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Headlines – Week of August 29, 2010
September 5, 2010
Commercial Real Estate Yields Spur Investors
According to an article in Bloomberg, yields on U.S. commercial real estate are nearing a record high compared to Treasury bonds, a signal to many investors that now is the time to buy property.
Capitalization rates, a measure of real estate yields, averaged 7.22% in the second quarter, as calculated by the National Council of Real Estate Investment Fiduciaries. That was 4.29 percentage points higher than the yield on 10-year government bonds as of June 30 and 4.75 percentage points higher than Treasury yields as of Aug. 31.
The current spread is near the record 5.39 percentage points in the first quarter of 2009, when the U.S. was dealing with the worst economic downturn since the Great Depression. The spread shrank to less than 80 basis points when commercial real estate prices peaked in 2007.
The article points to the recent acquisition of the 33-story Wells Fargo Building in San Francisco by a group of South Korean pension fund investors as an example of how low cap rates have dropped for some high end buildings. According to Real Capital Analytics Inc., a property research firm the office tower sold at a cap rate of about 7%.
In another transaction in New York, RXR Realty LLC bought a stake in a 22-story office building, at a cap rate of 6%.
U.S. sales of office, retail, industrial, apartment and hotel properties totaled $20.7 billion in the second quarter, up 86% from $11.1 billion a year earlier.
However, the deals were still 85% below the peak of $135.7 billion in the second quarter of 2007.
Florida Population Grows Again
According to the latest preliminary population estimates from the University of Florida (UF), Florida’s population grew once again last year after declining for the first time since the end of World War II the year before.
The Bureau estimates that Florida added a modest 21,000 residents between 2009 and 2010, but that followed a population decline greater than 56,000 between 2008 and 2009.
Florida grew by more than 125,000 residents in every year from 1950 to 2008. In 2009 it is estimated that Florida added 21,285 residents with its total population increasing from 18,750,483 on April 1, 2009, to 18,771,768 on April 1, 2010.
Foreign immigration continues to be relatively strong, and the state also continues to have substantially more births than deaths – the drivers of Florida’s growth in the last year.
The largest population gains were in some of the biggest counties. Miami-Dade led by adding an estimated 8,253 residents, followed by Hillsborough, 6,353, and Broward, 5,834.
The county with the biggest percentage increase was Lafayette, which grew by 5.2%, but that change was largely attributed to the addition of state prison inmates. There was no pattern to which counties lost population, which were spread throughout the state and include both large urban counties and small rural counties.
The largest population decline was in Seminole County, which lost 3,659 residents, followed by Pinellas, 3,119, and Volusia, 2,055. In percentage terms, the county with the biggest decline was Glades, followed by Jackson and Holmes.
The Bureau expects Florida’s population to continue to grow slowly during the next year or two, however within the next 10 to 20 years, the state’s annual population growth could be as high as 250,000.
From 2003 to 2006, Florida’s population grew by more than 400,000 per year, and in the previous three decades increases averaged about 300,000 per year.
Between 2000 and 2010, the counties that grew the most in absolute numbers were Miami-Dade, Orange and Hillsborough. Flagler had the highest growth rate, 90.4%, followed by Sumter, 82.6%, Osceola, 59.8%, St. Johns, 50.6%, and Wakulla, 41.7%.
The population figures are interim estimates that will be replaced by numbers from the 2010 census when they become available early next year.
Commercial Conditions Favor Business Growth
According to Lawrence Yun, National Association of Realtors (NAR) chief economist, the fallout from the recession continues to impact commercial real estate.
Vacancy rates are beginning to level off in some sectors, but rent discounts and moderate levels of landlord concessions are widespread. As a result we are very much in a tenant’s market which is quite favorable for businesses that are considering expansion.
Looking at the overall market, vacancy rates will shift modestly in the coming year according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail, and multifamily markets. Historic data were provided by CBRE Econometric Advisors.
Office Markets
Vacancy rates in the office sector, with high levels of available sublease space, are expected to increase from 16.7% in the second quarter of this year to 17.0% in the second quarter of 2011, and then ease later next year. The markets with the lowest office vacancy rates in the second quarter were New York City, Honolulu and Long Island, N.Y., with vacancies around the 9 to 11% range.
Annual office rent should fall 2.7% this year and decline another 2.1% in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be a negative 13.6 million square feet this year and then a positive 22.6 million in 2011.
Industrial Markets
Industrial vacancy rates are likely to decline from 14.1% in the second quarter of 2010 to 13.7% in the second quarter of 2011, and then continue to ease modestly as the year progresses.
The areas with the lowest industrial vacancy rates in the second quarter were Los Angeles, San Francisco, and Kansas City, with vacancies ranging between 8 and 11%.
Annual industrial rent is estimated to drop 5.4% this year, and to decline another 4.7% in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 31.7 million square feet this year and a positive 157.2 million in 2011.
Retail Markets
Retail vacancy rates should hold steady at 13.1% in both the second quarter of this year and in the second quarter of 2011, with a level pattern for most of next year.
Markets with the lowest retail vacancy rates in the second quarter include San Francisco, Honolulu, and Miami, with vacancies of 7 to 8%. Average retail rent is expected to decline 2.6% in 2010 and then flatten out, slipping 0.1% next year. Net absorption of retail space in 53 tracked markets is forecast to be a negative 2.3 million square feet this year and then a positive 6.4 million in 2011.
Multifamily Markets
The apartment rental market – multifamily housing – is benefiting from modestly higher demand. Multifamily vacancy rates are likely to decline from 6.0% in the second quarter of this year to 5.6% in the second quarter of 2011.
Areas with the lowest multifamily vacancy rates in the second quarter include San Jose, Calif.; Pittsburgh; and Philadelphia, with vacancies of less than 4%.
With additions from new construction, average rent should slip 0.6% in 2010, and then hold even in 2011. Multifamily net absorption is expected to be 105,200 units in 59 tracked metro areas this year, and another 138,000 in 2011.
Posted by Scott R. Lodde
Headlines – Week of August 22, 2010
August 27, 2010
Continuing CMBS Woes
In last week’s Headlines posting, I reported on a Globest.com article about CMBS loans maturing during 2010. This week brings more news from Globest.com about the avalanche of CMBS loans due in 2011.
According to sources from Fitch Ratings, 198 fixed rate commercial loans, with a total unpaid balance of $26.5 billion, are scheduled to mature in 2011. Of those loans, $4.7 billion, or 17.9%, are already in special servicing.
One-third of the loans are secured by retail properties, 29.4% by office and 16.4% by multifamily. The ratings agency says it believes loans secured by office, retail and hotel properties are the most challenging to refinance.
By date of origination, 34.7% of next year’s maturing loans are from 2001, followed by 33.7% from 2006 and 13.2% from 2007. Fitch expects higher default rates among the ‘06 and ‘07 loans, partly due to the fact that the older loans have the advantage of a decade’s worth of amortization and partly because the newer loans carry a higher LTV. The article notes that 83% of the loans that went into special servicing in July were from more recent vintages.
The cumulative loss severity rate will continue to rise from 35.4% as more loans from the 2006-2008 period of CMBS at relatively higher losses. Reasons for the higher losses from these years include lax underwriting standards, the absence of amortization and other loan structural features, historically low capitalization rates, current reduced market liquidity and the general impact of the economic downturn.
100,000 Bank Repos in South Florida Since 2007
According to an article published by CondoVultures.com, more than 100,000 properties – or an average of 2,300 per month – have been repossessed in the tricounty South Florida region (Miami-Dade, Broward, Palm Beach counties) since the real estate crash began in 2007.
Lenders surpassed the 100,000 threshold on Thursday, Aug. 19, when 317 properties were repossessed.
For the year through Aug. 20, lenders have taken back more than 33,600 South Florida properties, which already outpaces the 30,400 tricounty properties repossessed in 2009 and the nearly 26,250 in 2008, based on the government records from county governments.
Going forward, Condo Vultures.com expects that the number of bank repossessions to slow since foreclosure filings for the year are down by about one-third in 2010 compared to 2009.
The big unanswered question is whether the bank repos will trigger another drop in the South Florida real estate market.
Despite the spike in repossessions, bank-owned properties still represent only about 6% of the 68,500 residences on the resale market in the tricounty South Florida region as of Aug. 16.
South Florida’s residential inventory has increased on a weekly basis for nine of the last 11 weeks, representing a 5% jump in available product since May 31. Still, the overall resale inventory is down more than 36% from November 2008 when there were nearly 108,000 residences available in South Florida according to the article.
A key reason the number of bank repossessions has increased rapidly this year is the implementation of a new online auction technology being used by the South Florida circuit courts to clear the backlog. The online auction technology now allows hundreds of properties to be auctioned off more efficiently.
At the start of the housing crash in 2007, lenders estimated the typical foreclosure would take about six months to repossess a property at a cost of about $40,000 in the loss of debt service, damage, court courts, and attorney’s fees.
By 2009 as the foreclosure filings were spiking, the process extended out to an average of 18 months with an estimated cost of at least $100,000 per repossession.
FDIC Loses $2 Billion on Florida Bank Failures In 2010
The FDIC has lost more than $2 billion on bank failures in Florida in 2010 following the closing of two institutions outside of Tampa on Aug. 20.
Regulators realized a combined loss of $33.5 million with the closing of the Community National Bank at Bartow, with $67.9 million in assets and $63.7 million in deposits, and the closure of Independent National Bank in Ocala, with $156.2 million in assets and $141.9 million in deposits, according to a report based on Federal Deposit Insurance Corp data.
Florida bank failures now account for 14% of the $66 billion in overall losses realized by the FDIC since 2008.
As the losses pile up related to foreclosures, many Florida banks are opting not to do any lending, which is further exacerbating the problem. Banks generate revenue and profits based on originating and servicing loans.
The latest closings increase the total number of bank failures in Florida to 22 this year, reinforcing the state’s position atop the list of the most bank failures in 2010. Illinois is second with 15 bank failures, and Georgia is third with 11 failures.
Rounding out the top five rankings for states for bank failures in 2010 are California with 10 closures and Washington with eight closures, according to the report.
In 2008, regulators shuttered two Florida institutions seized two institutions at a cost of at least $152 million to the FDIC’s Deposit Insurance Fund. In 2009, regulators seized 14 institutions at a cost of $7.2 billion. In the first eight months of 2010, regulators have closed 22 institutions at a cost of more than $2 billion.
Nationwide, regulators have shuttered 278 banks at a cost of more than $66.4 billion since 2008. These failed institutions had combined assets of $629.1 billion and deposits of $441.6 billion, according to the report.
The 38-failed Florida banks since 2008 had combined assets of $31.4 billion and deposits of $24.6 billion.
Posted by Scott R. Lodde
Headlines – Week of August 15, 2010
August 22, 2010
Office Leasing Rebound Could be Deceiving
According to an article published in the Wall Street Journal and information gleaned from the Studley Report, the office property sector seems to be stabilizing.
However, just as the office market seemed to be turning a corner, the broader economy has suffered a setback that started in April and continued through June. On a trailing four-quarter basis national leasing activity rose 5.7% (161.3 million square feet).
In many cases, though, tenants are taking less space than they had before. This is due to the reality that they have fewer employees, but it’s also because they have discovered how to use space more efficiently. In New York, for instance, three of the second quarter’s five largest deals involved tenants either taking the same amount of space or less.
Nationally, the overall vacancy rate was 17.4%, the highest level it’s been since 1993.
Office using employment (which includes the information, professional/business services and financial services sectors) is the critical catalyst for office space demand. From peak to trough, U.S. office using employment has fallen by 8.3%. Four markets were hit with layoffs in office-using sectors that were well above the national average. These were Atlanta (-12.1%); Fort Lauderdale (-11.9%); Orange County (11.6%) and Tampa Bay (11.4%).
At the other end of the spectrum, the two Texas markets, Dallas/Fort Worth (-4.3%) and Houston (-4.1%), as well as Washington, DC (-1.2%), have held up much better than most markets during this downturn.
Analysts and brokers are especially concerned about the hundreds of office buildings that are in precarious financial condition due to the fact that they are worth less than the mortgages that were made during the boom times. Such properties have an intense need to fill space in order to boost rental revenue and, subsequently, values.
1 out of 4 renters never plans to own a home
According to a survey provided by Trulia.com, 27% of renters do not plan to buy a home … ever. Of those renters who do plan to purchase someday, 68% said it would be more than two years before they do.
Plans to delay a home purchase or not planning to buy at all could have an enormous domino delaying effect on economic recovery in the U.S. according to the company’s CEO. Renters converting into buyers are crucial to turning around the housing slump, but the current economic crisis is causing people to become very hesitant to get off the fence and buy a home.
According to the study, many Americans still maintain a core belief in the inherent value of owning a home: 72% believe homeownership is part of their American Dream. While it’s a decline from 77% six months ago, it shows that the American Dream of homeownership is still alive.
Nearly one in five Americans (19%) said that their attitude toward homeownership has grown more negative over the last six months; however, more Americans, 23%, said that their attitude toward owning a home has grown more positive in the same time frame.
Death of the ‘McMansion’ – Is the Era of Huge Homes Is Over?
From 1950 to 2004, the average size of an American home jumped from 983 square feet to 2,349 square feet. In the past few years, there have been an increasing number of references made to the “McMansion glut” and the “McMansion backlash,” as more towns pass ordinances against garishly large homes, which are generally over 3,000 square feet and built very close together.
However, according to another survey by Trulia.com, that figure is poised to drop for the first time in six decades and declares “The McMansion Era is Over.”
The survey delves into a harsh reality; with tough economic times in the background, large residences are no longer a given. Adults who might buy a house displayed a preference for smaller homes, with only 9% saying their ideal home size is more than 3,200 square feet – the same number of who said they’d like their home to be between 800 and 1,400 square feet. Fifty-five percent of Americans would prefer a home between 1,401 and 2,600 square feet.
Harris Interactiveconducted this July 2010 survey online within the United States on behalf of Trulia between July 22-26, 2010, among 2,055 U.S. adults aged 18 years and older. The sample included 1,345 homeowners and 663 renters.
For a little historical context, 1,200 square feet was the average home size in America in the 1960s. That grew to 1,710 square feet in the 1980s and 2,330 square feet in the 2000s.
What’s more, many in the real-estate business say they think this trend of downsizing, or “right-sizing,” is here to stay. Many believe this is a long-term trend and believe that families with children who’ve been foreclosed upon won’t want to go through these experiences they saw their parents go through.
The follow-up question, of course is what do we do with all the McMansions that have already been built?
The demise of the McMansion has stirred a growing discussion in the real-estate community about the possibility that it may force a dramatic redesign of the suburban McMansion tracts into mini-towns with more practical uses like offices, banks, grocery stores and movie theaters.
CMBS in Special Servicing Could Top $100B
According to an article written on GlobeSt.com, Fitch Ratings reported that there is almost no way to keep the volume of U.S. CMBS loans in special servicing from topping $100 billion by year’s end.
September brings 126 U.S. CMBS loans to maturity, with almost half of them already in special servicing in the company’s latest weekly U.S. CMBS newsletter.
The maturity breakdown by month through December is as follows:
September: 126 loans; $962 million (43% specially serviced)
October: 159 loans; $2.1 billion (34% specially serviced)
November: 158 loans; $1.6 billion (14% specially serviced)
December: 176 loans; $1.7 billion (16% specially serviced).
At the end of the 2nd quarter, $92 billion of loans were in special servicing, a number that will likely reach $110 billion by December. There are currently total 5,207 CMBS loans in special servicing of which 63% were transferred due to imminent default. However, Fitch says the ratio of delinquent vs. current loans in special servicing is 60 to 40, and the report notes, that the majority of loans that transfer as current eventually become delinquent.
84% of the total dollar volume comes from loans that were originated between 2005 and 2007, the peak years for commercial mortgage securitization.
Most maturing loans already in special servicing are either delinquent or in foreclosure. This trend is likely continue into 2011, when 2,198 fixed-rate commercial mortgage loans (representing $26.5 billion) mature with 17% already in special servicing.
Fitch expects loans secured by office, retail, and hotel properties from the 2006 and 2007 vintages to be the most difficult to refinance in 2011
Posted by Scott R. Lodde
Headlines – Week of August 8, 2010
August 14, 2010
South Florida home values see nation’s biggest drop in a year
According to a national report by Zillow, South Florida home values suffered the worst decline of 25 large metropolitan areas in the second quarter of this year, falling 15% compared with 2009.
The data in the report indicates the median home value in South Florida (Palm Beach, Broward and Miami-Dade counties) fell to $146,500, down nearly 7% from the beginning of this year and 52% from housing’s peak values in 2006.
Zillow found that 44% of South Florida single-family homes with mortgages are underwater. Nationally, 21.5% of homes with mortgages had negative equity in the second quarter.
Nationally, the median home value, including townhomes and condominiums, fell 3.2% from the same time in 2009.
While Florida and Arizona continue to drop, some areas of California such as Los Angeles and San Diego have increased slightly compared to 2009.
Other negative news regarding the South Florida market also came out this week from Miami-based Condo Vultures.
In the first half of 2010 as buyers purchased 36 new condo units at an average price of $267 per square foot.
While more than 95% of the 5,100 new condos created in Downtown Fort Lauderdale and the Beach since 2003 have been sold as of June 2010, this year’s average price ranks as the second lowest amount paid since 2003, and represents a 46% discount off of the 2007 peak pricing of $499 per square foot,
In Downtown Fort Lauderdale and the Beach, developers sold nearly 1,400 new condos in 2005, 1,300 in 2006, and 722 in 2007. Sales fell off to in 2008 to 238 and in 2009 to 65.
In another report from Condo Vultures®, nearly half of the 27 new condominium projects developed in Sunny Isles Beach during the latest real estate boom still have a combined 1,300 unsold units available despite steady sales in the first half of this year.
Of the 13 projects with developer inventory, four towers have failed to sell a single unit while an additional five projects still have between 40% and 70% of the original inventory remaining unsold.
The company estimates, that Sunny Isles Beach has about three years of new inventory remaining based on the current sales pace of 37 units per month.
And while no bulk deal has closed in Sunny Isles Beach for new condo product, there has been almost 60 bulk deals for new condos have closed since July 2008 in the tricounty South Florida region, accounting for more than 5,200 units and 6.4 million square feet of saleable space changing hands.
The bulk buyers – about 40 percent are foreign entities – have spent more than $1.5 billion to acquire the distressed units at an average of $238 per square foot in Miami-Dade, Broward, and Palm Beach counties.
Recently, an institutional investor acquired 132 units in the Miami condominium Vista Lago at the Hammocks for $161 per square foot, representing a 34 percent discount off the average sales price to date.
Homes lost to foreclosure up 6% from last year
According to a report by RealtyTrac, Inc., the number of U.S. homes lost to foreclosure surged in July, another sign lenders are moving quicker to take back properties from homeowners behind in payments.
Lenders repossessed 92,858 properties last month, up 9% from June and an increase of 6% from July 2009.
July makes the eighth month in a row that the pace of homes lost to foreclosure has increased on an annual basis. Banks have stepped up repossessions this year to clear out the backlog of bad loans.
Initially, lax lending standards were the culprit for foreclosures; however homeowners with good credit who took out conventional, fixed-rate loans are now the fastest growing group of foreclosures. Economic woes, such as unemployment or reduced income, are now the main catalysts for foreclosures.
RealtyTrac estimates more than 1 million American households are likely to lose their homes to foreclosure this year.
In all, 325,229 properties received a foreclosure-related warning in July, up 4% from June, but down 10% from the same month last year, RealtyTrac said. That translates to one in 397 U.S. homes.
Nevada posted the highest foreclosure rate in July, with one in every 82 households receiving a foreclosure notice. Rounding out the top 10 states with the highest foreclosure rate last month were: Arizona, Florida, California, Idaho, Michigan, Utah, Illinois, Georgia and Maryland.
Las Vegas continued to be the city with the highest foreclosure rate in the U.S., with one in every 71 homes receiving a foreclosure notice in July – more than five times the national average.
Some Experts Conclude the Worst is Over
In some positive news, a recent Reuters poll indicates, home properties in the 20 biggest U.S. metro areas could end up with a small rise in value this year.
However, with a slowing recovery and tight lending standards, most economists predicted it could take at least five years for average home prices to rise to heir 2006 peaks.
Most economists believe a major double-dip in the housing market is unlikely, but they do expect a modest summer decline due to the expiration of government programs that drew demand forward and propped up home values earlier this year.
The poll indicates a pullback could drag average prices down another 4.5% for a cumulative drop of about a third from where home values peaked in 2006.
Home prices as measured by the Standard & Poor’s/Case-Shiller 20-city index should rise a meager 0.2% this year, followed by another 1% increase in 2011.
Posted by Scott R. Lodde
America’s Pension Problem
August 12, 2010
I recently read another interesting article from John Mauldin in his weekly newsletter, Thoughts from the Frontline. This article focused on a report from the Center for Policy Analysis which indicates that state and local pension funds are drastically underfunded. This is another one of those examples, such as the “shadow inventory” of home and condominiums, that foreshadows other major problems for our economy in the coming years.
Essentially, the report argues that many state and local government pension plans’ liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds’ assets. The reality is that most pension plans and their consultants assume they are going to get an 8% return on their investments. This at a time of a slow economic growth, very low bond yields, and a stock market that may be in for a long-term secular bear market.
Due to the use of these high discount rates, the liabilities of state and local government pension plans are underestimated. The article notes a recent report by the Pew Center on the States and others that indicates pension assets will cover about 85%of the pension benefits owed to participants. Other studies that adopted lower discount rates have found liabilities may actually be 75% to 86% higher than reported. As a result, taxpayers’ role as insurer may be much greater than anticipated.
If the authors’ calculations are true, state and local pensions are underfunded by $3 trillion.
One of the graphs represents the reported unfunded pension and non-pension benefit liabilities for state and local governments as percentages of the states’ GDPs before adjusting the discount rate:
Seven states — Alaska, Connecticut, Hawaii, Illinois, Kentucky, New Jersey and West Virginia — have total unfunded pension and non-pension benefit liabilities above 15 percent of GDP.
Nine states have reported unfunded liabilities less than 2 percent of their GDP — Florida, Idaho, Iowa, Massachusetts, Nebraska, North Dakota, South Dakota, Tennessee and Wisconsin.
What is interesting is that only two states, Delaware and Florida have pension liabilities that are below zero (negative) as a percent of their states GDP (although Delaware has a very high level of Other Post-employment Benefits).
This bodes well for those of us who live in Florida as a place to retire. Many other states are on a collision course since pension funding will soon consume 25-30% or more of their tax revenues.
Posted by Scott R. Lodde