Friday, September 28, 2007

Law firms getting in on the act -- as real estate investors

That's what it looks like, and I think it is nicely done. The investment arm of a Baltimore law firm, according to this report, has bought an industrial site from a pharmaceutical company. I like the way the firm is doing this: as a separate arm in which the partners can presumably invest. By buying their own dirt, they eliminate any ethical considerations that may come in to play if a lawyer wants to go in with a client and take a piece of the action. All they need is business savvy. Some say lawyers are lawyers because they don't know business, but I know some that don't fit that stereotypical mold.

The builder's loss is prvate equity's gain

Fortune this week is echoing my sentiments. Some over-levered homebuilders are in trouble. Face it: You pay your (less, in this case) money, you take your chances.

And -- no big surprise -- private equity firms and hedge funds, flush with cash, are ready to buy, buy, buy. Take these smart guys, pair them up with savvy local developers (not amateurs) who really understand dirt, come to the table flush with cash, and voila! Gold in them thar hills....

Remember, one company's misfortune can be another's fortune - literally. It is not pretty sometimes but it is reality, like it or not.

Thursday, September 27, 2007

Types of deals we may not be seeing for a little while...

This may be one. I was introduced recently to Kevin Kingston's blog, and he has a good post about Harry Macklowe's acquisition earlier this year of seven NYC buildings in the old EOP portfolio. Kevin gave us these terms:

Purchase Price: $6.8 Billion
Down Payment: $50 Million
Amount Borrowed: $7.6 Billion (that's $800 million more than the purchase price)
Cash Flow: Negative for at least five years
Occupancy: 95%
Deal Consummated: 10 Days
Aprox. Square Feet: 8.41 million
Aprox. Price Per Sq. Ft.: $808

He also compares the cash flow issue to that of Harry Helmsley, who bought buildings for cash flow rather than developing. He did all right, eh?

This probably ends in one of three ways: success (rents will probably rise, and think of the phenomenal IRR on a $50 million investment for a $6.8 billion deal!), the mother of all workouts (short-term debt is coming due soon) or properties on the market cheap next year. Keep an eye open.

Wednesday, September 26, 2007

What doesn't this say?

When I first read this story about large residential projects pulling back, I was not a happy camper. Things looked bad.

But then I read it again, between the lines, and came to the following conclusions:

1. Projects are still being done. Of course, if you want the penthouse at the Chicago Spire, it'll cost you $40 million.

2. I saw no mention of any mess in non-residential commercial deals. Then I read that cap rates in August are still slightly lower. Take a look. A look at the chart in the WSJ showing where cap rates were, even pre-9/11. (On the other side, however, the Journal also reports that there is a current "paralysis" in the market, notwithstanding rate cuts. But is that for huge portfolio deals or for everything? From what I am hearing, there's money to be had for smart, well-planned single asset deals, especially from traditional lenders.

3. Check out this quote:

"The debt market is frozen for the inexperienced developer," said Robert Horowitz, a partner at Cooper-Horowitz Inc., which places about $15 billion in real estate debt a year. "To finance a supertall luxury condo project today, you need to have be an experienced developer with at least 30 percent cash equity, 50 percent presales and the ability to pay 9 to 10 percent interest."

In recent years, developers often obtained loans with 5 percent equity, fewer presales and lower interest rates.

OK, 20% equity would be better, and certainly lower interest rates would be good as well. But this, once again, seems more like sanity than a freeze. And I see nothing wrong with a lender looking for a developer with a track record -- do you???

4. No talk whatsoever of money waiting for deals to start up again. Sellers are waiting to see how things shake out in this market unless they are in a distressed situation. The same is true for loans, but again, not fatalistically. Per the WSJ story: "Many industry watchers believe it will be months before the market fully recovers. "Some deals have gone through, and pricing for senior bonds is firming up, but the market is still a little bit choppy in trying to work its way back to health," said Tad Philipp, a managing director for Moody's Investors Service."


Tuesday, September 25, 2007

News to us, but a great idea

Traffic Court led me to learn about a retailer called Peebles. These guys have over 600 stores in 33 states and yet I've never heard of them. Why? Probably because I live in an area large enough to be off their radar screen.

The m.o. of this company looks deceptively simple: provide upscale brands in small markets that you'd otherwise have to travel a long way to get to. This is sheer genius for several reasons. As David Bodamer said, with 20,000 sf stores (and by focusing on name brands) they do not compete with Wal-Mart. From a business perspective, they are going to pay DIRT cheap rent on their spaces because, based on a quick look at their website, they are going to markets that are not exactly what one might compare to New York, Chicago, SF or LA. And that is the beauty of it.

The business side is obvious. But what also makes this company attractive to me (granted, I know nothing about its financials or anything like that -- I'm no Jim Cramer) is the legal side of it. By working in smaller markets, perhaps by leasing vacated anchor tenant spaces in small malls or by taking other 20,000 sf vacant spaces, and as a national retailer in a tenant market, you probably also have a much bigger chunk of leverage on the legal side of the deal than you would in an ordinary retail lease (even a big box lease) in a major market. Why can't I think of these things?

The hardest part of blogging - keeping your mouth shut?

I was interviewed last night for a publication about my blogging, and the discussion really made me think about my role as a blogger more than I have since I started doing this.

The main thing I realized was this: I have not, will not and cannot be a newsbreaker, even when I have the inside scoop. Why? Ethics. I can think of half a dozen times in the last few months when I could have broken a story, sometimes weeks before word got to the media, but I never even thought of doing so because of the confidentiality I owe my clients. I know at least one instance where I could have brought what I think were some interesting insights on a deal that was already leaked in the press, but again, my duty to my clients had to outweigh the fun I have here ruminating on deals.

It is funny that I just did this but never really thought about why. Perhaps it is just ingrained into you with all the courses you take and warnings you receive about legal ethics, a term which is not an oxymoron even though it sounds funny.

The moral of the story? Blogging is great and all that, but not at the expense of your law license. But I'll do my best to provide thoughts, comments and links to what I think is interesting. Thanks for reading, and I'll get off the soapbox now.

Monday, September 24, 2007

Thanks, Sam...

I have said before that I think Sam Zell is just an mega-genius, and that it was reaffirmed by the EOP sale to Blackstone. Never media-shy, Sam in lectures at Wharton is saying that we have a confidence crisis going on, not a credit crisis. If you read this blog, you know I agree. According to the Forbes story:

"We're not really in a 'credit crunch.' I think we're in a 'confidence crunch,'" said Zell, funder of the Samuel Zell and Robert Lurie Real Estate Center at Wharton. "I would argue the excess liquidity that existed eight weeks ago still exists today. It has a different risk premium on it, but the actual amount of liquidity has not changed."

Zell said the slump should come as no surprise: "Over the last three years, people were flippant. They bought anything they wanted and were proud that they didn't do due diligence. I think they have all been chagrined and are scared out of their minds."

Bingo.

Sam also made me think about some things. Maybe I am overexuberant about real estate. It is what I do, after all. But "looking around the corner" is what sets the big boys from the others. And as a lawyer that is an especially important thing to keep in mind.

Flashpoint Academy update

One of my very first posts was about serial entrepreneur Howard Tullman's efforts respecting Flashpoint Academy and its new space in the Loop. Howard's website has plenty of construction and opening updates, and it looks as cool as I expected. Great work!

Gee, there's money behind the Childern's Museum move

Tell us something we didn't know. Actually, Crain's has a very good story (as usual) on the extra $1 million a year the museum will get by moving. And by the way, don't miss this op-ed piece!

Friday, September 21, 2007

Whoohoo! Back to 7 caps in the retail market!

Admittedly I have my buyer's counsel cap on here, as some of those clients have been on the sideline during the latest feeding frenzy. As cap rates start to come back to normalcy, I am gathering that even more deals will be on the horizon, but not until sellers face the reality that, at least for now, most centers are not going to be selling at rates like they were a year or two ago. But as Retail Traffic's article states, is there so much institutional money out there that those investors will drive the market and prevent rates from going too high? I like to think those investors are just as smart as the opportunistic folks; their only constraint is that they have to place the money somewhere.

CMBS and Swaps

I am linking to just about every post of Kenny Pratt lately. But it is well-deserved. The guy just gets it.

When I was a younger associate I spent the better part of an evening trying to understand swaps. Yes, I eventually got it, but it took time. Had I had the benefit of Kenny's post on the nature of swaps some years ago, it would have taken five minutes to understand it. Great work!

Thursday, September 20, 2007

And while we are on the topic of hotels...

Crain's also reports that Oaktree Capital Management is going to auction off Robert Falor's equity in Hotel 71 on East Wacker Drive (you know, the old Executive House, a late-'50s creation that Falor was trying to turn into a condotel). The bidding takes place on October 3 unless they can find an angel to take out Oaktree's loan.

This is sort of a tricky but fun type of deal, in that OCM does not own the loan on the hotel (there is a separate foreclosure action there that will have to be worked out), but has a loan on Falor's equity. If the reports are correct, basically it amounts to a mezzanine loan with the assets pledged on the debt. I used to see these deals all the time in the late 90s and early 2000s.

But now that the bankruptcy court seems to be signing off, it will be even easier to conduct such an auction because, IIRC, it would essentially be one of assets under the auspices of the Uniform Commercial Code. Oaktree apparently offered to get out for $35 million (still a decent but not OCM-like return on a $27 million loan, through you have interest and penalties and third-party fees to consider, not to mention the senior debt), so if you want a hotel that has just not, for whatever reason, been on anyone's radar screen for about 20 years, now's your chance. But my money is on the Oaktree guys; they are the masters of turnarounds.

(Full disclosure: OCM is a former client, but I had no involvement with this project.)

Wan't to buy the Pump Room? You had your chance.

The owners of the Ambassador East Hotel have taken the property off the market after failing to attract a credible bid for the property (which includes the venerable Pump Room restaurant) at a price above $60 million, or almost 20% lower than the asking price of $71 million. Instead, look for a renovation and a short-term refinancing at a 75% LTV.

Maybe this deal is a casualty of CMBS spreads, as the article indicates. Or maybe it is a location issue, as more hotels come in at different parts of downtown. Or maybe the hotel just needs a sprucing up to attract first-flight buyers. My take is that it is a timing issue that will be resolved as the market settles. It will be interesting to see how this whole scenario plays out at the end. I like this old grand dame hotel, and I think it will turn out well in the end.

Lawyers, marketing and response times

Surely you jest. Tom Collins has a good post today about law firms and response times to calls. Tom talks about how some law firms are now promising 24 response times, only to be trumped by a firm like Laner Muchin here in Chicago. Laner is an excellent labor law firm whose slogan is: "Two Hours. Period."

At the risk of tooting my own horn, I have but one question: "Why so long?" Maybe my own neuroses are coming out here. For instance, I loathe voice mail but accept it as a necessary evil. If you are paying me my hourly billing rate or flat fee (which is not cheap), unless I am (a) in a closing, on a long conference call or in a meeting of some sort, (b) on vacation or (c) halfway around the world where it is the middle of the night, I see no reason why you should have to wait even two hours to hear from me during business hours. (I'm about to solve (c), BTW, by buying a world-band Blackberry.)

The client may not get an answer to a question in that two hour period, but it is still a rare occasion that I don't at at least call or email someone to let them know I received the message and that I care. And I just don't understand people who don't follow this practice. To this day my all-time favorite voice mail from a client went something like this, "Hi, Dave, this is _____. So this is your voice mail? In the almost five years I've been working with you I can't ever remember hearing it." I'm sure that wasn't true, but it was a testament to a commandment I learned long ago and still practice, probably to a fault: be available. I won't criticize those who don't follow my rule, and I'm sure some people would laugh at my approach or tell me it is unhealthy. But it is my rule, and I'm sticking with it.

A Tiffany's box -- at $2,175 per square foot

That is a hefty number by anyone's definition. Reports from crefeed.com indicate that Two Rodeo Drive in Beverly Hills was sold to an Irish partnership for $275,000,000, or just about $2,175 per square foot. And you just don't get the blue box -- Versace, Damiana, Gucci and Porsche Design are thrown in as well. Of course, even though I have done some deals in Michigan Avenue in Chicago, the rents on Rodeo are so sky-high that I am getting a nosebleed just writing about this.

Wednesday, September 19, 2007

S&P Indicies - slow but still growing

The June S&P Commercial Real Estate Indicies are out, and the news is pretty good on the whole. There are some signs of slowing growth in prices over the tremendous leaps we've had, and a little weakness in apartments and in one region. But some sectors still have good growth, and the annualized increases in many sectors (yes, double digits) are great. So all in all, I'll still take the news as positive. Slowing growth is not necessarily a sign of bad things to come, as it would have been virtually impossible to sustain growth at the levels we'd been seeing. You are still looking at solid returns and values.

Tuesday, September 18, 2007

Reilly takes on Da Mare

First it was Lakeshore Athletic, now it is opposing the relocation of the Chicago Children's Museum to Grant Park. I'll tell ya -- Brendan Reilly has guts, because this latest move means taking on Mayor Daley. While aldermanic prerogative is almost always king here, there is one trump (small "t" -- sorry, Donald) card, and that is Mayor Daley, who apparently even threw a possible race card in the mix just to raise the stakes. And in this town, the mayor usually gets what he wants. The one thing Reilly has going for him is that aldermen hold on to their prerogatives like a sacred relic, meaning they might consider backing him en masse just for their own sakes in the future. But for a freshman alderman to take on Da Mare -- that is moxie at its finest.

Which way do you go, Ben...which way do you go?

The market has already priced a 25 bp cut in rates at the Fed meeting today. Some are hoping for 50 bps or more. But a surprising number of people (39%) in an unscientific WSJ poll are saying, "Don't do it." The theory? Inflation should be the main concern and a rate cut rewards the stupidity of speculators who levered deals too much and at the cost of those who were more rational. I admit that I like this attitude. You pay your money, you take your chances, so long as it does not foul up the whole kit and kaboodle. And if that means a few hedgies have to go without a new jet this year, then so be it. I was brought up to believe that you pay your debts and you live with your mistakes, even if that means some sacrifice.
P.S. For more in-depth -- and spot on, in my opinion -- analysis, check out the link in the Comments section to The Bloodhound Blog.

Monday, September 17, 2007

Would you like fries or a shake wth that lease?

Here's a very cool story about the new GC of Home Depot having to spend two weeks as a entry-level store clerk as part of taking the job.

I'm not an in-house guy but I love the idea and would relish the prospect. Spending time on the front line is a good thing; it gives you perspective, in my opinion. I'm sure HD is not the only company to do this; McDonald's, IIRC, has been doing or encouraging this forever.

Chicago's retail rents down -- 1%

Again, in my opinion this is bad news only for Chicken Littles. A one percent decline is not significant, although if it continued over several quarters that would be different. Vacancy rates remain at 7.5%, albeit with a lot more space coming online, and remember that this is an area-wide survey and not market-specific. Some markets, as always, are better than others. All the Greenspan stuff worries me more than this, but as he said, it is all irrational exuberance. I'll bet there is nothing wrong with rational exuberance.

Store these nuggets away

Kenny Pratt has some interesting insights that he gleaned from the Self Storage Association Conference. The best one for me is this one on the conduit market.

"Conduit Lenders are starving (no surprise). However the conduits that are quoting deals are offering spreads of about 200 basis points over the ten-year treasury yield. That is a big spread, but the all-in rate is still less than 6.5%. Not as good as we were seeing 6 months ago, but still very low relative to historic rates. "

Yup, spreads are high. But the rates are still low from a historical perspective. But remember that you have to pay a price: the pain of going through a conduit loan.

Friday, September 14, 2007

Private clubs losing leases

If I lived in the city I would certainly belong to one so I had a place to hang my hat for lunch and dinner. (In Bourbonnais our only similar option is our local country club.) While not the equal of the old gentlemens clubs of London, they are still great places.

I'm sad to see that the Mid-Day Club and the Tavern Club will have to relocate from their existing spaces. I've been to both and liked them for different reasons. Crain's reports that Mid-Day is doing well, but that the Tavern Club is not, leading to speculation that the club might merge with another.

Yes, the University Club and the Union League Club (to name two -- there are others) are still going strong, thankfully, but I'm still sad to see such institutions dying. It is a reminder of a perhaps more genteel age.

Thursday, September 13, 2007

More on 700 N. Michigan -- Landlord looks to evict Talbott's

Well, well, well...this story just gets more and more interesting! In order to "de-mall" 700 N. Michigan and bring in Zara, the landlord wants to evict the current tenant, Talbott's. The legal theory? landlord can throw the tenant out if it demolishes or "substantially renovate" the building. This seems like a substantial renovation to me, but if I were the tenant I think I'd have some pretty clever and arguable defenses. Let's see if the tenant comes up with anything good before (presumably) this case settles.

The Dead Deal Dance

One of my friends and former colleagues used to talk about doing the "dead deal dance" when certain deals died, usually for good reasons. Reading this story about market conditions reminded me of the dead deal dance.

I have to admit I have never seen a lender pull out of a deal while documents were in transit to the escrow agent. Hopefully I never will. But what I read from this story, somewhat between the lines, is as follows: (1) people are getting their arms around what is going on and realizing this is a short term crunch, with ice already breaking if it ever existed; (2) lawyers are not sitting on their posteriors doing nothing -- there is either slower, normal deal flow or other types of deals such as workouts going on; and (3) lenders are going back to the traditional Golden Rule: those who ave the gold make the rules.

Erwin Chemerinsky for Dean!

I was listening to Hugh Hewitt's great radio show on my way home last night and had the opportunity to hear him comment on the recent goings-on at the University of California-Irvine. Apparently UCI received permission to open a law school. Hewitt's blog has all the details.

I care for two reasons. (1) I used to live in Irvine; and (2) UCI hired my Con Law I professor, Erwin Chemerinsky, to be the dean. (For the record, Kathleen Sullivan, former dean of Stanford Law School, was my Con Law II prof.) But somehow politics apparently got in the way, and Erwin was sacked before even getting far off the ground.

All in all, I probably agree more with Mr. Hewitt on politics and legal issues than I do Erwin. And I agree with him here: this is a travesty. Put politics and world views aside. Dean Erwin Chemerinsky would have given immediate credit to UCI's law school, making it easy to attract first-rate legal scholars and attain prompt ABA accreditation. He is an excellent scholar and a prolific, high-profile commentator on constitutional law. He is much more fair and balanced in the classroom than he is while providing commentary. But just as important, he is as a teacher an accessible, friendly, outgoing, kind and generous person, almost to a fault. (OK, he had a rep as a tough grader thanks to our grading curve, but I don't care.) Any law school would be lucky to have this man as a dean. Period.

My take? UCI blew it, plain and simple. What a shame.

UPDATE 9/17/07: Looks like that over the weekend UCI did the right thing and re-offered the job, and Erwin accepted.

Wednesday, September 12, 2007

Several great stories on market conditions

Retail Traffic has several good stories in its current issue on the CMBS market continuing to limp along, traditional portfolio lenders jumping in and saying "I told you so" as borrowers say "don't waste time on a conduit" and the private equity slowdown, including predictions that retail REITs will be attractive to that market in the near future as business remains good. Go to Traffic Court and Editor-in-Chief David Bodamer will point you to the relevant stories in his publication.


Manhattan office market remaining strong

Reuters has moved a story, citing reports from Colliers, that Manhattan office leasing is at its strongest since before 9/11. Vacancies are down to 6.7% and average rents are over $62/sf. Yes, there are some signs of weakness and worries that we will eventually see more vacancies as the financial services industry upheaval continues. But the news is more good than bad.

Tuesday, September 11, 2007

Forget Wisconsin Dells...go to Sandwich?

Has anyone noticed that many new hotel properties are including water parks these days? Has anyone noticed that they are usually puny in comparison to the megaparks in Wisconsin Dells? Has anyone noticed that I sound like Andy Rooney?

In any event, here's the latest entry in Sandwich, Illinois. I have news for the developers: Sandwich is a nice town, but a weekend getaway? I don't know. They should make money because this will be the first hotel in a growing area. But the overhead of the water park? Maybe it will work and maybe not, and here's why. There are two theories here. One is that kids won't be so interested in a water park this small. The other is that this is like your local Kiddieland, a small park for tots who then graduate to the big boys. And when I drove by Kiddieland the other week, I can tell you it was jam-packed. On the other hand, word is that Kiddieland will be history by 2010 due to family squabbles....

Monday, September 10, 2007

Today's new word of the day: "de-mall"

I have posted in the past regarding 700 N. Michigan and the saga to lease the mall up. Today's news is probably good in that the owners seem to have gotten beyond that to a large degree by deciding to "de-mall" the mall.

With Spanish retailer Zara reportedly taking 30,000 sf and replacing Talbott's, the owners have apparently decided that enough is enough with a traditional mall. The atrium and common areas will be replaced largely with more tenant space (thus decreasing the load factor that is usually charged to tenants as part of taxes and operating expenses, and all the space fron the fourth (and maybe even the third) up to the eighth will be marketed for a hotel use. The bad news on a hotel is that the low floors with no views are not exactly prime. The good news is a prime location and demand for rooms, and maybe view is not that important anyway. Look at the Peninsula. Not the greatest views if any, but it is hands-down my favorite downtown hotel.

All in all? Good thinking by ownership in my opinion. For whatever reason and in spite of its locational advantages, 700 N. Michigan just never stuck as a primo address in spite of the efforts of some of the best in the business to make it so.

Like I was saying...smart money getting poised to buy

Carlyle Group has announced the closing of two new funds: a $7 billion European buyout fund and a $3 billion real estate fund. Does this quote, from the WSJ's story, sound familiar to readers of this blog?

"It might be counterintuitive to raise either a real-estate or a buyout fund in the current environment. But Robert Stuckey, who runs the real-estate group at Carlyle, argues that the dislocations should create opportunities. 'Because liquidity is less abundant,' he says, 'we believe that the capital markets may underprice certain properties.'"

Bingo. As some buyers get out, others come in, and they are smart buyers too. The last thing you'd call Carlyle is dumb. And don't think this is the last announcement you'll see.

Friday, September 7, 2007

Winning a landmark award

If you look to the left, you will see a picture of the Chicago & North Western Railway Powerhouse, the location of my Chicago office. I was pleased to see that the Powerhouse won a Chicago Landmark Award for Preservation Excellence. Here's a link to a recent photo of the exterior renovation. Congrats to my friends and clients and landlords at Structured Development!

Thursday, September 6, 2007

Gee, what a surprise, the alderman wins

And, preservation guy that I am, I think that is a good thing in this case. As you may know, Fifield Cos. was about to close on the acquisition of the Lakeshore Athletic Club when new Alderman Brendan Reilly stepped in and said, "Not so fast, my friend!"

The latest rather unsurprising news is that, based on the aldermanic opposition, Northwestern University is going to talk to developers interested in preserving the building. Of course with debt costs higher now than before they may or may not be able to come close to Fifield's $40+ million purchase price. And because of debt market changes, will Fifield eventually ask NU for a haircut (translation: purchase price reduction) if they do proceed to closing? Fifield appears to be saying no.

Law firms and retirement

I don't ever intend to retire completely from practicing law. (Some say I already am semi-retired because I work less than 60 hours a week.) In this day and age I can work from anywhere in the world. And I have! (The 13-14 hour time differemce between Chicago and Manila can be interesting to work with.) I think that what I do will help keep my mind active in my later years.

Now, I understand why law firms force out senior lawyers -- the economics and All That. But I don't blame senior, experienced, wise and really smart lawyers for not wanting to hang up their shingles entirely; I think that attitude is spot on. There should be a place for these good people (and their Rolodexes). And hurrah to those shops that actively look for seasonsed lawyers who have been pushed, however, gently, out of their shops.

For more, read this commentary on
"Geezer Recruitment" from Chuck Newton and the accompanying American Lawyer story.

Wednesday, September 5, 2007

More interesting stats for you future lawyers

Here's an absolutely amazing post from Empirical Legal Studies regarding new graduate salaries. In terms of salary you basically have two modes of law schools grad: the haves and the have-nots. The haves keep moving father away from the have-nots, whose salaries are remaining somewhat static. And I'll bet a nickel that the low end of the scale is probably underreported. The only comfort I see in the survey is that almost 10% of respondents are judicial clerks who will almost certainly end up on the right side of the chart.

In short, getting a law degree can be very risky financially, which is why I always recommend that prospective lawyers wanting the big bucks go to the most prestigious school possible. And while the thought of some big firm basically opting out of the wars and bottom-feeding for people at a slightly above average salary (>$62k....wow) while doing commodity work and promising humane hours is anathema to the big boys, but that model does seem to make sense from a pure profits standpoint.

And oh by the way...the WSJ chimes in....

with two interesting stories. The first is Chicago-specific, and the gist of it that Chicago sale prices could end up in the "doldrums" more than (presumably) NYC, SF and LA because (a) rents are not skyrocketing as much, (b) of credit concerns and (c) vacancies are higher than in the other majors.

If I were worried, (b) would trouble me the most. And a story about Libor "defying gravity" (someone there clearly is a Wicked fan) caught my interest in that regard. Yes, Virginia, the Fed cannot control the global markets alone. Libor and the federal-funds rates are not tracking each other as closely, in part because of a reluctance of European banks to make dollar loans. And with 3-month dollar Libor contracts in the 5.75% range, you are looking at some much higher borrowing costs that have to be factored into , again lowering prices (and mo creating opportunity). Again, as mentioned in my last post, the best alternative for a dirt investor is to stay out of loans that are locked in for lengthy periods. Carry the higher debt for now and move on when the time is ripe.

Pricing and sanity in the market

Bloomberg moved a story today citing experts predicting price drops in the US commercial real estate market of up to 15%. The story also says that because of these drops potential sellers are holding deals; additionally, contracts are terminating because of financing issues and increased borrowing costs and yield spreads have increased to up to 200 bps above 10 year Treasuries. Several experts are predicting big price drops and much less activity.

I guess I have to sort of repeat what I have said before. This may be a good thing for many investors, including the types I represent. Yes, some speculators are going to get hosed, and, at the risk of sounding cruel, rightly so in my opinion. As the story says, cap rates in 2002 were at 9.25%. In the 1Q of 2007 that rate was 6.5%, and the EOP deal closed at an amazing 5.3 cap (no wonder Sam got out...what a genius). Also remember that many EOP deals were flipped, perhaps at even lower caps. Let's not forget that rents are still rising in many markets. Finally, take into account the fact that there is money is on the sidelines waiting, just waiting patiently, for cap rates to come back to some level of sanity.

What do I think will happen? There will be deals, even though some sellers will not want to sell, if for no other reason out of necessity or from banks who take back properties, etc. There are always deals to be had for one reason or another, albeit not at the insane breakneck pace we've seen. Smart investors will buy at the right price, finance with traditional loans for the time being and take a hit with higher short term borrowing costs, waiting for rates to decline before refinancing into the most restrictive (but lower-cost) CMBS market. There will probably be fewer portfolio deals and more single-asset transactions. And we can all start acting normally again. And the sky, while at least partly cloudy, will not have fallen.

Tuesday, September 4, 2007

"Smaller" cities, luxury retail

An interesting trend noted in today's WSJ is the movement by luxury retailers such as Tiffany, Michael Kors, Ralph Lauren, Louis Vuitton and Burberry into markets where you usually do not expect to see them. Austin (which makes total sense) is the focus here, but other traditionally non-major markets such as Tucson, Nashville and Jacksonville are also mentioned. I guess retail expansion is at every level. The one sure bet here? They are not coming to Kankakee.

FATCO getting thinner

First American Corp., known by many in the industry as FATCO, is cutting another 1,300 jobs, bringing the total to 1,900 since the second quarter. FATCO also appears to be taking a serious look at moving more and more titled-related work offshore.

Title companies should remember the following: my clients send work to title companies not because of the name. Nor is price even the prime consideration, although it plays a secondary role. My clients pick title companies because of service and the ability to underwrite transactions creatively. An underwriter who can think outside the box is worth a fortune, and in my opinion, worth paying a little more premium because if a deal does encounter a title problem, the legal fees alone will eat up the savings by using a company that will not think outside the box.

(Note that I say "my clients" pick the companies. These days I rarely get to pick the title insurer in a deal because the sales people have gotten smart and have gone directly to the clients to push their services.)

It is unofficially fall. Where do we go from here?

Back to work time. Where does the market go? Beats me; that is why I am the lawyer.

But seriously, David Bodamer was once again kind enough to find a well-written post from Net Gain Real Estate about real estate investing in a marker correction, including a good basic three-point summary for analyzing property before getting into serious due diligence: cash flow, tenant quality and net growth. That is a great start for any investor in any property.

I also this holiday weekend got around to catching up on the zillion periodicals to which I subscribe and came across a characteristically witty piece in Fortune from Ben Stein. His take? "Stupid" investors who just buy the broad markets make money in the long run, while "smart" investors lose trying by jumping in and out of the market. My favorite line was what I assume is a swipe at Jim Cramer, one of my favorite writers: "[The smart investor] even has bald people on TV telling him he's right to worry." (I nonetheless love Cramer and think Confessions of a Street Addict is nothing short or sheer genius imo.)

Let's see who is right and how it will impact the CRE market.

 
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