Leaving for the moment the exciting melodrama where the League of Bald-Headed Financiers rescue the Self-Inflicted Walking Wounded and other Damsels-in-Distress-Whether-They-Like-It-or-Not, let’s pay a short visit to the land of bricks and mortar where residential loans are the Walking Dead and commercial loans are the Soon-To-Be-Dearly-Departed.
Midtown South: Manhattan’s Economic Crystal Ball? – The New York Observer – Tom Acitelli – 09 October 08
Midtown south, that region of heavily commercial Manhattan from roughly Houston Street to 42nd Street, may be the crystal ball for New York’s financial health. It has a lot of the island’s cheapest office space; and, yet, that same space is emptying slowly as companies trickle out sans successors….Even with the cheaper space, midtown south has been steadily losing its office tenants. midtown south’s vacancy rate increased from 5.6 percent in September 2007 to 7.1 percent in September 2008, more than the annual rate increase for all of Manhattan. At the same time, over 10 percent of midtown south’s office space was available for lease by October, according to CBRE-greater than the available amounts in midtown and downtown…the region isn’t as desirable an area for marquee companies as midtown or downtown. Class B office space dominates midtown south, and it’s where smaller companies go for a Manhattan toehold.
But that’s just it: It’s often the office region of last resort, an address born of necessity not of choice. Companies are splitting-and others aren’t coming in to replace them. That’s not good news for New York’s economy.
3Q 2008 Manhattan Market Overview Available For Download – Matrix – Jonathan J. Miller of Miller Samuel, Inc.
The 3Q 2008 Manhattan Market Overview that I author for Prudential Douglas Elliman was released on Friday.
…The average price per square foot of all new development was $1,320 this quarter, down 1.5% from the prior year quarter. The average price per square foot of a re-sale apartment was up 4.3% to $1,142 per square foot as the bulk of higher end new development has been absorbed while higher end re-sale properties continue to sell…The impact of the credit contraction, associated volatility in the financial markets, as well as unprecedented government bailouts on a federal level have not shown up in the market data for the quarter. The key metrics to consider going forward are the lower level of sales activity compared to last year’s record levels and the rise of inventory. The reduction in affordable mortgage products continues to hamper buyers in New York as well as most housing markets across the country. The upcoming quarter begins with modest inventory levels and the likelihood of a reduction in new development units entering the housing stock next year due to the credit contraction….
Click here for a copy of the full report
Goin’ Up-Prime!: Hudson City Bancorp Prime Losses Q3 2008 – Paper Economy – 15 October 08
…I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products…
Hudson City is now fully recognized as the “poster child” for safe prime-only mortgage lending, stringent underwriting standards and a CEO, Ronald Hermance, whose frequent media appearances usually come with heaping portions of high praise and accolades…
In fact, currently the average LTV of their non-performing loans (defaulted loans) is 69% so “prime” borrowers with 31% equity at the time of origination are now defaulting in steadily increasing numbers..
But how does the growth in defaults of the Hudson City Bancorp “prime” portfolio stack up compared to other well know default rates?
The Following charts compare the Hudson City default rate to that of Fannie Mae and the MBAA foreclosure rate…
Click here for full article and charts
Wells sees higher loss on big home equity portfolio – MarketWatch – Alistair Barr – 15 October 08
Hit from $84 billion portfolio almost doubles during third quarter…Wells said net charge-offs totaled $2 billion in the third quarter. The $84 billion home equity portfolio accounted for a third of those losses, even though it represented only 20% of the bank’s total $411 billion of outstanding loans.
Wells has split the portfolio in two, with $11 billion put into a liquidating bucket and $73 billion into what it calls the “core” home equity portfolio. The liquidating portion holds loans originated by outside producers, such as mortgage brokers, while the core bucket includes loans made by Wells directly.
The loss rate on the liquidating portfolio jumped to 7.59% in the third quarter, up from 3.46% in the second quarter. Losses on the core portfolio reached 2.43% from 1.36%, Wells reported…
If prices continue to fall, more of these loans will become worth almost as much as the underlying houses. That may increase the chances that homeowners will walk away from their properties and stop re-paying their loans.
Wells said Wednesday that more than three quarters of its $11 billion liquidating home equity portfolio had a combined loan-to-value ratio higher than 90%. That’s based on estimated home prices through August.
For the bank’s $73 billion core home equity portfolio, 44% had a loan-to-value ratio of more than 90%, Wells said…Wells changed the way it accounted for bad home equity loans earlier this year. The bank now charges off loans that are 180 days delinquent, up from 120 days. That deferred an estimated $265 million of charge-offs from the second quarter…
Funding For Commercial Real Estate Down – Seeking Alpha – Judy Weil – 15 October 08
…GM Seeking $500M Bond Investment or Sale-Leaseback of Detroit HQ. “Less than six months after it paid off its debt on its Detroit headquarters, struggling automaker General Motors (GM) is trying to refinance the Renaissance Center or arrange a sale-leaseback to raise about $500 billion. GM officials recently appeared before the Detroit Police & Fire Retirement System Pension Fund board [trying] to get the board to agree to a $250 million collateralized revenue bond investment… If that pension board agrees, GM would seek another $250M from another city pension fund… Several pension board trustees told news groups that they considered it too big of a risk.” (CPN, Oct. 14)
…Financial Upheaval Keeping Real Estate Deals in Check. “Nationally, there’s been a $225 billion drop in the amount of debt available for commercial real estate investments, according to Tom Sherlock, senior managing director for Newport Beach-based real estate investor and advisory firm Buchanan Street Partners, which arranges financing for developers and invests equity in projects for itself.”
Slumping economy hurts Las Vegas commercial real estate markets – Las Vegas Review-Journal – Hubble Smith via Seeking Alpha – 14 October 08
Las Vegas commercial real estate markets have not escaped the turmoil of the national credit and housing crises, a third-quarter retail market report from CB Richard Ellis showed…The retail market shows the strain of the economic downturn with steadily increasing vacancies and the first quarter of negative absorption, or the amount of new space taken by tenants, in a decade…Asking lease rates have remained steady throughout the year, dropping a penny in the third quarter to $2.20 a square foot. Lease rates dropped 40 cents a foot in the northwest submarket and about a nickel in the Nellis and southwest submarkets…Hispanic grocers have grown and that has affected traditional grocers, Mendlovic said. Specialty food stores such as the Buy Low market in the redevelopment area around Owens Avenue and H Street and Sunflower Markets in the southwest valley have found their niche in Las Vegas…
Applied Analysis showed 6.3 percent retail vacancy in Las Vegas, compared with 6.1 percent in the second quarter and 3.7 percent in the same quarter a year ago. Asking rates dropped to $2.16 a square foot from $2.18 in the previous quarter…Power centers, or larger centers anchored by big-box retailers, had the lowest vacancy rate of 3.7 percent, while neighborhood shopping centers had the highest vacancy at 8.5 percent…
Real estate impact to be ‘massive’ – Investment News via Seeking Alpha – Arleen Jacobius – 05 October 08
The credit collapse and the ensuing de- leveraging from financial institutions are expected to have a colossal impact on the real estate investment market…
Commercial real estate is in the second or third inning of a game that might go into extra innings, industry insiders said…
Financial institutions nationwide might have to reduce leverage by trillions of dollars, insiders said.
According to Buchanan Street estimates, that reduction could amount to $5 trillion.
“There will be some fabulous opportunities in this,” Mr. Ballard said.
“There will be folks who are forced to sell because they can’t refinance,” he said. “There will be more sellers than buyers, and purchase prices will decline.”
But observers say that while bargains will abound, buyers shouldn’t expect fire sale prices.
For one thing, managers are sitting on billions of dollars, waiting to scoop up distressed assets…
“Some real estate investors expect distressed sales to come within the next few months when short-term debt comes due and owners can’t refinance and have to sell assets,” said Susan M. Smith, director in the real estate advisory group of PricewaterhouseCoopers LLP of New York.
Deals will be different, though. There will be a “flight to quality,” with well-located fully leased properties’ fetching the best prices, Ms. Smith said.
Real estate with empty space will be tough to sell, because the banks that are still lending will lend only to the top-quality properties, she said.
Still, real estate investors won’t see appreciation in their return equations, and they will have to shift their growth assumptions downward, said Sarah Snyder, vice president of Callan Associates Inc., a San Francisco-based consulting firm…
Market observers said that cash will again be king because investors will need a lot more equity.
Mezzanine funds will become extremely important to lenders because they will be among the few with money.
While a number of managers raised mezzanine funds during the past year, the amount raised isn’t even close to the projected lending need.
The hardest loans to get will be first mortgages…
The field will be left to investment managers with ready cash who can move quickly and who can make returns with a minimum of debt…
New York City Income Property Market Report First Half 2008 Is Available For Download – Matrix – Jonathan J. Miller of Miller Samuel, Inc.
Our commercial advisory firm just released its New York City Income Property Market Report for the first half of 2008 for Massey Knakal. My commercial valuation partner John Cicero prepares the report. It’s the only report of its kind that covers the New York City commercial market.
Here’s an excerpt:
Though underwriting may be more conservative, the decline in sales volume is a function of lack of inventory rather than lack of demand. The underlying rental market remains strong and investors continue to be interested in such property but supply is constrained. The consolidated median price per square foot across markets declined to $222, down 5% from the prior six month period. Similarly, the median cap rate (across all sectors) inched up slightly to 5.8% from 5.5% from the prior period while the median GIM slipped from 12.4 to 11.5…
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