Real Estate Investing For Newbies

Everyone is aware that investing in property can make you rich in no time. If you know what to do and you play your cards proper, your investment can quickly develop into a winner.

Like any other company, it entails a particular diploma of risk, and that danger will get greater if you don't really know what you're accomplishing, due to the fact as you can win, you can also loose really a bit of dollars if you make lousy investments, specially in the beginning of your company improvement.

However, if you are a newbie in the company you really should not be as well apprehensive, due to the fact all you need to do is get all the info you require earlier than truly producing an investment and generally preserve up-to-date with the novelties in the discipline.For far more information about "investing for beginners", you ought to pay a visit to: investing for beginners

If you are actually fascinating in investing, a single of the issues you could think about in order to get you started off is a actual estate investing plan or a actual estate investing seminar, due to the fact you can get all the facts you want there.

The most critical items you have to know about is the latest legislation; you have to know all the laws and regulations that have any connection to your filed of activity, in order to avert any threat when starting up an investment.

As soon as you've received all the legal facts you require, you have to examine it meticulously, simply because you need to steer clear of any chance introduced to your investment out of mere ignorance. Understanding the legal frame of the investment is not at all as challenging as you may well believe (following all, so several individuals are carrying out it), but you do need to be careful and entirely understand all the implications it has.

When you can transfer on to the following step, you want to get data about the existing industry selling price of the property you are thinking of to buy. You must not just ask the seller and get his word for it, since his curiosity is to get the greatest price tag doable.

Rather, you ought to ask an evaluator or make your very own assessment, ask about the rates in that location and other information that may aid you get a clear thought of what the value of the house genuinely is.

If you are nicely knowledgeable on the real latest marketplace worth, you stand a significantly greater opportunity of scoring a deal. You can commence negotiating with the seller in order to acquire a excellent price tag. Keep in mind that the crucial to any negotiation is to know much more than the seller, due to the fact that will assure you finding a bargain and that is the essence of a excellent actual estate investment.

Real Estate Jargon/EDU

The main reason and focus of Mogul Launcher is to benefit and educate investors of all types in purchasing real estate. Commercial Real Estate Investment is a new area for many real estate investors. In an effort to assist those who are not familiar with real estate jargon, this article is meant for you. Below is an alphabetical list of terms used in this field.

Anchored tenants: large national brand tenants such as Albertsons, Longs Drug, Walmart, who bring a lot of traffic in the middle of the shopping cart.
CAM: Maintenance Area. Common fees associated with CAM CAM. For NNN leases, see CAM-term rates, tenants pay rent money to cover propertyTaxes, insurance and maintenance.
Cap Rate: The return of investment in the first year after purchase. Capitalization rate is the ratio of 1 Years operating income for the purchase price. The higher the cap, the higher the rental income. For people who invest in the stock market, the maximum rate is the reciprocal of P E.
Cash On Cash: APR return of your deposit without detection. First year cash flow from your original down dividedPayment.
Conduit loan: as Commercial Mortgage Backed Securities (CMBS) loans, often at lower cost than traditional commercial loans, but in a high prepayment penalty (the so-called sale of a penalty or yield maintenance) or no flexibility in payment.
CPD: car per day or volume of traffic on a road.
CPI. Consumer Price Index is often used to compensate for inflation to calculate the annual rent increase.
Due Diligence Period:the period after the decline of 15-30 days for buyers to verify ownership. The buyer may cancel the contract at that time and for any reason and receive a full refund of the deposit.
estoppel certificate: a letter signed by the lessee provided and confirms the terms and conditions of the current lease.
Full-service leasing: leasing, in which tenants pay rent, utilities, includes all-inclusive.
Gross Income: annual income firstCosts.
Gross lease: the tenant lease to pay rent. The owner pays, insurance fees and maintenance.
Total: Gross Lease able area or gross lettable area. This is the space that can be hired and receive rental income. Not included are facilities for services, elevator, etc.
GRM: Gross Rent Multiplier for apartment. Ratio between purchase price and annual income.
LLC: limited liability company. A legal person established in many investors toown commercial real estate.
LOI: Letter of intent / interest or commitment letter is not normally the property, an offer to buy a business.
May reviewer: Member Appraisal Institute accountants.
Master Lease: Lease signed by the seller to rent space to ensure clear offer for rent.
Mixed Use: retail commercial real estate with the first floor and apartments upstairs.
Triple Net (NNN) Lease: Lease intenants to pay the basic fee plus tax on rental property, insurance and CAM. Absolute NNN NNN lease rental agreement that tenants also pay for property management.
NOI: net operating income. annual income, after all costs (taxes, ins., & Maintenance) other than the payment of the loan.
Hall: Stand-alone building in a strategic position in a large shopping center.
Pass Through: see refund.
Percentage lease: Leasing, in which tenant pays rent based moreShare of income of the tenant.
Phase I Report on the inspection report is an assessment that the contamination of the soil / environment. It is usually required by the lender as part of the process of loan approval for a commercial property.
Phase II report: Report of inspection to soil, groundwater, surface surveys. This control is more complete, including testing to see if there is a pollution of soil and water.
Pro-forma net income: potential, iehigher income when the property is 100% leased.
Proforma Cap Rate: maximum potential rate of adoption is 100% leased property for rent to the market.
Repayment: The amount of the fee for insurance and property taxes CAM, the tenant must pay a basic fee, the owner of the next.
Guaranteed rent: rooms for rent paid by the seller to the buyer for the vacant until it rented.
SBA loans: the government guaranteed loans for home ownership.
SNDA:Subordination, non-interference Attornment. This is an agreement pursuant to the agreement signed by the tenants banks: the lender of a new bond in the position, as landlord in the case of exclusion, tenant rent as valid as long as it is not in default.
TIC: Tenants in common. One way for small / self-directed IRA investors own a share of ownership of high quality as tenants in common.

Making An Investment In California Real Estate

If you are thinking about making a real estate investment, you should consider California real estate. The real estate scenario in California is in a real boost now, with so many people willing to buy properties in the region. California homes for sale are one of the most in demand properties – these properties are demanded by not only the local residents but by those people also who are looking forward to rent these properties during their stay in California.

Thus, as a real estate investor one of the wisest decisions would be to buy any property and rent it out to tourists or other people and then sell it off later on. If you rent it out to tourists you will have a steady income while if you choose to sell if off, you will be able to make some good money, because these properties are going to have a boost in their values soon.

Here are some more reasons why making an investment in California real estate is considered to be a wise decision now.

Property values on the rise: Recent statistics have revealed that property values in California are appreciating. You might choose any kind of property; you will find that its value is on the rise. Thus, suppose you make an investment now and you sell if off in a few years, you are sure to make some quick profits. Moreover, if you wish to ensure that you make profits, you should make an investment in Southern California realty. The property values in this place are on a high like never before.

Rent out California real estate: Suppose you choose to buy a property now but at present you do wish to stay there. In such a case, you just need to rent out such a property to students, professionals and tourists. In such a case, you will be able to get a steady income every month. Thus, this is said to be a great idea for those who are looking for an increase in their monthly income.

Use it as your holiday home: If you do not stay in California but love to stay there during your holidays, you can purchase a California real estate and use it as your holiday home. You will be staying there during your holidays – you do not have to rent any additional place and pay hefty amount as bills. Moreover, your friends and relatives will also be able to enjoy the place anytime they wish. If you wish to buy any property as your holiday home, it is best to choose San Clemente real estate. This is the best place in terms of location, entertainment, convenience and comfort.

Prices of property affordable: Southern California realty is considered to be one of the most affordable properties of the region. You can choose between luxury homes, condos, apartments, cottages and villas – you will find that all properties are affordable and are the true value for the money you choose to spend on them.

Alarming California Real Estate Numbers From Appraiser’s Conference

posted by cehwiedel on August 16, 2010 @ 5:14 am

The Appraisal Institute’s Southern California Chapter-the largest of its chapters in the country-hosted its 16th Annual Summer conference on Thursday, July 29, 2010. The chapter presented an excellent program of continuing education that was well attended by both residential and commercial appraisers.

During the session, Norris-who is considered to be a top authority on the Southern California real estate market-shared some intriguing insights. He believes the region is in an artificial market and is concerned about the shadow inventory that could flood the market, forcing prices even lower. However, this isn’t the shadow inventory of bank-owned homes you may have heard about; he refers to all the houses that may yet go into foreclosure. The problem will vary by region, but referring to Riverside County in Southern California, Norris presented some pretty alarming statistics:

• 23% of prime borrowers are not making payments
• 47% of non-prime borrowers are not making payments
• 90% of properties are upside down on value-to-loan (60% owe more than 150% of value)

Many borrowers haven’t made a payment in more than two years and have yet to receive a Notice of Default.

These numbers are frightening when considering the inventory that may come into the market in the next few years. Norris added that lenders and the federal government have slowed the foreclosure process to prevent a further deterioration of housing prices. But this artificial slowing of foreclosures belies the fact that there are still major waves of residential mortgage defaults on the horizon. It will be interesting to see if this policy plays out for the best or backfires and causes another flood of foreclosure properties into the market . . .

A postscript or comment on this from a reader of The Big Picture:

Southern California: 23% of prime borrowers / 47% of non-prime borrowers not making mortgage payments is alarming…to me anyway.

I think that the banks are technically insolvent. If they did their accounting according to the rules, they would have to write down the value of non-performing loans. Given that this many loans are in the non-performing category, if the banks followed the rules, they would not have enough capital to remain in business and the FDIC would have to close them as they have closed 108 banks so far this year. The higher level problem is that the FDIC might have to close many / most banks, which would really upset the economy.

So, the banks are extending (Letting people stay in houses without making payments) and pretending (bending / breaking the accounting rules to hide the extent of their (and our) problems)…

Assuming that Riverside County numbers are typical of the entire state of California is not a valid assumption.

Perched here in coastal Orange County, inland California real estate generally looks at least as bad as Riverside County numbers suggest. However, coastal California real estate looks more buoyant.

The two real estate markets split like the poopy economy as a whole: if you’re out-of-work, it sucks to be you right now. If you have a job, things aren’t so bad. The anxiety then rests in keeping your job and paying down your debts just as fast as you can.

Real Estate Recovery

It’s been three years since the sub-prime mortgage crisis began, triggering a global recession. Richard K. Green, director of the USC Lusk Center for Real Estate, takes stock of the housing market in California and other states. How close are we to real estate recovery, and will we ever see pre-2007 prices again?

“The main answer is things have stopped getting worse, and they stopped getting worse a year ago,” Green says.

“California is doing a little better than the rest of the country — particularly places like Arizona, Nevada, Florida, Michigan and Ohio,” he notes. “California was among the hardest-hit states, and we’re starting to come out of it; those other places aren’t.”

However, even in California, housing prices and home sales are far from realizing 2006 peaks. “In Los Angeles, prices are about where they were in 2002. In San Bernardino, Riverside, Fresno and Kern Counties, they’re lower,” Green says. “We’re seeing small increases, but it’s hard to know how to interpret that, because what’s being sold is changing.” He explains that rising prices may simply be due to shifts in the type of housing stock involved; for example, foreclosures made up half of home sales in the region a year ago, but in 2010 dropped to a third.

“Overall, we’re just bumping along flat,” Green says.

Looking to the future, Green believes that cities like Riverside and Bakersfield may never return to 2006 prices in our lifetime (discounting possible inflation). However, the prospects for other parts of Southern California are rosier. On L.A.’s Westside, prices have the potential to reach their old highs within a year or two.

As with all real estate, demand is key. “Places in Malibu are like buying a piece of art, not a home,” Green says. “Rich people value trophies, and a house in Malibu is a trophy.”

Discounting these isolated gems, many places may not rebound to 2006 levels. Before the crash, prices had really gotten out of hand in certain areas, Green says. The mortgage crisis, dire as it was, had a corrective effect.

Worst May Be Over For Commercial Real Estate

By Roger Vincent-L.A. Times
After nearly three years of declines there are signs that Southern California's beaten-down commercial real estate market has struck bottom — setting up the possibility of a rebound later this year.

In a sign of the easing, heavyweight investors armed with buckets of cash are on the prowl, looking to snap up office buildings, warehouses, shopping centers and apartments at the market's low, industry observers say. The buyers are choosy, but the most desirable buildings elicit bidding wars when they come up for sale.

The auction earlier this year of Wilshire-Bundy Plaza, a prominent Brentwood office building, drew 40 bidders. The 14-story building will sell for $111 million to Santa Monica landlord Douglas Emmett Inc. if a Bankruptcy Court approves the deal, said real estate broker Bob Safai of Madison Partners.

"That's an incredible price in today's marketplace," Safai said. Now he is trying to sell 801 S. Figueroa St., a 25-story tower in downtown Los Angeles that he hopes will garner $180 million.

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Although commercial building landlords in many markets are still struggling with high vacancy rates and weak rents, the erosion in some sectors has slowed, piquing the interest of buyers. In addition, reinvigorated banks have been able to postpone or avoid liquidating billions of dollars' worth of distressed real estate loans sitting on their books, helping to solidify prices.

In a similar fashion, Southern California's housing market hit bottom more than a year ago and prices have been trudging higher ever since, partly because a feared wave of fresh foreclosures hasn't materialized.

If the commercial real estate market continues to gain strength it would represent a significant shift in economic risk because many experts had feared that mass defaults by landlords on their loans could cripple banks and drive the country deeper into recession.

"It's true that thousands of commercial loans must be worked out and some of these properties will enter the market in 2010," investment banker David Rifkind said. But "federal policy has been accommodating to banks and they are not being forced to realize losses."

With rents falling and the economy trembling, commercial real estate transactions had been rare during the downturn. Owners were holding on in hopes that prices would stop falling and buyers were holding back, waiting for the low point.

But a philosophical change has become apparent among investors, Rifkind said.

"There is so much money sitting on the sidelines that when distressed assets or even small pools of loans come to market, there is a flood" of interest, said Rifkind, managing partner of George Smith Partners.

"That became palpable to us in the first quarter," he said. "Money can't stay on the sidelines for long periods of time. It has to retool and be put to use."

That's not to say property values are leaping up across the board, however. Researchers at the Massachusetts Institute of Technology said that prices of commercial property sold by major institutional investors nationwide fell slightly in the first quarter compared with the last quarter of 2009, according to its index.

Prices were 41% below their mid-2007 peak, MIT said, but not down significantly from the temporary bottom reached at the end of the second quarter last year.

"Overall, the behavior of the index since mid-2009 is not inconsistent with a pattern of bouncing along the bottom, essentially moving sideways," said David Geltner, director of research at MIT's Center for Real Estate.

Similar conclusions emerged in another popular index tracked by Moody's and Real Estate Analytics. Prices were down overall in the last quarter from a year ago, including a 3% dip in office prices. Apartment and industrial buildings, however, both increased in value for the second consecutive quarter.

"The past four or five months have shown us the market is establishing a base," said Neal Elkin, president of Real Estate Analytics. "Whether it's a bottom or not remains to he seen."

Healthy properties — buildings in good locations that are nearly fully leased — have lost about 35% of their value from the peak, while distressed properties are down about 60%, Elkin said.

Investors naturally want to snatch up bottom-of-the-cycle bargains, but so far there haven't been a lot of big bargains to be had. The expected wave of bank-owned foreclosed properties hasn't materialized because lenders have been extending loans to building owners instead of calling them in as many investors expected.

A huge amount of capital for acquisition was assembled over the last year on the expectation that as much as $1 trillion worth of real estate loans were in distress and banks would be forced to dump properties to clean up their balance sheets.

"The debt hasn't gone anywhere, but how it's going to play out is proving to be much different" from what investors hoped for, Elkin said. Banks won't have to take losses until they complete the process of healing their balance sheets and build up their capital reserves, he said.

"It's not going to be another RTC."

The federally owned RTC — Resolution Trust Corp. — liquidated billions of dollars' worth of real estate assets including bad loans that came from institutions that failed during the savings and loan crisis of the 1980s. Many of the assets sold at deep discounts from their previous prices.

Among those looking to pounce on deals is BH Properties, a Los Angeles investment firm that obtained an eight-figure revolving line of credit from Wells Fargo Bank last month for the purpose of commercial real estate acquisitions.

Such credit lines have been virtually unheard of for the last year and a half, said Steve Jaffe, executive vice president of BH Properties. "We are cautiously bullish on today's market," he said.

The firm is targeting the Inland Empire, Phoenix and Las Vegas, markets where the recession hit real estate hard. They haven't done any deals yet but they are hardly alone among investors. With most banks now stable and property owners desperately hanging on, there has been no tidal wave of cheap real estate coming up for sale.

"This is going to be a slow trickle," Rifkind said, "not a rush."

Signs of Commercial Real Estate Recovery

by David Reinholtz
While the housing and real estate crisis has gained national attention with regard to homeowners and private property foreclosures, one major facet of this economic downturn has been with commercial real estate, and it hasn't had the attention of its private counterpart. Commercial properties have seen a drastic increase in vacancies and this, in turn, has caused lease rates to plummet. This snowball effect put the brakes on many new commercial development projects as well.

Yet, finally, at the start of the new year, there are signs that the commercial real estate market has reached the bottom and is beginning to show some signs of life developing. A recent survey conducted by the Allen Matkins/UCLA Anderson School, indicates that investors and developers are beginning to see the earliest signs of recovery, though these researchers warn that the strongest effects may not be seen until 2012.

The recovery will be geographically specific, depending on the city and the number of new construction projects that had been completed within the past two years. These new construction projects in certain cities have, for the most part, remained vacant or at reduced vacancies, awaiting the full economic recovery. In these instances, these new construction projects may very well stall or delay recovery in these regions. San Diego is a prime example of a city in which recovery may be slower than the national average.

The Allen Matkins/UCLA survey has been conducted on a regular, monthly basis during the most recent economic recession and it has been several months since the survey noted any measurable optimism about future forecasts in the commercial real estate market. Developers and investors generally make their decisions about projects approximately two years before the projects are completed.

The significance of this survey then indicates that since investors and developers are beginning to feel some optimism, then they are beginning to see hope for business recovery and subsequent new projects having businesses willing to lease or purchase space within this time frame. Six months ago, these same investors and developers had a pessimistic view about the future, which meant that unless something changed, the market would continue to remain stagnant or worse, continue to fall.

This new survey certainly indicates that there is a level of interest in future commercial real estate ventures and bodes well for a long-term recovery process. While this survey was conducted throughout Southern California, its effects can be related to other regions throughout the country. The key factor, as previously mentioned, will be the level of new construction that was completed in a region during the past two years.

For example, this survey indicates that Los Angeles will experience a recovery in the commercial real estate market first in Southern California. Its new construction paled in comparison to San Diego or Orange County in recent years. Another aspect to consider is that Los Angeles wasn't a victim of the collapse of as many finance companies as other regions around it, which meant that there are fewer commercial vacancies.

The survey also takes into consideration the recovery of lease rates as well as vacancies. While Los Angeles should recover on all three fronts faster then its southern counterpart, vacancies are expected to improve throughout San Diego and Orange counties. What is still troubling for this region, however, is that while the economic recovery begins, lease rates are not expected to recover until well beyond 2012.

In fact, commercial lease rates should expect to fall further this year before leveling out at approximately 20 percent below their mid-2008 peak. However, according to survey specialist Richard Ellis, vacancy and net absorption should improve in the year 2011. The major factor that much of this improvement relies upon, of course, is overall employment and job growth.

While the nation continues to wait on signs of true recovery, commercial real estate investors and developers are finally seeing signs of a brighter future for the commercial real estate market.

THE INDUSTRIAL REAL ESTATE MARKET IN L.A. IS GROWING STRONGER

In FASCINATING INFORMATION, Trends, Uncategorized, all, statistics |
By Jodi Summers
“This particular cycle has caught us with something we have never seen before. We have been left with a significant amount of industrial space,” observed Ken Jackson, director of sales and acquisitions at Dynamic Builders. “Nonetheless, the demand for industrial space is still strong, he said.”When you are Downtown, and look to the southeast and see the one-story and two-story buildings out there, there are thousands of apparel and general merchandise companies that started there. It shows the huge strength of L.A.”

In 2009, the industrial market had one of the worst years in decades, purchase prices and lease rates reached 10-year lows. The U.S. vacancy rate for industrial properties hit 10.3% at the end of last year, according to the Urban Land Institute. Other firms, such as Grubb & Ellis, peg it slightly higher at 10.7%. Locally, we have always been blessed, as Los Angeles, peaked at 3.3% in the fourth quarter of last year, according to the Los Angeles Economic Development Corporation – up from 2.2% a year earlier.
Now, the industrial property market is slowly returning. “The worst has passed,” confirmed Craig Meyer, a managing director for Jones Lang LaSalle. “We’re clearly at the bottom looking up.”

Major cargo hubs like Los Angeles, Seattle, Kansas City, Houston and Dallas are expected to bounce out of the slump faster than other markets. While Phoenix, Chicago and Detroit are among the cities projected to lag.
Exports are up and manufacturing activity jumped last month to the fastest pace in more than five years. Around the ports of Los Angeles and Long Beach, which together handle about 40% of the nation’s cargo container shipments, sales and leasing activity for industrial properties began rising last summer. Cargo volume posted a 28% annual increase in February, reinforcing the continued strengthening of the industrial real estate market.

How To Avoid Hiring A Bad Property Management Company

In Southern California, property management is an important aspect of investing in real estate. The profitability of your property is dependent on hiring a qualified, helpful and professional property management company.
Hiring the wrong management company can mean losing thousand of dollars. Property owners who hire the right property management company however, can enjoy the benefits of a lucrative property investment.
Some of the most common, and often, detrimental mistakes a property owner makes is not doing enough research. The more research you do, the more you can avoid hiring a bad management company.
Property management companies that also sell properties, often nation wide corporations like Century 21, etc. are often a bad idea. They usually are primarily real estate agents, who also do property management because they want to manage when you choose the sell the property. A property management company like this is not a good idea because they make more money selling than managing. You would benefit more from a smaller, specialized company that deals only with property management in your area and nothing else.
Make sure you check the references of your management company’s other clients. Don’t be afraid to make a few phone calls, and get a good track record. You shouldn’t sign anything before you have a good idea that the company you’re hiring is the best at property management and one that you can trust. On the other hand, as an owner, you shouldn’t be too demanding of references either. A good property management company will not release all of their clients’ information to you, because it is private and confidential information. The management company won’t be making an obscene amount of money managing your property, so they can always tell you to take your business elsewhere. You will do well with around 3 references to talk to, and get an idea of how they work with their clients.
Some other things to keep in mind: Is the company licensed in the state of California? Is the company insured? Do they have a fidelity bond to protect you in case an employee mishandles your money? Will they provide you with reports? Will they market your property? How do they deal with late charges? How do they handle tenant complaints? And so on. These are some tips for making sure you hire a good property management company that will professionally and efficiently manage your property, helping you turn your home/apartment/condo/commercial property into a steady investment.

Hope for California's future?

By: E. Scott Reckard

Job losses are staggering. Declines in property values are among the worst in the nation. The percentage of immigrant residents is even falling.

But California, it seems, has managed to retain some of its traditional allure.

Many Golden State residents believe their longer-term personal situations, and the economy, are going to improve despite pervasive negative feelings about the state’s current economic woes, according to a poll released Thursday by Citibank.

To be sure, nine of 10 Californians said the state’s job and real estate markets are no better than fair, and seven in 10 saw few signs of an improving economy.

Solid majorities of respondents to the poll by the New York bank detected no signs of improvement in the state’s small-business environment, the quality of its schools and education, the tourist industry, or commercial real estate.

Nonetheless, “Seventy-four percent of young people still feel this is an excellent place to live,” Rebecca Macieira-Kaufmann, Citibank’s president of California operations, said in an interview.

Key responses to questions about California:

-- 91% said economic conditions are only fair or poor.
-- 91% said job opportunities are only fair or poor.
-- 76% said they see no signs of the job market improving.
-- 65% said they see no signs the real estate market is improving.

And yet ....

-- 64% said California is a good or great place to live.
-- 62% were comfortable with their level of debt.

As so often happens, the poll detected a split between denizens of Northern California and Southern California.

Just half (52%) of Los Angeles-area residents believed that the economy would improve in 12 months, compared with about two-thirds (64%) in San Francisco. In the Bay Area, 62% said job opportunities would be better in the next 12 months, versus 56% of Southern Californians.

Indeed, 14% of Bay Area residents described current job opportunities as excellent or good. In the Southland, only 5% agreed.

Macieira-Kaufmann said Citi uses the survey, conducted quarterly, to stimulate conversations with its customers about their financial situations and plans.

The poll, by ABT SRBI Public Affairs, was conducted in English and Spanish by telephone March 23-31 among a random sample of 1,201 Californians ages 18 and older. The margin of sampling error for the entire group was plus or minus 3 percentage points, with a larger margin of error for subgroups.

Wall Street's Next Crisis

by Jesse Eisinger

Now that the subprime shakeout is nearly over, another real estate mess looms, this time in commercial property.
So far, the current credit crisis has zeroed in on mortgages for the less affluent. But easy credit was a sprawling millipede whose wobbly legs reached into the farthest corners of the financial markets. This is the year the other 999 shoes start to drop.

Any loan to any borrower can begin to seem subprime if there's too little down and too much debt. And that, unfortunately, brings us to the commercial-real-estate market.

For the past several years, the market for commercial property—offices, malls, apartment buildings, industrial plants, warehouses, and the like—has enjoyed the very best of times. Prices soared, and lenders lent readily. Owners had no problem meeting their payments. By early 2007, delinquencies had fallen to record lows.

In their own way, however, commercial-real-estate loans were no less foolish than those made to home buyers with speckled credit. And as with the subprime mess, the reckoning will come. Just like what happened in other sectors already hit by the credit crunch, these loans will cause problems that will probably find their way beyond the obvious players in the commercial-real-estate market. Judging by the aspects of the credit crisis we've already seen, commercial-real-estate trouble will probably emerge sooner than people expect—and will be worse than they anticipate.

The implosion is going to be a refreshingly simple and familiar story. The commercial-real-estate frenzy has none of the nagging complications found in the residential market. There aren't any targets of predatory lending. There are no huge failures by government regulators. The aftermath won't see people thrown out of their homes—an unadulterated societal ill regardless of whether they should have known better or were tricked into taking on loans they couldn't afford.

Let's make it clear up front: The commercial-real-estate blowup—while ugly—won't be as bad as the current housing crisis. It's a smaller market, and any single property often has a diversified group of tenants with different sources of income. The supply of buildings didn't increase dramatically over the past several years, as in residential real estate. And the losses won't be as severe, because many commercial spaces can be refashioned for new occupants.

But there will be trouble, in part because of the rise of the untested commercial-real-estate structured-finance market. Just as with residential mortgages, Wall Street banks package commercial-real-estate loans, slicing them up into tranches according to risk and parceling them out to a range of investors. In 1995, $15.7 billion worth of commercial-mortgage-backed securities were issued. Through the third quarter of 2007, $196.9 billion was issued, according to Commercial Mortgage Alert, a trade publication. That amount means 2007 will be a record year, even though issuance collapsed in the fourth quarter as investors panicked over the credit crunch. Right now, there is about $730 billion in commercial-mortgage-backed securities outstanding. "Not only have we been in a rising tide, but the loans are very different in underwriting standards than even five or 10 years ago," says Alan Todd, head of commercial-mortgage-backed-securities research at J.P. Morgan. "We haven't been through a cycle yet" with these new structures, he adds ominously.

The perennial lesson to be drawn from the coming slump: You can't protect greedy and myopic people from themselves. With residential mortgages, one of the most persistent myths to take hold in recent years was that home prices on a national level had never decreased in a given year. That wasn't true, but perhaps we can forgive people for being hopeful.

The commercial-real-estate market has no such excuses. Everyone knew that the business is highly cyclical. Indeed, a huge downturn had occurred as recently as the early 1990s, within the memory of most of the professionals now in the market.

Amid the tall office spires of America's cities, big-money pros have simply been playing a game of greater fool, trying to bring in huge returns with borrowed money and sell out before the arrival of the crash they knew was coming. And in this case, the fools won't just be famous developers. Some of the same banks and Wall Street firms now entangled in the subprime residential crisis will also be caught in the mess. The commercial-real-estate meltdown will be a market failure, pure and simple. We will be able to look at the wreckage in the next several years with wonder and awe, untroubled this time by sympathy for those left holding the bag.

Here's what we know about what happened in commercial real estate: Lending standards fell, starkly. Or as I prefer to see it, they were thrown out of the 60th-floor window of that gleaming office tower in downtown Atlanta/Phoenix/New York/San Francisco/insert your city here. The gap between the cost of debt servicing and the cash actually being generated by the buildings narrowed. What's more, it used to be that banks made loans for no more than 80 percent of the value of a property to ensure a healthy cushion of protection, but by the early part of 2007, loans were sometimes made for 120 percent of a property's value. Who would be so crazy as to lend more than a property is worth? Anyone who believes in perpetual-motion machines—that is, that rents and underlying property values must always go up.

A prime example is Tishman Speyer Properties, which paid a record price for two giant New York apartment complexes. To make the purchase work, the company must now figure out a way to kick out current tenants—many of whom have their rents stabilized by law—at a faster rate than has been managed in years past, in order to replace them with ones who will pay more. Historically, that turnover has been about 6 percent, says Todd, but Tishman Speyer is assuming a rate of more than double that for the first couple of years, and 10 percent for the next few after that.

Free money frothed up the market. The clear top—as clear at the time as it is in hindsight—was when real estate mogul Sam Zell sold his Equity Office Properties to the Blackstone Group, a private equity firm. Blackstone had entered into a bidding war with Vornado Realty Trust for E.O.P. and ended up paying much more than it had initially bid. Yet Blackstone managed to unload so many E.O.P. properties so fast that the deal looks brilliant. The bag holders are ultimately the ones who will appear foolish. Indeed, in a sign of things to come, one titan already does: Harry Macklowe, a famed New York real estate buccaneer, leveraged himself to the gills to buy seven New York office buildings from E.O.P., a side agreement to the Blackstone purchase. He borrowed $7.6 billion, based on stratospheric valuations, while putting a minuscule $50 million of his own equity into the deal, financing much of the purchase with short-term debt. Since the summer, Macklowe has struggled to refinance the debt in increasingly choppy markets. And he has had to put up as collateral his trophy property, the General Motors Building in midtown Manhattan.

Lending standards had been loosening across the industry for years. Standard & Poor's and Moody's both voiced early concerns in late 2004 and the beginning of 2005. Sure, "supply and demand is in balance, but that's not a license to loan more money against a given cash flow," says Tad Philipp, Moody's managing director of commercial-mortgage finance. "What we were seeing was riskier and riskier loans, and the loans got riskier still. And we are just past the top of the cycle."

Despite their misgivings, the ratings agencies kept slapping seals of approval on commercial-real-estate structures. Just as they did when rating securities containing residential mortgages, the agencies relied heavily on recent historical data, which were misleading. Such transactions are designed so that investors who take on the most risk stand to get wiped out first. What happened is that the level of cushioning shrank dramatically, meaning damage from bad loans will seep into higher-rated tranches more quickly than generally expected.

To its credit, Moody's started requiring higher levels of protection in the spring of 2007. S&P and Fitch, according to a J.P. Morgan analysis, lagged significantly—and won market share as a result. Those two will come to regret that they didn't respond faster to the Moody's move. And of course, those stuck with the paper won't be able to ignore what they bought during the frothy times, when commercial-real-estate structured finance became a big, lucrative business for Wall Street. As financial firms pushed these securities out the door, the structures took on alarming qualities.

As Todd explains, in the early part of the decade, commercial-mortgage-backed-securities deals rarely had any one loan that was so big it dominated the pool. But in recent years, the top 15 loans in a 200-loan pool could make up 40 to 65 percent of the pool's total value. In the old days, any single default wouldn't hurt a structure disproportionately. That's no longer true. Investors and ratings agencies haven't fully appreciated how hairy these structures have become, according to some commercial-mortgage experts. Todd calls this blindness to risk the agencies' and investors' "biggest mistake" with regard to commercial real estate. "You are disproportionately exposed to the largest loans.... It's been so good for so long, we don't have models set up to look at defaults properly," he says.

In recent months, as real estate developers have scrambled for funding from lenders, a standoff has developed. The banks haven't been able to find buyers for structured financial products. At some point, the banks will have to come down in price, and then they will take losses, just as they have with leveraged loans made to corporations being taken over by private equity. Since the losses haven't happened yet and since we've reached the end of a very good year in commercial real estate, Wall Street is understandably reluctant to face reality. Why take losses that will eat into this year's bonuses if you can take the losses next year, when, as everyone knows, the market will be bad?

We've seen this throughout the financial markets in 2007. This has been the season of see no evil, hear no evil, speak no evil—until you absolutely have to. But you can't hold off losses forever, as the huge write-offs at banks have demonstrated. Through the first nine months of 2007, Wachovia was by far the top contributor of loans in the commercial-real-estate-structures business, followed by Lehman, Credit Suisse, Morgan Stanley, and J.P. Morgan, according to Commercial Mortgage Alert. Now the firms are sitting on those loans, waiting to unload them. "The problem is there are no buyers. Nobody wants to take a really big loss and jump the gun too quickly," an investment professional at a commercial-real-estate investment trust told me. "There's a game of chicken going on."

A few weeks ago, a hedge fund manager emailed me a PowerPoint presentation on the commercial-real-estate market. It opened with a typically dry title: "2008 C.M.B.S. Forecast."

I clicked through to the first page, "Capital Markets." It had a picture of a derailed train. The next page, "Credit Fundamentals," included a photo of a bridge collapsing in a hurricane. Next came "Property Values," featuring an imploding skyscraper. The fourth page was "Economic Outlook"—a ship run aground on the rocks.

Mortgage reform: What is to be done?

By Chris McLaughlin

Over the past 18 months, the government has taken extraordinary steps to keep the housing market viable. Home sales reversed their four-year descent, and prices stabilized. So far. But it has cost $126 billion to date, and the bill is still growing. What’s next? With the Obama administration largely mute on the issue, Congress will hold its first hearing today about how to restructure the mortgage system in the wake of the financial crisis. “Don’t make the American taxpayer responsible for handling speculative situations or bubbles,” he said. Rep. Spencher Bachus, ranking Republican on the committee, said in a subsequent CNBC interview that he would prefer government exit the industry entirely. “We need to phase it out over time,” he said. “America is about competition and innovation. The federal model simply is not the efficient model.” Working out a new system is likely to take years. For the time being, the market is still resting on three government pillars: Fannie, Freddie and the Federal Housing Administration. And even staunch free-market advocates who want to get rid of Fannie and Freddie in the long run agree that the housing recovery remains too fragile for the government to step away anytime soon. “The first priority is we have to keep financing homes, and we don’t have a way to do that without Fannie and Freddie,” said Peter Wallison, a senior fellow at the conservative American Enterprise Institute. “We have to deal with the realities of where we are today.” Since the government took over Fannie and Freddie, Obama officials have given few details on their long-term thinking, apart from saying that they want to delay a legislative proposal until next year.

DSNews.com – short sales now number 1

According to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, last month distressed properties – those involving homes acquired as part of a foreclosure or pre-foreclosure sale – accounted for 48.1% of the home purchase transactions tracked by the survey. The February numbers were up significantly from the 37.3% level recorded as recently as November. It was also the highest distressed property market share seen since last July. Stepped up government efforts, including temporary foreclosure moratoriums and a push to qualify more financially troubled homeowners for mortgage modifications, temporarily reduced the number of distressed properties coming on the housing market in the fall and much of this past winter. But now a growing number of distressed properties appear to be hitting the housing market. There are three major types of distressed properties: damaged REO, move-in ready REO, and short sales. During the period from November to February, sales in all three categories rose. Damaged REO grew from 12.3% to 14.4%; move-in ready REO grew from 12.6% to 16.6%, and short sales grew from 12.4% to 17.1%. “Short sales now account for the No. 1 category of distressed property,” commented Thomas Popik, research director for Campbell Surveys. “Losses on short sales are typically lower than for REO, and both lenders and the government are pushing programs to facilitate short sales. But as more and more people default or simply want to walk away from their properties, mortgage servicers are having trouble expeditiously processing these complicated transactions.”

More regulation needed

Philadelphia Federal Reserve Bank President Charles Plosser said yesterday that better regulation is needed to dissuade financial market players from taking excessive risks after the “too big to fail problem” undermined discipline. “The too big to fail problem has essentially removed much of that market discipline,” Plosser told an economic conference in Prague. “We have to have ways of disciplining the actors in the marketplace so that they don’t take excessive risks, and in many cases the market can do that and do that quite effectively. But when we protect creditors, when we protect people from failure, we encourage them to take risks.” Bernanke made clear at the weekend that large financial firms continued to play a crucial role in the global economy, and Plosser said different, but not necessarily more regulations were needed. “Government regulation and government oversight will never replace the marketplace officially … when there is regulation they will look for ways around that regulation in order to be successful,” he said. “We will always as regulators be behind that curve. The only way we can be effective in protecting financial stability is to have regulations and rules that complement and encourage more market discipline, not replace it.” If only things were as simple as adding more bureaucrats.

DSNews.com – seven more banks fail

The FDIC’s failed bank list jumped to 37 for the year after seven more community banks fell over the weekend – three in Georgia, and one each in Alabama, Minnesota, Ohio, and Utah. Appalachian Community Bank in Ellijay, Georgia had 10 branch locations, with $1.01 billion in total assets and $917.6 million in deposits. Bank of Hiawassee, based in Hiawassee, Georgia, ran five branches and had $377.8 million in assets and $339.6 million in deposits. Century Security Bank in Duluth, Georgia operated two branches and had $96.5 million in assets and $94 million in deposits. First Lowndes Bank in Fort Deposit, Alabama was a four-branch institution, with $137.2 million in assets and $131.1 million in deposits. Minnesota’s State Bank of Aurora operated out of a single branch office. It had $28.2 million in assets and $27.8 million in deposits. The single branch of American National Bank in Parma, Ohio had approximately $70.3 million in assets and $66.8 million in deposits. Bank Corp. in Draper, Utah, had $1.6 billion in assets and $1.5 billion in total deposits.

Goodbye to Acorn

The Association of Community Organizers for Reform Now

(ACORN) will no longer darken our doors nationally, after a meeting of the board over the weekend. The fate of the local branches remains unclear. Although the majority will cease operation on April 1, as the non-profit continues to look for ways to settle its debts, some may rebrand themselves and operate around under a different name. In an e-mail sent to reporters, ACORN said: “[We] have a great deal to be proud of — from promoting homeownership to helping rebuild New Orleans, from raising wages to winning safer streets, from training community leaders to promoting voter participation— ACORN members have worked hard to create stronger to communities, a more inclusive democracy, and a more just nation.” ACORN began a turn for the worst when, in September, videos emerged online of ACORN workers allegedly giving some fraudulent advice to filmmaker James O’Keefe and his associate, Hannah Giles. House Republicans last year began an investigation into how Acorn’s political arm was funded. Republican investigators on the House Oversight and Government Reform Committee determined that “there were no firewalls” between Acorn’s federally subsidized housing activities and its political wings, said Kurt Bardella, a spokesman Rep. Darrell Issa, the top Republican on the committee. Officials of Acorn Housing, created by the main Acorn group in the mid-1980s, have said they had a separate board and budget, though the two organizations shared office space in some cities. Congress last year cut off federal funding for Acorn Housing. Federal money last year provided about three-quarters of the group’s budget of $24 million. A large offshoot formerly known as Acorn Housing, which counsels low-income homeowners, has changed its name to Affordable Housing Centers of America and plans to continue operations.

The Curious Case for a Real Estate Shortage

by BRIAN DAVIS

At a time when almost everyone in the real estate industry, and most homeowners trying to sell, are desperate for more buyers and market activity, some analysts are predicting a real estate shortage in the next few years.

Really? Is a real estate shortage even possible in the foreseeable future?

David Crowe, the head economist for the National Association of Homebuilders, is arguing forcefully that America will in fact see a real estate and rental lease shortage in the coming years, and points to the relatively little real estate development currently underway (about 591,000 new homes in 2010, and 87,000 new rental lease units). Population growth and its subsequent demand should outstrip those figures pretty easily.

But wait a minute – is David Crowe a reliable source? He’s paid to push for more real estate development! Still, the argument is so brazen, so counterintuitive, that perhaps there’s something there.

Consider for a moment that the number of distinct households has contracted quite a bit since early 2008, as more people are living under a single roof to consolidate resources and slash expensive rental lease or mortgage costs. Single and young people in particular who lose their jobs or take pay cuts are often quick to move in with a friend or with family, or to sign a rental lease on an extra bedroom in their home to help pay the bills.

Then there are the people who would likely have moved out on their own, but didn’t because of the poor job market. Many in Generation Y are camping out with Mom and Dad for an extra year or two to save money and slash costs, where a few years ago their counterparts were quick to go sign a rental lease on a flashy apartment in the drinking district of their local city.

In short, the demand for real estate is artificially contracted at the moment, and is poised to expand back to normal levels as soon as jobs reappear and people feel confident in signing a new deed or rental lease.

But here’s where things get interesting: there are currently about 14.2 million vacant homes in America right now, which is a discouraging high number for any real estate professional. It will take years to fill all of those vacant homes, even using the most generous estimates of population growth and expansion in the number of households. And it doesn’t matter.

A hefty percentage of that vacant real estate sits in areas that will either not recover economically, or will recover slowly, and those homes are effectively irrelevant for the housing recovery. Because the demand for real estate will follow the job recovery, what we’ll see is a rental lease and real estate shortage erupt in areas where employment recovery blossoms, as hungry job seekers eagerly move where the jobs are. Rural areas, and systemically depressed areas (such as much of Michigan and Ohio), will sit fallow and all of their vacant real estate will have not the slightest effect on housing demand.

There may well be a housing shortage, as our biased friend Mr. Crowe suggests. If and when it comes, it will be extremely location-sensitive, with hot pockets of demand and large swaths of untouched, unwanted real estate.

Commercial real estate: A protracted recovery

Thu, 2010-03-11 12:09 — Michael Lagazo

Rising vacancies and falling rents are impacting all sectors of commercial real estate. Landlords are focusing on tenant retention and negotiating lease extensions at low rents with favorable allowances to sustain revenues. The Beige Book Jan. 13, 2010 Summary indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report. Commercial real estate markets deteriorated in most districts based on information collected on or before Jan. 5, 2009. Commercial real estate transactions and leasing activity are minimal with isolated minor increases in sales. Commercial construction activity is reported to be shrinking rapidly (http://bit.ly/7zmicc).

Bloomberg reporters, Beth Williams and Stuart Bern, note that U.S. commercial real estate prices have fallen more than 40 percent from their peak in October 2007, while the default rate on commercial mortgages more than doubled in the third quarter of 2009 to 3.4 percent from the previous year, according to data compiled by Moody’s Investors Service and Real Estate Econometrics.

Grubb & Ellis indicates that in 2010, commercial real estate fundamentals will decline more slowly than in 2009, with most property types reaching bottom near the end of 2010 and beginning a slow recovery starting in 2011. Robert Bach, senior vice president, chief economist at Grubb & Ellis, reports in the Jan. 19, 2010 Weekly Market Insight that vacancy rates in Q4 2009 increased by 30 basis points for office and 20 basis points for industrial compared with third quarter gains of 50 and 30 basis points, respectively. This raises the possibility that the office and industrial leasing markets may bottom out as early as mid-year with modest, positive absorption possible in the second half of 2010.

As featured in the Jan. 19, 2010 National Real Estate Investor podcast titled, “Commercial Real Estate: Hey, Save a Piece of Stimulus Pie for Me!”, John B. Levy, founder of John B. Levy and Company, the real estate investment banking firm, does not anticipate resurgence in commercial real estate values until 2011. Levy offers a clearly improved outlook for 2010 compared to last year, anticipating a protracted recovery of values and pricing with gradual increases depending on how the economy grows as well as the rebirth of commercial mortgage-backed securities (CMBS). According to Levy, the first and second quarters of 2010 will be slow improving in the second half of the year, but favorable overall compared to 2009’s totals.

In a Jan. 13, 2010 Bloomberg interview, Kenneth Laub, a broker for five decades, and consultant and founder of Kenneth Laub & Company, is said to have handled more than $40 billion of real estate transactions since its inception in 1969, says, “It’s not a supply/demand thing; it’s an overleveraged condition." Unlike previous cycles driven by supply and demand where inventories have been overbuilt making it a landlords’ market or diminished rents make it a tenants’ markets, the current market is driven by a need to deleverage. Ultimately, Laub said that a coming recovery will extend beyond typical periods of two to three years. “It won’t be a typical part of a cycle where we’re down for two or three years and things recover. It will be longer than we’ve gone through before.”

Wall Street Journal Real Estate Reporter Christina S.N. Lewis explains that, despite property prices bottoming, a large number of commercial assets remain underwater, with loans worth more than the property's value. That distressed debt totals hundreds of billions of dollars on bank balance sheets and in commercial-mortgage-backed securities held by institutional investors.

Any stabilization applies to only the top quartile of properties—fully leased buildings with steady rental income located in established markets. "[In general] I wouldn't say there's been any improvement in pricing for a property that isn't top-tier," said Robert M. White Jr., president and founder of Real Capital.

Michael Stuart elaborates in the January issue of Commercial Investment Real Estate that loan demand continues to decline or remain weak and credit quality continues to deteriorate. Amassing capital in a credit-restricted market tops real estate priorities. Stuart recommends pursuing non-traditional capital-raising options. For instance, Simon recently sold $500 million of five-year unsecured bonds priced to yield 5.46 percent, bringing the total capital Simon has raised in bond and equity offerings since March 2009 to $3.4 billion. Its cash available for strategic acquisitions, including capacity on its revolving line of credit, is now in excess of $6 billion.

Moody’s Investors Service said that commercial property prices rose one percent in November, after 13 consecutive months of declines, according to their latest Moody’s/REAL Commercial Property Price Index (CPPI).

Here are some excerpts from the Moody’s/REAL report:

►After 13 consecutive months of declining property values, the Moody’s/REAL Commercial Property Price Index (CPPI) measured a one percent increase in prices in November. Prices began falling over two years ago and significant declines were seen throughout 2009, with several months experiencing five percent-plus value drops. The one percent growth in prices seen in November is a small bright spot for the commercial real estate sector, which has seen values fall in excess of 43 percent from the peak.

►Transaction volume fell in November. Overall, 362 total sales were recorded, with an aggregate value of $4.1 billion.

►We expect commercial real estate prices to decline further in the months ahead. Prices for properties with short-term lease structures, such as multi-family, could show signs of a sustainable recovery later this year, while other property types will likely need longer to turn the corner.

“We are beginning to see some early, yet encouraging, recovery signals, as the manufacturing sector is improving,” said Craig Meyer, managing director and head of Jones Lang LaSalle’s North American Industrial Services team. National Real Estate Investor reports that rental rate appreciation is not expected to begin until consumer spending and production activity trends reverse.

“There will be giant opportunities that come out of this,” said Laub. Opportunity lies in overleveraged and underfinanced distressed assets. Record-level inventory is available in all sectors. Bargain hunting hedge funds, foreign investors and solvent real estate companies will acquire properties with diminished values. In a Jan. 19, 2010 Bloomberg interview, Laub said that prices and values will begin to stabilize once unemployment stabilizes. At approximately 200-square feet per unemployed worker, demand for space will increase once companies begin hiring.

New services are emerging as property owners seek to restructure their finances, acquire tenants or liquidate assets. In a Jan. 15, 2010 squarefeetblog post, Stan Mullin, the former head of SIOR, wrote a detailed article covering receiverships that explains how commercial agents will benefit from working with court-approved receivers to preserve the value of an asset after a default. There is a major upsurge in receiverships as a result of the crisis, and most of the major commercial real estate (CRE) firms have either revived or setup service lines to service the loan industry.

“We’re going to have a lot of new services that are going to evolve, things we haven’t seen or done before,” Laub said.

Deleveraging is just getting underway. Deleveraging takes two to three years at which time gross domestic product (GDP) growth is suppressed. The market is only at the beginning stage or renegotiating between mortgage holders and developers.

“The rebirth of the CMBS market is absolutely going to happen this year,” said Levy. “Last year, we had three CMBS deals, and that was three more than anyone predicted. The CMBS market in 2010 won’t resemble the one we knew and loved in 2007, but we will see a rebirth with reasonable and rational underwriting. I even think we’ll see the first multi-borrower CMBS deal this year.”

Real estate forecast: Time is of the essence for sellers

CB Richard Ellis, Allen Matkins highlight trends in O.C., Southern California regions.
BY TAMIRRA STEWART
Published: March 03, 2010 03:20 PM

Time is of the essence for sellers: That was the mantra that emerged from a commercial real estate forecast delivered online Wednesday by CB Richard Ellis and the Allen Matkins law firm.

The conference covered the office, industrial, retail and multi-family sectors, as well as retail investment and capital markets in Orange County and the greater Southern California region.

“Landlords need to streamline,” says Martin Togni, a partner in Allen Matkins’ San Diego office. “By the time third-party approvals are received, the deal is gone. Landlords need to be nimble.”

Industry executives who spoke during the event, which was viewed via the Internet by about 1,000 commercial real estate owners, developers, investors and tenants, encouraged quick closings and the need for sellers to "bend" to buyers' requests.

"It's not just about rent," especially in Orange County's tenant-driven office market, notes Natalie Bazarevitsch, senior vice president of CB Richard Ellis. “Buildings are competing for tenants at the same time, and tenants are carefully studying landlords.”

Orange County’s office sector can expect flat or negative absorption, with no rent growth expected until the end of this year or the beginning of 2011 – which falls in line with a number of recent reports.

But the region's quality of life, entrepreneurial spirit and proximity to major airports draws buyers in, notes Dave Desper, senior vice president of CB Richard Ellis' Newport Beach office.

“We expect price decline in leases and sales in the next couple of quarters, with recovery expected in the third and fourth quarters,” he says.

Speakers noted a number of trends to expect in Southern California's commercial real estate sector this year. Here's a breakdown of the highlights:

Office sector: Rental and vacancy rates will fall in the first half of the year, with rent growth at the end of 2010 or early 2011.

Industrial sector: Though activity has been rising, recovery is expected toward the end of the year and into 2011.

Retail sector: Rent is stabilizing, though the year will be tough. The speakers project slow growth over a long period of time.

Retail investment: Executives expect large declines in defaulting properties.

Multi-family sector: Increasing interest rates will result in a decline in values.

San Diego economic indicators up again

By Dean Calbreath, UNION-TRIBUNE STAFF WRITER

Friday, February 26, 2010 at 12:04 a.m.


Despite public skepticism over the strength of the economy, San Diego County’s leading economic indicators continue to suggest that the long-troubled employment and housing markets are on the mend and that a recovery is in the offing, according to a report released yesterday by the University of San Diego.

Economist Alan Gin, who compiles the index for USD’s Burnham-Moores Center for Real Estate, said the numbers indicate that the decline in local economic activity has either bottomed out or will probably bottom out by June. But he warned that the jobless rate, which has been in the double digits since last June, is likely to stay high even after the economy sputters back to life.

“Employment is typically a lagging indicator, as firms usually wait until they are sure that a recovery has taken hold before they make the big commitment to add permanent staff,” Gin said. “The situation will probably be more difficult in this recovery, because many firms took steps to be much more efficient and are unlikely to hire back as many employees as they let go during the downturn.”

The USD index has been rising steadily for the past 10 months and now stands at 107.9 points, up from an all-time low of 100.7 in March. Its all-time high was 144.2 in March 2006, when the real estate market was peaking.

Gin’s conclusions were echoed by a Southern California index of leading economic indicators released yesterday by California State University Fullerton. Like the USD index, the Fullerton index has been rising steadily since last spring.

Fullerton economist Adrian Fleissig, who compiles the index, said it suggests that Southern California will begin to have positive economic growth in the next three to six months, “although it may be a jobless recovery.”

Fleissig cautions that even though the economy is showing signs of recovery, he does not forecast much growth in Southern California this year or next, partly because of the continuing economic sluggishness in San Bernardino and Riverside counties.

“Although some parts of the region are doing better than others, for the region as a whole it’s going to be a long and slow recovery that will probably continue to lag the U.S. economy,” he said.

Five out of the six standards that USD uses to evaluate the economy improved in January:

Home construction. After the two worst years for home building in San Diego County since the Great Depression, construction has been inching up in recent months. In January, the county issued 282 permits for residential units.

That’s very low by historical standards, but it’s more than three times the volume of the year before, when 87 units were authorized. That was the first time since record-keeping began in the late 1970s that the county OK’d fewer than 100 units during a month.

Unemployment. Initial claims for unemployment insurance dropped during the month, which Gin describes as “very positive news.” January is usually one of the worst months of the year for employment because retailers lay off their seasonal staff after the holidays.

Hiring. Even in the best of economies, January is a bad month for job openings, coming after the holiday-related burst of hiring by retailers and others. Last month was no different, but Gin said that after adjusting for such seasonal changes, job postings held up pretty well between December and January, though they are below where they were last year at this time.

An index of online want ads issued by Monster.com that Gin uses to compile his index shows that the strongest areas for job postings in San Diego are for military-related employment, security guards, and community and social workers, while the lowest demand is in the sciences. Even though biotech is seen as one of the driving forces of the local economy, there were half as many postings for scientists last month as in the previous January.

Stock prices. Like much of the stock market, most San Diego stock prices ended January lower than where they began. But Gin evaluates the market using a monthly average of each day’s closing, and by that definition, the month was positive. After the Dow Jones industrial average dropped below 10,000 in early February, stocks have been on the rise for most of this month.

The national economy. The national index of leading economic indicators maintained by The Conference Board in New York rose last month for the 10th month in a row, which Gin says reflects well on the San Diego economy.

The only negative on Gin’s list was consumer confidence, as measured by monthly polls conducted by The San Diego Union-Tribune. The polls show that confidence actually rose slightly in January, but Gin’s index uses a moving average of several months’ data.

LOS ANGELES MULTIUNIT PROPERTY SNAPSHOT – MARCH 2010

LOS ANGELES MULTIUNIT PROPERTY SNAPSHOT – MARCH 2010
March 1, 2010 on 5:42 pm
By Jodi Summers
And the good news is – research is indicating that the Los Angeles employment market is expected to stabilize in the second half of 2010. Following a loss of 115,000 jobs in 2009, payrolls are forecast to expand by 0.3 percent this year, with the addition of 13,000 positions, observes the 2010 National Apartment Index Report by Marcus & Millichap. The lack of job growth is hurting demand in the multifamily market, confirms Reis Research. “It is only when labor markets stabilize and recover that we will see a ramp-up in household formation that represents the greatest driver for rental apartments,” observes Victor Calanog, Reis research director.

Investors obviously feel that the Los Angeles market is stabilizing. Comparing February 2008 to February 2010, the number of under contract multiunit properties in Los Angeles is up 148%, according to Clarus Market metrics.
In 2009, the national vacancy rate for apartment properties rose 1.3 percentage points to 8%, the highest level since t in 1980. Average asking rents in the sector dropped 2.9% to $1,026/unit last year. Rents fell or held flat in 69 of the 79 markets tracked by Reis.
For years, Los Angeles has had low, low, low vacancy rates, hovering between 2-3 percent – making it a very attractive market. Even with the recession making higher priced units on the West Side less desirable, vacancy rates are still hovering between 5-6%. The National Apartment Index Report notes that the lingering high unemployment will continue to pressure owners to lower rents. Asking rents are expected to fall to $1,335 per month in 2010, while effective rents will slip to $1,263 per month, respective declines of 2.8 percent and 3.6 percent annually.

Now that the economy is coming back, Los Angeles multiunts are still attractive. Between Feb-08 vs. Feb-10, the number of for sale properties is down 44% and the number of sold properties is up 53%.

According to Realpoint, 6.53% of securitized loans backed by multifamily properties are delinquent, which is the CMBS market’s second-highest delinquency rate behind the hotel sector’s 8.09% rate.
Investors realize the current value of the Los Angeles, and there is a trend of cash-rich buyers shifting money out of the stock market and buying multiunit property with the intent of holding it for future generations. This is why the average months supply of inventory is down -79.8%

Investment Sales Volume Seen More Than Doubling to $100B in 2010

Sales of office, retail, multifamily and industrial properties could exceed $100 billion in 2010. That would more than double the $45 billion projected for all of 2009, according to Real Capital Analytics.

"We have hit bottom and are starting the new decade on the upswing," the New York research firm said.

The projected increase would be the first year-over-year gain in investment-sales volume since 2007 when it rose 32% to $439 billion. In 2008, volumes had plunged to $133 billion.

Real Capital noted that credit markets have shown signs of thawing, which could help facilitate sales in 2010. It added that capital raising by investors has been strong this year, led by REITs, which raised $28.3 billion this year, including $17.2 billion of equity from 59 stock offerings.

While REITs have used much of the money raised to pay off maturing debt, Real Capital said they still figure to "dominate in acquisitions in 2010." Some REITs have already accumulated substantial war chests and are deploying them.

For instance, Simon Property Group this month agreed to buy the Prime Outlets affiliate of Lightstone Group in a deal that values the company at $2.33 billion.

In addition to REITs, a number of investment managers have raised capital to take advantage of potential opportunities. And much of that has yet to be deployed.

Exactly when the sales rebound begins is tough to predict. Property owners are not yet pressured to sell. And, by most accounts, the gaps between what they are asking and what investors are offering remain wide.

"For now, it's still a dilemma with buyers saying they don't want to go first," for fear they might overpay in what is a falling market, said David J. Lynn, head of U.S. research and strategy for investment manager ING Clarion Partners. "And before they go first they're saying they want an optimal payout."

Ross Moore, executive vice president and director of market and economic research for Colliers International, said, "It's more a matter of buyers still waiting for sellers to capitulate" and drop their asking prices.

Property values as of the third quarter were down 42.9% from their peaks in October 2007, according to the Moody's/Real Commercial Property Price Indices, and Moody's Investors Service warned they could fall up to a total of 65% from their peaks before bottoming.

Despite predicting a sales increase, Real Capital Analytics has also reported that there have been "very few" closed sales of distressed assets, which include properties whose loans are in default or are being foreclosed on. It also warned that distressed assets are unlikely to be offered at the deeply discounted prices that opportunistic investors may be expecting. So far, that has been the case, as growing volumes of maturity defaults are extended and other distressed loans are restructured, keeping those assets out of the market.

Nonetheless, assets that can be classified as distressed are expected to account for the lion's share of sales activity in the years ahead. For example, the FDIC had taken over 148 banks with $515.6 billion of assets from late 2008 through mid-November, and about $65 billion of CMBS loans were in special servicing as of early December, according to Realpoint.

Overseas investors are shaping up as a force that could drive up pricing, according to Janice Stanton, senior managing director of Cushman & Wakefield's capital markets group.

She said that German investment funds in particular are focused on buying in the United States after some had waited too long to buy in the United Kingdom before commercial property pricing there rebounded. She estimated that capitalization rates in the U.K. have dropped 50 to 100 basis points since topping at averages of about 6% in the middle of the year.

Because the U.K. market timing was miscalculated, Stanton said European investors will be willing to bid aggressively to avoid repeating that mistake in the United States. "U.S. investors are pricing differently," she added. "They are saying fundamentals will continue to deteriorate."

Examples of Europeans buying here include the German investment fund manager, Deka Immobilien GmbH, which in September bought 1999 K St. NW in Washington, D.C., for $207.8 million. The price reflected a 6.3% first-year capitalization rate versus the 7% rate that U.S. investors are said to have bid for the office property.

Victor Calanog, research director for Reis Inc, seconded the sense that foreign entities could stir the investment pot here. "The story for the past few months has been about a widening of the bid/ask spread, with both parties not willing to concede. If economic conditions appear to have stabilized, and foreign competitors are sneaking into the mix, perhaps the twain may yet meet and transactions begin to move," he said.

The sense that debt financing will become more available is based on three single-borrower CMBS deals that allowed.

Developers Diversified Realty Corp., Inland Western Retail Real Estate Trust Inc. and Flagler Development Group were able to raise capital at relatively attractive coupons. In addition, a number of conduit lenders are said to be priming their lending operations, with Bridger Commercial Funding saying it was re-starting its lending operation and would bring up to $200 million of loans to market through a CMBS deal by the middle of next year.

Investment Sales Volume Seen More Than Doubling to $100B in 2010

CRE News
Sales of office, retail, multifamily and industrial properties could exceed $100 billion in 2010. That would more than double the $45 billion projected for all of 2009, according to Real Capital Analytics.

"We have hit bottom and are starting the new decade on the upswing," the New York research firm said.

The projected increase would be the first year-over-year gain in investment-sales volume since 2007 when it rose 32% to $439 billion. In 2008, volumes had plunged to $133 billion.

Real Capital noted that credit markets have shown signs of thawing, which could help facilitate sales in 2010. It added that capital raising by investors has been strong this year, led by REITs, which raised $28.3 billion this year, including $17.2 billion of equity from 59 stock offerings.

While REITs have used much of the money raised to pay off maturing debt, Real Capital said they still figure to "dominate in acquisitions in 2010." Some REITs have already accumulated substantial war chests and are deploying them.

For instance, Simon Property Group this month agreed to buy the Prime Outlets affiliate of Lightstone Group in a deal that values the company at $2.33 billion.

In addition to REITs, a number of investment managers have raised capital to take advantage of potential opportunities. And much of that has yet to be deployed.

Exactly when the sales rebound begins is tough to predict. Property owners are not yet pressured to sell. And, by most accounts, the gaps between what they are asking and what investors are offering remain wide.

"For now, it's still a dilemma with buyers saying they don't want to go first," for fear they might overpay in what is a falling market, said David J. Lynn, head of U.S. research and strategy for investment manager ING Clarion Partners. "And before they go first they're saying they want an optimal payout."

Ross Moore, executive vice president and director of market and economic research for Colliers International, said, "It's more a matter of buyers still waiting for sellers to capitulate" and drop their asking prices.

Property values as of the third quarter were down 42.9% from their peaks in October 2007, according to the Moody's/Real Commercial Property Price Indices, and Moody's Investors Service warned they could fall up to a total of 65% from their peaks before bottoming.

Despite predicting a sales increase, Real Capital Analytics has also reported that there have been "very few" closed sales of distressed assets, which include properties whose loans are in default or are being foreclosed on. It also warned that distressed assets are unlikely to be offered at the deeply discounted prices that opportunistic investors may be expecting. So far, that has been the case, as growing volumes of maturity defaults are extended and other distressed loans are restructured, keeping those assets out of the market.

Nonetheless, assets that can be classified as distressed are expected to account for the lion's share of sales activity in the years ahead. For example, the FDIC had taken over 148 banks with $515.6 billion of assets from late 2008 through mid-November, and about $65 billion of CMBS loans were in special servicing as of early December, according to Realpoint.

Overseas investors are shaping up as a force that could drive up pricing, according to Janice Stanton, senior managing director of Cushman & Wakefield's capital markets group.

She said that German investment funds in particular are focused on buying in the United States after some had waited too long to buy in the United Kingdom before commercial property pricing there rebounded. She estimated that capitalization rates in the U.K. have dropped 50 to 100 basis points since topping at averages of about 6% in the middle of the year.

Because the U.K. market timing was miscalculated, Stanton said European investors will be willing to bid aggressively to avoid repeating that mistake in the United States. "U.S. investors are pricing differently," she added. "They are saying fundamentals will continue to deteriorate."

Examples of Europeans buying here include the German investment fund manager, Deka Immobilien GmbH, which in September bought 1999 K St. NW in Washington, D.C., for $207.8 million. The price reflected a 6.3% first-year capitalization rate versus the 7% rate that U.S. investors are said to have bid for the office property.

Victor Calanog, research director for Reis Inc, seconded the sense that foreign entities could stir the investment pot here. "The story for the past few months has been about a widening of the bid/ask spread, with both parties not willing to concede. If economic conditions appear to have stabilized, and foreign competitors are sneaking into the mix, perhaps the twain may yet meet and transactions begin to move," he said.

The sense that debt financing will become more available is based on three single-borrower CMBS deals that allowed.

Developers Diversified Realty Corp., Inland Western Retail Real Estate Trust Inc. and Flagler Development Group were able to raise capital at relatively attractive coupons. In addition, a number of conduit lenders are said to be priming their lending operations, with Bridger Commercial Funding saying it was re-starting its lending operation and would bring up to $200 million of loans to market through a CMBS deal by the middle of next year.

Big landlords hope? O.C. recovery in 2013

February 7th, 2010, 2:49 pm · 16 Comments · posted by Jon Lansner

The latest Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey of big landlords ad property owners shows a burgeoning optimism that a revival is somewhat near for much of Southern California. Well, the caveat being — eh, Orange County. Jerry Nickelsburg, UCLA senior economist, says of the region in a press release: “As the recovery from this deep recession takes hold, investors in commercial real estate are increasingly of the view that 2012 is going to represent an improvement over today.”
Yet the report says of Orange County:
“For some time we have been saying that the Orange County office market is a 2013 or 2014 recovery. The loss of finance and real estate jobs created a huge hole in demand which is not easily filled. Our panel is also more optimistic about Orange County than they were six months ago, but the optimism seems to be based more on the transfer of buildings to new owners at lower capital costs and on the decline of rents to levels which are sustainable in today’s market. In other words, the panel expects markets to equilibrate and market conditions to improve, but not to the extent of Los Angeles or San Diego. So, opportunities are going to exist in this very tough market, but not in the creation of new floor space for lease.”

Hope seen for commercial real estate Survey: Small rebound is projected for 2012

BY MIKE FREEMAN, UNION-TRIBUNE STAFF WRITER
FRIDAY, FEBRUARY 5, 2010 AT 12:04 A.M.

It’s no secret that office landlords in San Diego and across the country are hurting as vacancies rise and lease rates plummet. But a survey released yesterday of commercial real estate builders and investors sees light at the end of the tunnel.

It won’t occur until 2012, according to the Allen Matkins/UCLA Anderson School Forecast survey. And it likely won’t be that strong in San Diego, as thousands of square feet of new offices built in the past two years may well stall a rapid recovery.

But it has been several months since the Allen Matkins/UCLA survey found anything optimistic in its forecast. So that alone is a change. Developers and investors often make decisions about projects two years or more ahead of when they actually complete them.

“They’re starting to look out and say there may be some favorable opportunities, when in June, the last time we took the survey, (the results) were pessimistic,” said Jerry Nickelsburg, senior economist with the UCLA Anderson School. “Now this survey indicates that at least people are out sniffing.”

The survey, which includes all of Southern California, predicts Los Angeles will recover first, in part because it didn’t have as much new construction added to the market as San Diego or Orange County, and in part because it didn’t see as many buildings empty from defunct finance companies.

For San Diego, the survey predicts an improvement in vacancy rates by 2012 as job growth in business and professional services, health care and education rebound. But lease rates aren’t expected to improve until later.

Mark Read, senior managing director of CB Richard Ellis, said his company’s research predicts lease rates will fall further this year, eventually dipping about 20 percent from their peak in mid-2008.

But CB Richard Ellis expects better vacancy and net absorption — a real estate term that calculates the amount of space leased versus the amount vacated — in 2011.

“It all depends on job growth,” Read said. “We just haven’t seen that yet.”

A California RE Downturn Won't Crash the Markets

Might banks’ growing problems with their commercial real estate loans spark a rerun of the subprime mortgage debacle? A lot of pessimists seem to think so, but I doubt it.
Yes, banks are running into severe credit problems with their CRE portfolios, and, yes, those problems are costing shareholders plenty. But there’s a difference between a normal, cyclical credit downcycle and Armageddon II. As it is, banks are enduring a lot of CRE pain, and will keep on enduring pain for several more quarters. That does not mean the whole financial system is at risk.
To begin with, the term “commercial real estate lending” covers all kinds of different kinds of activities, from financing the development of strip malls to so-called “owner occupied” loans to small businesses. Some of those categories will have issues—but by no means all. So generalizations about CRE lending should be viewed with suspicion. On one end of the credit spectrum, yes, financing strip malls can be a risky proposition. But at the other, owner-occupied credits tend to be among the most solid in the lending industry. A bank’s mix of CRE exposure is often as important as its absolute level of exposure.
In the near-term, the biggest CRE problems at many banks so far have to do with souring loans to homebuilders, many of whom have run into problems as a result of the housing bust. Those credit issues have more to do with the mortgage mess, and aren’t necessarily an omen of new problems in other parts of CRE lending. At many banks, homebuilder-related credit problems appear to be peaking, or will shortly. The problems at homebuilders will not likely start a domino effect of problems at other types of CRE lending, however.
In any event, here are six reasons to believe that the CRE downturn, while painful, doesn’t figure to turn into a system-threatening calamity:

1. Underwriting has been much better this cycle than it was in past cycles—and certainly better than the excesses that occurred during the subprime mortgage riot. There simply is no CRE equivalent of a ninja loan, or an option ARM, or a two-year teaser. (Nor, for that matter, is there any federal policy in place to promote subprime CRE ownership.)
Rather, lenders, urged on by regulators, have been careful this cycle to lend on cash flow, not asset values (as many mortgage lenders did, whether they knew it or not). LTVs tend to be lower than they are in residential lending. (At Zions Bancorp., to pick a fairly typical CRE-oriented lender, fully 55% of the bank’s portfolio has a loan-to-value of 70% or less.) So even if property prices drop by a lot (and in many markets, they have), loss severity will likely be relatively mild.

2. The bears are likely overstating the size of the potential problem. There’s just $3.5 trillion in CRE debt outstanding, against something like $10.5 trillion of residential mortgage debt. So any problems with CRE figure to be smaller than residential, from the get-go. And while critics imply that all $3.5 trillion in CRE debt is at risk to some degree, that’s not right. Remember, commercial real estate loans represent all sorts of different categories of lending, of varying inherent credit quality. The MBA reports, for instance, that among the top ten commercial real estate bank lenders, 48% of their aggregate balance of commercial (nonmultifamily) real estate loans were related to owner-occupied properties. The vast majority of those loans will stay current.

3. The commercial real estate market isn’t overbuilt to anywhere near the extent residential real estate was at the top of the housing bubble. In fact, certain segments aren’t overbuilt at all. Take a look at the chart below. It shows annual completions of office space, as a portion of existing stock, going back to 1956. Compare that to the residential building boom that went on in places like Las Vegas, Southern California, and South Florida as the housing bubble inflated in the 2000s. Once the bubble burst, the overhang of redundant supply has helped keep prices down. There simply isn’t a similarly sized overhang in CRE now. In most major markets, vacancy rates are still relatively low, and are nowhere near their 20-year highs.

4. Lenders have a lot more options in mitigating CRE losses than they do residential mortgage losses. Here’s an important difference between residential and commercial real estate lending: mortgaged commercial properties usually throw off cash flow; mortgaged residential properties don’t. That can make a big difference to lenders when the commercial mortgage goes delinquent. The commercial lender can temporarily rework the loan to accommodate the property’s reduced cash flows. Recent accounting and regulatory changes even encourage this. The residential lender, by contrast, has few alternatives to foreclosure. Skeptics dismiss CRE workouts as “extend and pretend,” but in fact workouts tend to be a low-cost alternative to foreclosure. They happen in every CRE downcycle.

5. Interest rates are low. That makes it easier for squeezed borrowers to hang on for longer than they could during the last CRE blowup in the early 1990s. Then once the recovery gathers steam, demand for space will increase and rents will rise, and much of the CRE problem will solve itself.

6. In many markets, property prices have fallen below replacement cost. In midtown Manhattan, for example, prices are off by 42% from their peak, and are now just half of replacement cost. In Dallas, prices have fallen by 29%, and are 33% below replacement cost. And in Los Angeles, prices 19% below their peak, and 20% below replacement cost. Given where prices are now, and how far they’ve fallen, further material declines in property prices seem unlikely.

Put all this together, and it’s hard to see how CRE loans are shaping up to be a rerun of the subprime mortgage disaster. Is the sector in for a further rocky period? Of course. We don’t expect to see any real signs of recovery until later this year. Meanwhile, the indications we’re seeing so far in banks’ fourth-quarter earnings reports is that lenders seem to have their arms around the problem.

That’s encouraging. As the market realizes that banks’ CRE problems are merely cyclical, and not the sign of another financial meltdown—regardless of what the doomsters have to say.

Bottom is near for building owners; recovery is another matter - latimes.com

Bottom is near for building owners; recovery is another matter - latimes.com

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Commercial real estate is a hot market, for court-appointed caretakers - latimes.com

Commercial real estate is a hot market, for court-appointed caretakers - latimes.com

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Office buildings with the highest vacancy rates - latimes.com

Office buildings with the highest vacancy rates - latimes.com

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Fed report: Economy improves, but hiring outlook in Western states is grim

Fed report: Economy improves, but hiring outlook in Western states is grim

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How To Figure Out The Foreclosure Market

A Swift Turn-Around in 2010

With plummeting rents and market values the lasting impression of 2009, many industry analysts welcome this news with a much-needed sigh of relief. Nearly every commercial real estate market across the country, including the So. C al commercial real estate market, has seen commercial real estate values take a tumble and commercial real estate sales fall flat.

Forecasters expect a turn-around once the market bottoms out, as many cash-rich investors seem to be waiting along the sidelines for the last of the foreclosures, loan workouts and defaults to hit the market by then. In other words, there are some investors with very fat wallets just waiting to jump in on one-in-a-lifetime opportunities when it comes to commercial real estate.

In addition to the purchase of Los Angeles commercial real estate, leasing activity is expected to increase, as well, thanks to dropping lease prices.

Some of the industry groups that show this rebound in 2010 include: the Real Estate Roundtable, the MIT Center for Real Estate, the National Multi-Housing Council, Pricewaterhouse Coppers and the Urban Land Institute.

The bottom line is that, amidst all of the doom and gloom of 2009, 2010 is expected to bring some great opportunities.

Economy will continue to weigh down the commercial real estate sector this year | Real Estate | PE.com | Southern California News | News for Inland So

Wednesday, January 6, 2010

By JACK KATZANEK

The Press-Enterprise

The economy will continue to weigh down the commercial real estate sector this year, but a company with a heavy presence in Inland Southern California believes the free-fall is probably over.

Grubb & Ellis Co., which offers leasing and investment services for commercial tenants and builders in Riverside and San Bernardino counties, is predicting demand for commercial space will be flat in 2010. The company's 2010 forecast suggests more declines this year, but also that a bottom is in sight.

The Inland economy did show some signs of stabilizing in November and December, but few are bullish about employers in the region adding significant numbers of new jobs in 2010. That means it is unlikely they will need additional office or warehouse space.

Job growth forecasts for the area vary, but the consensus suggests there will be little growth. Unemployment did decline in the two-county area in November, the most recent month for which there is data, and the region had some job growth in October and November.

That was among several indicators that signaled the recession ended in the second half of 2009. Grubb & Ellis' forecasters say that this means some fresh investment could enter the game in the form of bargain-hunters.

"Buyers with cash are well-positioned to acquire properties at a discounted rate," Mano Leventakis, managing director of the company's Inland Empire operation, said in a statement.

There are worries that a wave of foreclosures is coming in this sector in 2010, but Grubb & Ellis predicts this concern is probably "an exaggeration." The dollar value of outstanding commercial mortgages adds up just a fraction of the residential mortgages that led to the subprime meltdown.

Leventakis said that the gap in what investors are willing to pay for distressed properties and what the lenders holding the mortgages will sell for will narrow in the second half of the year. This will stave off many potential foreclosures.

Mary Sullivan, the former research director in Grubb & Ellis' Inland office and now a consultant, said there won't be a quick bounce for commercial real estate in the first half of this year.

"I don't think things will be substantially better by mid-year," Sullivan said. "But by the end of the year and into 2011 it will level out a little more."

Sullivan agrees that, nationally, the fears of a wave of foreclosures could be overstated, but it's a bigger concern for the Inland area because many tenants are not as well established as they are elsewhere. That could worry investors.

Another issue is the willingness of banks to back future investment.

"I think the financing issue is still going to be a major unknown for 2010," Sullivan said. "It affects the business side, but it also affects a tenant's ability to expand."