Global Aging and the Crisis of the 2020s

January 31, 2011

I recently read a posting from John Mauldin on his newsletter on entitled Global Aging and Crisis of the 2020s.  In his newsletter, Mauldin often shares the insights of other authors on subjects that may affect his reader’s investing decisions.

The article in Mauldin’s newsletter was co-authored by Neil Howe and Richard Jackson from their work with the Center for Strategic and International Studies on the Global Aging Initiative. Howe and Jackson are also the authors of “The Graying of the Great Powers” and other commentary on the impact that demographics will have on our future. You can see that paper HERE.

The article by Howe and Jackson describe how demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. They note another startling trend that will surface in the 2020s as global aging begins to have a profound effect on economic growth, living standards, and the shape of the world order.

The following are some of the important concepts taken from the full article:

  • The developed world has been aging for decades, due to falling birthrates and rising life expectancy and the 2020s, this aging will get an extra kick as large postwar baby boom generations move fully into retirement.
  • According to the United Nations Population, the median ages of Western Europe and Japan, which were 34 and 33 respectively as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility.
  • In Italy, Spain, and Japan, more than half of all adults will be older than the official retirement age—and there will be more people in their 70s than in their 20s.
  • By 2030, working-age population will be stagnant or contracting in nearly all developed countries, the only major exception being the United States.
  • In a growing number of nations, total population will begin a gathering decline as well. Unless immigration or birthrates surge, Japan and some European nations are on track to lose nearly one-half of their total current populations by the end of the century.
  • Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline.
  • China will face a massive age wave that could slow economic growth and precipitate political crisis. Russia will be in the midst of the steepest and most protracted population implosion of any major power since the plague-ridden Middle Ages.
  • Many other developing countries, especially in the Muslim world, will experience a sudden new resurgence of youth whose aspirations they are unlikely to be able to meet.
  • The developed world is destined to see its geopolitical stature diminish with one important exception to the trend … the United States.
  • Simple arithmetic. By the 2020s and 2030s, the working-age population of Japan and many European countries will be contracting by between 0.5 and 1.5 percent per year. Even at full employment, growth in real GDP could stagnate or decline, since the number of workers may be falling faster than productivity is rising.
  • A graying workforce means less entrepreneurialism since new business start-ups in high-income countries are heavily tilted toward the young. Of all “new entrepreneurs” 40 percent are under age 35 and 69 percent under age 45. Only 9 percent were 55 or older.
  • Savings rates in the developed world will decline as a larger share of the population moves into the retirement years. As a result, either businesses will starve for investment funds or the developed economies’ dependence on capital from higher-saving emerging markets will grow. The penalty will be lower output or higher debt service costs and the loss of political leverage, which history teaches is always ceded to creditor nations.
  • The developed countries will have to transfer a rising share of society’s economic resources from working-age adults to nonworking elders. Graying means paying—more for pensions, more for health care, more for nursing homes for the frail elderly.
  • By the 2020s, political conflict over deep benefit cuts is unavoidable. On one side will be young adults who face stagnant or declining after-tax earnings. On the other side will be retirees, who are often wholly dependent on pay-as-you-go public plans.
  • With the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anticompetitive changes in the economy. Governments we impose cartels (tariff barriers and other anticompetitive policies) to protect market share that tend to shut the door on free trade and free markets.
  • Psychologically, older societies are likely to become more conservative in outlook and possibly more risk-averse in electoral and leadership behavior. Elder-dominated electorates may tend to lock in current public spending commitments at the expense of new priorities and shun decisive confrontations in favor of ad hoc settlements. Smaller families may be less willing to risk scarce youth in war.
  • The rapid growth in ethnic and religious minority populations, due to ongoing immigration and higher-than-average minority fertility, could strain civic cohesion. With the demand for low-wage labor rising, immigration (at its current rate) is on track by 2030 to double the percentage of Muslims in France and triple it in Germany. Some large European cities, including Amsterdam, Marseille, Birmingham, and Cologne, may be majority Muslim.
  • Over the next few decades, the outlook in the United States will increasingly diverge from that in the rest of the developed world. Aside from Israel and Iceland, the United States is the only developed nation where fertility is at or above the replacement rate of 2.1 average lifetime births per woman. By 2030, its median age, now 37, will rise to only 39. Its working-age population, according to both US Census Bureau and UN projections, will also continue to grow through the 2020s and beyond, both because of its higher fertility rate and because of substantial net immigration, which America assimilates better than most other developed countries.
  • Most of the developing world is also progressing through the so-called demographic transition—the shift from high mortality and high fertility to low mortality and low fertility that inevitably accompanies development and modernization. Since 1975, the average fertility rate in the developing world has dropped from 5.1 to 2.7 children per woman, the rate of population growth has decelerated from 2.2 to 1.3 percent per year, and the median age has risen from 21 to 28.
  • In many of the poorest and least stable countries (especially in sub-Saharan Africa), the demographic transition has failed to gain traction, leaving countries burdened with large youth bulges. By contrast, in many of the most rapidly modernizing countries (especially in East Asia), the population shift from young and growing to old and stagnant or declining is occurring at a breathtaking pace—far more rapidly than it did in any of today’s developed countries.
  • The demographic transition can trigger a rise in extremism. Religious and cultural revitalization movements may seek to reaffirm traditional identities that are threatened by modernization and try to fill the void left when development uproots communities and fragments extended families.
  • International terrorism, among the developing countries, is positively correlated with income, education, and urbanization. States that sponsor terrorism are rarely among the youngest and poorest countries; nor do the terrorists themselves usually originate in the youngest and poorest countries. Indeed, they are often disaffected members of the middle class in middle-income countries that are midway through the demographic transition.
  • China may be the first country to grow old before it grows rich. For the past quarter-century, China has been peacefully rising, due in part to a one-child-per-couple policy that has lowered dependency burdens and allowed both parents to work and contribute to China’s boom. By the 2020s, however, the huge Red Guard generation, which was born before the country’s fertility decline, will move into retirement, heavily taxing the resources of their children and the state.
  • By 2030 China will be an older country than the United States which may weaken the two pillars of the current regime’s legitimacy: rapidly rising GDP and social stability. China could careen toward social collapse—or, in reaction, toward an authoritarian clampdown.
  • By the 2020s, Russia, along with the rest of Eastern Europe, will be in the midst of an extended population decline as steep as or steeper than any in the developed world. The Russian fertility rate has plunged far beneath the replacement level even as life expectancy has collapsed amid a widening health crisis. Russian men today can expect to live to 60—16 years less than American men and marginally less than their Red Army grandfathers at the end of World War II. By 2050, Russia is due to fall to 16th place in world population rankings, down from 4th place in 1950 (or third place, if we include all the territories of the former Soviet Union).
  • Sub-Saharan Africa, which is burdened by the world’s highest fertility rates and is also ravaged by AIDS, will still be racked by large youth bulges as will certain Muslim-majority countries, including Afghanistan, the Palestinian territories, Somalia, Sudan, and Yemen.
  • These echo booms will be especially large in Pakistan and Iran. In Pakistan, the decade-over-decade percentage growth in the number of people in the volatile 15- to 24-year-old age bracket is projected to drop from 32 percent in the 2000s to just 10 percent in the 2010s, but then leap upward again to 19 percent in the 2020s.
  • In Iran, the swing in the size of the youth bulge population is projected to be even larger: minus 33 percent in the 2010s and plus 23 percent in the 2020s. These echo booms will be occurring in countries whose social fabric is already strained by rapid development.
  • During the era of the Industrial Revolution, the population in the developed world grew faster than the rest of the world’s population, peaking at 25 percent of the world total in 1930. Since then, its share has declined. By 2010, it stood at just 13 percent, and it is projected to decline still further, to 10 percent by 2050.
  • The collective GDP of the developed countries will also decline as a share of the world total. The Group of 7 industrialized nations’ share of the Group of 20 leading economies’ total GDP will fall from 72 percent in 2009 to 40 percent in 2050.
  • The United States is only one large country in the developed world that does not face a future of stunning relative demographic and economic decline. Due to its relatively high fertility rate and substantial net immigration, the U.S. current global population share will remain virtually unchanged in the coming decades. The US share of total G-20 GDP will drop significantly, from 34 percent in 2009 to 24 percent in 2050. The combined share of Canada, France, Germany, Italy, Japan, and the United Kingdom, however, will plunge from 38 percent to 16 percent.
  • According to information published by the United Nations, in 1950, six of the top twelve populations were developed countries. In 2000, only three were. By 2050, only one developed country will remain—the United States, still in third place.
  • The conclusion of the authors; “… population trends point inexorably toward a more dominant US role in a world that will need America more, not less.”

Full Article

Posted by Scott R. Lodde

Headlines – Week of January 23, 2011

January 31, 2011

 U.S. has best employment outlook in 12 years

According to recent survey from the National Association for Business Economics (NABE),  economists are more hopeful about overall economic growth, the job market and demand for companies’ products and services by many measures than they have been since the start of the Great Recession.

The survey found that business decisions are now being driven by the fundamentals of an improving economy.

The quarterly survey includes the views of 84 economists for private companies and trade groups who are NABE members. The data are reported by broad industry groups. Many results are expressed as Net Rising Index, or NRI – the percentage of panelists reporting better outlooks minus the percentage whose outlook is bleaker.

The number of economists who saw hiring by their firms increasing over the next six months was 42 percent, compared with 7 percent who expected to lay off workers. The NRI of 35 was the highest in the 12 years that the question has been asked.

The survey predicted more layoffs were expected in the transportation, utility, information and communications sectors.

All major industry groups saw more demand for their products and services, the sixth straight quarter of positive results. Demand grew by slightly less than in the previous quarter, but has held relatively steady since last spring, the NABE said.

Eighty-two percent of the economists expected the nation’s economy to grow by two to four percent in 2011, up from 54 percent in October. The latest government data had the economy growing at a 2.6-percent annual rate in the July-September quarter.

Florida Economist Fishkind: ‘We’re in recovery’

Economist Hank Fishkind of Fishkind & Associates recently spoke at the 2011 Economic Forecast Breakfast sponsored by Whitney Bank in partnership with the Economic Development Council, Manatee Chamber of Commerce.  At the event Fishkind told the group  that Florida’s recovery is in its early stages even if it doesn’t seem like it to some people.

Calling it the “worst recession, probably, since the Great Depression, and at least the worst since 1975,” Fishkind said, “This is the recovery – right now,” Fishkind said. “The momentum is growing.”

As evidence of the ongoing recovery, Fishkind pointed to recent improvements, including:

  • Job growth in the tourism and convention industries
  • Job growth in education
  • Strong retails sales at the close of 2010
  • Consumer belief that it’s safe to spend money
  • $500 billion boost from a 2 percent cut in payroll taxes

Fishkind also expects retirees to return to Florida’s warm shores, but “there is a discernible lag between recovery and population growth,” Fishkind said. “It takes time for people to realize there is a recovery.”

For a true turnaround, however – the kind that everyone sees and appreciates – Fishkind says the state must wait until 2012.


Record Foreclosures in 2010

RealtyTrac reported that more than 3.82 million foreclosure filings—default notices, scheduled auctions and bank repossessions—were reported on 2.87 million U.S. residential properties in 2010, an increase of nearly 2 percent from 2009 and an increase of 23 percent from 2008. Some 2.23 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 2.21 percent in 2009; 1.84 percent in 2008; 1.03 percent in 2007; and 0.58 percent in 2006.

Nevada retained the distinction of having the most foreclosed properties in the nation. More than 9 percent of Nevada housing units (one in 11) received at least one foreclosure filing in 2010, giving it the highest state foreclosure rate for the fourth consecutive year despite a 5 percent decrease in foreclosure activity from 2009. Arizona came in second for the second year in a row, with 5.73 percent of its housing units (one in 17) receiving at least one foreclosure filing in 2010, and Florida was next, with 5.51 percent of its housing units (one in 18) receiving at least one foreclosure filing during the year.

RealtyTrac reported that total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity, triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings (Robo signing)

Full Press Release

Posted by Scott R. Lodde

Headlines – Week of January 16, 2011

January 27, 2011

Cities where it’s cheaper to buy than rent

According to an article in the InmanNews, it is cheaper to buy a home rather than rent one in 72 percent of the 50 largest U.S. cities.  The article used an index released by real estate search and marketing site Trulia, which compares the total cost of homeownership to the cost of renting.

The index compares the median sales price of homes with the median rent on two bedroom apartments, condos, and townhomes that were listed on Trulia as of Jan. 10, 2011.

Here are the top 10 cities where it’s best to buy than rent, according to the index:

1. Miami
2. Las Vegas
3. Arlington, Texas
4. Mesa, Ariz.
5. Phoenix, Ariz.
6. Jacksonville, Fla.
7. Sacramento, Calif.
8. San Antonio, Texas
9. Fresno, Calif.
10. El Paso, Texas

Full Article

Home prices fall in major U.S. cities

According to an article in The Associated Press, home prices are falling across most of America’s largest cities, and average prices in eight major markets have hit their lowest point since the housing bust.

Some analysts are calling for a “second wave of the housing bust” or a “double-dip” in home prices.

The article uses data from the Standard & Poor’s/Case-Shiller 20-city home price index which fell 1 percent in November from October. All but one city, San Diego, recorded monthly price declines.

Eight others sank to their lowest levels since prices peaked in 2006 and 2007, the lowest point since the housing bubble bust.  The eight cities include Atlanta, Charlotte (North Carolina), Las Vegas, Miami, Portland (Oregon), Seattle, Tampa (Florida), and Detroit, which saw the largest drop at 2.7 percent from the previous month. 

Millions of foreclosures are forcing prices down, and many people are holding off making purchases because they fear the market hasn’t hit bottom yet. Many analysts expect home prices to keep falling through the first six months of this year.

Over the past year, prices have risen in four major metro areas. Prices rose 3.5 percent in Washington, the largest gain. Los Angeles, San Diego and San Francisco also posted gains.

Some of the worst declines have come in cities hard hit by foreclosures.

As of November, average home prices in Las Vegas have fallen 57.2 percent from their peak in August 2006 and are back to where they were in late 1999. Another foreclosure hotbed, Phoenix, is down 53.9 percent from its June 2006 peak. Average home prices there are back to where they were in 2000.

Miami has fallen 48.8 percent from its peak in December 2006, and is selling at late 2002 levels.

The 20-city index has risen 3.3 percent from its April 2009 bottom. But it remains well below its July 2006 peak.

Full Article

Five Florida Cities Are Tops For Doing Business

According to an article in The Orlando Sentinel, Orlando is cheapest place to open business.  The article quotes information provided byBizCosts which compared the annual costs of operating a typical corporate headquarters in 55 cities across the U.S., weighing factors such as labor costs, tax burden, utility costs and travel costs. For its model, it calculated those expenses for a 75,000-square-foot facility employing 300 people.

Based on that model company, BizCosts found that the yearly cost in Orlando is about $19.9 million per year; Jacksonville is about $20.1 million; and Broward County is about $21.6 million. New York City had the highest cost, at $28.5 million a year.

Florida cities benefited from relatively low labor costs, tax burden, land and construction costs.

The report comes a month after the Small Business & Entrepreneurship Council placed Florida sixth overall — and second among big states — in a ranking of the best places to run a small company.  

In total, five Florida city areas made the list. No other state had more than one area in the top 20.

Florida city areas by rank and yearly cost to operate:
1.   Orlando
3.   Jacksonville
7.   Tampa Bay
16. Palm Beach County
20. Broward County

Full Article

Posted by Scott R. Lodde

The State of the State of the CRE Industry – January 4th, 2011

January 18, 2011

On January 4th, I participated, along with five other panelists in a discussion regarding the state of the commercial real estate industry.

The event was sponsored by the Commercial Real Estate Professionals & Investors Group (CREPIG)

CREPIG was originally started on LinkedIn in 2007.  The group functions of LinkedIn are considered minimal and so a portion of the group was moved to this site which is built on a Ning platform.   Membership hit over 1,000 on March 1st of 2009.

CREPIG’s mission is to serve the investment community and the personal investor to find the funding, resources and projects needed to succeed or complete their current or long term goals. To help, teach and mentor the next generation of CRE professionals and be an overall place of connection and learning.

The discussion was hosted by Bob Schecter and JW Najarian, co-founding members of CREPIG.  The introduction to the presentation was described as: Terrible, dreadful, awful, frightful, gruesome, ghastly, horrid, hideous, grisly, horrific, fearful, appalling, shocking, and abysmal, are a few of the adjectives that I’ve seen used of late, to describe the current state of the CRE industry. As undeniable, inescapable and dire as the situation may have become, dwelling on it won’t make it any better.  So what’s happening in the industry?  Our panelists give us their thoughts.”

Members of the panel included:

  • Alan D. Pollack, President

                Delta Investment Group

  • Eric Salveson, Senior Vice President

              Johnson Capital 

  • Jeff Vinzani, Attorney at Law

              Nexsen Pruet

  • Jim Krieger

             Abide Corp Mortgages Services

  • Leonard M. Manriquez, President & Chief Executive Officer

              Commercial Asset Management

  • Scott R. Lodde, Principal

             Alliance Real Estate Asset Management Group, LLC

The following is a brief summary of the ideas and experiences of the panelists and where they believe the commercial real estate industry is headed in 2011.

Click HERE for a link to the Audio-cast where is can be heard or downloaded.

Alan D. Pollack

Brokers specializing in distressed commercial notes and REO (California, Texas, and Florida).  Local and community banks.

Seeing high activity level. Written more offers in 4th quarter of 2010.  Banks are challenged balancing reserves and trying to keep doors open while their assets are diminishing.  Targeting $5 – $20 m single asset properties including REO, fractured developments, incomplete construction, and empty retail across the commercial sector.

Some of the stronger banks are holding on for a higher price point; however, smaller community banks are actually moving some of their assets.  As they move assets off their balance sheet the banks are attempting to raise more equity to shore up their reserves.

Eric Salveson

Working at Johnson Capital and in the business since 1970.  Did $800 million in transactions in 2009.  $1 billion in 2010 and on-line to do more in 2011.

Finding that there is a division in the marketplace as far as quality goes. High quality assets (AAA rated) whether office, apartments or industrial are being traded at incredible cap rates. Apartments in sub 5% range. Office building in good areas (e.g. downtown LA, Chicago) in sub 6.5% range.

All other properties (lower asset quality) are being sold by banks that do not believe in “extend and pretend”.  Plenty of bridge and mezzanine financing available for these assets at higher rates.

Much more active market than in the first half of 2010, 2009 and the end of 2008. 

On lower quality assets it is interesting on how values are being calculated.   Plenty of capital in the market.

Jeffrey Vinzani

Attorney with the law firm Nexsen Pruet in Charleston, NC.  185 – 200 lawyers.

Being in the South, seeing a positive picture. Immigration patterns indicate people still moving to the South and coastal regions.  Charleston has a triple effect going on with Boeing who is building a manufacturing plant with about 10,000 jobs. Clemson University secured a $100 m grant to build a wind turbine testing facility.  Sheep Island area building huge distribution facilities off interstate.

View nationally.  Positive about new tax extension in place. Should help small businesses make investment decisions and hire more workers.

Key is growth in employment and small and large business investing their capital.

Banks are eager to lend but under watchful eye of the regulators.

Jim Krieger

President of Abide Corp, a small boutique commercial mortgage broker in Seattle, WA.

Majority of clients in Pacific Northwest.

Pockets of areas around the country that have the potential for strong performance.  Seattle in a bubble.  Don’t have extreme lows or extreme highs when it comes to real estate.  Strong manufacturing with Boeing.  Large technology industry with Microsoft.  Huge Asian influence.

Looking at properties in LA and Phoenix.  Many loans matured and are currently in distress.  Retained as work-out specialist.

In last two months business is in an uptick.  Recently been able to work out two deals to extend on notes.  Recently got a transaction closed at the end of 2010 in a twenty-four hour period.

Leonard M. Manriquez

President of Commercial Asset Management (CAM), the Special Assets Services division for ALB Commercial Capital. CAM operates as an asset Management Company involved in the evaluating, management and disposition of distressed commercial real estate assets.

Sees last quarter of 2010 as best quarter but lower than previous years.  Still sees uncertainty in market primarily from the hesitation seen from investor groups.

Don’t yet see capital moving back into the market completely with an array of loan products. Quite a few lenders for different property types have fallen out of the market.

Positive going into New Year.  Lenders showing signs of flexibility with their existing debt.  In good position to help clients with work-outs and modifications.  Big opportunities in note sales.

Scott R. Lodde

State of Florida one of the most distressed parts of the country.  That being said, we have re-invented ourselves over the past few years.  We are primarily a real estate development company and by necessity got into the real estate asset management business specializing in the hospitality industry.

Hospitality is the canary in the mine. The industry went into the recession faster than any segment but will come out of it faster than anyone due to the ability to change rents on a daily basis.  Also, there has been a 21% decline in the number of hotels rooms under construction from the end of 2009 to end of 2010.

On the revenue side, RevPAR is up in 2010 and is expected to be in 2011.  The business traveler is coming back.  We hope that is an indicator the jobs are coming back.

Representing clients who are buying notes and REO.  We see opportunities to buy distressed notes and especially distressed hotels in 2011. 

We don’t need any more inventory (office, hotel, retail).  The action is in the work-out loan business.  Major opportunities in mezz loans subordinating existing equity for well located assets.

JW Najarian

Problems continue in office and retail with continuing unemployment.  2011 is the year things will turn around.

Jim Krieger

Two different perspectives.  On a local level, Washington State experienced highest level of bank transition in 2010.  Majority banks have stopped lending up until last quarter of 2010.  Wanted dust to settle before getting back into lending business.

Most lenders have become distressed asset managers.  Now settling down.

Brought on as a consultant for CMBS portfolio. Needs to be addressed in first two quarters of 2011.

Multifamily will be first sector to come back.

Eric Salveson

Last two loans closed were retail centers in Hawaii.  Seeing more activity for construction loans in multi-family.  High quality assets are different than inferior building. 

Pleased with market studies that came in on new apartment development projects.

Retail appraisals showing distress as well as office unless extremely well located assets.

Suburban market is tough, other than well located neighborhood shopping centers.  Action in downtown areas.

Average workspace in the next five years will be around 125 SF.

Bob Schecter

What is needed in our business is a rejuvenation … a rebirth or we will all be work-out specialists.

New construction will put contractors back in business.  Retailers opening new stores only upon absolute necessity. 

Landlords at the mercy of tenants.  Don’t know where all the optimism comes from.

Eric Salveson

Losing manufacturing base which creates jobs for everyone.  Facebook and Boeing both have $50 billion of market value.  Facebook has only 2,000 employees and Boeing has over 50,000 employees.  Government needs to address manufacturing base in this country.

Japan has been in a recession for over 10 years.

Back in the 1970s we wiped out all the bad real estate.  Today it’s simply “extend and pretend”.

10% – 15% is being foreclosed.  If you buy at “new” level, you will make money. 

Alan D. Pollack

Some banks are recapitalizing existing deals by rewriting a loan with a new (stronger) borrower at lower leverage.  Banks get to convert non-performing loan to performing loan with new (larger) capital.

Scott R. Lodde

Don’t see any new construction.  Country overbuilt in every sector.  Good thing is that we are keeping busy as real estate consultants.  Jobs and population increases (country is still growing) will get us out of this real estate recession but it may take many more years.

Eric Salveson

Investors are going back to basics.  Back to 10% cash on cash returns.

Increases in values over past 15-20 years are a result of cap rate compression not rental income growth.

Bob Schecter

Investors can no longer play the cap rate strategy.  Must buy real estate based upon increases in rental income over time. 

Posted by Scott R. Lodde

Headlines – Week of January 9, 2011

January 17, 2011

Regulators close banks in Florida, Arizona

Last week regulators closed the first two banks of 2011 after 157 banks were shuttered in 2010. 2010 had the most closures since the savings-and-loan crisis two decades ago. The 157 bank closures nationwide last year topped the 140 shuttered in 2009.

The Federal Deposit Insurance Corp. took over First Commercial Bank of Florida, based in Orlando, with $598.5 million in assets and $529.6 million in deposits; and Legacy Bank, based in Scottsdale, Ariz., with $150.6 million in assets and $125.9 million in deposits.

First Southern Bank, based in Boca Raton, agreed to assume the assets and deposits of First Commercial Bank of Florida. Enterprise Bank & Trust, based in St. Louis, is assuming the assets and deposits of Legacy Bank.

In addition, the FDIC and First Southern Bank agreed to share losses on $484.3 million of First Commercial Bank of Florida’s loans and other assets. The agency and Enterprise Bank & Trust are sharing losses on $119.8 million of Legacy Bank’s assets.

The failure of First Commercial Bank of Florida is expected to cost the deposit insurance fund $78 million; that of Legacy Bank is expected to cost $27.9 million.

Florida has been the state hardest hit by bank closures, with 29 failing in the state last year. Other states that have seen large numbers of failures are California and Illinois.

The 2009 failures cost the insurance fund about $36 billion. The failures last year cost around $21 billion, a lower price tag because the banks that failed in 2010 were on average smaller. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007.

The growing number of bank failures has sapped billions of dollars out of the deposit insurance fund. It fell into the red in 2009, and its deficit stood at $8 billion as of Sept. 30.

The number of banks on the FDIC’s confidential “problem” list jumped to 860 in the third quarter from 829 three months earlier. The 860 troubled banks is the highest number since 1993, during the savings-and-loan crisis.

The FDIC expects the cost of resolving failed banks to total around $52 billion from 2010 through 2014.

CMBS Modifications Hit All-Time High

According to an article on, the default rate on vintage CMBS may have reached an all-time record level in December of last year, but without special servicers stepping up the pace on loan modifications, it could have been much worse. was quoting a report issued by Standard & Poor’s Ratings Services entitled “US CMBS Loan Modifications Reached An All-Time High In 2010.”

S&P’s view is that loan extensions have relieved some of the stress in the property markets over the past few years. Although they believe the number of modifications will remain high in 2011, the firm also expects liquidations to increase as a percentage of total resolutions as market conditions improve.

The report notes that 354 loans with a principal balance of $15.6 billion were modified during the first 11 months of last year. That’s well above the 216 loans with a principal balance of $7.06 billion that were modified in all of 2009. Ninety-six percent of all the loan modifications since 2000 occurred during this 23 -month period, according to the report.

The most commonly modified loans are backed by retail properties, representing 49.3% of total modifications by principal balance. However, when loans from the General Growth Properties portfolio are taken out of the equation, retail’s share drops by more than half to 22.6% and office takes first place with 30.8% of modifications by principal balance. Loans backed by lodging properties are the next most common at 19.3%, followed by multifamily with 16.9%.

Similarly, retail has the highest modification rate – i.e. percentage of retail modifications relative to retail’s outstanding balance – at 7%, but that drops to 2.1% if General Growth is excluded. That leaves the lodging sector with the highest percentage of modifications at 5.6%.

According to Trepp data, properties in the lodging sector had a delinquency rate ranked second at 14.31% in December and could be among the first to reap the most benefits from modifications according to S&P.  The firm believes the fundamentals in the lodging property are rapidly improving, and believe that higher liquidation values may be more likely during the post-modification era.

The 2000-vintage CMBS has the highest modification rate of any vintage at 9%, as well as the highest delinquency rate at 36.9%.   2007 CMBS loans account for 29% of modified loans by principal balance, along with nearly one-third of total CMBS outstanding.  In 2011 and 2012 a large amount of the five-year term loans originated in 2006 and 2007 vintage years will mature and the firm expects the percentage of modified loans to the outstanding balance of these two years to increase substantially.

Full Article

Posted by Scott R. Lodde

Headlines – Week of January 2, 2011

January 8, 2011

South Florida Resales Have Record Year

According to a report by, more South Florida (Miami-Dade, Broward, and Palm Beach counties) residences resold in 2010 than in the last year of the real estate boom in 2006.  In 2010, buyers rushed to take advantage of deep discounts on distressed properties and a government-funded $8,000 first-time home buyers tax credit.

In 2010, 75,000 single-family houses, condos, and townhouses – an average of 6,250 per month – were resold in 2010 compared to less than 67,600 transactions – 5,600 per month – in 2006, according to a new analysis from the licensed Florida sell-side brokerage CVR Realty™.

Peter Zalewski, a principal with Condo Vultures® LLC believes today’s South Florida real estate market is strictly a function of price, not emotion.  Nearly 7,400 more residential resale transactions have occurred in the year 2010 than in the year 2006 due in large part to the current prices that are 40 percent less on average.

South Florida’s residential resales for 2010 totaled nearly $16.6 billion, an increase of about $1billion from 2009.

The 2010 total dollar amount for completed transactions is $10 billion less than in 2006 when gross resales reached nearly $26.9 billion, according to the report.

At the peak of the market, the average South Florida resale transacted at a price of $398,000 in 2006. In 2010, the average South Florida residential property resold for $221,200, representing a 44 percent discount compared to five years earlier.

Single-family houses resold for an average of $297,000 in 2010 compared to $502,000 in 2006, a 41 percent decrease in average pricing from the peak.

Condominium units and townhouses resold in 2010 for $160,400, a 47 percent – or more than $140,000 – decrease off of the $302,400 average in 2006.

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2011’s Strongest and Weakest Markets

Home prices are expected to rise in 40 percent of major metropolitan areas, according to Veros Real Estate Solutions, a research firm that provides information to the mortgage industry.

The markets Veros expects to be strongest are:

1. San Diego/Carlsbad/San Marcos, Calif.
2. Kennewick/Richland/Pasco, Wash.
3. Pittsburgh
4. Fargo, N.D.
5. Washington, D.C. metro area

The five markets Veros expects to be weakest are:

1. Reno/Sparks, Nev.
2. Orlando/Kissimmee, Fla.
3. Boise City/Nampa, Idaho
4. Deltona/Daytona Beach/Ormond Beach, Fla.
5. Port St. Lucie/Fort Pierce, Fla.

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Florida has second-longest foreclosure process

Recent data from LPS Applied Analytics shows that New York has the longest foreclosure process in the nation.  On average mortgage loans in the foreclosure have been delinquent for 600 days on average.

Loans in foreclosure in Florida, New Jersey Hawaii, and Maine have been delinquent for an average of more than 500 days. Close behind, California and Nevada’s home loans have been delinquent for 461 and 427 days.

Meanwhile, Nebraska and Wyoming were found to be the two speediest states — loans in the foreclosure process are delinquent by an average of 358 days.

The data indicates that states using a judicial process have backlogged courts. Florida, which has some of the highest numbers of foreclosures in the country, has had to set up separate courts and bring in retired judges to help handle the skyrocketing foreclosure cases.

Government officials and agencies also cause foreclosure delays through temporary moratoriums, mandatory mediation sessions, and loan modification or assistance programs.

Mortgage servicers also cause delays, not wanting to take on the legal and financial responsibilities of owning any more homes.

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 Posted by Scott R. Lodde

Hotel Forecast Turns Positive

January 6, 2011

The big four in hotel consulting turned very bullish in their forecast for the hospitality industry as 2010 progressed.  As the year ended, PricewaterhouseCoopers (PwC), Colliers PKF Hospitality Research (PKF), Smith Travel Research (STR) and Hospitality Valuation Services (HVS) all came out with forecasts for 2011 and beyond.

All four firms predict 2010 will end with positive occupancy growth (5.3% to 5.7%).  With the low levels of supply growth anticipated through 2012, two of the firms predict occupancy to rise above the 60% mark in 2012 (PwC and STR did not provide a forecast for 2012).   

As a result, revenue per available room (RevPAR) will grow 4.3% to 5.7% for the first time since 2007.

2010 ended better than anyone expected as the year began and as a result the firms forecast ADR increases for 2011 between 3.9% and 4.8%.

The recovery in lodging demand however is only part of the story. Since 2007, 3,300 new hotels have opened, and PwC estimates that room inventory in 2010 will average 7.7% ahead of 2007 levels. Occupancy rates in 2010 are 8.2% below 2007 levels, and average daily rates are 6.0% below, resulting in RevPAR 13.7% below 2007 highs according to their numbers.

A return of business travel and some group activity have contributed to the positive trends seen in 2010 as the industry decreased reliance on more price-sensitive booking channels. In 2011, continuation of such shifts in the mix of business, as well as increases in negotiated rates and moderate gains in group demand, are expected to drive the higher rates that are predicted.

ADR increases, combined with higher occupancy levels, are expected to increase RevPAR 5.5% to 7.4%, the largest annual gain since 2006.

The other major factor affecting hotel fundamentals is the slowdown in construction.  According to the latest (November 2010) STR/McGraw Hill Construction Dodge Pipeline Report, total active U.S. hotel development pipeline comprises 3,174 projects totaling 330,920 guestrooms, a 20.7% decline since November 2009.

The following chart is the consensus of predictions from the four firms:

Posted by Scott R. Lodde

Headlines – Week of December 26, 2010

January 3, 2011

2011 – The Year of the New Normal

According to many economists, 2011 is the first full year of the New Normal, an entrenched period of slow economic growth, high unemployment, and volatility.

So what will the “New Normal” look like for commercial real estate? Some believe it will return to the ‘Old Normal’ … before the bubbles of the early 2000s, when nonrecourse commercial real estate loans were a rarity and home owners didn’t spend the equity in their homes at the mall. 

Many reports seem to indicate that brokers in major markets are seeing multiple bids on Class A, top-tier properties even if the transaction numbers are still a fraction of those in 2007 or 2008. Lenders are taking calls again—if not yet making many commercial real estate loans. Cap rates for some Class A properties are nearing pre-credit crisis level.

And what about jobs, the real catalyst for economic recovery?  According toCBRE Econometric Advisors in Boston, the good news is that the pace of new job creation should pick up to about 100,000 jobs a month in the near future. They predict the increase will begin in mid-2011 and last a year or so before leveling off. In the longer term, job growth will “settle down to about 50,000 a month,  much slower than the 2003–2007 recovery, but still the fastest growth of any developed economy.

Another positive factor — the record high corporate profits and funds available for investment. As of the second quarter of 2010, U.S. companies saw the internal funds available for investment increase by $61.1 billion, according to the U.S. Bureau of Economic Analysis. The addition of $30 billion in federal funds for small-business lending in fall 2010 could also boost business confidence and thus hiring.

Office rents have also repriced, but instead of moving up to better space, some tenants are moving away from top-of-the-line space as companies don’t want to be perceived as overspending  This shift away from ostentatiousness to value is all part of the New Normal lifestyle.

A prevailing sense of economic uncertainty is making commercial real estate more attractive to investors. Most of what investors are buying falls into two diverse pools—Class A core assets in major markets or severely distressed properties.

The quest for the best has increased the deal volume through August 2010 to $54 billion. That’s half of the deals done over the same period in 2008 but up 45 percent from 2009’s lows, according to Real Capital Analytics.

At the other end of the investment spectrum, distressed buyers are still active. Vultures with patience are being rewarded with more product to choose from and price drops of about 20 percent last year compared to 2007 highs.  Lenders have taken on too many extend-and-pretends and are moving some off their books.

However, regulatory pressure that discourages lenders from foreclosing and selling repriced assets to entrepreneurial investors is keeping the market from clearing.  Lenders have learned that they aren’t the best owners of commercial real estate and are less eager to seize assets

This regulatory pressure from the FDIC not allowing commercial real estate loans exceed 300 percent of the bank’s equity has kept most lenders from making new loans.

Five Predictions for Residential Real Estate in 2011

According to the analysts at Freddie Mac, key macroeconomic drivers of the economy – such as income growth, unemployment rate, and inflation – will affect the performance of the housing and mortgage markets in 2011. With fiscal policy supporting aggregate demand for goods and services and an accommodative monetary policy providing low interest rates and ample liquidity to capital markets, the economic recovery should accelerate gradually over the year, with the second half of 2011 exhibiting more growth and job creation than the early part of the year.

These forces will support a gradual recovery in the housing and mortgage markets. Here are five features that will likely characterize the 2011 housing and mortgage markets:

  1. Low mortgage rates. With Fed observers expecting the central bank to keep the federal funds rate at its current target range of 0 percent to 0.25 percent for most (or all) of 2011, relatively low mortgage rates will be a feature of the 2011 mortgage market. Thirty-year fixed-rate loans are likely to remain below 5 percent throughout the year, and initial rates of 5/1 hybrid adjustable-rate mortgages will likely remain below 4 percent in 2011. 
  2. Prices have hit bottom. House prices are likely to begin a gradual, but sustained recovery in the second half of 2011.
  3. Housing will remain affordable. With affordability high, many first-time buyers will be attracted to the housing market in the New Year, likely translating into more home sales in 2011 than in 2010.
  4. Refinances will dwindle. Many eligible borrowers have already refinanced and the federal Making Home Affordable refinance program is expiring on June 30. While fixed-rate loans are likely to remain low, they will move up gradually, making it even less likely that refinances will be attractive to most home owners.
  5. Delinquency rates will decline. Based on the last several business cycles, the share of loans that are 90 or more days delinquent or in foreclosure proceedings — known as the “seriously delinquent rate” — generally crests within a year of the start of the recovery in payroll employment, and this economic recovery appears to fit within that pattern. Payrolls began to rise last January, and by the spring the seriously delinquent rate had begun to fall.

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Top Ten Issues Affecting Commercial RecoveryHere are the top five issues facing commercial real estate in 2011, according to consultant Deloitte LLP.

  1. The market remains uncertain. The recovery isn’t following previous trends. While there is some indication that the worst may be over, some markets continue to decline.
  2. Impact of “amend and extend.” Some banks are recognizing that they will never recover full value on some properties and are willing to work with borrowers. This has made it more difficult to tell when the business has hit bottom.
  3. High maturities remain a challenge. The high level of maturing debt over the next several years remains a significant barrier to recovery. In addition to commercial mortgage-backed securities (CMBS), loan delinquencies and commercial real estate loan defaults, there is also an increase in strategic defaults as more commercial borrowers make a pragmatic business decision to exit profit-draining investments in order to divert money to performing projects or shareholders.
  4.  The number of deals is increasing. A good sign.
  5. The economy is recovering very slowly. This increases opportunities in distressed properties, but the overall market isn’t in a hurry to pick up.
  6. Fundamentals moderating, but recovery may be slow. Absent a strong boost from the economy, the performance of commercial real estate fundamentals has remained weak for an extended period. However, while trends vary by property type, some key industry metrics indicate that sharp declines experienced during the height of the downturn are in the process of stabilizing.
  7. REIT rebound continues. Commercial real estate fundamentals may be in the early stages of a slow recovery, but another key element of the market — Real Estate Investment Trusts (REITs) — has already demonstrated a strong rebound. Return on investment for REITs has outperformed the competition recently, and firms are taking advantage of the spotlight by raising funds, which could eventually lead to increased acquisition activity for the segment.
  8. Capital markets — lending stabilizes; demand subdued. As commercial real estate struggles to deleverage, key lending sources have demonstrated flexibility in the treatment of existing debt, but have remained somewhat strict in terms of new loan origination. New lending is expected to remain subdued in the near term; however, stabilization is evident and alternative sources such as CMBS are showing signs of renewal.
  9. Regulations directly and indirectly impact CRE. In 2008 and 2009, government intervention in the form of stimulus programs, including the Troubled Asset Relief Program (TARP) and the Term Asset- Backed Loan Facility (TALF), indirectly impacted commercial real estate by injecting liquidity into the financial system and helping prevent the financial crisis from intensifying further. In 2010 and 2011, newly introduced financial and health care regulations should also impact commercial real estate both directly and indirectly, perhaps leading to increased demand for commercial space, as well as decreased access to capital.
  10. Positive signs for global CRE. Global commercial real estate has shown signs of improvement, following a pause in the industry’s globalization as a result of the financial and economic downturn that originated in the United States. In non-U.S. markets, investment trends began to demonstrate a return to growth in the first half of 2010, but a rebound to robust, pre-crisis levels is challenged by some of the same lending and distress-related issues that have been prevalent in the United States. As the global market begins to recover, the Asia Pacific region is expected to be a catalyst for growth, both as a destination and a source of investment into the U.S. market.

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Posted by Scott R. Lodde

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