Saturday, May 24, 2008

Macklowe - saved to the tune of $2.9 billion?

Nice money if you can get it. Of course, these numbers may not keep Harry on the next Forbes 400 list (as the story says), but it means he gets to pay off his nasty bridge/mezz loan and refi the balance. (Macklowe paid $1.4B for this building in 2003.)

The real story here is not that Boston Properties bought this puppy at 2 AM today. They are also buying another three other Midtown buildings for a billion or so. They apparently put down $165 MM is earnest money with a closing in the next few months (meaning -- OMG get this -- due diligence?!?!).

The $2.9 for the GM Building is a record for a single asset in the US. But I am on vacation so I don't have the resources to look up some price estimates on the other buildings.

Wednesday, May 21, 2008

My sources from ICSC say

No links here; just passing along what clients are saying. Confidence is high, attendance perhaps a little less busy than last year but still robust, perhaps more so than one would expect. I think some developers are pushing hard to start deals that won't go until some deals get signed.

Whether you are making deals is dependent on one thing, and one thing only: location. If you have dirt in a prime space you are busier than ever or at least business as usual. If you are in an exurb or a less prime area, then your deal making is way down.

As I said earlier, I am seeing the signs of breaks in the market. The only fears now are the election, consumer confidence and gas prices. Speaking of which, if you'll excuse me I need to go invest $100 in a tank of gas.

The corner of State and Madison

Boy, talk about memories. The world's busiest street corner. Caron Pirie Scott & Co. Shopping, shopping, shopping.

Now it's one out of three. We'll still have (some) shopping, thanks to Joseph Freed & Associates, at the masterpiece landmark building. The first three tenants? Fox & Obel, Flat Top Grill and Billabong.

Pretty darn good job of leasing, and a nice tenant mix.

Monday, May 19, 2008

Anecdotal evidence from the front

The phone's ringing more than it has been. (Hopefully this does not mess up my golf plans for this week.)

Financing is finally starting to get done. River West just got its largest order of that type in its three months of existence.

A lawyer friend advises that his/her business is up for the first time in months, and mostly because of financings and refinancings. (Yeah, bringing down that interest rate can't hurt when you compare it to LIBOR plus x basis points.)

I know, it is all anecdotal, but the signs keep pointing in the direction I want to see. I also know that maybe I just want to see things go that way and am biased in that direction, but hey, I'm entitled.

Chicago retail leasing down...what does it mean?

Eddie Baeb has a good story in this week's Crain's about demand for retail leasing going down by 22%, led by discount grocers and discount stores. As the story said:

“Stores like Target, Wal-Mart and Home Depot really drive growth,” says Jeff Kuchman, a principal with Oakbrook Terrace-based Mid-America. “When they pull back even marginally you feel that in a big way.”
As the story says, though, there are some good "buts." Developers are listening and building less. If you are in the city, you are probably way worse off than in Kendall or McHenry (and probably Kankakee, too) counties. And some sectors are still growing like gangbusters, such as entertainment and fast food. (And that's even down here: we have a Culver's and an Arby's under construction about a mile from my house.)

It'll be interesting to see how fast any of this changes when the market turns -- and it is turning.
But that's for my next post.

Friday, May 16, 2008

Thanks for stopping by, but now go...

...take a look at this month's Retail Traffic magazine. Normally I breeze through a magazine in a few minutes, but this is the second month in a row that I was compelled to read every page of this publication.

The May issue is just chock full of good information, including David Bodamer's take on retail downturns and the current market David also mentions but also writing near the end that in this slowdown some developments have wisely slowed down. This means, as Neil Bluhm was quoted elsewhere in the magazine, there won't be a crazy 1980s-style glut, particularly as there is not a cash flow crisis.

There's also good stories on rent concessions, interesting JV partnerships, an indoor lifestyle center (which I thought was an oxymoron) from Westfield, and even a preview of next week's ICSC conference. (It even has a very slick website.)

Unfortunately, family obligations are keeping me from going west Sunday, but I am hoping to have some reports from friends and colleagues who will be there. (I'll have to hit this fall's legal conference instead.) Stay tuned.

Thursday, May 15, 2008

Like I was sayin' -- mixed signals, but...

...I see more positive signs than negative. See this CoStar review for a nice wrap-up.

The big negative? Jamie Dimon thinks the credit crunch is ending (and so do I, based on what my clients are telling me about their summer pipeline) but that we may have an extended, long-term economic challenge.

The positives?

CBRE Investors (a former client) just finished raising $2.2 billion for its US Fund 5.

GE Cap is giving out big interest-only portfolio loans. (Those guys at HFF, who brokered the loan, are simply phenomenal.)

Cantor Fitzgerald (yes, you read that right) is jumping into opportunistic real estate. I'm still trying to reconcile that in my head.

I'm ever the optimist, but I see a busy summer and fall ahead.

Tuesday, May 13, 2008

Yes, I read this op-ed correctly.

The theory?


Although it is will be painful, the only long-term solution to the credit crisis at hand and the America's economy in general is to allow much higher interest rates, which will begin to redirect capital away from leveraged speculation and consumer borrowing and toward more productive activities such as saving to invest in manufacturing, infrastructure and research and development of new technologies. There will surely be short-term pain during this transition to higher interest rates, but the long-term result will be a healthier economy with a more sustainable growth potential that will ultimately benefit the real estate industry more than the current policies of trying to delay this inherently unstable and unsound house of cards built on leveraged speculation from its inevitable collapse.
Currency is also the problem. The dollar is down some 40%, which is why foreign travel is so tough. And the scary thing is that the dollar could get replaced eventually by the euro or the yuan as the de facto world currency, which would be major-league bad for us. Does the problem really go so far as questioning the fundamentals of securitization, in which case no interest rate can change the market? You tell me.

But raise interest rates now? Boy, that's a leap of faith I can't take. And I am not sure we can either. But this was a very thought-provoking piece that I have to consider going forward.

Wow - an honest assessment

It takes guts to say, "I don't know." As a lawyer I have to do that sometimes. Yes, the answer to a question is just not always in my head or at my fingertips and I may have to look in a book to make sure my gut instinct (if I have one) is right. I'd rather be right than shoot from the hip and be wrong.

That's probably why this story made me chuckle, as a net real estate fund said this in a report: "The market," it asserts in the first paragraph, "is difficult to make sense of at the moment." Why? According to Boulder Net Lease Funds, you have pressure on one side from tough debt markets, rising oil prices and decreased demand, but you also have cap rates shifting as well. (You also have lower interest and bank borrowing costs that can play a factor.)

Before you just discount the source, let me tell you that the Boulder folks are smart. I have had them on the other side of deals in the past and I know they know what they are doing. So, if you are befuddled by the market, I guess you should not feel bad. And if someone tells you that s/he has this all figured out, check the hip for a gun.

Thursday, May 8, 2008

And your survival plan is?

NetGain Real Estate has an interesting article out about getting through the next twelve months in CRE. It says the turnaround may take longet than we think because of the consumer part of the economy (I'm not so sure about that), and also "believes that we have seen the worst of the slide and that any further declines in stock and real estate values will not be significant."

I like some of the tidbits on investing, which I think bode people well to read. Rather than repeat them here, go take a look. Some of them seem a little obvious e.g., "Strong lessees have a positive affect on real estate value"), and there are one or two I'd consider disagreeing with for the right price, but that does not bother me. It is worth re-reading and reminding yourself of some sound fundamental thinking in this market.

Final question: are you a survivor, a non-survivor or a new winner?

(Courtesy of Traffic Court.)

Wednesday, May 7, 2008

Ground leases...oh joy, oh rapture

I've done a ground lease deal or two in my time. They are fun. But if you are buying a building subject to a ground lease you have to make sure you comply with the lease terms or you may have to face the consequences.

Such is the case at the Drake Hotel, where the ground lessor is suing the ground lessee, alleging a default under the lease for, among other things, failing to provide the lessor with copies of financing and hotel management documents. All I can say is good grief. One thing I've always liked about being the ground lessor is the ability to just sit down, be quiet and collect rent. Obviously that isn't the case here, and I have seen and been involved with matters where the ground lessor raised a fuss. Here's an example of one.

Full disclosure: the lessee is represented by my good friend and former colleague, Gene Leone. Gene is quoted in Tom Corfman's story as saying, “In 26 years of practice I have seen some very silly things, this is near the top.” I have not read the lawsuit, read the lease or contacted Gene about this (setting up a golf game with him is my priority), but if Gene said what he said, I'm inclined to believe him. Why? Simply stated: Gene's earned that level of respect from me over nearly a decade. (Additional full disclosure: I have represented Walton Street Capital, L.L.C., one of the JV parties of the lessee, in the past, though not on this deal.)

By the way, I recommend Mitchell Passell's book Empire if you want to learn more about ground leases from a layman's perspective. It is a fun read involving many of the characters of New York real estate, including Donald Trump and Leona Helmsley.

Sunday, May 4, 2008

What do you mean, the landlord can make me move?

Michael Mandel hits another home run, this time with an excellent analysis of the relocation clause typically found in leases and suggestions for tenants in negotiating the clause.

This clause gives the landlord the right to move a tenant within the building (or sometimes even to another comparable building, which I would fight hard if presented to me) if the landlord gives adequate notice, pays expenses, etc.

Scary? Well, it does not happen very often, usually only to accommodate a major tenant in the building. I agree 100% with Michael, especially when it comes to floor and light and that the tenant should never pay more money or have its pro rata share increased by reason of the move. (However, if the new premises are smaller the numbers should decrease.)

I would add only one other point to consider negotiating: try to limit the number of times the tenant can be relocated.

Friday, May 2, 2008

Maguire to go private?

Maguire's name came up at lunch with a friend a few weeks ago in connection with the direction of the market and the failed attempt to sell the company. Now I am reading that Robert Maguire is trying to take the eponymous company private by dumping its non-OC assets, distributing the proceeds to shareholders and then going private with the remaining OC assets.

The independent directors are apparently saying no dice to the initial proposal because it is too iffy. My question: is this a sign of desperation or need for liquidity or loan issues, or a sign that the company, whose shares are down some 50% in the last year, might be a good bargain in a depressed market? Mr. Maguire surely knows more about his own company than we do. Guess we'll have to watch this.

Denial = not just a river in Egypt

According to this report from CoStar, lenders are saying that while they don't expect a collapse, they are not eager to jump back to the 2004-2007 days, are selling CMBS portfolios, and have instituted thorough vetting processes.

And here is more anecdotal evidence about the credit crisis holding up deals from Robert Manor at the Tribune, including one unidentified developer using the word "meltdown" and reports, "even the strongest institutional borrowers are having difficulty getting money." (Exception: Self-storage, which may be why I have not seen Kenny Pratt post in forever.)


Good! I'll be the first person to say this should happen. Due diligence should be just that: due and diligent. The years prior to now were insane. Forget the legal fees; think about what is healthy in the market. Maybe I am in denial about how bad things really are, or maybe I am out of that league, but what I do know is that things are cyclical and it is nice not to have to worry about too much going on sometimes.

Now, I wonder how these lenders will feel about larger deals as they need to find 6% returns, as I mentioned yesterday. Hard to say. They may be too spooked or they may not. Delinquencies will be an interesting factor to consider; it appears the lag is catching up and delinquencies are rising, in which case people on the sidelines with cash may be looking for bargains from lenders who foreclose or do a deed-in-lieu. Case in point: I am watching a retail property in my area that I am hoping to get a group together to buy if it goes belly-up.

So let's see how all the predictions come out.

Finally, let me say one thing on very small commercial deals: I have lenders beating on doors to do small deals with interest rates over 6%. But again that is on small deals and for people with great credit.

(Courtesy of Deal Junkie.)

Linens & Things finally pulls the Chapter 11 trigger

It was really a matter of when, not if, right? 20% of the stores are closing, they have DIP financing and may even be able to pay some creditors.

Four stores are closing in Chicago: three in the north/northwest 'burbs (Palatine, Schaumburg and Skokie) and the Michigan Avenue store at 600 N., a location that commands high rents. What typically happens in a Chapter 11 is that the leases get rejected by the debtor, leaving the landlord out of luck.

This probably won't be the last BK, even if the economy picks up. The question now is who is next.

And what are Warren and Charlie going to say?

I'm kicking myself for not being in Omaha this weekend to catch the Warren and Charlie Show live tomorrow. Oh, well. Maybe next year.

Will they have any thoughts about dirt? Usually no. But if you think I would not bet against Sam Zell, what about betting against Buffett? Go ahead, at your peril. (Of course he's had a misstep or two; if he hadn't he would not be as good as he is.) I will be curious to hear his thoughts about taking a chunk of AmEx and the Wrigley deal.

Thursday, May 1, 2008

Treasuries are low? Then CMBS makes sense, or so says Sam

Think about it. We had lenders jumping all over each other in pricing while Treasuries, about the safest investment there is, were at higher rates.

Now interest rates are back down. And CMBS is not exactly at record-high default levels, is it? (Granted, the market lags, but get real.)

So the ever-quotable Sam Zell is saying that it only makes sense for institutions to return to the CMBS market, and that he is seeing the first steps of an easing in the market. This is especially true if lenders hold to the 6% floor we've been hearing about, as those are the kinds of numbers that allow money to be made. And spreads are down to boot.

Does this mean the downturn's over? Heck no. The Germans have not bombed Pearl Harbor, and I think you'll see some interesting shaking up on some properties or developments being pushed back, regardless of cache or quality. But if buyers and developers can get reasonable financing, that's a sign that we're back to reasonable times.

 
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