Tuesday, August 25, 2009
Commercial Property Distress to Rise Amid Wave of Maturing Debt.
Commercial Property Distress to Rise Amid Wave of Maturing Debt. Even if government programs aimed at restarting the securitization market (CMBS) are successful and constraints on debt capital ease (not likely until the banks get pushed by the regulators), the combination of deteriorating property fundamentals, declining values and tighter underwriting will make it impossible for many owners to refinance maturing loans without considerable equity contributions. During the first quarter of 2009, the distressed component of the marketplace increased by more than 50 percent, and with nearly $400 billion in commercial mortgage debt due to mature at the end of 2009 and 2010, distress will rise further. We see this distressed debt causing owners to sell at depressed prices or banks foreclosing and then selling at heavily discounted prices. Either way we will see many great buying opportunities at the end of 2009 and into 2010.
Tuesday, August 4, 2009
Delinquenct rates on California commercial loans more than doubled
The delinquency rate on California commercial loans has more than doubled on $60 billion worth of loans in the second quarter 2009, according to the California Mortgage Bankers Association in a report released recently. This report shows that the delinquency rate continues to climb each quarter. Our projection is that over the next 12-24 months we will see a substantial number of loan foreclosures which means the lenders will be selling properties they have foreclosed upon at substantial discounts. We have a number of bank/lender relationships and we are just starting to see these properties hit the market. Over the next 1 to 2 years we expect to purchase numerous highly discounted properties from commercial lenders as they move these assets off their balance sheet.
Great article in the Wall Street Journal about the challenging environment for REITS
An article in the WSJ focuses on the tough environment for REITS that is just around the corner. challenging
--tons of debt coming due over the next two years
--lower commercial property values
--dwindling occupancy
--lack of buyers
Major REIT players have staggering debt levels. Maguire Properties, has 94% debt to capital. Despite the 60% run up in the REIT share market, they are still more than 65% off the highs of February 2007.
This will clearly lead to a buyers market for the typical property that a REIT owns....Class A office towers, shopping malls, etc. The advantage to us is that it will trickle to our target markets, where there are very few buyers like us. Most of the large real estate buyers will be cherry picking the portfolios of distress REITS, not paying any attention to our target market....$2 million to %15 million. We're flying below the radar screen
--tons of debt coming due over the next two years
--lower commercial property values
--dwindling occupancy
--lack of buyers
Major REIT players have staggering debt levels. Maguire Properties, has 94% debt to capital. Despite the 60% run up in the REIT share market, they are still more than 65% off the highs of February 2007.
This will clearly lead to a buyers market for the typical property that a REIT owns....Class A office towers, shopping malls, etc. The advantage to us is that it will trickle to our target markets, where there are very few buyers like us. Most of the large real estate buyers will be cherry picking the portfolios of distress REITS, not paying any attention to our target market....$2 million to %15 million. We're flying below the radar screen
Tuesday, June 9, 2009
Silicon Valley
There has been very limited transaction volume in all of California but in Silicon Valley, transaction volume dropped to an all time low. A mere $9 million in office transactions traded during the first quarter of 2009 in Silicon Valley, a 98 percent drop compared with the first quarter of 2008 when $716 million was sold. The star performer was the industrial market, with $67 million traded. Still, that was down about 65 percent from a year ago. The commercial banks in California are about to start selling commercial real estate that they have foreclosed upon so transaction volume should pick up.
A vacant research and development building just closed this month in Silicon Valley. The buyer paid $111 per square foot (PSF) in June 2007 and our sources say the building closed for $47.50 PSF down 57% in two years. To get this steal the buyer had to put up a large cash deposit and close in 15 days which not many entities can do. This type sale might represent the bottom of the market.
We closely watch Silicon Valley for properties. Silicon Valley houses the worlds largest concentration of high technology companies and before this market starts to recover there will be many great deals to be made.
A vacant research and development building just closed this month in Silicon Valley. The buyer paid $111 per square foot (PSF) in June 2007 and our sources say the building closed for $47.50 PSF down 57% in two years. To get this steal the buyer had to put up a large cash deposit and close in 15 days which not many entities can do. This type sale might represent the bottom of the market.
We closely watch Silicon Valley for properties. Silicon Valley houses the worlds largest concentration of high technology companies and before this market starts to recover there will be many great deals to be made.
Friday, May 1, 2009
Investor Impressions From The Stella Capital Visit In Asia
We went to several countries in Asia last week market sound our distressed real estate strategy. We probably had 30 one on one meetings, plus a presentation to over 60 people in a five star hotel conference room. Everyone "gets it". There is not alot of rocket science to what we are doing.......we're buying great properties, great locations at a severe discount.
Probably the only objection or concern that we had could be summed up with this question. "Why would I want to own a building all the way in California at 30% off when I can buy a newly built building here in Malaysia at 50% off?"
My Answer is in two parts:
1)Safety. Lets say the world economy gets worse, I feel that property in select areas of California would take less of a hit than a property in Malaysia. With a value/distressed strategy such as ours, the most difficult thing to do is to pick the bottom. No one can do that. But we are attempting to buy properties in the bottom segment of a real estate cycle, if our timing is off slightly, I'd rather have the cushion of owning a high quality property that will not get beat up so bad. We can all take a 5% to 10% price decline, but it would be tough to swallow a 25% to 50% price decline.
2)First to rebound. As the hockey great Wayne Gretzky says, "I skate to where the puck is going to be, not where it has been" Its all about the rebound....which areas are going to come back first. I could go on and on about how great California is/was/going to be, but in summary, on its own, California is the seventh largest economy in the world. I recently read a 100+ page report by one of the largest investment banks that interviewed over 200 institutional investors from around the world that managed a collective $1 trillion in assets. The most interesting question was: "Once the world economy shows signs of improving, where is the first place you would invest?" 46% replied the United States. So you have to ask yourself not where is the money now, but rather where is it GOING to be invested?
Probably the only objection or concern that we had could be summed up with this question. "Why would I want to own a building all the way in California at 30% off when I can buy a newly built building here in Malaysia at 50% off?"
My Answer is in two parts:
1)Safety. Lets say the world economy gets worse, I feel that property in select areas of California would take less of a hit than a property in Malaysia. With a value/distressed strategy such as ours, the most difficult thing to do is to pick the bottom. No one can do that. But we are attempting to buy properties in the bottom segment of a real estate cycle, if our timing is off slightly, I'd rather have the cushion of owning a high quality property that will not get beat up so bad. We can all take a 5% to 10% price decline, but it would be tough to swallow a 25% to 50% price decline.
2)First to rebound. As the hockey great Wayne Gretzky says, "I skate to where the puck is going to be, not where it has been" Its all about the rebound....which areas are going to come back first. I could go on and on about how great California is/was/going to be, but in summary, on its own, California is the seventh largest economy in the world. I recently read a 100+ page report by one of the largest investment banks that interviewed over 200 institutional investors from around the world that managed a collective $1 trillion in assets. The most interesting question was: "Once the world economy shows signs of improving, where is the first place you would invest?" 46% replied the United States. So you have to ask yourself not where is the money now, but rather where is it GOING to be invested?
Thursday, April 30, 2009
The Most Recent Office Vacancy Rates Do Not Seem To Be In Line With Job Losses
Think about this for a moment. We've had MASSIVE job losses, the worst economy since the great depression-16 months into it, yet office vacancy rates are around 12%. I've seen estimates that the overall negative absorption is only around 15 to 25 million square feet. Hardly much inventory at all. The early 1990's witnessed a peak vacancy rate of 13%. Look to your left, now look to your right, isn't this economy much worse?
I think that there is a huge discrepancy between what is available for lease and what is hidden, or off market. When you look back at the last real estate correction (2001) in our target market (California), it was primarily related to the tech bubble. Small technology companies they were supposed to grow 100 fold in five years swallowed millions of square feet of office space. After they blew up, immediately their office space went on the market, it was either absorbed, or it would sit on the shelf as inventory. You knew about the available space. What I think we are seeing now, and my point, it that vacancy rates should be a lot higher for the simple reason that the companies that are initiating layoffs, are major FORTUNE 500 companies. They are very reluctant to surrender nice sizable properties for the simple reason that it is so hard to acquire properties that fit their needs. Many large companies probably expect to rehire, the economy to turn around soon, or various other reasons to hang in there. But if this does not happen quickly, they will be forced to unload. Much different attitude than a small tech company with 100 employees.
My feeling is there are lots of unlisted office space available that are not being reflected in the most recent vacancy rate reports. Reality is that the true vacancy rate could be in the high teens. That puts tremendous pressure on values....and creates more situations for us to sniff around in and buy the right property at our price.
I think that there is a huge discrepancy between what is available for lease and what is hidden, or off market. When you look back at the last real estate correction (2001) in our target market (California), it was primarily related to the tech bubble. Small technology companies they were supposed to grow 100 fold in five years swallowed millions of square feet of office space. After they blew up, immediately their office space went on the market, it was either absorbed, or it would sit on the shelf as inventory. You knew about the available space. What I think we are seeing now, and my point, it that vacancy rates should be a lot higher for the simple reason that the companies that are initiating layoffs, are major FORTUNE 500 companies. They are very reluctant to surrender nice sizable properties for the simple reason that it is so hard to acquire properties that fit their needs. Many large companies probably expect to rehire, the economy to turn around soon, or various other reasons to hang in there. But if this does not happen quickly, they will be forced to unload. Much different attitude than a small tech company with 100 employees.
My feeling is there are lots of unlisted office space available that are not being reflected in the most recent vacancy rate reports. Reality is that the true vacancy rate could be in the high teens. That puts tremendous pressure on values....and creates more situations for us to sniff around in and buy the right property at our price.
Thursday, March 26, 2009
Great Cover Article in the WSJ today about how Delinquency Rates on Commercial Real Estate Loans are Skyrocketing
On one hand, I'm shocked at the accelerated pace of defaults. I thought we
would see these levels in several months. Not now! On the other hand, this
is what we want. Our main focus is commercial Real Estate in California.
With the amount of delinquencies coming, that translates into lots of distressed
sales in our target markets. There will be many opportunities to pick our
"pitch to hit". My prediction is that we will have two or three times the
amount of inventory to choose from in a short while.
would see these levels in several months. Not now! On the other hand, this
is what we want. Our main focus is commercial Real Estate in California.
With the amount of delinquencies coming, that translates into lots of distressed
sales in our target markets. There will be many opportunities to pick our
"pitch to hit". My prediction is that we will have two or three times the
amount of inventory to choose from in a short while.
Highlights for the Wall Street Journal article:
- Commercial Real Estate loan defaults have doubled since September
- US Banks could suffer as much as $250bb in commercial r/e related losses in this downturn versus $48bb in the recession of the early 1990's
- Declines in Commercial r/e could be between 35% to 45%
- Of the estimated $154bb in Commercial r/e loans coming due over the next three years, 2/3 may not qualify for refinancing
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