Watch List (Nov. 16-22): Seismic Shocks

A Weekly Report of Property and Credit Market Conditions and Real Estate Investment Opportunities

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By Mark Heschmeyer

November 20, 2008

In this week's issue:

CalPERS housing program loses $3.1 billion.

Thomas Properties Group presses courts for needed $100 million from Lehman Bros.

Non-performing matured loans boosting CMBS, CDO delinquencies.

Rivals Cushman & Wakefield, CBRE thinking alike.

Seismic liquidity shocks.

LaSalle Hotel cuts outlook.

Don't blame this cancelled project on the economy.

Plus, we give you the latest properties on the Watch List: Specially Serviced in: Tampa, FL; Westborough, MA; Comstock Park, Detroit and Lake Orion, MI; St. Ann, MO; Webster, NY; Cincinnati and Mansfield, OH; Oklahoma City, OK; and Lubbock, TX.

Editor's Note: Loans of Concerns

We've added a new feature to Watch List this week: Watch List: Loans of Concern. Readers have been asking for some time for information on properties experiencing operational issues but that have not gone into special servicing. That's what we give you with Loans of Concern. This week's issue, includes properties in: Phoenix, AZ; Alameda, Burbank, CA; El Dorado Hills and Milpitas, CA; Grand Rapids and Livonia, MI; Riverside, MO; Charlotte, NC; New Hyde Park, NY; Philadelphia, PA; and El Paso, TX.

The properties identified on this list have not gone into special servicing and are not delinquent or in default in their loan repayments. However, they have been identified in the past week by various bond rating agencies as loans of credit concern within a CMBS portfolio. We identify the properties and give you the rating agency comments on these properties.

There is one catch. You can only this get this report (and all of the stories included in this column, too) by downloading the file in Adobe pdf format. You can download the file here.

CalPERS Housing Program Loses $3.2 Billion

After losing $3.2 billion in value, The California Public Employees' Retirement System (CalPERS) is restructuring its housing investment portfolio.

In reports to the pension fund's investment committee, CalPERS investments staff reported the market value of its housing assets stood at $6.1 billion as of June 30, 2008, down from its original cost of $9.3 billion.

This $3.2 billion reduction represents a 35% decline in market value of the CalPERS housing portfolio. CalPERS is the nation's largest public pension fund with more than $189 billion in assets.

The negative housing program performance hurt CalPERS total real estate portfolio return. The gross returns for the total real estate portfolio were negative for the most recent quarter (-12.7%) and 1-year (-11.2%). The gross 3-year (11.6%), 5-year (19.6%) and since inception (11.7%) returns are positive.

The net returns for the total real estate portfolio were also negative for the most recent quarter (-13.0%) and 1-year (-12.6%). The net 3-year (8.5%), 5-year (15.5%) and since inception (10.3%) returns are positive.

In addition to the market downturn, CalPERS said the housing program's performance was impacted by the following contributing factors.

The housing program commitments expanded and resulted in an exposure that, at its peak, was approximately 20% of the total Real Estate portfolio.

The housing program utilized, on a historical cost basis, leverage of approximately 60%, including loan guarantees, thereby significantly increasing the volatility of the program performance.

There were over-concentrations of investments in the housing program by vintage year, geography, and product type. And

Like the majority of industry participants, existing housing program systems did not identify the scale of the market decline and provide corresponding risk mitigation measures.

"This portfolio reflects the realities of today's market and accurately depicts readjustments of price and risk," said George Diehr, chair of the Investment Committee.

"We intend to keep the vast majority of our assets," Diehr added, "and our long term horizon enables us to be patient. If the market values increase over time, we can expect cash flow back and a return on our capital."

As part of its review and restructuring CalPERS is also looking at its partners. CalPERS housing partners include Hearthstone, IHP Capital Partners, McFarlane/Weyerhaeuser Partners, Newland Capital Advisors, Resmark Equity Advisors, and Wells Fargo Reality Advisors.

The McFarlane Weyerhaeuser (MWHP) partnership has undergone partial restructuring. Landsource, co-owned by MWHP, Lennar, and LNR is currently under bankruptcy protection, and CalPERS is awaiting more information on the creditors' proposed plan for liquidation of assets. The proposed plan will be subject to a court hearing process, including comment from creditors and debtors. The plan would need approval of the Bankruptcy Court before proceeding.

Three other partnerships, Resmark, IHP, and Wells Fargo, are currently under evaluation and may undergo some level of restructuring.

"We will continue to execute upon a strategy to achieve appropriate investment performance and expect the restructuring of our valued partnerships will be largely completed over the next 12 months," CalPERS said.

CalPERS restructuring also so far has included the following actions.

Retained legal, industry and financial advisors to evaluate and pursue appropriate alternatives.

Conducted a comprehensive financial review of assets and funds throughout the housing program.

Completed appraisals of all assets.

Discontinued certain non-viable investments.

Restructured certain outstanding debt and reduced leverage. And

Revised system policies and controls.

Thomas Properties Group Presses Courts for Lehman's $100 Million Commitment

TPG-Austin Portfolio Holdings LLC, for which Los Angeles-based Thomas Properties Group Inc. serves as the manager, is looking to the U.S. Bankruptcy Court to get Lehman Brothers Holdings Inc. to ante up on $100 million it promised to the group.

"We are seeking to compel Lehman Brothers to accept and honor its obligation to fund the $100 million revolving credit facility under the Credit Agreement with TPG-Austin," said Jim Thomas, chairman, CEO and president of Thomas Properties Group. "In the alternative, we are asking for authority to allow TPG-Austin to seek alternative financing, secured by liens superior to the existing liens in favor of Lehman Brothers."

According to TPG's motion with the courts, the money is critical. Without it, TPG-Austin will run out of money in January and won't have the $19 million it needs to meet its property tax payments.

"We believe that it is in the best interests of all parties to resolve this issue, and we are asking the court to act quickly in this matter. We continue to have confidence in the Austin market and in this portfolio," Thomas said.

TPG-Austin owns a portfolio of 10 properties totaling 3.5 million square feet in Austin, TX.

Thomas Properties Group, indirectly through its joint venture with the California State Teachers Retirement System (CalSTRS), holds a 6.25% interest in TPG-Austin.

An affiliate of Lehman Brothers currently owns 50% of the equity in the Austin portfolio.

Lehman Commercial Paper, Inc. is the loan syndication agent on a $292.5 million Credit Agreement under which TPG-Austin is the borrower. Under the Credit Agreement, a $192.5 million term loan was fully funded, and a $100 million revolving credit facility remains unfunded.

TPGI has not yet determined if alternative debt financing or additional equity investment is available to TPG-Austin or what the terms of such debt or equity capital will be.

Non-Performing Matured Loans Boosting Delinquencies

An uptick in non-performing matured loans drove overall U.S. CMBS delinquencies higher in October, according to the latest U.S. CMBS loan delinquency index by Fitch Ratings.

Similarly, 14 new delinquent loans led to the fourth straight monthly increase in the U.S. commercial real estate loan CDO delinquency last month, Fitch reported.

"With CMBS issuance at a standstill and portfolio lenders cautiously managing their balance sheets, borrowers are facing increased difficulty accessing capital to refinance maturing loans," said Susan Merrick, managing director and CMBS group head. "Given the illiquidity in the market, we expect the proportion and dollar balance of maturity defaults to continue to grow at a fast pace with delinquencies approaching close to 75 bps by the end of this year."

The proportion of non-performing matured loans within the CMBS loan delinquency index has increased significantly over last year and particularly has trended upward in recent months. In October 2007, non-performing matured loans made up 16% of new delinquencies and 4% of the overall index. This compares to the 42% of new delinquencies and 15% of the overall index comprised of non-performing matured loans one year later, as of October 2008.

"Timely repayment of maturing loans will continue to be a concern until global economic pressures subside and both lender and investor confidence are restored," said Merrick.

On the CDO side, refinancing to third parties also has remained difficult with nearly 90% of all new delinquencies this month considered matured balloon loans. Overall, 67% of the CREL delinquency index consists of this type of delinquency.

While 74% of matured balloon loans continue to make monthly payments, approximately 26% (18% of CREL delinquency index) are considered non-performing with inadequate cash flow to meet debt service obligations. In these cases, sponsors have refused or are unable to infuse additional equity into the projects.

"Borrowers continue to be challenged to meet all extension requirements by loan maturity," said Karen Trebach, senior director. "The increase in matured balloons this month reflects that the extension process is taking longer both to negotiate and document."

Rivals Cushman & Wakefield, CB Richard Ellis Thinking Alike

Rivals CB Richard Ellis Group Inc. and Cushman & Wakefield have nearly simultaneously launched new groups to target investors challenged with distressed commercial real estate assets.

CBRE's Restructuring Services Group plans to provide services for all commercial property types as well as investment-grade residential properties.

Spencer Levy, senior managing director, will lead the CBRE Restructuring Services Group. The group will provide services in the areas of recapitalizations, distressed loan sales and workouts; asset and portfolio valuation; surplus space disposition and portfolio optimization.

Clients served by the group will include financial institutions (including banks, insurance companies, savings & loans) and other entities focused specifically on distressed assets, special servicers and bankruptcy specialist firms.

Cushman & Wakefield formed a Resolution Group, an interdisciplinary team of property investment and management professionals from across the United States, to offer clients a coordinated approach to maximize the value of individual assets, portfolios and loans that are facing a variety of challenges stemming from the ongoing financial crisis.

The group includes professionals with specialized expertise in the areas of asset management, financial analysis, valuation, leasing, property management, project management, investment sales, loan sales, debt and equity finance and litigation support.

"The challenges borne by the credit crisis and slowdown in the economy have increased demand among our clients for a comprehensive approach to problem resolution from the capital markets and real estate perspective," said Frank Liantonio, executive vice president of Global Capital Markets for Cushman & Wakefield.

Separately, Cushman & Wakefield, which had lost more than $40 million for the first six months of the year, returned to profitability last quarter. IFIL Spa, the Italy-based majority owner of the New York brokerage firm, reported that Cushman & Wakefield posted a profit of nearly $7 million in the third quarter.

Seismic Liquidity Shock

Senior real estate executives say they believe that the dysfunctional U.S. financial markets and the broad economic downturn have paralyzed the income-producing real estate sector -- encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings, according to The Real Estate Roundtable Sentiment Survey for fourth quarter 2008.

"Real estate is now experiencing a seismic liquidity shock. Even though loan delinquencies in the sector are very low, the ongoing lack of credit and drop in asset values has paralyzed the market," said Jeffrey D. DeBoer, Roundtable president and CEO. "It is now clear that unless bold policy actions are taken to specifically assist commercial real estate markets, this problem will intensify to mammoth proportions."

The fourth quarter 2008 sentiment survey shows senior executives' confidence in the real estate market has deteriorated below last quarter's depressed levels. Nine out of 10 of respondents said conditions are worse, and more than half stated that conditions are "much worse" than 12 months ago.

Of all respondents, nearly four in 10 expect real estate market conditions to get worse in 2009, up from 24% in the previous quarter.

LaSalle Hotel Cuts Outlook

LaSalle Hotel Properties rescinded its prior outlook for 2008 due to the continued rapid deterioration in the overall economic environment and lack of clarity related to its negative impact on the operating fundamentals of the lodging sector.

"At this time we do not believe that we can provide a credible outlook for the remainder of the year as expected performance at our hotels continues to decline as demonstrated by our portfolio experiencing a RevPAR decline of approximately 11.4% in October versus our projected decline of 6.7% just three weeks ago," said Hans Weger, LaSalle Hotel CFO.

LaSalle Hotel Properties owns 31 upscale and luxury full-service hotels, totaling approximately 8,500 guest rooms in 14 markets in 11 states and the District of Columbia.

Don't Blame This One on the Economy

Gaylord Entertainment terminated its plans to develop a resort and convention hotel in Chula Vista, CA. Prolonged planning and approval processes, a complicated regulatory and legal structure, and excessive off-site infrastructure costs contributed to this decision.

"We are very disappointed to have made this decision since the greater San Diego region is such an important convention market," said Colin V. Reed, chairman and CEO of Gaylord Entertainment. "However, over the last year to 18 months, this project has become much more complicated and risky as infrastructure costs escalated and the time line for the hotel was extended by the very complicated and prolonged approval process. While many will likely attribute this announcement to the rapidly deteriorating economy, the fact is that the complexity and costs of the project were the main drivers of this decision."

Read Watch List First

The Watch List is a powerful one-two-combination of both top-down macro analysis and bottom up micro real estate news, as well as valuable leads about companies expanding and contracting and property and loan investment opportunities. It is available for free by e-mail, which is the quickest way to review all of the news in the column as soon as it is published and link directly to the news and features you want. Just e-mail me your name, title, company, company business, city, state, and e-mail address. You can reach me by clicking on the byline above or e-mailing me at Mark Heschmeyer

Property Watch List

Property	Property Type	CMBS	Special Servicer	Notes
855 Publishers Parkway & 655 A B C Basket Road, 855 Publishers Parkway & 655 A B C Basket Road, Webster, NY	Industrial, 464,091 square feet	Bear Stearns 2000-WF2	Capmark Finance	The loan transferred to special servicing in December 2007 due to imminent default. A foreclosure complaint was filed in April 2008 and the court appointed a receiver. A foreclosure sale was authorized in September. The property is 81% occupied, but occupancy is expected to drop to 32% in December based on departure of two tenants.
Solectron Building, 125 Fisher St., Westborough, MA	Industrial, 198,000 square feet	Bear Stearns 2000-WF2	Capmark Finance	The loan transferred to special servicing in October due to imminent default as the borrower indicated it would no longer fund loan payments. The property has been vacant for three years. The borrower is seeking debt relief or facilitating a transition to the lender. Foreclosure is anticipated.
Village East Apartments, 610-614 Orion Road, Lake Orion, MI	Multifamily, 39 units	Bear Stearns 2000-WF2	Capmark Finance	The loan transferred to special servicing in October for imminent default. The borrower indicated that increased expenses and decreased rents have resulted in insufficient cash flow to cover current debt service even though the property is 100% occupied. The borrower requested a loan modification, which the special servicer has denied.
Amaretto At North Tampa, 14401 N. 22nd St., Tampa, FL	Multifamily, 96 units	First Union 2002-C1	CW Capital Asset Management	The loan transferred to special servicing a year ago due to 60-day delinquency. Foreclosure was completed in June. A real estate owned business plan was approved that included capital expenditure plan to be initiated/completed by October and then marketing the asset for sale in November 2008.
Western Heights, 13160 W. Outer Drive, Detroit, MI	Multifamily, 100 units	First Union 2002-C1	CW Capital Asset Management	The loan transferred to special servicing in March due to a 60-day delinquency. The borrower has no plans for bringing the loan current. Ten units are gutted and down. Jim Allen of Miller Canfield was engaged to commence foreclosure for sometime in December.
Northwest Plaza Shopping Center, 500-650 Northwest Plaza, St. Ann, MO	Retail, 1,825,218 square feet	GCC 2006-FL4	Wachovia Bank	The lender sent a default/acceleration notice to the borrower with a deadline of Nov. 3.
Alpine Market Place Shopping Center, 4255 Alpine Ave. NW, Comstock Park, MI	Retail, 23,965 square feet	GMAC 2001-C1	Capmark Finance	The loan was transferred to special servicing in July due to imminent default. As of June, the center had only one tenant reporting occupancy of 26%. The center has been listed for sale but no serious offers have been received. The borrower has indicated it will no longer advance funds to make the debt service payments. Local counsel has been engaged and is pursuing foreclosure.
Cherry Hill Apartments, 4708 SE 44th St., Oklahoma City, OK	Multifamily, 104 units	GMAC 2001-C1	Capmark Finance	The loan transferred to special servicing in May because of payment default. The borrower initially brought the loan current then lapsed again into payment default. Counsel has been engaged and directed to pursue foreclosure. The borrower re-instated the loan in September.
Wellington Apartments, 2102-2105 33rd St. & 2100-2101 34th St., Lubbock, TX	Multifamily, 121 units	LB-UBS 2007-C6	Midland Loan Services	Occupancy as of Sept. 25 was 56.38%.
Gateway Retail, 2010-2016 August Drive and 68 Briggs Drive, Mansfield, OH	Retail, 20,216 square feet	LB-UBS 2007-C6	Midland Loan Services	Collections in process.
Asmann Apartments, 1607 Asmann Ave., Cincinnati, OH	Multifamily, 91 units	GMAC 2001-C1	Capmark Finance	The loan was about two months delinquent.
Westwood Apartments, 2503 Harrison Ave., Cincinnati, OH	Multifamily, 76 units	GMAC 2001-C1	Capmark Finance	The loan was about two months delinquent.

Editor's Note: Loans of Concerns

CoStar Columns

For news of companies with increasing space needs, see Expansions & Relocations, a weekly column of major corporate headquarters expansions and relocations.

For news of companies shedding commercial space, see Closures & Layoffs, a weekly listing of future corporate downsizings.

For news of property financing and a listing of loans nearing their maturity, see Property Finance, a weekly column of commercial real estate finance news and loan leads.

For news of properties about to go through a change of ownership, see Under Contract, a weekly listing of properties to be sold or acquired.

For development and construction news, see In the Pipeline.

For retail news including expansions, closings and mergers and acquisitions, see CoStar's Retail News Roundup.

For green building news from CoStar, see Green Lede.

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