A Chill Economic Wind Blows Cold for Real Estate as Survivors Brace for an Even Chillier 2009
The wild ride from business boom to real estate bust ended abruptly in 2008, leaving many in commercial real estate, and in several other industries, with a bad case of whiplash -- aggravated by the extensive shoe gazing over what might have been if the market had played out differently.
The year began with some industry experts expressing cautious, and in retrospect misplaced, optimism about a modest market correction. But the economy, already likely in recession a year ago, simply went from bad to worse. Conditions came to a head in September amid fears by some that the entire financial system might collapse. Credit markets stayed frozen and bad commercial loans stacked up. Buyers and sellers stayed on the sidelines, unable to price deals and afraid to make a move they’d regret later.
The nation shed nearly 2 million jobs through November of 2008, and still counting. Corporate downsizing drove a wedge into property fundamentals, with rising vacancies, falling cash flows and plunging values pummeling investor confidence. With flat or negative absorption in many U.S. markets, job losses likely will spell trouble for year-end absorption totals, further dimming the outlook for office and industrial space in 2009.
Indeed, commercial real estate is facing the prospect of its worst year since the depression of 1991-1992, with values expected to plunge further, foreclosures and delinquencies expected to rise sharply and the limping economy likely to put a damper on property-level returns. The good news is, and it’s arguable, that the market may now be at least chronologically closer to the beginning of a recovery than the beginning of the downturn in 2007. Tens of billions of dollars in opportunity capital waits on the sidelines for the market to find a bottom, though some of that, too, is fleeing.
The nearly 10,000 news stories published by CoStar’s news and research teams over the last 12 months - powered by
CoStar Property Professional, the industry’s largest database of commercial property -- comprise a rich record of the trends and transactions in 2008. In this final issue of
CoStar Advisor for 2008, we look back at some of the top headlines and most-read and talked about articles published
in our free weekly newsletter (sign up here if you're not presently a subscriber) over the last 12 months.
CoStar serves as an unparalleled source of market intelligence and insight -- an agent to help navigate shifting economic conditions. We hope our news coverage provides additional insight and value and we look forward to reporting on market happenings, both locally and nationally, in the year ahead.
JANUARY
Bankers Re-Evaluate Deteriorating Real Estate Loan Portfolios
Banks spent the last quarter of 2007 trying to stay ahead of tightening credit markets and the disintegrating economy, a fact that became evident in financial reports released in early January. Rising levels of troubled loans appeared most notably in residential mortgage portfolios, which led to a steep jump in expenses, bad loans and loan-loss reserves.
Losses were up in most of the major loan categories -- subprime, Alt-A, home equity, consumer, credit card, single-family and multifamily development and construction. But most banks reported generally satisfactory results with the rest of their commercial real estate portfolios. Banks warned, however - presciently, as it turns out -- that asset quality could continue to deteriorate in 2008.
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New Year Starts With a Bang!...of Retailers Shuttering Stores
While cautious optimism was the mantra for retail real estate at the beginning of 2008, the year started out with a round of post-holiday store closings that would become all too familiar by year’s end. Many expect another flurry of bankruptcies and closings in the New Year.
(For more on the major retail store closings and bankruptcies that occurred this year, see related CoStar Advisor coverage)
Anaheim, CA-based Pacific Sunwear of California, women’s apparel retailers Talbots, Inc. and Liz Claiborne, Rite Aid, Macy’s, Harvey Electronics, Krispy Kreme and Starbucks announced hundreds of closings in late December 2007 and January 2008,
while troubles began to mount for Australia's Centro Properties Group -- the second-largest shopping center owner in Australia and the fifth-largest in the U.S. at the time -- which spend the year trying to stave off bankruptcy liquidation.
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Las Vegas Mega-Casino Receives Foreclosure Notice
The credit crunch that gripped the nation's debt and capital markets arrived on the Las Vegas Strip in January in the form of a notice of default from Deutsche Bank to Ian Bruce Eichner, the developer of the $3 billion Cosmopolitan Resort & Casino project under construction on Las Vegas Boulevard. A construction loan of $760 million matured, though Deutsche Bank agreed to work on a month-by-month basis with general contractor Perini Building Co. Inc. to continue construction on the 2,988-room casino and resort.
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By August, however, it was reported that MGM Mirage, Starwood Hotels & Resorts Worldwide, Hyatt and Hilton were considering purchasing the troubled property.
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Troubles Mount for Multifamily Owners
Just a month after the collapse of MBS Cos.' Texas apartment empire came to light came news of two more major multifamily owner/managers trying to steer away from loan defaults and foreclosures.
Atherton-Newport Investments LLC, a real estate investment and development company in Irvine, CA, controlling about 5,000 units, filed for Chapter 11 bankruptcy protection in Southern California. In Florida, student housing apartment owner Booth Companies in Tallahassee defaulted on numerous loans backing at least 18 complexes comprising 2,400 units near Florida State University in Tallahassee.
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More Top Stories in January
FEBRUARY
Invested in the Past? Buyers and Sellers at Opposing Ends of the Bargaining Table
From the outset of 2008, it was clear buyers and sellers remained at opposite extremes in terms of pricing, further exacerbating the deal paralysis gripping the market.
Save some 1031 exchanges getting done out of necessity to meet tax obligations and some institutional properties trading due to the flow of foreign capital taking advantage of the depressed dollar, industry executives and brokers reported almost no bread-and-butter investment sales activity, a condition that persisted through the year.
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Mezz Debt Hot Again as Owners Scramble to Fill Funding Gap
Preferred equity and mezzanine financing filled some -- but by no means all -- the gaping holes left in the commercial mortgage market by the collapse of commercial mortgage-backed securities (CMBS). In addition to the return of the traditional mezzanine lenders, some of the largest and most deep-pocketed real estate investment companies got a piece of the action by scooping up pools of existing mezz loans.
In an example from the hotel and restaurant sector, Ashford Hospitality Trust Inc., a REIT, in January 2008 said it would joint venture with Prudential Real Estate Investors on a $400 million partnership for U.S. hotel investments.
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Macklowe Served With Default Notice on Manhattan Properties
The increasing depth of commercial mortgage woes became clear when Macklowe Properties was served with a notice of default as talks stalled with lenders to refinance $7 billion in debt taken on following the New York developer’s blockbuster purchase of seven Manhattan skyscrapers from Equity Office Properties Trust in early 2007.
Firm founder Harry Macklowe had tried to work out an agreement with Deutsche Bank AG and other senior debt holders for $5.8 billion in loans, but junior debt holder Vornado Realty Trust (NYSE:
VNO) opposed the plan on the grounds it would be forced to write down its investment if the buildings are sold for less than their purchase price in the softening market. At the beginning of February 2008, Macklowe turned control of the portfolio over to Deutsche Bank as the company struggled futilely to refinance the loans in the face of the credit crunch.
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More Top Stories in February
MARCH
Spooked: Credit Market Concerns Haunt Commercial Mortgages
New CMBS issuance declined from $61.2 billion in the first quarter of 2007 to $5.1 billion through March 2008, CoStar reported. No commercial real estate collateralized debt obligation (CDO) issuances were reported in first-quarter 2008, compared to $8.1 billion in the quarter a year earlier. With nowhere to sell loans, lenders followed suit and virtually turned off the spigot for new commercial real estate loans.
With reduced availability of credit and concern about the vulnerability of commercial real estate properties in an economic downturn, CMBS yields increased sharply and spreads widened to gaps not seen since the late 1990s.
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Bleeding Indicators? Less Work For Architects, Contractors May Signal Tough Times Ahead For Developers
In boom times and bust, architects and others in the design and construction sectors are among the first to feel changes in the direction of economic winds in real estate. An early indicator of today’s near-shutdown of the commercial construction pipeline surfaced when a monthly index released by the American Institute of Architects (AIA) measuring billings from architects for on-the-board projects dropped sharply to a five-year low -- the steepest year-over-year decline since 2001.
The index continued to hit record lows through the year, signaling at least another year of pain for commercial developers and contractors.
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More Top Stories in March
APRIL
CoStar Study Finds Energy Star, LEED Bldgs. Outperform Peers
A widely reported study by CoStar Group found that sustainable "green" buildings outperform their non-green peer assets in key areas such as occupancy, sale price and rental rates -- sometimes by wide margins.
The results indicate a broader demand by property investors and tenants for buildings that have earned either LEED® certification or the Energy Star® label and strengthen the "business case" for green buildings, which proponents have increasingly cast as financially sound investments. According to the CoStar study, LEED buildings command rent premiums of $11.33 per square foot over their non-LEED peers and have 4.1 percent higher occupancy. Rental rates in Energy Star buildings represent a $2.40 per square foot premium over comparable non-Energy Star buildings and have 3.6 percent higher occupancy.
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Credit, Liquidity Crunch Fuels Surge in Sale-Leasebacks
Companies hoping to recycle capital and cut operating costs became more interested than ever in selling their buildings and becoming tenants.
Oak Brook, IL-based Inland Real Estate Acquisitions, Inc. closed on the final portion of the $736 million purchase and leaseback of property in nine southern states from SunTrust Bank involving 433 triple-net lease properties encompassing more than 2.2 million square feet. Atlanta-based SunTrust planned to lease back the property from Inland Real Estate Acquisitions, which negotiated the deal on behalf of an entity within The Inland Real Estate Group of Cos., for 10 years with an option for multiple renewals.
Retail banking was but one of a growing assortment of corporate users, private companies and institutional owners seeking to unlock the value of their assets, ranging from pharmaceutical firms and hospitals to store chains, warehousers and manufacturers.
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More Top Stories in April
MAY
$2.8 Bil. GM Building Sale the Most Ever Paid for a Single Office Building
Macklowe Properties’ $4 billion sale of four Midtown Manhattan office towers, including the 2-million-square-foot General Motors trophy tower at a record-shattering price of $2.8 billion -- the most ever paid for a single office building - brought a close to nearly 18 months of high-stakes drama that extended from the corporate boardrooms of powerful Manhattan law firms and financial lenders, to the family room of one of the city's storied building owners.
Boston Properties (NYSE:
BXP) agreed to acquire the four towers for $3.95 billion. The $2.8 billion paid for the GM building, as confirmed by CoStar in an SEC filing, was twice the $1.4 billion that veteran developer Harry Macklowe paid for it in 2003, which also set a record at the time and a transaction that some say marked the beginning of the most recent real estate pricing run-up.
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Watch List (May 4-10): Lenders Continue To Tighten Money Supply
Domestic and foreign banking institutions reported having tightened their lending standards and terms further on a broad range of loan categories in the first quarter of 2008, according to the Federal Reserve. The number of domestic banks reporting tighter lending standards was close to, or above, historical highs for nearly all loan categories in the survey.
At the same time, demand for bank loans from both businesses and households reportedly weakened further in the first quarter, although by less than had been the case over the previous quarter. The Federal Reserve Board's April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months.
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More Top Stories in May
JUNE
Industry Weighs In On JLL/Staubach Marriage
Real estate insiders mostly gave a thumbs up to the merger between Jones Lang LaSalle and Staubach Co., the latest in a series of blockbuster mergers to sweep the brokerage industry.
Staubach Retail and Cypress Equities were not part of the transaction.
See related CoStar retail coverage
In the deal announced in June after months of speculation, the companies said they would operate under the Jones Lang LaSalle name, creating a commercial real estate firm likely surpassed in the U.S. only by Los Angeles-based CB Richard Ellis in size. The acquisition of Dallas-based Staubach Co., founded in 1977 by Hall of Fame Cowboys quarterback Roger Staubach, added 14 new offices and more than 1,000 new employees to Chicago-based JLL, strengthening the global company's presence in key U.S. markets such as New York, Southern California, Washington, D.C., Chicago, Northern California, Dallas, Houston, Atlanta and New Jersey.
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When It Comes To Job Growth, U.S. Regions Running Hot and Cold
The housing slide and resultant credit crunch has impacted every sector of the country, but the economic downturn has been felt more strongly in some regions than in others. For example, four states -- California, Illinois, Michigan and Ohio -- have accounted for more than half of all of the layoffs in the first three months of 2008. And while housing prices have declined across the board, two markets -- Dallas and Charlotte -- continued to defy the trend and have posted two consecutive periods of price increases.
CoStar Advisor took a look at some of the fundamental data driving the economy (commercial real estate leasing and sales activity, jobs, population, housing prices and employment productivity) on a regional basis.
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More Top Stories in June
JULY
High Gas Prices Driving Real Estate in New Directions
Gas prices were a big issue for commercial real estate through late summer, when prices began to fall. The $4-plus/gallon of gas peak hit last summer pushed the real estate industry in unforeseen ways.
It changed the way brokers market property, how brokerages charge clients, how managers budget improvements, how tenants decide where to locate, how local governments approach development and transportation issues. It changed how consumers decide where to spend money, how logistics firms manage their distribution centers, how landlords calculate their expense pass-throughs, and how lenders fund construction projects and acquisitions. It had investors adjusting their acquisition criteria and had asset managers recalculating cash flows.
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How To Survive, and Perhaps Even Thrive, In a Bear Market
The bear market compelled some property investors to revert to a traditional way of doing business: the good-old buy-and-hold.
Mid-year market conditions clearly pointed to flat rental growth, rising property vacancies and a drought in property sales. CoStar Advisor polled readers to get their advice on how to "survive" today's market conditions. What we heard is that opportunities to thrive abound.
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More Top Stories in July
AUGUST
A Dud of a Thriller? Commercial Real Estate Drama Lacks a Killer
Just as a good thriller can bring an audience to the edge of its seat in anticipation of that pinnacle of dread, the anxiety mounted in intensity last summer within commercial real estate markets waiting for that long-predicted moment of economic distress when it will all come crashing down.
The problem, if that's the right word, is that the market had yet not played out to a well-scripted ending. Lawrence Yun, NAR chief economist, said commercial real estate activity is projected to weaken over the next six to nine months, as measured by net absorption and the completion of new commercial buildings.
"The pace of decline has intensified due to job cuts and very sluggish economic activity since the beginning of the year, particularly in those industries requiring commercial building spaces," he said. "We anticipate the weakest commercial brokerage activity in nearly three years as a result."
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Updated: Merger Wave Continues with Joining of 4 Colliers Affiliates
Formalizing a partnership arrangement struck nearly two years ago, four independently owned Colliers affiliates combined under a single ownership entity last summer. The combination created a brokerage, investment and property services powerhouse -- and further advanced the trend of commercial real estate companies joining forces to provide a broader range of services across wider areas of the U.S. and around the globe.
After testing the waters since October 2006 through a partnership agreement, St. Louis-based Colliers Turley Martin Tucker, Baltimore-based Colliers Pinkard and Cassidy & Pinkard Colliers of Washington, D.C. announced in August they would formally merge their ownership into a single holding company and add Colliers ABR, Inc. in New York. The transaction closed Sept. 3 and the affiliates will continue to operate under their respective current names.
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More Top Stories in August
SEPTEMBER
What Impact Will Mounting Wall Street Troubles Have On Property Fundamentals?
In light of extraordinary turmoil on Wall Street in September, CoStar Group Senior Editor Mark Heschmeyer contacted executives across the country this week to gauge what impact the historic events are likely to have on commercial real estate. The result was a four-part package of articles examining all facets of the crisis.
New York City offices won't be the only properties to experience the fallout from the collapse of the Wall Street investment banking houses, according to industry executives. The people contacted by CoStar said the consolidation of the investment banking community would likely result in large amounts of space and real estate assets being returned to the market -- and at much reduced prices to current carrying value -- likely meaning a readjustment of property prices across the board.
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Bearish Real Estate Execs Try to Digest Bad News from Wall Street
A record 90% of executives polled for DLA Piper’s annual real estate outlook survey described their outlook as bearish in September. Most said the potential impact of the Wall Street financial crisis now eclipses the savings & loan bailout and market meltdown 20 years ago.
The weight of the long credit crunch and the more recent investment bank crisis -- and new worries about whether the proposed $700 billion rescue package will kill or cure the economy -- was etched on the faces of many among the more than 400 execs at the DLA Piper Global Real Estate Summit at the Four Seasons Hotel in Chicago.
Editor's Note: For news on commercial development, be sure and subscribe to In The Pipeline, a column covering new projects and construction. To receive the column for free every week by e-mail, join our distribution list.
Real estate opinion makers began sketching back-of-the-envelope plans of attack while acknowledging they have no real idea of what to plan for -- or how deeply the crisis, and the efforts of Congress, the Treasury and even the presidential candidates to craft the proposed recovery plan, will affect capital markets or professionals at the property level.
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INDECISION '08: Tenant Hesitation Hinders Leasing of New Projects
Call it the "deer in the headlights" effect. Caught in the glare of bad economic news, mixed-signals about the direction of the economy and an imminent change in administrations, many business tenants opted to stay in a holding pattern and renew leases in their current locations rather than incur the expense and risk of moving.
While that’s helping keep rents and occupancies fairly stable in most markets, brokers and analysts warned that developers may take a hit to their bottom lines in the next two years as absorption continues to flatten or decline in many U.S. markets. At most risk are developers delivering new projects. With tenants now opting to renew their leases rather than expand or move, developers may need to cut rents, beef up concession packages and generally accept lower yields to fill buildings that started construction a year or two ago during better times, commercial brokers told CoStar Advisor.
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More Top Stories in September
OCTOBER
Frozen By Fear: Forecasters Say Real Estate Likely to Hit Bottom in ’09
Economics -- the dismal science -- earns its nickname during real estate down cycles. And following the shock of seeing Wall Street all but implode, it should not be surprising that the first round of forecasts for next year painted a gloomy picture for commercial real estate -- though studious observers (especially those with ample cash for distressed property opportunities) may find a silver lining or two.
U.S. commercial real estate is facing the prospect of its worst year since the depression of 1991-1992, with property values expected to plunge, foreclosures/delinquencies rise sharply, and a limping economy likely to put a crimp in property cash flows, according to the 2009 Emerging Trends in Real Estate report released in October by the Urban Land Institute and PriceWaterhouseCoopers LLP. Total expected returns on private equity real estate investments will likely drop into negative territory for the first time in nearly two decades as the market hits bottom as expected in 2009.
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Huge TIC Real Estate Investor Succumbs To Fast Changing Market
Expect to see more job descriptions like this one currently posted on a career placement board:
Tenants-In-Common (TIC) Workout Specialist. The successful candidate will be responsible for leading the workout of our client's TIC portfolio. He/she will maintain frequent and open dialogue with TIC investors to advise on the optimal strategy for restructuring, refinancing or sales of assets, as appropriate.
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READY TO SWOOP? Industry Braces For New Era of Vulture Opportunity
Let the jockeying begin. Brokerage firms, investment banks, turnaround specialists and other service providers are once again beginning to maneuver for position in anticipation of the long-expected sales frenzy that accompanies any major market correction when sellers and lenders reprice property assets at deep discounts -- and investors with hundreds of billions in pent-up private equity dollars swoop in search of bargains.
At least, that's how it's always worked in past crashes. So far at least, the market has not seen a wholesale drop in asset values. But that isn't stopping firms schooled during past real estate bear markets from preparing for the return of opportunistic investors. For example, New York-based real estate investment banking firm Savills LLC, the U.S operation of the UK-based real estate giant, announced in October it had formed a distressed real estate division to help clients and their lenders restructure, recapitalize or form joint ventures to free up liquidity. Many other companies and startups have since followed suit.
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More Top Stories in October
NOVEMBER
Largest Problem Loans: The List No One Wants To Be On
While millions of dollars being pumped into the global financial system to ease the credit crunch, the rescue effort is still in the early stages and it remains difficult to obtain financing for commercial real estate or even refinancing for performing loans. There’s a growing sense that the protracted credit crunch will likely continue to swell the number of loan delinquencies and defaults.
One of the best glimpses into the state of real estate defaults and delinquencies can be found in the hundreds of billions of dollars of loans backing commercial mortgage-backed securities (CMBS). Fitch Ratings' current rated U.S. CMBS portfolio was composed of 475 transactions with a balance of $556 billion. As of Sept. 30, Fitch’s loan delinquency index was 45 basis points due to the delinquency of 488 loans representing a balance of $2.5 billion. Delinquent loans range in size from $87,740 to $112 million, with an average loan size of $5 million. Of all the loans, 17 have outstanding balances greater than $20 million.
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How Will Commercial Real Estate Handle the ‘Obama Effect’?
The election at least removed one element of uncertainty for the commercial real estate industry. Change is coming to Washington, DC, as promised -- and real estate is wasted no time in making sure its agenda is front and center for President-elect Barack Obama and the 111th Congress.
To almost no one’s surprise, CRE types tended to favor Republican John McCain over Obama -- based at least in part on concerns that the Democrat’s tax policies could adversely affect the industry’s ability to continue attracting significant amounts of investment capital. An August survey of 425 real estate executives by law firm DLA Piper found that just over 30% believed Obama would have a more favorable impact on the industry as president, versus 67% for McCain.
With Obama now making the transition into office and the Democrats having strengthened their holds on Congress, CoStar Advisor polled real estate professionals on their thoughts regarding what should be the top priorities during the first 100 days of the Obama Administration.
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For Brokers, Downturn Poses a Question of Depth and Duration
Presentations of third-quarter results to investors by the publicly held commercial real estate brokerage houses mirrored a world and a time of financial distress and uncertainty. Reflecting the difficult environment, the comments from the CEOs of CB Richard Ellis Group Inc., HFF Inc. and Jones Lang LaSalle Inc. were stern and offered little assurance regarding the near-term outlook for leasing, investment sales and credit markets.
Putting guidance on the future is a fool's errand, Brett White, CBRE president and CEO said in his conference call. However, there was no uncertainty in explaining current market conditions. In a word, they are horrible, execs agreed.
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More Top Stories in November
DECEMBER
Hotels Brace for One of the Worst Declines Since 1930s
Cracks are quickly spreading through the facade of support that has boosted the hotel real estate industry through the credit market turmoil of 2008. Some analysts believe those cracks are likely to expose more and more buildings and hotel operators to deeper and wider stress in 2009.
Through the first three quarters of ‘08, U.S. hoteliers held the line against hotel stay discounts despite declining levels of demand. In fact, room rates were up 3.7% through the first nine months of the year, a pace greater than the long-term average for growth.
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RISING WAVE? $1.35B SoCal Office Portfolio Default Unlikely to Be Last
Those holding commercial mortgages will navigate the gnarly surf of unpredictable capital markets in '09 and 2010, and some will inevitably wipe out. Softening real estate fundamentals made it difficult all year for over-leveraged landlords to make payments on the loans taken out to buy properties during the go-go market of 2005-07. And it figures to get worse.
One of the first of what some expect to be a large number of distress sales in coming months was the acquisition of 31 Southern California office properties totaling 56 buildings and 4.5 million square feet by Houston-based Hines in a transaction valued at $1.35 billion. Trouble is, all of the value associated with the sale is tied up in debt. The previous owners, Cabi Developers, defaulted on loan payments and were forced to turn over the properties to Hines or face foreclosure.
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Nothing On the Drawing Board: Architect Index Drops to All-Time Low
The latest round of predictions and surveys released in December won’t do much to assuage the anxiety gripping commercial real estate. The latest Architecture Billings Index, a monthly barometer compiled by the American Institute of Architects (AIA) to forecast future construction activity, offered cold comfort. The November index posted its lowest reading since AIA began the survey in 1995, resulting in a second straight month of record decline.
The report showed an index of 34.7, down from the 36.2 mark in October. The index for inquiries for new projects was 38.3, also a historic low. If the forecast holds, building activity will be virtually nil through most or all of 2009.
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More Top Stories in December