Global Viewpoints

Preparing for Hurricane Season

This Sunday will mark the official beginning of hurricane season, which runs from June 1 to November 30, and the forecast ranges from near-normal to above-normal, according to the National Oceanic and Atmospheric Administration (NOAA), because the climate patterns it expects have produced a wide range of activity in past seasons.

The outlook for 2008 calls for a 60 percent to 70 percent chance that there will be 12 to 16 named storms, including six to nine hurricanes and two to five major hurricanes that may reach Category 3, 4 or 5 proportions. An average season has 11 named storms, including six hurricanes, two of which typically reach major status.

What does that mean for commercial property owners?

First, it might be a good idea to make sure that their property and casualty insurance is up to date and provides the right amount of coverage, both in terms of the value of the building but also the amount of downtime and resulting loss of income an owner might experience because of a natural disaster. For example, a shopping center owner might end up losing rental income if the retailers in the center can't operate.

Commercial property catastrophe insurance pricing has decreased from the inflated premium levels of 2006 and 2007, and the supply of hurricane insurance for businesses has increased this year, according to Robert F. Howe, global leader of Property Operations for Marsh Inc.

The median rate reduction experienced so far is 11 percent to 12 percent. “Market rates are below pre-Hurricane Katrina levels and, in some cases, below pre-September 11th levels,” he says.

Because of these shifting supply-demand characteristics, it may be a good time for business to lock in pricing. “Some underwriters are offering long-term deals to clients, which is good news,” Howe adds.

Secondly, a comprehensive disaster plan is always a good idea. There are several companies across the U.S. that specialize in disaster planning and even if you're one of those people who like to focus on good things, there's a reason why "better safe than sorry" has become a cliché. Businesses should inquire about their customers’ and suppliers’ disaster management plans as well.

Condo Market Still in Trouble

While the apartment market motors along, the condo market is still idling according to the Multifamily Condo Market Index (MCMI). The index value for current market conditions in the first quarter 2008 dropped to 15.2 – roughly half the 29.6 value from a year earlier, according to the National Association of Home Builders (NAHB).

Similarly, builders’ expectations regarding market conditions six months from now is at 29.7, compared to 32.9, during the same time last year. "As condo development has slowed sharply, the heavy inventory overhand is being absorbed to some degree– some going to owner/buyers, and others into the rental market,” says David Seiders, NAHB’s Chief Economist. “As mortgage credit once again flows to truly qualified prospective buyers, the market will slowly climb back into balance.”

The MCMI index is derived from a quarterly survey of multifamily builders and developers, and the index is rated on a scale of 0 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses.

The component of the index that gauges current conditions in the condo market has been below 25 during the past five quarters. And, builder expectations for the next six months are only slightly more optimistic. The component tracking expectations stood at 29.7 in the first quarter of 200. In the first quarter of 2007, this component of the index stood at 32.9.

But there is reason to think that buyers are waiting in the wings, ready to buy once they think the market is approaching its bottom. The index value for traffic of prospective buyers is at its highest point since early 2006, when the survey began asking that question.

Responding to a series of special questions on credit and lending that accompanied the first-quarter MCMI survey, none of the respondents said that the availability of credit for multifamily construction was better than during the 4th quarter of 2007.

About 19 percent described the lending situation as “about the same,” while 81 percent described it as “worse” than the previous quarter. And 44 percent did not even seek credit. Most who described the condition as “worse” indicated that lenders had lowered the allowable loan-to-value ratio or have reduced the amount they are willing to lend.

Renters Stay Put

A new survey commissioned by the National Apartment Association finds 67 percent of current renters will not make the move to buy their own home in the next year. The survey also found consumer confidence in the existing state of the U.S. housing market at a low point, with 80 percent of U.S. adults believing the situation will not improve over the next six months. Meanwhile, apartment occupancy is at an all-time high.

“The country is deep into the discussion of the economic fallout of sub-prime mortgage lending. However, little attention has been paid to how the crisis is impacting people’s choices to stay in rental homes and wait out the storm,” says National Apartment Association President Douglas Culkin. “The results of this survey reflect what our membership is experiencing across the country. Renters are not eager to take a chance on homeownership this year. If the economy improves, that trend may abate, but, for now, people are generally staying put.”

The independent survey of more than 2,000 U.S. adults, conducted by leading market research firm Harris Interactive, also found that half of renters plan to continue renting their current residence for the next year and 46 percent of non-homeowners have no plans to buy a residence within the next year.

The survey also found that renting is seen as favorable to owning: 71 percent of adults feel that there are advantages to renting vs. owning in the current real estate market, with 48 percent citing financial reasons (e.g. not being impacted by unpredictable housing values and mortgage rates) over more traditional reasons such as amenities packages (18 percent) or the flexibility of a short-term lease (32 percent).

The Association also reports that occupancy rates in rental housing have seen the largest annual increase (1.5 million units) in history dating back to 1965, based on Commerce Department data. This increase has produced an all-time record high of the number of rental housing units in the country, now totaling 34.7 million units or about 83 million persons.

"Just last week, the Commerce Department cited that the main reason for an upswing in U.S. homebuilding is the construction of rental properties – not single-family homes – further supporting our findings of what the average U.S. adult is experiencing,” Culkin adds.

Rental growth in Europe's distribution sector

Limited supply of industrial space drove Oslo, Norway's rents up by 10 percent during the first quarter, according to Jones Lang LaSalle. The city posted the highest rental rate growth in Europe for that period, but future rental growth is expected to be more modest.

Across the rest of Europe, Central and Eastern European cities saw the highest rent growth. Specifically, Warsaw's distribution warehousing market generated the highest rent growth during the first quarter across Europe, according to the Jones Lang LaSalle European Warehousing Clock.

The Polish capital saw rents increase 9.5 percent, while other Central and Eastern European cities such as Budapest and Moscow also saw large rental increases – 8.3 percent and 7.1 percent, respectively. Our own blogger Melissa Securda recently blogged about Poland and Russia's booming property markets. Make sure to take a look to see what she has to say about their growth drivers.

The report also shows that rental increases above 5 percent have been achieved in Madrid (7.1%), Brussels (6.4 percent), Antwerp (6.3 percent), Stockholm (5.9 percent), Manchester (5.1 percent) and Rotterdam (5 percent).

However, out of a total of 32 markets examined, only seven recorded increasing prime rents. "Whilst annual growth in prime distribution warehousing rents remained stable, over the last quarter we have recorded a deceleration in rental growth, down to 0.5 percent form 0.8 percent in Q4 2007, indicating a now confirmed slowdown of rental growth in the European logistics sector," says Alexandra Tornow, associate director of Jones Lang LaSalle and author of the report.

Is the Credit Squeeze Easing?

One indicator that the credit squeeze is easing is the TED spread – the difference between interest rates on 3-month Treasury bills ("T") and the 3-month Eurodollar futures contract ("ED") as represented by the dollar London Interbank Offered Rate (LIBOR).

Treasuries are risk-free, while LIBOR is a proxy for the credit risk of corporate borrowers. The recent narrowing suggests that lenders are becoming more willing to take risks, according to Bob Bach, senior vice president and chief economist at Grubb & Ellis. At some point this easing, if it is sustained, should begin to show up in the commercial real estate capital markets.

Apartment Demand Stays Strong

Demand for apartments remains strong, but the continued credit crunch is causing the volume of property sales to slow sharply and making it more difficult for apartment firms to access the debt and equity markets, according to the National Multi Housing Council’s (NMHC) Quarterly Survey of Apartment Market Conditions.

The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose significantly from 33 in January to 44 in April, as more respondents reported tighter conditions—and fewer reported looser conditions—than three months earlier.

While this reading is still below 50, it is not much below, and comes on the heels of 16 consecutive quarters of over-50 readings.  (For all four of the survey indexes, a reading above 50 indicates that, on balance, conditions are improving; a reading below 50 indicates that conditions are worsening; and a reading of 50 indicates that conditions are unchanged.)

It is also a sign that the “shadow market” of rental homes being offered by individuals no longer able to afford to live in them is not seriously eroding demand for professionally managed apartments.

“The bursting of the for-sale housing bubble has greatly slowed the outflow of renters into ownership,” notes NMHC Chief Economist Mark Obrinsky. “More than 80 percent of the survey respondents reported a decrease in the number of renters leaving to become homeowners.”

Even though there has been an increase in the number of condo and single-family rentals, these properties do not typically compete for the same renters as professionally managed apartments, Obrinsky explains. “In fact, professionally managed properties may become even more desirable in the current market as renters of many of these individually owned condos and houses find themselves without housing because the owners of these properties have lost the property to foreclosure,” he adds.

The housing market downturn and financial market dislocation are affecting multifamily financing, and thus, the volume of apartment property sales, however. The Debt Financing Index posted a sharp fall, to 22 from 45 in January. Two-thirds of respondents noted that borrowing conditions had worsened compared with three months earlier, a reflection of the continued widening of spreads and tightening of credit standards.

Equity financing is also increasingly difficult to obtain. The Equity Financing Index declined to 13, its lowest reading ever. A record 76 percent of respondents reported that equity finance was less available, compared with 17 percent who indicated conditions were unchanged and two percent who saw improvements.

The Sales Volume Index declined to 13 this quarter, the second lowest reading in the NMHC Survey’s history. This marks the 10th straight quarter where the index was under 50. Three-fourths of the respondents said sales volume was lower than three months before, while only one percent said it was higher.

“While there are still many buyers looking to purchase apartment properties,” Obrinsky says, “there is an unusually wide disparity between buyers and sellers about the appropriate prices in today’s market. In addition, even though investors remain committed to deploying considerable equity capital in the apartment sector, tighter credit makes it harder to hit target rates of return. The upshot is the current low level of transactions.”

Reducing Pressure and Increasing Opportunity

By Barry Tuman

According to the London Times, UBS, the sub-prime stricken European banking group, has successfully offloaded about $22 billion (£11 billion) worth of mortgage securities for $15 billion to BlackRock, lending the US money manager more than three quarters of the total purchase price. This sounds suspiciously to me like the much listened for sound of air escaping from an over-inflated balloon.

Switzerland's largest bank, which has written down $37 billion from the credit crunch so far, has taken a hit of $7 billion on the value of the securities. Their value for sale purposes was put at $15 billion.

The deal means UBS receives about 68 cents on the dollar against the value of the securities. I feel like I am back in another real estate era, maybe anywhere town USA during the S&L readjustment of the 90s.

Having been through similar cycles in the property markets before, this relaxing of market liquidity pressure seems like another touch stone on the road to shifting opportunity. These signals sometimes announce that opportunities may be now ready to be picked in a more than one-off fashion. Of particular note is the balance sheet cleansing act of selling an asset under value, taking the medicine of the write down and then making a new performing loan. Oh yes, the era of the 90s…… The memories are still strong. 

UBS said it had provided a collateralised loan to BlackRock of about $11.25 billion to part-finance the sale of the securities. It is understood that if the value of the fund improves beyond an agreed level, UBS can claim a share of future profits.

BlackRock paid the remaining $3.75 billion after raising fresh equity from investors. Might as well let your friends share in the upside too…

JLL's European Forecast

The UK market is predicted to be down, the German market is deemed the largest economy, and Russia the biggest growth opportunity, according to Jones Lang LaSalle, which outlined expectations for Europe's commercial markets during the MIPIM property marketing show in Cannes.

JLL forecasts UK investment turnover to be down 30 percent to 40 percent in 2008, but is seeing increased interest from both domestic and overseas investors. Germany is predicted to have the strongest rental growth in Western Europe this year, and JLL predicted that interest in single asset and single sector portfolios will increase as large scale mixed portfolios become scarce.

JLL also projects that retail will begin to challenge offices as the most popular asset class. Russia will maintain dynamic growth in 2008. Construction is expected to remain one of the fastest growing sectors in the economy throughout 2008, and JLL predicts the "birth" of business parks in Moscow and further growth of the country's regional cities.

Bottom line for Europe: JLL predicts uncertain market conditions throughout 2008 and investment transaction volumes for the full year to be down 25 percent on 2007, but to fall only to 2005 levels – a level of activity that, at the time, was viewed as cause for great optimism.

Oil Prices are More Worrisome than Credit Crunch & Weak Dollar

People who sit in the C-suite are more worried about oil prices than they are the credit crunch or the dollar's fluctuation, according to a recent survey by DLA Piper.

The national law firm surveyed more than 100 of its top corporate clients and found that 55 percent of executives said the price of oil has been a serious problem for their business this year. An even greater number – 59 percent – said they anticipate the price of oil will continue to be a concern well into 2009.

“The fact that the price of oil was cited in the survey as a major concern is no surprise,” says former governor Jim Blanchard, co-chair of the firm’s Government Affairs practice. “But the fact that it overshadowed everything else for these business executives -- the credit crunch, foreign competition and the devaluation of the dollar – was an unexpected finding, and underscores the deep impact energy costs are having on the economy as a whole.”

The group as a whole was almost evenly split on the impact of the credit crunch, although a greater number of executives from financial institutions (44 percent) said it had a significant impact on their businesses. The dollar’s fluctuation appeared to have little or no negative economic impact for a majority (66 percent) of the executives surveyed.

All of these factors are contributing to a negative outlook for the U.S. economy. Over half of respondents (53 percent) demonstrated a negative outlook for the U.S. economy in the second half of 2008. Senior business executives also identified a recession as the biggest threat to the U.S. economy, with 31 percent choosing this option.

When asked what were the most important issues the next president and Congress should focus on, 54 percent of all respondents said energy policy. Foreign investment and trade policy shared the lowest scores with only three percent of respondents cited foreign competition as a threat to the U.S. economy and just eight percent listed foreign investment policy as an important legislative for the Congress and the next president. Among the few who ranked foreign competition as an issue, labor costs rather than tax policy, environmental regulation or legislative policies, were cited as the area of greatest concern.

Strong Demand for Russian Industrial Space

By Melissa Securda

Demand for industrial space across Russia saw a marked increase in 2007, a trend that shows no signs of slowing in 2008.  Logistics companies and retail companies are the driving force behind the surge in demand, and since these companies generally require class A facilities, the trend of regional expansion will continue into 2008 as 11 large-scale warehouse projects deliver.

Numerous development opportunities have caught the eye of international developers and firms from Europe, the US, and the Middle East all have projects in the works. A report by Colliers International highlights the Israeli firm Mirland Development which has plans for $280 million in warehouse projects. The largest Russian developer of industrial projects is Mos CityGroup, which has plans for a 400,000 square meter logistics facility with easy access to the airport and highway system. 

Foreign interest in Russia’s warehouse and logistics sector indicates a higher level of market sophistication. Lease contracts reflect this with their terms of eight to 10 years length, opposed to shorter terms in recent years. However, underdeveloped infrastructure throughout Russia presents a challenge to warehouse and logistics tenants, which need to be addressed in order for the country to emerge as a global logistics player in today’s market.    

Next week, I’ll look at the booming retail industry across Russia.