Boy, have they. Retail Traffic has a great story about insitutional investors hedging their bets in 2008.
The thoughts from ING Clarion, are that the days of cap rate compression are finally over and that investors are no longer deploying capital indiscriminately. Gee, what gave you the clue, Holmes?
Here's the good stuff. The crystal ball from ING is that this is probably another V-shaped downturn, with values bottoming at a 6.6 cap (remember the days of 9s and 10s, anyone?) in Q3 and turning around in 2009.
I know that you are only talking a 60 bp change in rates, but when they are that low those rates could mean big dollars on huge assets. I wonder how they reconcile the turn with a predicted rise in effective retail rents of only 3% over the next three years? Is it because fundamentals are still good and the downturn is credit and consumer economy based? It'll be interesting to see how this plays out.
Wednesday, April 30, 2008
Boy, have they. Retail Traffic has a great story about insitutional investors hedging their bets in 2008.
Tuesday, April 29, 2008
Commercial real estate fundamentals lag the economy, but one market indicator in particular provides an early warning sign of impending changes. Office sublease space has increased by 12% from its recent low in the second quarter of 2007, ending the first quarter of 2008 at 81.9 million square feet. During the last downturn in 2001, sublease space more than doubled after three quarters of softening. Thus, the office market is feeling the effects of the weaker economy, but the pace of softening so far has been gradual.I thought the CBD (central business district) numbers looked good but the suburban numbers were not.
Then I heard an opinion in the news today that we are Japan in 1992, a country of spenders turning into a country of savers because of impending retirements, and that we should expect a 15 year doldrum. There's a Yale economist who as a similar opinion. And now we read that hone prices are, not shockingly, down 12%.
Personally, I don't see it. We're not Japan. The WaPo will tell you why.
Does that mean we will have another 23 year run-up? Probably not. But hopefully a prolonged downturn is unlikely with good central banking policies and sound thinking. Let's hope the Fed does the right thing this week.
Monday, April 28, 2008
Sam Zell calls the estimated difference between the $6 billion Harry Macklowe paid for the EOP Manhattan properties and the $7 billion he paid for them "Macklowe stupidity.'' Ow. You must have a thick skin to play at that level.
While people do not want to overpay:
The pace of commercial real estate deals may pick up as U.S. pension funds such as the California Public Employees' Retirement System move money into real estate, Zell said. "I don't think they can afford to sit on the sidelines and get 2 percent from Treasuries when they need 7 percent'' of returns to pay retirement benefits, he said of the funds. That could lead to an "opening'' in credit markets.
Makes sense to me, but we have to see what the rest of the dirt world says and does.
My blog disclaimer is OK, and hopefully somewhat witty.
But if really you want to see something funny, at least by lawyer standards, click here. Patrick Lamb, another BigLaw refugee, started his own law firm a few months ago, and his website is now up and fully functional. I especially liked the crack about tax lawyers for the IRS Circular 230 disclosure.
I like his billing ideas. But most of my transactional clients like paying me by the hour. I hope this changes with time.
Posted by David at 4:50 PM
I know we keep hearing about plans to cut, cut, cut and recession this, recession that, but MarketWatch says these retailers are still expanding.
I keep seeing and hearing about LOI after LOI and lease after lease. Keep 'em coming. Certain boxes (Wal-Mart comes immediately to mind) thrive in these kinds of conditions as people cut back to essentials. (Maybe it is just like staying at a cheaper hotel or using generic brands, etc.)
(Courtesy of Traffic Court.)
Posted by David at 12:40 PM
Sunday, April 27, 2008
Good infrastructure is a key to good, well-valued dirt.
I am starting to think we need an Eisenhower-era level project to fix infrastructure problems, be it publicly or privately financed. Can our ridiculously school taxes go to roads instead? At least I use the roads.
Where I live roads are literally crumbling. One main artery, US 45/52 from the Will County line north, is almost impassible. Yes, it is THAT bad, so much so that some have called for its closure. I found similar problems near O'Hare yesterday.
The one good thing our current governor has done? Open road tolling.
Are the rumors of an increase in residential refinancings true? Or are a lot banks just really messed up in underwriting? I was happy to see National City staying independent for the time being. (But they certainly not out of the woods, as this story reminds us. And other banks, too, are not immune.)
And what's up with RBS? Would buying LaSalle along with ABN/AMRO have made a difference?
River West is happily taking orders, which I hope means there's life in this market yet. I guess we have to face that deals will be done, whether with willing sellers, distressed sellers or banks dumping properties handed to them by borrowers. A title company colleague told me the other day that 30% of his/her company's business was "touched" in one way or the other by the foreclosure process.
I really like the idea of creating a NYBOR rate tracking the borrowing costs of US banks as a benchmark instead of LIBOR. Fine, call me a xenophobe.
Friday, April 25, 2008
"Amateur hour is over." So says Tony Thompson in this GlobeSt.com interview.
He's so right in so many ways on this one. The interview was an interesting read. If I have time to give you more analysis later I will but I am buried in work and meetings today. Telling thought: no NNN investing, because he says that is something you should see G&E/Triple Net about. (Well, he also admits he has a "very limited" noncompete.)
I think I know another reason he started this and left the old shop which I will not disclose here. I told a good friend my thoughts over three years ago, and we'll see whether I was right. I'm probably not.
Posted by David at 8:29 AM
Wednesday, April 23, 2008
Tom Corfman has a story at Crain's this morning stating:
Garrett Kelleher failed to pay nearly $430,000 in property taxes due nearly two months ago on the proposed site of the Spire, even as the Irish developer was launching a lavish, five-city Asian tour to trumpet the massive skyscraper.Corfman goes on:
The 2,000-foot-tall Spire project would challenge even the most seasoned developers. And the failure to manage a routine task like property taxes raises questions about Mr. Kelleher’s ability to complete a multi-billion dollar project that demands the highest level of concentration.
The reason? According to a spokesperson, an error in the address for the bills.
I personally think Corfman is the best real estate writer in Chicago out there, but, putting my lawyer cap on, I can tell you this happens to the best of developers. It often occurs in the early phases of a development because a tax bill does not get to the right person or the right address because records have not been updated or whatever.
But that also does not mean I think this should be a free pass for the Spire, especially these days when you can get and check these records online. The fact of the matter is, when you have a project that is this high profile, you'd better dot the i's and cross the t's because if you don't, people will be watching. And we are watching.
Hard to tell. But Moody's, through NREI, reports that most sectors held their own in the first quarter, with limited service hotels being the notable exception. You could plausibly argue that this is a sign that things are not bad, or you can argue that things are just starting to move down and that banks will own a lot of dirt soon. Case in point: a lunch with a friend recently who predicted that many, many buildings on deals s/he worked on will be going back to the lenders soon. Heck, look at the Macklowe portfolio -- and now he's willing to sell 50% of his company since no "quality" bids came in for the GM Building (wow and ouch - and the New York Post report is even uglier).
It looks like retail is still doing well, which I guess is good for me. Now, I wonder aloud whether all the possible BK filings we're hearing about in the news could impact this, but again, it comes down to location. Yes, there are stores going dark, but plenty of retailers are also building. I'll bet a nickel the ICSC conference in Vegas next month will be, in the words of Arte Johnson, verrrry interesting.
Tuesday, April 22, 2008
Super-blogger Susan Carter Liebel had a good post yesterday about solo practitioners and small law firms winning not on price but on value provided to their clients. She cites a story from The Complete Lawyer by Marcie Shunk captioned "Welcome to the Age of the Smaller Firm."
The thesis of this article? Small law firms are the real wave of the future.
That's all fine and dandy, until you read on. Susan's post is spot on, as is the general concept of the Shunk post, but I do have to take some definitional exception to the term "small firm." It seems to me that, according to this story, anything outside the AmLaw 200 is considered a small firm.
Huh? These are all super firms that are mentioned here. But I would not call them small by any means. Oppenmheimer, Wolff & Donnelly has 107 lawyers by my count. Keesal Young? 70. Bartlit Beck? 65. Jones Walker? Around 230!
There are plenty of real small firm lawyers that are doing first-rate work. Throwing out the best boutique firms in the country as examples of great small firms seems a little left field to me. It almost tells me that people think the days of "real" small firms may be going by the wayside. If that's the case, then so be it. But if this thesis is true, then show me lawyers in firms of less than 10 or 20 people servicing some Fortune 1000 clients.
Someone near and dear to me asked me to draft an office lease for some property that person owns. I received a hand written, one page term sheet with a base rent figure.
What freaked me out until I read it more carefully was the treatment of gross and net items in the lease. Those of you in the know (probably all of you if you are bothering to read this far) are aware of leases such as bond leases, net or triple net leases, gross leases, modified gross or plus-E leases, and the like. (You can find what I think is a good recent summary written by Michael Mandel here. New York is a whole ballgame of its own sometimes, especially dealing with the form Manhattan leases with their crazy long riders.)
All I was reminded of was this: you cannot just draft blindly and assume every deal is the same. And the terms I mentioned above, while very, very helpful, are not always precise. (It reminds me of my first plus-E lease in Texas.) For instance, I am drafting a so-called "gross" lease here, but the tenant will have separately metered premises and will pay for half of the trash removal. The landlord is apparently covering everything else. (We'll see once I finish the first draft and discuss it with the client.)
And for you clients: don't get annoyed when we ask what you think might be crazy or dumb questions. It is for your protection, not to run up the bill.
Monday, April 21, 2008
I have said time and again that I do not make news, I just report it. So, if I know about a deal (whether I am working on it or not), I don't leak it. Not my job, and I do not even want to think about the privilege and confidentiality issues that abound. (I also don't want my clients worrying about it.)
The good news is that GlobeSt.com reported today that a deal I worked on last year, the redevelopment of the New City YMCA property in Chicago, is moving along. Roundy's Supermarkets, which we discussed here recently, has signed an 80,000 sf lease. (Full disclosure: I did not negotiate that deal.) Other tenants are in the works, and, as my friend Jeff Berta says, “Unfortunately, we cannot announce any particular names at this time.” They are still talking about how to deal with some of the residential portions of the property.
I'm looking forward to a summer groundbreaking for multiple reasons.
Triple Net Properties/NNN Realty Advisors merges with Grubb & Ellis, Tony Thompson steps aside, and guess what? He's right back in the game with Thompson National Properties, L.L.C.
The NNN world has been very slow lately. I have some thoughts as to why but I cannot share them in public right now. It seems like this play will be more of a value-added company rather than a NNN play, which is a smart thing to do. Thompson should have the savvy and the capital (both in equity and ability to raise money and find loans) to do well.
Posted by David at 10:06 AM
Saturday, April 19, 2008
If you are in my business, you know about Libor, which is an acronym for the London interbank offered rate. For those of you not familiar with it, Libor, is a benchmark for fixing loan rates around the world. It has increasingly been used in commercial real estate over the last few years over the old standard of US Treasuries. There are Libor "contracts" of varying lengths, such as 30, 90 and 180 days that we use as a benchmark interest rate. So, in other words, if I have a loan that is "6-month Libor + 225" that means the interest rate is 2.25% above the rate for a 180 day Libor contract at a given time (and then usually subject to adjustment each six months).
Now, in addition to the loan rate floors that I wrote about the other day, we have a new wrinkle: Libor rates are spiking the last few days, due in part, it seems, to possible "growing concerns among bankers that their rivals weren't reporting their true high borrowing costs, for fear of signaling to the market they were desperate for cash." What this means? Harder to get a decent loan rate, that's what, but that's also mainly due to the floors.
Before you jump off a cliff, remember that Libor a year ago was over 5%. Now it's gone up 20 bps in two days, but still around 2.9%. So don't panic.
In commercial real estate, the rise in Libor is bound to have a chilling effect, because many developers borrow heavily using floating-rate debt linked to Libor. Until recently, declining rates had benefited borrowers, but some lenders were growing wary. Banks have started to include a floor in Libor-linked loans, said Peter Fitzgerald, chief financial officer at Radco Cos., an Atlanta developer. That means borrowers' savings would be limited if Libor continued to sink, but borrowers can be hit by the latest rise.
"If Libor were at 4% instead of under 3%, there would be a disaster that would take years to unwind," he said.
If you have a big rate hike then I'd be worried because that could make a real mess out of some deals, as increased borrowing costs screw up your pro formas and blow your returns on deals. And should the markets consider going back to the old days of Treasuries if there is real concern about the integrity of the Libor system? Maybe. (As an aside, I also see opportunity for mezzanine lenders here.)
Friday, April 18, 2008
Jordan Crouch has two great posts today on lending; one on brokers and the other on rates. Just go to his blog and look at them.
I saw an ad in the paper today mourning the loss of Kimco founder Martin Kimmel. David Bodamer has more.
Edward Roski has his latest proposal for bringing the No Fun League back to Los Angeles, this time with a 75,000 seat stadium in the City of Industry. Good luck. Apparently they only have to file a supplemental EIR, but even if someone wants to move a team to LA does anyone care anymore? With so much else to do (including USC and ucla football), I'm not so sure.
Why am I being so short? It is noon. I have largely finished my work for the day, and I am eager to go play at least nine holes. But there's a storm front coming soon, so I'd better hop to it!
Have a great weekend.
Wednesday, April 16, 2008
Robert Manor is now covering the commercial real estate beat for the Tribune. So far I have liked was he's been writing, but today's column might be his best yet. Why? Objectivity! Instead of gloom and dooming, he lays out the facts in a story with this very cool hed: Good enough equals great in real estate.
Sometimes average isn't so bad, especially amid economic uncertainty.Bravo. We're not doing great, but stop the talk of everything tanking for now. That does not mean things may get worse or conditions will change, but the balanced nature of the story really caught my eye.
Several commercial real estate industry observers have issued reports in recent days, examining how the Chicago market is faring. What they found in general: Chicago real estate markets may not be outperforming, but neither are they in distress.
Welcome, Mr. Manor; I look forward to reading your work.
I tend to be fairly optimistic about the market improving this year. But then I represent people who don't eat if they don't deal. You keep reading about people poised to jump into the market when the time is right, but those deals are still holding.
Then you have Jeff Brown, who sees a lot of his people in the world applying Murphy's Law and O'Toole's Corollary. Jeff hits yet another home run. As I am sure I have said before, I also think sometimes people who write about these things tend to want to push the negative for many reasons, follow a herd mentality and tell people what they want or expect to hear. It is also easier to make negative predictions than positive ones; usually if you are wrong no one cares but if you are wrong when you are bullish, well, you are a pariah for sending people over the cliff.
I make no pretensions about knowing where the market is going, but I do know that many people in the business have made a ton by selling when the herd is buying, and vice versa. Think about it....
Tuesday, April 15, 2008
This is something I have not seen in a long while. Jordan Crouch reports that most lenders are putting a "floor" on loans in the 6-6.25% range. So, no matter how low 10-year T-Bills (or, presumably, LIBOR, which is what I am usually seeing quoted these days) go, rates will not follow. Jordan does not see any sign of a bottom yet.
What pickup I am seeing is on smaller deals. Portfolios? Not much at all, although there was this story about a 22-property industrial deal that closed the other day in town. I've dealt with the buyer, TA Associates, before. They are very good investors and leave no stone unturned when doing a deal. And they bought at a cap rate of 6.5%, which is right around market.
Sometimes portfolio deals bother me just because of the risks involved. That being said, I've done my share as a lawyer and the complexity of it all can be a lot of fun and good for your billings!
Posted by David at 10:57 AM
Monday, April 14, 2008
I was doing a little browsing this evening and noticed that my law school classmate, Laine Wagenseller, has started a real estate blog aptly named SoCal Real Estate Law.
I haven't spoken to or seen Laine since law school, but I remember him as a very bright and good guy. It is therefore easy for me to recommend that you check out his blog, and, in particular, this post on what I also think is a very real problem: the decline of accountability when people make bad or stupid business decisions.
Bravo, Laine! And welcome to the fray. Glad to see you are doing well in the world.
Posted by David at 7:04 PM
If you could see this now....
I know this property is in Bucktown. I know Bucktown is hotter than hot for development. I know prices can be high there.
But $767 per square foot? I repeat: wow. If the national retailers can come in with high rents, and with parking available on this site that makes it a premium location, on top of a great corner, this could be a good deal. But boy, that's going to be an interesting pro forma. And you still have to get it through the alderman and zoning and into a PUD.
Some analysts are saying that the real estate market is at its worst since the 1980s (ah, the RTC days) and are predicting there may be "multiple bottoms" over the next 12-36 months.
Just when things start to look better, another financial bomb explodes on Wall Street. The shock waves might keep real estate managers and investors reeling for years to come, experts say.
“It's like terrorism,” said Jack Foster, managing director and head of Franklin Templeton Real Estate Advisors, a real estate fund of funds firm in New York.
I'm no analyst, but I don't buy that. First, I'm not sure this is the worst we've seen in 20 years, and back then of course commercial property was way overbuilt. Now? Not so much, with some exceptions.
And while most institutional investors are cutting back on buying at the moment, the article states that money is being raised to buy raw land for development or for opportunistic investing. Smart calls.
And FWIW, my friends in the legal biz who have been very slow lately are starting to see a little more work come in. Remember, there is often lag from deal people to lawyers while initial tire kicking is going on.
From Pensions and Investments, via Deal Junkie.
I've always been intrigued by Chicago's Marina City, the corncob-looking twin towers at State Street and the Chicago River designed by Bertrand Goldberg and built in 1964.
As a purist, I did not like it when Smith and Wollensky came to town and put a New York style facade on the ground floor. I just hated the look.
Now I hear that Dick's Last Resort (which I like, by the way) wants to move there too and add outdoor seating and, well, its unique brand of service to the mix.
Come on, people. Landmark this iconic building already. And put Dick's where it belongs, more north in River North or keep it near Navy Pier.
Also see Pulitzer Prize winner Blair Kamin's blog for more.
Sunday, April 13, 2008
Just catching up on vacation reading here...if you want a quick primer on B-piece buyers and their (critical, at least these days, since the B has the right to kick out deals) role in the CMBS market, then check out this story from the Journal last week. You'll learn something.
Friday, April 11, 2008
Could the news be better? Yes, because leasing activity is down in the last quarter, roughly 10% from the same time last year. And vacancies are up, from 5.7% to 6.1%.
The news here to me is that things are not a whole lot worse. Maybe things need to catch up? Maybe the latest casualties are not priced in? Ummm....well....or maybe the market is not all that gosh-awful. For instance:
Cushman & Wakefield said that in the first quarter, overall rents jumped more than 25% to $67.13 a square foot from the year ago period. Mr. Harbert says even though the economy is weakening and overall vacancy rates are increasing, vacancies have not risen to the point where landlords feel compelled to lower their rents. However, he notes that they are giving more free rent and more generous construction allowances.Uh huh. Read that again. Now could this be the calm before the storm? Maybe. But it is just as likely a sign that landlords are simple not willing to push the panic button.
Posted by David at 8:49 PM
Tuesday, April 8, 2008
It was (VERY SLIGHTLY) easier to put it away back in the days of the pager-like, non-browser, no cell phone devices. (Yes, I go back that far. I've had one since 2000, when dinosaurs roamed the earth.) Now that it is all of the above it is harder to do.
I noticed the story said you should not take it with you on vacation. I am about to leave on a trip. I won't take it with me but I am hoping not to pull it out every ten minutes either. (It was also easier to put away when there were BlackBerry dead zones. Do those exist any more?)
Wish me luck. I may be posting less frequently while away though I will have a laptop with me (addiction #2).
(Courtesy of Sibdu Blog.)
Posted by David at 11:33 AM
"I don't expect to see any dramatic change in cap rates or the viability of high-quality office investments in the U.S.", he said, adding the pace of new developments had slowed sharply since the summer, which would help keep a lid on supply.
Yes, there is less demand right now, but supply is not what it was in the 1990s. That does not mean that will not change in some markets down the line (Chicago in 2009-10, for instance), but we also can't crystal ball the economy two years down either.
Monday, April 7, 2008
Here's some advice about this in the context of a Chicago apartment. In short, it is in the eyes of the beholder. Usually, scratches, paint, a little carpet wear -- that's OK. Nail hole? Ordinary. Fist hole? Not. HVAC? It depends on who was responsible for maintaining it; life expectancy and other factors can also come into play.
What do you do? Take pictures of the place so you have evidence. Write down a list of what is wrong at the outset. I know this sounds silly coming from a lawyer, but unless tyou have alocal law to the contrary, common sense is a good approach.
The Journal had a story the other day that compares condotels to dotcoms that crashed a few years back. I took a pass a year ago on the concept. And that was not the first time either. I remember look at condotels at a resort in Scottsdale back in 2001 and again in Florida in 2005.
Why did I look? A friend was doing well with one in Orlando but that was back in the earliest of days. Something just did not seem right about the whole thing. Finally, a savvy real estate agent told be to be very careful about this, to the detriment of her commission(!)
And my spider sense may have been right this time. These are great for developers because they get the money up front which allowed them to get construction financing. Great mitigation of risk. And the management company still keeps roughly half the revenue as a management fee, so they make out all right too. The losers? You guessed it. All the risk of a down market is shifted on to the individual unit owners.
Will there be litigation? You betcha.
How many times do you have hear this? If it sounds too good to be true, it probably is.
The only upside? If I make some money this year and next I might be able to pick up some stuff on the cheap. That's not too good to be true.
Sunday, April 6, 2008
Here's a little Chicago tidbit I stumbled across: a Hines L.P. fund just picked up One North Wacker Drive from a German investment fund advised by RREEF for $540 million, or $386/sf.
Let's see: great location, excellent tenant mix (and 98% occupancy), LEED certification...a couple of years ago a building like this might have been buried in some mega-portfolio deal and no one would have talked much about it. But as a single asset deal, I mention it because it is, in my view, a decent price for a great A-building in a market that is supposed to be in the tank. Here's the difference of this "bad" market: I'm sure the buyer didn't have to sign a contract without changes, do cursory due diligence lasting a week or two and close immediately thereafter.
In other words? Gee, back to normalcy. And good property is always good property.
Some stylebook errors aside (referring to firms such as Cadwalader, Wickersham & Taft and Wachtell, Lipton, Rosen & Katz by their first names only on first reference is a faux pas imo, especially in a non-trade publication), it is a good story. My one substantive quibble is that I do not recall it mentioning the fact that successful trial lawyers make the most money of all.
I know I am beating a very dead horse, but it bears repeating, especially if predictions of more outsourcing, the rise of paralegals performing unsupervised work lawyers now do, etc. come true. The monetary returns of law school aren't great for the average person, especialy nowadays with crippling debts upon graduation. Personally, I'd shut down about 60% or more of our law schools, but what do I know?
Saturday, April 5, 2008
That stranger was my mother, who blew a tire today on a narrow section of freeway driving between a concrete barrier and a semi.
She could have been hurt or killed.
You stopped your motorcycles, took off your helmets(!) and worked feverishly to help her get back on the road, again, in dangerous conditions. You would not take a dime from her, saying that you hoped someone would do the same for your mother.
You did, however, accept Mom's (and her friend's) thanks, prayers and a hug. And I will always remember that preconceived notions about people and their habits and dress are just that.
And let me add my own thanks, from the bottom of my heart. You are gentlemen in the truest sense of the word. May God bless and keep you well, and may all your travels be safe.
Posted by David at 8:10 PM
Wednesday, April 2, 2008
Assuming it is true, and election year or no, I'd rather just say the "R" word and be over with it. Why? Kevin Kingston reminded us why back in November. (In short, the last four recessions were over or almost over by the time they were announced.) And we're seeing that again. So let's just move on.
Tuesday, April 1, 2008
If you are in the business and this is not telling you something, then you might want to change careers. Hold on tight.
According to Deal Junkie, Shorenstein Co, which has been a seller in the market for a while now, is apparently poised to buy. Why? Dry powder and signs of distress, according to an interview with Doug Shorenstein originally in the San Francisco Chronicle.
Zell sees changes afoot, investors smarter than I'll ever be are watching for the right deals...yeah, another normal day at the office.