Global Viewpoints

Financial Crisis: The Fate of Interim Loans is Choking the CRE Market

By Jennifer Brenner Andrade

As each day of the country’s financial crisis unfolds before our eyes, the complicated nature of this beast and its impacts on commercial real estate leave most in the industry completely overwhelmed. One immediate issue, most agree, is the fate of the interim or short-term loans that are an essential component in making the CRE industry work.

We interviewed Lawrence Longua, a commercial real estate finance expert at New York University’s Schack Institute of Real Estate, on the affects of this crisis on commercial real estate.

“There are billions of dollars of interim loans on the books of these banks and even if they are performing loans, they are jamming balance sheets,” explains Longua. With very little, if any permanent financing available and interim loans rapidly maturing, the entire system is constrained, he says. The commercial banks, he continues, “have no idea how to get repaid and no workout capability and even if they push out the maturities, it makes it impossible to extend new credit.”

The bottom line is that liquidity will be constrained in the CRE market for some time, he says.

According to Longua and others, the entire commercial real estate community is waiting to see how the government proposed bailout will ultimately impact the industry. As Washington recoils from the failure of HR 3997, the Emergency Economic Stabilization Act of 2008, the Mortgage Bankers Association is pleading with lawmakers to continue working on the bill.

“We hope Congressional and Administration negotiators will immediately regroup and find common ground upon which they can build a new agreement,” says John A. Courson, Chief Operating Officer of the Mortgage Bankers Association (MBA) in a statement issued on the association’s website. “Restoring liquidity to the credit markets is crucial to both stabilizing Wall Street and keeping the U.S. economy moving forward.

“The credit crunch is not only preventing financial institutions from being able to access capital but is also preventing large and small businesses from being able to borrow money, money they use to operate their businesses, upgrading facilities and equipment and hiring and paying workers. If businesses don’t have access to that capital, they will stop growing and the economy will stagnate.”

According to Longua, the real impact of the bailout on CRE will greatly depend on what the government ultimately pays for the assets they plan to purchase. Further, he notes, it is unclear as to who the government will engage to determine the correct price for assets. This will be a particularly difficult job right now, he says, as the lack of transactions has created a market with no real price discovery and limited transparency. "It is a difficult situation," says Longua, "because if the government pays what these assets are worth at today's marked-to-market value, then more banks will fail."

Virtually everyone seems to agree that a massive valuation effort will be underway soon.

“As a result of the credit crisis, we’re seeing a lot fewer transactions and longer transaction cycles. Likewise, property owners are struggling to find refinancing, which is creating opportunities for other investors to buy assets at a discount, and in fact we’re seeing capital being amassed for these moves,” says Stephen Lowrance, VP of product management for the industry standard ARGUS Valuation—DCF product at ARGUS Software.

“Also, many financial institutions are converting to commercial banks and are facing requirements to deleverage, which also will lead to opportunistic investments by carefully positioned investors and other lenders. As transactions begin to ramp up, cycles will shorten, but there will also be an increased emphasis on due diligence and careful analysis of the underlying asset to minimize risk and maximize returns. This is where the expertise of ARGUS can really pay off. It’s no coincidence that ARGUS software became an industry standard following the tumultuous events of the 1980’s, including the S&L crisis, bailout and formation of the RTC.”

As for the future of the industry, Longua does not believe that there will be a retreat from the advances in transparency made in the commercial real estate industry over the past few years.

“Commercial real estate has gone from a lumpy, bulky undisciplined industry to the discipline of the public markets,” comments Longua. “The CMBS model has proven to be valid,” he adds, “but there were too many originators in CMBS machines with sloppy underwriting.” Longua goes on to say that once the CMBS market is reduced to a group of “fewer, more disciplined participants” it will improve and be a viable investment vehicle in the future.

President Bush Speaks On Credit Crisis

By Melissa Securda

Borrowers, lenders, investment banks, insurers, rating agencies, and investors based financial decisions on faulty assumptions which engendered the global credit crisis we face today. The subprime borrower obtained a mortgage without fully understanding the loan terms and their ability to make payments. Lenders relaxed their standards and originated loan after loan to subprime or Alt-A borrowers and assumed housing prices would continue to rise, thus making these loans more attractive to investors.

Investment banks packaged subprime mortgages into securitized instruments. Insurers assumed the risk was low and covered more money than they could pay. Rating agencies assigned institutional grade ratings to mortgage backed securities – both commercial and residential. Investors, in turn, had a healthy appetite for high-risk products which provided them massive financial rewards.

By August 2007, the problems began compounding. American Home Mortgage filed for bankruptcy on August 6th, and in the days and weeks that followed, Countrywide Financial announced liquidity problems, short term credit markets around the globe quickly contracted, and the European central Bank, Federal Reserve, and Bank of Japan all took measures to inject currency into the market. The credit crunch had begun. Since then, the global economy experienced increasing downward pressure; lenders imposed stricter requirements and increased costs associated with borrowing money, and lenders and borrowers experienced severe defaults. Just over a year later, in September 2008, the US financial system was in crisis mode following twelve months of progressively more serious financial debacles culminating with the collapse of Wall Street giants.

President Bush addressed the American public on Wednesday night in an effort to gain support for a massive bailout plan, adding that "major sectors of America's financial system are at risk of shutting down." The plan, which seeks to allow the government to buy troubled securities, many tied to subprime mortgages, should be enacted as quickly as possible to avoid further financial-market distress.

While the details of the plan still need fine tuning before Congress votes, lawmakers call for swift government action necessary to prevent strained financial companies from failing completely and destroying the future health of the global financial system.

JLL Sells Three Hotel Monacos

 

The real estate investment banking group at Jones Lang LaSalle recently arranged the sale of three Hotel Monaco properties including the Hotel Monaco Chicago, Hotel Monaco Denver, and Hotel Monaco Salt Lake City on behalf of institutional clients advised by PREI® (Prudential Real Estate Investors).

The portfolio of assets was purchased by Cornerstone Real Estate Advisers, LLC for the Cornerstone Hotel Income & Equity Fund II, LP (CHIEF II) for an undisclosed sum. To support Cornerstone’s purchase, Jones Lang LaSalle’s real estate investment banking group secured the acquisition financing from a major life insurance company.

The portfolio consists of the 192-room Hotel Monaco Chicago, the 189-room Hotel Monaco Denver, and the 225-room Hotel Monaco Salt Lake City. These three boutique hotels are located in the heart of their respective city’s downtown core.

“Cornerstone seized an excellent opportunity to acquire a geographically diverse portfolio of top-performing boutique assets,” said Alan Tantleff, executive vice president for Jones Lang LaSalle Hotels who led the sales effort for PREI. “These three properties demonstrated strong and growing cash flow with a combined RevPAR penetration exceeding 115 percent.”

Other members of Jones Lang LaSalle Hotel’s team included Tom Fisher in Chicago and John Strauss in Los Angeles. The acquisition financing effort was led by Executive Vice Presidents Ben Singer and Jeff Davis.

“From contract to closing, we arranged this financing in just 60 short days to successfully meet an aggressive acquisition timeline,” said Mr. Singer. “This large loan package was also provided without any syndication requirement—a feat which is exceedingly difficult to accomplish given current market conditions. We credit the success of this strategy to the superior level of cooperation between the seller, Cornerstone Real Estate Advisers and the lender, as we all worked together quickly to meet a common goal.”

World’s Second Largest Tower Gets Underway in South Korea

By Jennifer Brenner Andrade

In the midst of all the bad news and difficulties in the US commercial real estate industry, it is nice to hear about new projects getting underway. An international consortium including US-based Portman Holdings, Samsung C&T Corporation, Hyundai E&C and SYM-Associates has begun construction on the massive, 151-story tower in Incheon, South Korea, a town located just west of Seoul.  John Portman & Associates  of Atlanta designed the building

According to a prepared statement, the 587-meter tower, which is on target to become the second-tallest skyscraper in the world after Burj Dubai in the Middle East, will be completed by 2014. A vertical mixed-use project housing offices, hotel, retail and residential components, the tower is an iconic structure that is part of the Songdo Landmark City project or Districts 6 and 8 of Songdo, a multi-use development on 5.8 million square meters of re-claimed land from the Yellow Sea.

The groundbreaking event was attended by a number of prestigious executives and elected officials, including South Korean President Lee Myung-bak who as reported by Thomson Reuters said at the ceremony, “This landmark tower will symbolize Incheon and Korea. I hope this project delivers a better standard of living and more jobs for the city and the country as a whole.”

Commenting on the building, John C. (Jack) Portman, III, vice chairman of Portman Holdings and CEO for John Portman & Associates noted, “The 151-story Incheon Tower must be more than a building, more than mere real estate. We intend for it to become the beacon of technology, the symbol of the growth, versatility and spirit that symbolizes the uniqueness of modern Korea and its intention of leading the way as the central hub of Northeastern Asia.”

The End of an Era: Morgan Stanley and Goldman Sachs to Become Commercial Banks

By Jennifer Brenner Andrade

The era of powerful independent investment banks is no more as two Wall Street titans, namely, Morgan Stanley  and Goldman Sachs, were approved by the Federal Reserve Board to become bank holding companies. This shocking news comes on the heels of  other major Wall Street upheavals:  Lehman Bros. recently filed for bankruptcy and Bear Stearns was sold to JP Morgan in what amounted to a liquidation sale.

The firms will now be subject to federal oversight, but will also provide access to the Federal Reserve Bank’s funds.

In a prepared statement, Lloyd C. Blankfein, chairman and CEO of Goldman Sachs said, “…we made the decision to become a public company, recognizing the need for permanent capital to meet the demands of scale. While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding.”

For its part, Morgan Stanley chairman and CEO,  John J. Mack, Chairman and Chief Executive Officer, said, “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.  It also offers the marketplace certainty about the strength of our financial position and our access to funding.  As we evolve our business model and move quickly to seize these new opportunities, we remain intensely focused on continuing to provide world-class service and advice to our clients and deliver long-term value to our shareholders.”

 

 

 

Wall Street's Impact on Regional Vacancy Rates

By Melissa Securda

Because financial companies drive real estate activity in the New York region, commercial real estate markets surrounding Manhattan could soften greatly as a result of recent problems on Wall Street. Lehman Brothers currently occupies roughly 2.7 million square feet of office space in New York City, and according to Jones Lang LaSalle’s research, if Lehman vacates completely, the city’s vacancy would rise one percentage point. Vacancy rates would increase further as additional companies re-asses their real estate strategy and downsize.

Known as “Wall Street West,” Jersey City, New Jersey has a commercial real estate market of 17 million square feet, and since the 1980’s, the waterfront district has been home to satellite offices for large investment-banking firms and other securities-based businesses. Troubled Lehamn Brothers has 1,500 employees in Jersey City and occupies roughly 500,000 square feet of office space. Additionally, Lehman occupies office and industrial space throughout northern New Jersey. Lehman’s impact alone could negatively affect Jersey City and surrounding market.

As the financial markets react and begin to normalize, the commercial real estate markets in the New York region will begin to respond. Some estimates point to a disastrous situation for real estate markets surrounding Manhattan, while others are much more conservative. With strong market fundamentals and development activity in check, Manhattan and the northern New Jersey office market should bear any increased vacancy rates stemming from the current financial crisis.

The Fall of Wall Street Giants

By Melissa Securda

The global financial landscape changed permanently on Monday September 15th with the demise of Wall Street giants Lehman Brothers and Merrill Lynch. American International Group (AIG) further distressed the financial marketplace with its plea for federal assistance to stave off the company’s collapse. Undoubtedly, this marks the start of the largest financial realignment in history.

Many questions remain. What will be the global impact to the financial markets? How long will it last? What happens next? And, how will the situation impact the commercial real estate industry. Unfortunately, no one knows the answers with any amount of certainty.

In the few days following the announcements from Lehman and Merrill, financial markets around the globe responded with massive selling. Stock markets in London, Tokyo, and China all closed down by mid-week and the Dow Jones Industrial Average fell 500 points following the announcements. The Financial Times blamed Lehman’s collapse for the FTSE 100’s worst closing since June 2005. A New York Times article reported financial companies’ losses stemming from the financial crisis could exceed $1 trillion, and the recovery on Wall Street will be painful and slow.

A most obvious impact to the commercial real estate industry will be the addition of sublease space to the market as financial companies close their doors. Other economic pressures weigh on an already stressed industry. The tightened credit market makes obtaining debt difficult for investors. When financing is available, investors must meet more stringent lending standards. Jones Lang LaSalle research indicates property transaction volume for the first half of 2008 totals $236 billion, nearly on par with 2005 levels. Hesitant investors will be even more cautious as the global financial markets stabilize, causing recovery to take even longer.

The History of Global Data Standards for the Valuation Profession

By Bruce A Kellogg, MAI, FRICS

 

Global Data Standards were created approximately ten years ago, with each major component of the valuation community, the U.K. and the U.S., playing a significant role.  Today, the primary organization that created data standards in the U.K., known as PISCES (the Property Information Systems Common Exchange Standards) or OSCRE EMEA (Open Standards Consortium for Real Estate in Europe, the Middle East and Africa) has been the leader in developing these standards to not only have consistency with terminology and definitions of real estate terms, but to create a business procedure that expedites and facilitates real estate activities and optimizes labor costs by eliminating much of the busy work consisting of manual data re-entry, data scrubbing and custom systems integration.  By eliminating these steps, data processing time is reduced from months/weeks/days and hours to a matter of minutes. And because you’ve eliminated one or more human touch points, data quality also improves.

 

The Appraisal Institute, along with a body affiliated with the National Council of Real Estate Investment Fiduciaries (NCREIF), named the Data Consortium, were two of the first data standards organizations to enter this arena, and the first to truly focus on valuation.  The Appraisal Institute began their involvement through the Commercial Data Storage Standards (CDSS) team and the Residential Data Storage Standards (RDSS) team to develop consistency and efficiency with sale and lease comparables.  It was in 2004 that the Commercial Appraisal Report Standards (CARS) project team was established to expand the data standards to include literally every definition used within an appraisal report.  The group that was originally focused on the CDSS functions grew to include not only commercial appraisers, but those who represented software firms relating to both financial analysis, such as ARGUS Software, and those that developed and sold appraisal templates. 

 

With the emergence of OSCRE Americas (OA) in about 2003, the Appraisal Institute began to realize that there was an organization that could take the data standards created by the CDSS and the new CARS team, which was more of a management group focused on the process created by these data standards, and hand them to OA to finalize a comprehensive dictionary and business procedure that would be created by OA members comprised of professionals from every sector of the valuation business; i.e., service providers, clients, technical (IT) personnel, etc.  The Appraisal Institute joined OA in 2005 and has had a leadership role as a member of the Board of Directors ever since.  At this moment, the Appraisal Institute Work Group (AIWG) of OA is about to publish their extensive dictionary that will be utilized by the entire valuation community to ensure the highest quality, most efficiency and greatest transparency possible for all parties involved in the valuation profession.

 

OSCRE International today comprises both OA and PISCES, with each having published many different data standards for all sectors of the real estate community.  The recent rate of publication by OA of its standards is without precedent, which will result in its members and other users realizing numerous benefits that will result in greater profitability.  This benefit is even more desirable today as we look for ways to overcome the challenges of the current marketplace.  The next goal for OSCRE International is to generate new members and work groups in the third and final region: Asia-Pacific.  OSCRE A-P (OAP) is being explored and educated about the benefits and will likely develop into a significant final piece to the global data standards picture that will ultimately bring the entire world together.  Without adoption by everyone, there is truly no standard.  We are very close to making this a reality within the next year or two, no doubt!

W Hotels to Open in Leicester Square- West End Resilient Through Slump

By Jennifer Brenner Andrade

New York-based Starwood Hotels has selected London’s stylish West End  as the locale for its newest property. Set to open in 2010, W London-Leicester Square will be built on the site of the former Swiss Centre building in the heart of Leicester Square.

The 194-room hotel will be built in partnership with McAleer & Rushe Group, a construction and property development company from Northern Ireland. The hotel will be part of a 10-story, mixed-use development. Jones Lang LaSalle Hotels represented McAleer & Rushe in the operator search and negotiations for the Leicester Square hotel.

“Attracting a prestigious global brand like W Hotels to the UK only adds testimony to the major significance of our Leicester Square project,” said Eamonn Laverty, managing director of McAleer & Rushe in a press release. “This new mixed-use development of hotel, retail and leisure will create a highly visible gateway to Leicester Square and forms part of McAleer & Rushe’s wider involvement in the regeneration of London’s West End.”

A Q2 report on Central London published by Colliers CRE this Summer says the West End has been resilient through the slump currently afflicting other parts of London.

According to the report,“The West End has seen continued strong leasing activity in Q2 2008. Quarter on quarter take-up increased by 14%, with 1.0 million sq ft of space let, just below the ten year average of 1.1 million sq ft. Indeed, the West End made up 51% of all take-up in Q2 2008, improving an otherwise subdued lettings market in Central London.”

Slowing Development

By Melissa Securda

The past year has been a time of tremendous uncertainty for the global financial community.  As the system reels from the credit crunch, new economic troubles including rising food and oil prices and job losses weigh on the global marketplace.  Information provided by Real Capital Analytics shows that commercial real estate transactions total roughly $306 billion for the first half of 2008, a figure that represents about half of 2007’s transaction activity during the first six months of that year.  

Commercial real estate development has been directly affected by the credit crunch.  Global lenders are denying credit to many developers and demanding tougher repayment and refinancing terms.  Banks are scrutinizing projects and guarantors for both small and large development projects. 

The pain is far-reaching.  Since January, nine Japanese developers filed for bankruptcy and more failures are expected as banks cut back on lending.  The London development market suffers from rising financing costs and falling purchase prices.  Since 2004, only three of the planned 19 major office projects will actually break ground. 

The slower pace of real estate development, while painful for the developers, will help keep market fundamentals in check.  Different from previous downturns, the period of market uncertainty experienced today will not be marked by an over-supply of vacant space in the market. 

Commercial development over the next few years will largely be confined to fast growing markets like India, China and the Gulf Coast Countries and areas where developers are not highly leveraged.