Entries Tagged 'Commercial Real Estate' ↓

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Sam Zell, billionaire and commercial real estate maven, is predicting that commercial real estate is coming back, albeit slowly as the credit market is loosening up. The city center is the strongest market and there is great risk in the “ex-urban, the glass-block commodity office building” sector.

Overall though Zell seems very bullish on the market and with his track record I would pay attention.

“I believe the overall market has already started to ease,’ Zell, chairman of Equity Residential, the largest U.S. apartment owner, said in an interview in New York. “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.’
For the first time since July, when credit markets froze in reaction to rising home-loan defaults, investors are starting to move their money from Treasury bonds, whose returns are below the inflation rate, and into commercial mortgage-backed securities. Insurance companies and pension funds need to earn at least 6 percent to cover their liabilities, Zell said.  Bloomberg.com

CB Richard Ellis has made the Fortune 500. This is pretty big news as the company is the first commercial real estate firm to make the list. They came in at 404^th place of the largest companies in the United States.

Congratulations to the crew over there. It looks like all of the aquisitions over the past few years have paid off.

The Los Angeles-based company (NYSE: CBG) landed at No. 404 in the magazine’s May 5 issue.

The Fortune 500 is an annual list compiled by Fortune magazine of the top 500 U.S. public corporations as measured by gross revenues. Wal-Mart tops the 2008 list with almost $379 billion in 2007 revenues, followed by Exxon Mobil and Chevron. CBRE’s 2007 revenues topped $6 billion. via  Pacific Business News

The Blackstone Group is going against those predicting dire consequences for the commercial real estate market by raising an additional 10.9 billion dollars for their Real Estate Partners VI fund. The company sees a number of potential bargains on the horizon as the market retracts from its highs in 2006–2007.

Blackstone said it had raised a total of nine real estate funds with total capital commitments of $25.7 billion. The fund it just closed is called Blackstone Real Estate Partners VI.
Previous real estate investments Blackstone has made include Equity Office Properties (EOP) and Hilton Hotels Corp.
“Between raising or investing, raising is by far the more difficult task,” said Michael Holland, chairman of private investment firm Holland & Co and a former partner at Blackstone. He said investors in the fund would have been attracted to Blackstone’s track record. “They would be taking into account huge sales they’ve made — such as EOP. Those look right now to be reasonably brilliant.” via Reuters.

The furor of the week over the Bear Stearns buyout has focused on the 2 dollar share price JP Morgan paid. What is interesting in the deal is how JP Morgan has gotten a high priced real estate asset, The Bear Stearns Headquarters, for a relative pittance. The building is valued at roughly 1.1 billion while the total cost of the buyout was 236 million.

Of course their is debt on the building, about 570 million, but there was also an alternative need. JP Morgan is looking to move from their present building and the Bear Stearns Headquarters is much newer. The location near Grand Central Terminal does not hurt either.

JP Morgan will have to absorb the risk and poor decisions Bear Stearns has made, but once that is complete the upside could be fairly dramatic.

Located at 383 Madison Avenue, the building is coveted for its proximity to Grand Central Terminal and for its relative newness. While J.P. Morgan had planned to move its investment-banking and trading operations to a building that is planned for the World Trade Center site, it will now move those operations to the Bear Stearns headquarters. However, J.P. Morgan will retain the right to build at the World Trade Center site, according to the article. via WSJ

“They see the handwriting on the wall,” said Martin S. Fridson, a leading expert on junk bonds, said of buyout firms. “They’re staring into the jaws of hell.” via the New York Times.

Wow, the hyperbole.

But it is true, tighter credit has made mincemeat out of the big buyout firms that are so dependent on cheap and easy credit. Adding to the pain is that Blackstone went public last year so they have to be much more transparent in their reporting.

It is one thing for a private company to take it on the chin for a quarter or even a year. Budgets get cut, bonuses disappear, and the company goes into survival mode. However, when you are a public company there is no hiding the fact that the walls are coming down.

So while last year Blackstone was the toast of the town, now it has watched their stock drop over 50 percent and their chief executive lose 3.9 billion in net worth as the stock sinks.

For us it is a downturn, but for the over leveraged, the credit crunch spells disaster. Now where have we heard that before?

God help you if you live in Michigan.

When unemployment became onerous and the government was hit with declining tax revenues they decided to try to bolster the manufacturing sector. The passed a new tax law that gave special benefits to those creating new jobs.

As is typical with all governments, instead of lowering spending while the incentives took hold, they moved the burden to a new target. And that target was commercial real estate in the form of a tax hike that is 4 times what they are paying right now.

So instead of having a reliable income from commercial real estate, they have made the market insolvent as there is no economic incentive for buyers to come into the state and the market is in such flux that loans are not being written.

To make matters worse, lending standards are already tight and many commercial loans on properties are unable to be written for those refinancing (many commercial loans are of a 5 year term) so foreclosures are expected to SOAR in the state. 

So the powers to be in Michigan are essentially facing a tax roll that is declining as manufacturing is dropping in the state, home prices are falling reducing taxes even further, and now have burdened the commercial real estate market to such a degree that it will soon be in free fall.

Last one out, turn out the lights?   

The owners of Michigan’s malls, office buildings and warehouses are getting a huge shock this month as they begin to figure out their tax bills under the state’s new business tax. Some commercial-real-estate developers are seeing 200 to 400 percent increases as the result of the switch to the Michigan Business Tax from the Single Business Tax, which was eliminated last year.

The developers say the extra burden couldn’t come at a worse time.

“The real-estate industry — particularly the income-producing real-estate industry — is facing difficult times without the tax situation,” said Joshua T. Weiner, chief executive officer of Portage-based development firm Meyer C. Weiner Co. via MLive.com

Reading through the local paper I came across an article on how Buckhead is about to have a glut of Class A office space in the coming year. For those of you that do not know, Buckhead is “the place to be” in Atlanta business these days, just north of downtown.

With all of the cheap money that has been floating around the past few years development has been rampant. So now the question is, if the best area in down is going to see price deflation in commercial space, what is that going to do to the rest of Atlanta’s commercial rates?

Or put it this way. If the prime rates in the best area are lower than those in less desirable areas, why would anyone sign a lease till the smoke settles? If I can have a prestigious address for less than my present address, will I move? And what will my landlord have to do to keep me?

These are questions that the rest of the country is going to run into as the boom in commercial construction comes to a head in the coming years. It is not just Buckhead in Atlanta, but most other cities as well. When new construction lease rates are cheaper than old construction, how will the market find equilibrium?

Almost 2 million square feet is under construction and scheduled to come online next year, but the vast majority of that space is unleased.
That’s “definitely a cause for concern” for the building property owners, David Demarest, managing director of tenant representation with Jones Lang LaSalle, told commercial real estate representatives.
Jones Lang LaSalle hosted a breakfast meeting to unveil its analysis of the intown office market.
Demarest mentioned three large buildings that are under construction without any prelease agreements: Terminus 200, 3630 Peachtree Road and Two Alliance Center. Another Buckhead building, 3344 Peachtree, which is mixed use, is about half leased.via the ajc.com.

Here is a question to the media.

Why is it when residential sales drop it is because of the fault of the housing industry, but when sales of commercial properties fall it is because of the credit crunch?

I know I am seriously generalizing the issue but that is how the media is approaching this.

• All residential problems are reported as based upon upon greed, subprime problems, and fraud.
• All commercial real estate problems are based upon the credit markets falling apart.

Yet both market problems were created by prices soaring too high and money that was too easily given. The dynamics are not that different but the reporting is.

Sales of US hotels are expected to fall as much as 50 per cent this year because the credit squeeze has reshaped investors’ ability to purchase real estate, says a report due for release today.

The value of hotel property sales is expected to fall to $23bn-$26bn, down from a record $45bn in 2007, as deals become more difficult, according to real estate brokers Jones Lang Lasalle. The expected slide in sales would more than undo last year’s 38 per cent rise.

“The credit crunch has halted mega-deals and many portfolio deals,” the report will say. via the Financial Times

3 years after the closing of the Linden General Motors plant in northern New Jersey they have found a buyer. Duke Realty has bought the 2.7 million square foot plant with aims of building a mall and a mixed use industrial development on the property.

The plant had previously employed up to 6,000 people and has been a landmark in the community. The use of these relics of an industrial age in the tri-state area as commercial and retail make a great deal of sense. The odds of a major manufacturer coming back into the space with the high expenses and employment costs are slim to none.

Google Map of Linden GM Plant

Instead, convert these properties so that they will benefit the communities around them.

“We are working closely with the city of Linden to outline our intentions” for the site, Reuter said. In early 2006, Indianapolis-based Duke Realty purchased another former GM automotive assembly plant, in Baltimore, and redeveloped it as an office and industrial park.

This is Duke Realty’s first property in New Jersey, Reuter said. The 2.7-million-square-foot plant in Linden will be demolished before the site is redeveloped, he said. Demolition and cleanup will take about a year.

State Department of Environmental Protection case managers have visited the site to deal with contamination, said Irene Kropp, the DEP’s assistant commissioner for site remediation. While there are remediation issues, such as soil and shallow groundwater, they will not impede development, she said. via NJ.com

The perils of borrowing in a credit crunch are not only felt by the homeowners but also with the big boys.

Harry Macklowe, one of the heavyweight real estate players in New York, is facing the credit crunch head on as he is unable to find financing on 7 properties that he purchased last year for 7 billion dollars. Now he may be forced to turn them over to Deutsche Bank who holds a 5.8 billion dollar loan on them.

Talk about taking a 1.2 billion dollar haircut in one year.

Real-estate titan Harry Macklowe has reached a tentative deal to turn over to Deutsche Bank effective control of seven Manhattan office buildings he acquired less than a year ago for 7 bln usd, the Wall Street Journal reported.
Macklowe borrowed 5.8 bln usd from the bank to acquire the buildings early last year. The debt is scheduled to come due on Feb 9 but Macklowe has found no way to refinance that debt, the newspaper quoted people familiar with the matter as saying. via Forbes.com.