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.
Saturday, July 17, 2010
Monday, June 14, 2010
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."
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.
Get a daily snapshot of business, financial and technology news delivered to your inbox with our Business Daily newsletter. Sign up »
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."
Monday, May 17, 2010
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.
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.
Monday, May 10, 2010
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.
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.
Wednesday, April 21, 2010
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.
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.
Friday, April 9, 2010
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.
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.
Monday, April 5, 2010
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.
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.
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