Real Estate Journal Online

As Bank of America struggles – successfully, according to its executives – to once again become a “growth company,” one way that it is limiting its losses is by selling off commercial real estate[1]. The lender, which has been hit hard by litigation associated with its acquisition of Countrywide and by the robo-signer scandal hopes to decrease the chance of write-downs on commercial loans by selling off those assets now. Given that commercial property prices have fallen 40 percent since their 2007 peak and the bank’s core portfolio fell 28 percent in 2010 alone, this seems like a wise decision in order to limit loss. However, BofA is not exiting the commercial real estate business completely, says its head of commercial banking division David Darnell, but will remain active and involved in a “very disciplined way.” Chief executive officer Brian Moynihan hopes that this move will help the lender continue to expand without acquisitions like those of Countrywide and Merrill Lynch & Company, which led to litigation and serious losses in real estate and mortgage securities.

The lender said in an official statement that although “credit quality for commercial real estate is showing sign of stabilization,” it expects that “elevated unemployment and ongoing pressure on vacancy and rental rates will continue to affect primarily the non-homebuilder portfolio”[2]. By shedding some of its “excess weight” in commercial loans, BofA may be able to reduce its “legacy assets” left behind by other CEOs and limit losses on the books. Do you think that BofA’s actions are a sign that commercial real estate is not done heading down, or does this make you want to buy?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter!

Let us know what you think of BofA’s continuing troubles below.

---

[1] http://www.businessweek.com/news/2011-03-08/bofa-selling-commercial-real-estate-assets-risk-chief-says.html

[2]http://www.streetinsider.com/Corporate+News/Bank+of+America+%28BAC%29+Slashing+its+Commercial+Real+Estate+Assets/6353289.html

Since 2008, not much has happened on the commercial real estate retail front in southern California, but Rick Caruso, president and CEO of Caruso Affiliated and mall magnate, believes that he can change that with a new retail/luxury residential model of shopping center[1]. The apartment and retail development, projected at $60 million, will be located near another one of Caruso’s properties, LA’s Grove shopping center.

The complex will be eight stories and consist of 88 apartments over a Trader Joe’s grocery. While smaller than many of Caruso’s other projects, it will play a significant role in the return of development to the area. Caruso, who is “committed…to pushing the bounds of the industry” through the development of high-quality retail centers[2], started the new project after a similar project quickly leased nearly to capacity – and 30 percent above the local average – within a short period after completion.

All over the country, the “right products” are moving in the real estate industry even while others struggle to stay afloat. It looks like new construction – carefully thought-out and designed new construction – could be the key to the elusive element of building that fuels most recoveries and has been notably absent from this one. Do you think that there is a place for new construction in today’s economy, or is there too much old construction for new construction to flourish on a wide scale?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter!

Let us know what you think of building in today’s market below.

---

[1] http://www.latimes.com/business/realestate/la-fi-caruso-development-20110308,0,7462076.story

[2] http://www.carusoaffiliated.com/companyProfile/bios/rickc.shtml

While it might be hard to see how the commercial market could move so quickly from a total standstill to having too much action and capital, that is just what many experts are predicting could happen during the “long healing process” in the commercial industry[1]. That’s right: now that things are starting to look better with transaction volumes heading up and great deals being done right and left by careful investors who have waited for just this time to move into the market, analysts believe that copycats could start moving in over the next few years and gumming up the system with “too abundant” capital.

But is that really such a bad thing? The commercial real estate market relies on investor confidence just as other real estate markets do. And renewed confidence in t he market is currently causing the commercial mortgage-backed securities (CMBS) market to double in value while lenders and investing firms are acting quickly to get involved in all related arenas. “The best bargains come in a bad market,” say analysts, pointing out that soon that bad market could start to change its face and become a good one with investors still struggling to get in.

It seems that what this really means is that if you want to get in on the ground floor of the growing commercial real estate industry once more, then the time to act is now. According to the National Real Estate Investor, the commercial real estate sector is in the “early stage of the next real estate up cycle [and]…will attract significantly more investor interest and new capital in 2011”[2]. Of course, you should always analyze your specific deals for yourself before you jump in head over heels, but does this sound like bad news to you or do you think this means that it is time to invest?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter!

Let us know what you think about today’s market conditions in the commercial sector below.

---

[1] http://www.nuwireinvestor.com/articles/in-real-estate-and-investment-best-bargains-come-in-bad-56991.aspx

[2] http://nreionline.com/news/real_estate_bets_2011_0307/

Banks that restructured commercial real estate loans to make them appear more attractive are now facing an SEC investigation[1]. Lenders around the country have been using “creative” methods to try and keep their commercial loan portfolios from turning toxic, but now the SEC is questioning “extend and pretend” and other debt restructuring strategies which may involve modifying the terms of existing commercial loans or breaking a commercial loan into pieces. These practices are legal, but the SEC fears that they may be being abused in order to reduce requirements on the volumes of reserves a bank has to set aside.

According to a report by Trepp, LLC, a data firm specializing in commercial data, non-performing commercial real estate loans make up 72 percent of the $320 million in non-performing loans reported by banks in February[2]. They are also being credited with the failure of 12 banks last month. In comparison, residential real estate loans comprised 20 percent of the non-performing loans in February. It should be noted that the Mortgage Bankers Association (MBA) reports that commercial and multifamily loans did have the lowest delinquencies “across the board” in 2010.

Do you think this is a bad sign for commercial real estate in 2011? What do you make of this in light of the positive press coverage and appearance of a slow but steady rebound in the commercial industry?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter!

Let us know what you think below.

---

[1] http://www.zacks.com/research/get_news.php?id=062l7984

[2] http://www.dsnews.com/articles/home-loans-now-less-of-toxic-threat-than-commercial-real-estate-2011-03-03

Thanks to a planned $9.4 billion purchase by Blackstone Group LP, commercial buyers could be back in droves, say analysts[1]. While Blackstone takes over 588 of Australian Centro Properties Group’s U.S. malls[2], Ventas Inc., one of the nation’s leading health care real estate investment trusts (REIT) plans to buy out another healthcare REIT to the tune of $5.7 billion, making Ventas the largest U.S. owner of senior housing in the country. This is great news for U.S. commercial property, says managing director of Real Capital Analytics Dan Fasulo. “Both…deals are a great signal that liquidity has returned to the commercial real estate space,” he explained, adding that the two deals occurring in such a short period of time are likely to “have ripple effects on the entire industry.”

At this point in time, most analysts agree that a commercial double-dip is unlikely, though many housing experts do not feel able to say the same for the housing market. However, confidence in the market is, as always, still critical to recovery and growth. An increase in the volumes of deals and takeovers helps investor have confidence in the market, said Christopher Macke, a CoStar Group senior real estate strategist. When that confidence is combined with low interest rates, investors find it difficult to resist “the prospect of cheaper financing and higher returns.”

Are you feeling optimistic about commercial real estate? This could be the year that the experts have been waiting for. Let us know how you plan to make your move in 2011.

Thank you for reading REJournalOnline’s Commercial Real Estate Letter!

Please leave comments and questions below.

---

[1] http://www.bloomberg.com/news/2011-03-01/commercial-property-deals-may-double-in-u-s-as-blackstone-bets-on-rebound.html

[2] http://online.wsj.com/article/SB10001424052748703409904576174931824620662.html

One after another, the major players in real estate are moving to add mall properties to their portfolios in addition to the mad dash for multifamily housing[1]. According to Bloomberg news, Blackstone Group, L.P., agreed to buy one of the biggest U.S. shopping centers, Centro Properties Group, for $9.4 billion over the past weekend[2]. And this is not just one mall; it’s 588 of them, making this deal Blackstone’s biggest deal since 2007. Experts hope that the firm is right on the money, literally, and betting on a major U.S. commercial recovery in the coming months.

Centro Properties Group is an Australian company that has suffered both in the U.S. and at home as both countries’ real estate markets struggled. This acquisition will likely enable “Centro’s Australian operations to continue as an independent company,” said an unnamed source familiar with the deal. Michael Wood, a Sydney-based real estate advisor, believes that this purchase price is a good sign because the price that Centro is getting is close to net tangible assets, or the total assets of the company. This could indicate that the commercial real estate world is, at least in some cases, returning to “normal” as companies buy and sell for near-worth rather than focusing exclusively on bargain basement prices and desperately made deals.

Recently, Forrester Research released a study in which its vice president and research director announced that “consumer purchasing behavior [is] returning to normal,”[3] albeit much of this buying is now taking place online, which does not necessarily help the physical retail real estate industry. Do you think that the retail real estate sector will ever fully recover from the past few years, or have consumer buying habits changed in such a way that some of the damage will be permanent?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know how you are feeling about the commercial sector in general and retail property in specific below.

---

[1] http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/morning-meeting-blackstone-joins-mall-spree/article1923183/

[2] http://www.bloomberg.com/news/2011-02-28/blackstone-to-buy-centro-s-u-s-assets-for-9-4-bln-wsj-says.html

[3] http://www.businesswire.com/news/home/20110228005297/en/Double-Digit-Growth-Online-Retail-Western-Europe

According to Jones Lang LaSalle Hotels, a hotel investment firm, Miami area hotel investing is about to take off[1]. Over the past 12 months the hotel industry has begun to show signs of recovery in many areas around the country, with real estate investment trusts (REITs) and foreign investors showing renewed interest in the industry. Now, Jones Lang LaSalle predicts that “deal volume in the area could reach $750 million in 2011.” This would be a 250 percent increase over the previous year.

While not everywhere in the country is projected to experience such a dramatic comeback as Miami, executive vice president of Jones Lang LaSalle Hotels Fernando Garcia-Chacon predicts that Miami is definitely going to be a hot spot because of the high number of distressed properties currently controlled by lenders and “ripe for investment” in the area. Garcia-Chacon predicts that not only are investors ready to take advantage of low prices – and to snap up deals in a market that is not currently producing new-hotel construction – but that brand hotels like Marriott will also be looking to buy up previously-private properties and convert them. Short sales on hotels, already somewhat common in the area, could rise as well, showing that “these hotel experts do have a lot of confidence in South Beach,” he said.

Last year, many experts predicted that the hotel industry might not recover until late 2011 or even 2012 and beyond. Do you think news like this indicates that they were wrong, or is Miami an isolated example of resort property recovery?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know if you plan to invest in hotels or other resort property in 2011 by leaving a comment below.

---

[1] http://www.miamiherald.com/2011/02/24/2084083/increase-in-hotel-investment-expected.html

Starting at the end of February, small business owners with balloon payments due before December 31, 2012 can refinance their commercial mortgages using the Small Business Administration (SBA)’s 504 program[1]. Historically, 504 loans have been used for real estate or refinancing only if a business was expanding. However, since many small business owners are no longer able to refinance using conventional methods in time to avoid balloon payments, this “gap in the lending market” will be filled with “$15 billion worth of refinancing available through the 504 program.” SBA predicts that the program will generate nearly $34 billion in total project refinancing in the next two years.

SBA administrator Karen Mills described the need and the program to fill it in this way: “The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years.” She predicts that the rescue program, which is temporary, will help the small businesses that take advantage of it remain afloat and continue to provide and protect jobs. Under the current program terms, borrowers must put up 10 percent of the equity of the property to qualify for the refinance. They can refinance 90 percent of the current appraised property value or 100 percent of the outstanding mortgage – whichever is lower. The 504 loans cannot be used for any other business expenses, and applicants must be current on existing loans.

Other businesses may be able to take advantage of this offer in the future, but, for now, SBA’s associate administrator of capital access, Steve Smits, says that “we are making this initial restriction to make sure our funding goes first to small businesses with the most need.” Do you think that this program is a good idea? Will it “rescue” small businesses?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know how you feel about the SBA and its rescue programs below.

---

[1] http://www.bizjournals.com/wichita/news/2011/02/21/sba-program-helps-with-real-estate-debt.html

For investors interested in multifamily housing, the proposed unwinding of Fannie Mae and Freddie Mac, the government-controlled GSEs that many hold largely responsible for the housing crisis of the past few years, could be great news. In the white paper released two weeks ago to much fevered debate, one overlooked aspect of the end of Fannie and Freddie has been their impact on the multifamily market. While many investors fear that removing the GSEs from the multifamily loan equation could leave them high and dry without funding for development and other deals, the Obama administration’s proposal paper emphasized that “as we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment of the market”[1].

Of course, if the government remains heavily involved in this arena of real estate investing, it leaves the industry open to the same problems that have plagued the residential market. Many experts fear that poor lending decisions could lead to a commercial dip that could tank the already-delicate economy, while others believe that the administration is merely paying lip-service to concerned multifamily investors while not actually planning to continue to support the market. This belief is backed by the lack of specific strategies for insuring that there are “rental options near good schools and good jobs,” a goal cited in the report but not backed by solid strategy and action plans at this time.

Tom Musil, a finance professor and real estate specialist at the University of St. Thomas, points out that Fannie Mae and Freddie Mac essentially have kept the multifamily housing market afloat in the past three years – and probably longer[2]. “When it comes to multifamily housing, especially affordable, we’ve fallen way behind in this nation…The agencies are the players that kept working in those underserved markets,” he has said. In 2010 the GSEs delivered 60 percent of all multifamily loans, while in 2009 the number was even higher, 80 percent.

Do you think that it is appropriate for Fannie and Freddie to play such a big role in the multifamily housing sector?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know how you feel about government and GSE involvement in multifamily housing moving forward below.

---

[1] http://online.wsj.com/article/BT-CO-20110211-712137.html

[2] http://finance-commerce.com/2011/02/fannie-freddie-reforms-could-threaten-rental-market/

A Texas entrepreneur singlehandedly raised nearly $8 million dollars to fund two commercial investments in New Mexico and Texas, which would have been impressive if the money had gone to building the large-scale retail development projects that he was pitching to would-be investors. Unfortunately, instead of building retail space, he spent most of the investment capital on “expenditures unrelated to the two projects” and now faces up to a total of 200 years in federal prison[1]. The 68-year-old man, Eric Brauss, who was indicted late last week, was indicted on ten counts for defrauding investors.

What makes this case more complicated is that Brauss fled the country in 2009 after his company, Today Realty Advisors, closed down (or fell apart) as his schemes started to crumble[2]. He is believed to be living in Brazil and, according to his attorney, is likely gone for good[3]. It is believed that myriad investors have a total of $200 million at risk in various partnerships with Brauss, but the indictments last week are the first criminal charges. According to his attorney, Brauss “liquidated valuable personal items including his watches and wine collection…Frankly, Eric’s not coming back,” the lawyer said. Brauss faces civil complaints from Bellagio, Mandalay Bay and the Mirage in Las Vegas for gambling losses in addition to an ongoing FBI probe.

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know what you think should be done with Brauss below.

---

[1] http://www.ntxe-news.com/artman/publish/article_67894.shtml

[2] http://www.dallasnews.com/business/headlines/20110218-former-dallas-arts-patron-eric-brauss-indicted-on-fraud-charges.ece

[3] http://www.dallasnews.com/business/headlines/20100408-With-Las-Vegas-on-Dallas-dealmaker-3853.ece