but HCN hasn't ruled out the possibility of converting it at a later date, said George L. Chapman, HCN chairman, CEO and president, in a conference call discussing the Genesis transaction.
While RIDEAs offer increased operating income, they're also exposed to the economy and property operations turn sour, a risk acknowledged by Chapman.
"We looked hard at whether or not there would be too much exposure given the rewards we would get from engaging in our RIDEA structure," he said. "I think there is some caution. But I could see as we get more color, more clarity on just what exposure there is, going back and talking further with the sellers Formation and JER about perhaps converting into a RIDEA structure. So we’re not against it at all. And the closer we can align without undue risk, the better we feel about it."
Tuesday, February 8, 2011
Pent-Up Shopping Demand Fuels Surge In Retail Leasing
Mirroring the rebound in other commercial property sectors, leasing and occupancy of U.S. malls and shopping centers continued to improve across the country in fourth-quarter 2010, and CoStar Group economists expect demand to accelerate for the next two years as shoppers open their wallets and the economy adds jobs, leading to renewed demand for retail space.
With the very low amount of new supply of retail space and a strengthening economy, retail vacancy rates are expected to continue to decline through mid-2013.
Absorption of retail space, which has been positive for six consecutive quarters, should continue to be positive through at least mid-2012, CoStar Group forecast this week in its Year-End 2010 Retail Review and Outlook. CoStar Real Estate Strategist Suzanne Mulvee co-presented the retail market report with Real Estate Strategist Kevin White.
"Retail real estate fundamentals have closely followed retail sales, which are now looking quite positive. Retail sales turned positive in 2009 and between early 2009 and today, have eclipsed their pre-recession high," Mulvee said. "We're moving in the right direction from a fundamentals standpoint. Recovery is in motion."
Over the last few months, fears of a double-dip recession have eased and GDP growth, now at around 3%, will continue to be strong through this year and into 2012, White said. Consumer spending, which has improved for the last 18 months, ramped up a strong 4.4% in the fourth quarter, the best since 2006. Retail sales are growing at a healthy 7% clip, levels not seen since the housing boom, White said. Household finances have recovered to a reasonably healthy level, and pent-up demand for consumer durables is solid. Spending on health care and personal care are up 14% while food/beverage spending has increased 5% and general merchandise is up 4%.
But the outlook isn't without risk or potential problems, which could cast a shadow over the longer-term outlook later in CoStar’s forecast during 2013-14, White cautioned. Housing remains locked in a double-dip downturn. State and local government cutbacks will continue to be a drag, especially in state capitals and other metros dominated by government. The federal deficit is expected to hit a record $1.5 trillion this year, leaving a 70% debt-to-GDP ratio that could drive up interest rates.
"We're not expecting consumers to lead this recovery by any means, but we also don't expect them to be the huge drag on the recovery that some of the more pessimistic economists expect them to be," White said. The economy should get a boost from pent-up demand for cars, clothing and electronics.
"American consumers went on a buyer's strike during the recession. Finally, they're loosening up the purse strings and there's a lot of pent up demand that will continue to play out over the next year."
Stepped up leasing activity resulted in 13 million square feet of positive absorption in the fourth quarter nationally -- the sixth straight quarterly improvement - with most individual metros seeing a net gain in leased space, including Houston (3.8 million square feet), Washington, D.C. (3.04 million square feet), Philadelphia (2.87 million SF), Boston (2.28 million) and Long Island, NY, (1.87 million) rounding out the top 5 metros that are concentrated in healthier segments of the economy, including energy, government, and health care and education sectors.
The direct vacancy and availability rates declined again in the fourth quarter and appear to have turned a corner, although they remain well above their five-year averages.
Retail construction, like most other commercial categories, remained stifled, with developers delivering a record low of less than 50 million square feet in 2010. Very new supply is in the pipeline, with starts totaling only 23 million square feet in 2010, including just 3 million square feet in the fourth quarter. That compares with 176 million square feet started during the market peak in 2007.
Very few large centers are under construction and projects have especially plummeted for grocery-anchored centers, which are exposed to the weak housing market, as big-box value retailers like Sam's Club and Costco have competed for the dollars of thrifty shoppers.
"We've not yet at the bottom for deliveries of new construction, we're still probably a year away," Mulvee said.
Quoted rents continue to fall and their recovery will trail improvements in fundamentals. With profits rising quickly, matching their 2006-07 levels, retailers are under less pressure to cut occupancy costs.
All told, CoStar forecasts a strong recovery in the retail sector. Deliveries will rise gradually, hitting 40 million square feet by fourth-quarter 2014. Absorption will peak and vacancies will bottom in the first half of 2012, with a gradual decline in absorption through 2014 paired with a rise in vacancy rates as the supply pipeline reopens.
With the very low amount of new supply of retail space and a strengthening economy, retail vacancy rates are expected to continue to decline through mid-2013.
Absorption of retail space, which has been positive for six consecutive quarters, should continue to be positive through at least mid-2012, CoStar Group forecast this week in its Year-End 2010 Retail Review and Outlook. CoStar Real Estate Strategist Suzanne Mulvee co-presented the retail market report with Real Estate Strategist Kevin White.
"Retail real estate fundamentals have closely followed retail sales, which are now looking quite positive. Retail sales turned positive in 2009 and between early 2009 and today, have eclipsed their pre-recession high," Mulvee said. "We're moving in the right direction from a fundamentals standpoint. Recovery is in motion."
Over the last few months, fears of a double-dip recession have eased and GDP growth, now at around 3%, will continue to be strong through this year and into 2012, White said. Consumer spending, which has improved for the last 18 months, ramped up a strong 4.4% in the fourth quarter, the best since 2006. Retail sales are growing at a healthy 7% clip, levels not seen since the housing boom, White said. Household finances have recovered to a reasonably healthy level, and pent-up demand for consumer durables is solid. Spending on health care and personal care are up 14% while food/beverage spending has increased 5% and general merchandise is up 4%.
But the outlook isn't without risk or potential problems, which could cast a shadow over the longer-term outlook later in CoStar’s forecast during 2013-14, White cautioned. Housing remains locked in a double-dip downturn. State and local government cutbacks will continue to be a drag, especially in state capitals and other metros dominated by government. The federal deficit is expected to hit a record $1.5 trillion this year, leaving a 70% debt-to-GDP ratio that could drive up interest rates.
"We're not expecting consumers to lead this recovery by any means, but we also don't expect them to be the huge drag on the recovery that some of the more pessimistic economists expect them to be," White said. The economy should get a boost from pent-up demand for cars, clothing and electronics.
"American consumers went on a buyer's strike during the recession. Finally, they're loosening up the purse strings and there's a lot of pent up demand that will continue to play out over the next year."
Stepped up leasing activity resulted in 13 million square feet of positive absorption in the fourth quarter nationally -- the sixth straight quarterly improvement - with most individual metros seeing a net gain in leased space, including Houston (3.8 million square feet), Washington, D.C. (3.04 million square feet), Philadelphia (2.87 million SF), Boston (2.28 million) and Long Island, NY, (1.87 million) rounding out the top 5 metros that are concentrated in healthier segments of the economy, including energy, government, and health care and education sectors.
The direct vacancy and availability rates declined again in the fourth quarter and appear to have turned a corner, although they remain well above their five-year averages.
Retail construction, like most other commercial categories, remained stifled, with developers delivering a record low of less than 50 million square feet in 2010. Very new supply is in the pipeline, with starts totaling only 23 million square feet in 2010, including just 3 million square feet in the fourth quarter. That compares with 176 million square feet started during the market peak in 2007.
Very few large centers are under construction and projects have especially plummeted for grocery-anchored centers, which are exposed to the weak housing market, as big-box value retailers like Sam's Club and Costco have competed for the dollars of thrifty shoppers.
"We've not yet at the bottom for deliveries of new construction, we're still probably a year away," Mulvee said.
Quoted rents continue to fall and their recovery will trail improvements in fundamentals. With profits rising quickly, matching their 2006-07 levels, retailers are under less pressure to cut occupancy costs.
All told, CoStar forecasts a strong recovery in the retail sector. Deliveries will rise gradually, hitting 40 million square feet by fourth-quarter 2014. Absorption will peak and vacancies will bottom in the first half of 2012, with a gradual decline in absorption through 2014 paired with a rise in vacancy rates as the supply pipeline reopens.
Wednesday, May 5, 2010
May Newsletter
1Q Bank Results: Potential for CRE Armageddon Fading
Weakness, Trouble Remain but Healthy Lenders Could Carry CRE Markets to Better Days
Although first quarter results of U.S. bank holding companies across the country are unmistakably downbeat about the short-term outlook for commercial real estate in general, and their portfolios in particular, they also hint at a growing sense that the problems are working themselves out.
For starters, banks generally reported that troubled loan assets were systematically moving through their books. For example, older construction loans on commercial developments and owner-occupied properties were being shifted to term loans, giving borrowers a chance to work through slow cash flow periods.
Banks were also widely reporting that the inflow of new nonperforming commercial real estate loans was beginning to slow down. At the same time, more of the loans already being labeled as non-performing were being shifted to the real estate owned (REO) category. From there, it is likely only a matter of time before those assets would be sold back into the marketplace.
In the performing section of their portfolios, banks reported that a substantial portion of those assets have also already been renewed or restructured.
In its April 2010 Global Financial Stability Report, the International Monetary Fund contained a brighter outlook for bank losses in the near term, as expected write-downs on both the loan and securities books of U.S. banks decreased across the board compared to last fall, said Mark Fitzgerald, senior debt analyst for CoStar Group.
"These improved short-term losses are due primarily to two factors. First, signs of an improving economic environment have decreased loss expectations," Fitzgerald said. "Second, some write-downs have simply been pushed forward, as external factors, including low interest rates, have enabled banks to push off distress into the future."
In part because of that delay, the IMF report forecasts real estate loan charge-offs are still expected to increase in 2010 and may not peak until 2011.
"What are the implications for commercial real estate investors?" Fitzgerald asked, then answered: "The banks supply approximately 50% of all debt capital to the sector, so lending capital could be constrained for some time. However, there is a bright side. If we continue to follow our current path, and distressed assets bleed slowly into the market over time, then healthy lenders may have enough capacity to meet low transaction volumes (especially with depressed pricing). The large banks that have recently reported
healthy earnings (primarily due to their trading and fixed-income operations) are a potential source of capital, and these banks have historically been under allocated to commercial real estate compared to the overall banking sector."
However, Fitzgerald added: "On the other hand, if an external factor pushed more distress into the marketplace (i.e. major interest rate increases, changes in regulator behavior), this could create significant opportunities for opportunistic investors."
What follows are recent comments and reports from specific large and medium-sized bank and bankers regarding current commercial real estate portfolio and market conditions and market outlooks. The statements come from first quarter earnings reports, earnings conference calls and monthly banking condition filings with the U.S. Department of Treasury and are believed to be relatively indicative of what most banks reported.
Thursday, April 8, 2010
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