Jones RE

DESPITE THE MARKET TURBULENCE, THERE WILL BE NO DOUBLE-DIP RECESSION

2011-09-05T16:12:00.000-07:00

By Victor Calanog, NREI Contributing Columnist

The tumultuous events of the last four weeks have prompted downward revisions to economic forecasts, and for good reason. On July 29, U.S. GDP growth figures for the second quarter came in at an anemic 1.3%, with first-quarter figures revised down to 0.4%.

Then came the debacle over the debt ceiling debate, and the S&P downgrade. The probability of a double-dip recession has now risen to between 30% and 50% based on consensus estimates, up from a relatively low 15% earlier in the year.

And yet there is good reason to believe that the economic recovery will continue to putter at an uninspiring pace, but progress nonetheless. Monthly job growth has been positive for 10 straight months since October 2010. Some 930,000 jobs have been created in the first seven months of 2011, about as much as the 940,000 jobs that were created in all of 2010.

Yes, it is disappointing that projections made early this year calling for 3.5% to 4% annualized GDP growth never materialized, but this is hardly like late 2008. Back then, major institutions were failing and had to be bailed out, and the economy shed hundreds of thousands of jobs beginning in January 2008.

Sentiment is a powerful force
The main problem is not an economy on the ropes, but a weak recovery plagued by institutional gridlock, and changing expectations of whether U.S. policymakers can encourage job creation while managing debt and deficit levels. We are at a critical juncture given the decidedly mixed nature of economic and financial data.

If we lose confidence as individuals and curtail spending quickly, and if businesses lower expectations and pull back on hiring, then we just earned ourselves the kind of low growth and high inflation environment that characterizes periods of stagflation.

Already we’ve observed a 0.2% drop in consumer spending in June. Preliminary August numbers from the University of Michigan’s consumer sentiment survey indicate a sharp drop to 54.9, its lowest level in 30 years.

A second recession is certainly not outside the realm of possibility, particularly if consumer and business spending pulls back. If this happens, however, then this would be a recession largely of our own doing, and we will really only have our fears, proclivities and frustratingly gridlocked systems to blame.

Commercial real estate effects
Obviously, a double-dip recession would suspend any hopes of a quick and robust recovery in fundamentals. But today’s uncertainty actually raises questions about how investment sales will fare. The sharp drop in equity markets may actually prompt greater demand for assets considered “safe havens,” generating a positive halo effect for Class-A properties in gateway cities and nudging cap rates downward.

For now, reports from brokers indicate that few buyers are pulling back or lowering pending bids on attractive properties because of the events of the last few weeks.

As new information arrives over the next two months, we will find out whether the optimists are prevailing or if the pessimists will win the day. Consensus estimates now place 2011 U.S. GDP growth at 1.6% to 1.8%, but that still implies that second-half GDP growth will accelerate to around 2.5%. For now, a double-dip recession is unlikely to happen, but sentiment is a fickle thing.

FLOOD OF DISTRESS RETAIL NOT FORTHCOMING, RCA FIGURES SHOW

2011-09-05T16:10:00.000-07:00

By Elaine Misonzhnik, Retail Traffic Associate Editor

The retail sector may be moving to the next stage in the cycle of distress resolution. In the second quarter of the year, the volume of new retail centers entering distress fell to $1.6 billion, the lowest figure since the third quarter of 2008, according to Real Capital Analytics (RCA), a New York City-based research firm.

At the end of June, the level of outstanding distress for U.S. retail properties was $26.7 billion, only 3% higher than a year earlier.

RCA’s definition of distress includes properties that have been delinquent on their mortgage payments, defaulted on their loans, have been foreclosed on, experienced an owner bankruptcy or are in lender REO.

At the same time that the number of new retail properties entering distress has begun to taper off, resolutions have been on the rise. In some cases, lenders’ improved financial state has allowed them to realize the losses from bad real estate bets.

S&P U.S. DEBT DOWNGRADE: IMPLICATIONS FOR COMMERCIAL REAL ESTATE

2011-08-16T13:09:00.000-07:00

Chris Macke, Contributor, Forbes

To understand the implications of Standard & Poor’s lowering the credit rating of U.S. government debt by one notch to AA+, we first have to understand why U.S. debt was downgraded, and maybe more importantly what was not part of the reason for the downgrade. Let’s start with the latter.

The title of the statement on the downgrade is very revealing, especially the word order, “United States of America Long-Term Rating Lowered To ‘AA+’ On Political Risks And Rising Debt Burden.” In reading the S&P statement on the downgrade, the U.S. debt wasn’t downgraded because it didn’t have the ability to pay its debt obligations today; the U.S. does.

U.S. debt was downgraded because it nearly didn’t have the go-ahead from U.S. leaders to agree to pay the debt obligations today. That is why S&P’s primary focus was on the process used to increase the debt ceiling. There is the ability to pay one’s debt, and then there is the choice to pay one’s debt.

While I am not addressing whether the downgrade was warranted, I will say that S&P got it right when it focused on the political process. Think of the Republicans and Democrats as two partners in a real estate partnership or two members in an L.L.C. They had the means to borrow the money necessary to continue operations including servicing their debt; however, they very nearly weren’t able to agree to do what was necessary to pay the debt, i.e. raise the debt ceiling – that was the reason for the downgrade.

A borrower’s ability to service its debt and their ability to agree to service their debt are two different things. In the five C’s of lending this falls under the “C” that stands for character – will you do whatever it takes to meet your financial obligations. The U.S. character has been impaired. As a result, continued rhetoric and indications that either party might be willing to default on its debt will have the same effects as a real estate partnership that does the same: They will pay a higher interest rate and at some point if it continues long enough will have increasing difficulty borrowing money.

The difficulty that Democrats and Republican had in agreeing to do what was necessary to service their debt obligations was painfully obvious. This is what led to the downgrade, not whether the U.S. had the ability to service its debt today. Is there a possibility that at some point, again like in a real estate partnership, the U.S. debt will rise to such a level that you start having to pay a higher rate of interest? Yes. Given what was going on in the European Union and the rate on 10- year Treasury notes, it doesn’t seem we were there, yet.

With this heightened concern, why haven’t rates on U.S. Treasuries skyrocketed? While there are a number of reasons, including favorable expectations regarding inflation, in the near term the U.S. can thank the EU to a large degree. The rate on U.S. Treasuries is a function, among other things, of inflation, creditworthiness of the U.S. and alternative sovereign debt investment opportunities.

The recurring fears of sovereign debt default by various EU member countries is making the U.S., even with all its political dysfunctionality, look better than it otherwise would. We may have difficulties in taking the steps to agree to pay our debt, but we have the capacity to pay our debt. Conversely, there are very real concerns regarding the ability of various EU member countries’ ability to pay their debt.

The larger impact for commercial real estate could be on the demand side, at least in the near term. Companies and consumers are already hesitant to spend. Downgraded U.S. debt will likely only increase that hesitancy given the increased uncertainty it creates. There could be a negative impact on consumer and business confidence and thus spending, which could translate into reduced economic activity and as a result reduced commercial real estate demand, at least in the interim.

At this point there seems to be minimal negative impact on the cost of capital for the U.S., which is the starting point from which the real estate industry’s cost of capital is figured. This could change in the future. Whether it does depends on many factors, including, as S&P correctly pointed out, the functionality of the partnership between Republicans and Democrats. That is why they call it the study of politcal economy.

OFFICE LEASING STRONG IN SPITE OF ANEMIC JOB NUMBERS

2011-08-08T22:32:00.000-07:00

Randyl Drummer, CoStar Group

Lease Deals Inked As Office Tenants Take Advantage of Lower Rents in Prime Buildings; 'Phantom Space' and Weak Job Growth Keep Lid On Net Absorption

Despite slower-than-expected job growth and the uncertain impact of the debt-ceiling issue and overseas economies, office leasing remained very strong in the second quarter of 2011 as office-occupying businesses continued to gradually add workers and absorb space.

Preliminary second-quarter CoStar data shows that bargain-hunting tenants are trading up to larger and better buildings, taking advantage of concessions and asking rents that average 10% lower than their 2008 peaks.

Driving that demand is the expectation that, should more robust job growth resume as expected, office rents could be poised to increase ahead of demand growth as the shutdown in new development has curtailed any meaningful new supply.

Brisk gross leasing activity continued in the second quarter at an expected 120 million square feet -- well above the average of 90 million square feet over the last few years and up a robust 60% from the market bottom in 2009, according to data presented at CoStar Group’s Mid-Year 2011 Office Review & Outlook.

The national office vacancy rate edged down slightly to 13.3% at mid-year from last year's cyclical peak of 13.6%. The percentage of CoStar submarkets with declining vacancy rates, an important leading indicator of office market health that dropped several percentage points in the first quarter, began trending back up in the second quarter.

Class A asking rents across the U.S. stood at an average $27.50 per square foot at the end of the second quarter, down from $30.50 per square foot in mid-2008, with concessions knocking off an additional 10%-20% from the cost of occupancy. As rents decrease and terms become more flexible, tenants are increasing or upgrading their space, said Andrew Florance, CoStar founder and CEO, who led the presentation of the latest quarterly data.

The second quarter saw the fifth consecutive increase in net absorption of office space. However, the gain was very modest due to faltering growth in jobs over the last two months exacerbated by an abundance of 'phantom' space from prior layoffs.

In the previous recovery cycle in commercial real estate from 2003 until the downturn in 2008, each new job added to the office-occupying workforce created an extra 233 square feet of demand for office space. The current recovery has brought demand for just 88 square feet of added space per new employee, Florance said.

"We’re sort of in the doldrums right now. The only thing driving net absorption is bargain hunting," Florance said. "It will be pretty difficult to find super strong absorption numbers the next quarter or two."

The U.S. economy hit a soft patch last quarter, with the debt ceiling debate and other fiscal issues undermining business confidence and most indicators continuing to disappoint analysts over the last eight weeks.

However, business investment in IT and technology are creating strong real estate demand among tech companies, and the office-dwelling professional and business services segment is seeing the strongest employment growth, generating one-third of all new hires. Other sectors showing gains are education, health services, trade and manufacturing, and leisure and hospitality.

Losses in public sector jobs have partially offset those gains, with the private sector adding 2 million jobs over the past year while total job growth is closer to 1 million due to reductions in government payrolls, mostly at the state and local level, with some at the federal level as well.

Lower Rents Spur Leasing, Absorption
Houston logged the strongest year over year net absorption at 2.5 million square feet, although landlords lowered average rents in that market by 2.4%. Landlords in the technology-centered San Francisco Bay area raised rents by nearly 4% but still achieved an increase of 2 million square feet in absorption.

Other top markets that dropped rents and saw absorption increase include Seattle/Puget Sound, Philadelphia, Boston, South Florida, Orange County, CA, and Dallas -- all of which had modest absorption gains of around 1 million square feet.

Absorption was down about 1 million square feet in New York City, where owners have aggressively raised rents 7.3% year over year and cut discounts.

Class A buildings enjoyed the strongest net absorption, with many Class B and C tenants trading up for better quarters.

If robust job growth projections by Moody's Economy.com come to pass and the nation avoids a fiscal crisis due to government default, the national vacancy rate could fall to a phenomenal 8.5% by 2015 amid diminishing supply, according to CoStar forecasts. Those same factors could push rents up by more than 12% annually within four years.

"Markets continue to regain their footing as a result of the combination of tenants looking to capitalize on favorable lease rates and construction that is at 40 year lows," adds Chris Macke, senior real estate strategist for CoStar. "The rate of recovery going forward in the office sector will depend on how aggressive corporations are in their hiring activities."

In investment sales, the second quarter saw a big uptick in sales volume, roughly back to 2006 levels. While core investment-grade properties are seeing some price appreciation, prices remain soft in general-grade commercial property. However, this year could be the tipping point on overall pricing. Prices per square foot in several large metros in 2011 are exceeding their historical averages in such markets as Washington, D.C., San Francisco, Seattle, Boston, Denver and Orange County, CA.

JONES REAL ESTATE WELCOMES 3 NEW TEAM MEMBERS!

2011-07-18T14:30:00.000-07:00

JonesRE has brought in three new agents to better serve our clients. We would like to announce our new team members, Michael Moniak, Manuel E. Hernandez Hernandez and Jana Farman.

Michael Moniak
Michael Moniak began his career with Greg Jones in 2003. Michael has an extensive background in commercial real estate and working with Fortune 100 companies. His experience in marketing, property management, and computer technologies enables him to work effectively with both property owners and tenants to obtain profitable results.

Michael's commercial real estate career began in 1984 with C.J. Segerstrom & Sons where he established their first PC's and evaluated profits for all properties, including The South Coast Plaza. His marketing expertise includes working on national brands, such as: Kraft-Budget Gourmet, StarKist Tuna, and Schick Razors. Technology achievements include working in New Zealand for Unisys to sell a multimillion dollar data warehouse system to the largest retailer in the South Pacific, The Warehouse.

Blending solid educational training along with proven professional expertise, Michael earned an MBA from Pepperdine University and BA in Finance from California State University, Fullerton. He has taught business classes at San Bernardino Valley College and served on the board of directors for the American Red Cross-Rio Hondo Chapter, The Gary Center, and the Whittier Uptown Association. His hobbies include long board surfing and teaching paraplegics to ski at the U.S. Adaptive Recreation Center (USARC) in Big Bear.

Manuel E. Hernandez
Most people refer to him as “Manny”, he is a native Angelino and a veteran of the United States Army. He studied Economics at the California State University Los Angeles. After he obtained his education, Manny went on to be a top performing sales representative at Rich Steel of Los Angeles for 20 years. In 1984, Manny found his calling for Commercial Real Estate specializing in the sale of commercial, land, investment and new tract homes. Manny is a licensed real estate broker in the states of California and Washington. He began working with Jones Real Estate in 2011. Manny is currently a member of the RIAOC Board of Directors and is Chairman of the Education Committee. Manny’s enjoys studying world history and spending time with his grandsons at the ball park.

Jana Farman
A North Orange County native, Jana is a Commercial Real Estate advisor with extensive knowledge in site selection, negotiations and marketing of retail, office and industrial properties. She places a high value on customer service and in maximizing the client experience while maintaining transaction satisfaction and profitability for both sides. She gets those tough deals done!

In 2011, Jana was actively pursued by a number of brokerages due to her success and strong work ethic selecting Jones Real Estate as her brokerage of choice being attracted to a successful, well established brokerage with a team atmosphere focused on customer service.

Jana is a member of the Greater Southern California chapter of CCIM, RIAOC, and a Board of Director for the North Orange County YWCA. She has a BS Degree in Business and an MS Degree in Organizational Leadership with 20 years experience working in the corporate sector which gives her richer business acumen as she understands the inner workings of a corporation.

JONES REAL ESTATE RECEIVES 15 OFFERS IN 3 WEEKS!!

2011-07-11T22:28:00.000-07:00

JonesRE just went under contract in the sale of a 60,000 square foot multi-tenant retail shopping center anchored by Ralph’s Super Market, known as the Pacific Place Shopping Center. Located in Los Angeles County, in the city of North Whittier, this property is a great investment opportunity. Within 3 weeks of being on the market, JonesRE received 15 offers! Four Buyers were all cash at full price! This is due to our extensive marketing and strategic approach in locating qualified Buyers.

CALIFORNIA BUDGET WARS: LEGISLATURE APPROVES ELIMINATION OF REDEVELOPMENT AGENCIES

2011-06-30T15:23:00.000-07:00

On Wednesday, June 15, the California Senate and Assembly passed ABX1 26 and ABX1 27 as part of a larger package of budget bills intended to close California’s approximately $9.6 billion budget deficit. ABX1 26 and ABX1 27 are so-called “trailer bills” which go along with, and help implement, the state budget bill. ABX1 26 eliminates all California redevelopment agencies (“RDAs”) effective October 1, 2011. However, ABX1 27 provides that a California RDA can continue to operate and function after the October 1, 2011 elimination date if certain steps are taken by the applicable local jurisdiction, including passage of a local ordinance requiring the local jurisdiction to remit certain revenues to school entities and special districts. Taken together, the two bills effectively eliminate RDAs unless these agencies “voluntarily” turn over certain tax increment revenues for local government uses.

Yesterday, Governor Brown vetoed the state budget bill (AB 98 and SB 69). As of this writing, ABX1 26 and ABX1 27 have not yet been sent to Governor Brown for signature. Budget talks are still ongoing, so it is impossible to predict with certainty what will happen. Nevertheless, many believe that Governor Brown will sign ABX1 26 and ABX1 27 as soon as the Legislature sends him an acceptable, revised budget bill. If signed, ABX1 26 and ABX1 27 would take effect immediately.

Most of the provisions of ABX1 26 are taken from Governor Brown’s initial proposal to eliminate RDAs, and therefore will be familiar to those who have received Cox Castle & Nicholson’s client alerts and e-mails over the past few months. ABX1 26 eliminates RDAs effective October 1, 2011, and protects only those “enforceable obligations” existing as of the date of the Governor’s signature. It also prohibits RDAs from taking actions or spending money between the effective date of the legislation and the October 1 RDA elimination date, except for actions or payments made to honor existing obligations. ABX1 26 also empowers the state controller to “claw back” certain assets transferred by an RDA to the relevant local jurisdiction or housing authority after January 1, 2011—a direct response to the efforts of certain RDAs earlier this year to avoid prospectively the reach of Governor Brown’s proposed RDA elimination by moving RDA assets over to the city, county or local housing authority, as applicable. Accordingly, any financing involving the direct or indirect use of RDA funds that was committed after January 1, 2011, needs to be reevaluated immediately to consider the application of these two bills.

The enforceable obligation requirement is intended to protect existing contracts with RDAs. Under ABX1 26, however, an RDA must submit a list of its existing obligations within 60 days of the effective date. Thus, a party to an existing contract should work closely with the applicable RDA to verify that the RDA includes the contract on its list of existing obligations, and timely submits the list.

There are some notable differences between the final, approved version of ABX1 26 and the prior drafts of that bill that circulated in Sacramento over the last few months. For example, prior versions of ABX1 26 provided that the local jurisdiction that authorized the creation of an expiring RDA could elect to retain the housing assets and functions previously performed by that RDA, in which case all amounts on deposit in the RDA’s Low and Moderate Income Housing Fund would be transferred to that local jurisdiction. The final version of ABX1 26, by contrast, treats the RDA’s Low and Moderate Income Housing Fund like all other RDA unencumbered assets, requiring that all of those assets be distributed to local taxing authorities pursuant to a statutory method of apportionment.

Turning to ABX1 27, this bill reiterates that the motivating public policy behind the elimination of RDAs is primarily budgetary. If the local jurisdiction voluntarily commits to make annual Department of Finance–calculated deposits into an Educational Revenue Augmentation Fund (ERAF) benefitting local schools and into a Special District Allocation Fund (SDAF) benefitting local special districts (i.e., units of local government that provide some service not provided by the county or city), then the local RDA may continue to operate and function without regard to the October 1, 2011 elimination date. Essentially, these ERAF and SDAF funding obligations would serve to plug the local jurisdiction’s share of the approximately $5 billion in property tax revenues the Legislature believes are being diverted each year to RDAs.

Assuming that the Governor signs both ABX1 26 and ABX1 27, RDAs would have no power to approve new projects effective immediately. Local jurisdictions would be able to restore such power by enacting an ordinance pursuant to ABX1 27, but due to timing issues under the bill it is unclear if local jurisdictions will be able to do so for several months. In the interim, though, RDA doors would appear to be closed for new business.

These bills are lengthy and complicated, and contain many revisions negotiated at the eleventh hour. Therefore, we are continuing to study the final, approved versions of ABX1 26 and ABX1 27.

BANK CREDIT FREEZE SHOWS SIGNS OF THAWING

2010-11-08T19:36:00.000-08:00

More Banks Reporting Increasing Troubled Asset Disposition Activity; Turning an Eye to Renewed Lending

Maybe it is time we start taking bankers at their word that commercial real estate wasn't and isn't a catastrophe waiting to happen. Maybe, just maybe, as they've been telling us for the last four consecutive quarters, there are serious risks but they are manageable and are being dealt with and disposed of.

Why, now?

Because third quarter commercial bank earnings reports released in the last week seem to back up that talk. Individually, there are definitely still banks in trouble. But collectively banks seem to be on the tail end of their commercial real estate troubles. Distressed loan levels have stabilized, the amount of new delinquencies is decreasing and more banks are beginning to push troubled assets back into the marketplace.

Banks' exposure to CRE loans has been a source of concern for many observers, said James Abbott, senior vice president, investor relations and external communications for Zions Bancorporation, but "so far that is not playing out in our portfolio and has been reasonably benign around the industry."

In fact, there are a lot of indications the commercial real estate market is stabilizing and even strengthening, Abbott said.

"If you look at CMBS spreads and some other indicia of this, it's appearing that maybe we're not going to see the kind of storm some had predicted," he said. "But I think it's going to take another two or three quarters perhaps before it's really clear that there aren't substantial losses around the industry in that product type."

Some banks even reported in their quarterly earnings conference calls that they are gearing up for increasing their commercial real estate lending activity or seeing renewed interest in borrowing. Such banks are still the exception, not the norm, but we haven't heard this kind of chatter since 2007.

"I would say that we've continued to be very judicious in the commercial real estate area," said Jerry Plush, senior executive vice president, CFO and chief risk officer of Webster Financial Corp.

"[We] continue to look for opportunities that make sense for us, and we're continuing to see that there is definitely some build-up in the pipeline there that we could see in the coming quarters," Plush added. "We're not saying that there is going to be substantial growth," Plush said. "It would be either to maintain balances or slightly above, but soon you will start to see the emergence of those small business and middle-market numbers rising in the commercial category."

Rene Jones, chief financial officer of M&T Bank Corp., said his bank is seeing customers paying down debt and repositioning themselves for future expansion.

"We’ve seen in the commercial real estate space a number of pretty well healed commercial real estate folks actually just looking at the liquidity and their portfolio, maybe selling down some projects to improve the overall liquidity position," Jones said. "But overall, our commitments aren't up, so I think people are just on hold. The rates are low, they’re trying to lock in some credit today but they’re not necessarily using it because they’re not yet investing."

Beth Mooney, vice chairman of KeyCorp, said they are definitely starting to see stability in commercial real estate, particularly the middle market loan book.

"We have obviously seen that client base de-lever over the last seven to eight quarters. But if you look into the trends from the first, to the second, to third quarter, we had the lowest level of decline in this quarter that we’ve seen through the cycle and we are actually starting to see, particularly in our Great Lakes and Northeastern regions, signs of increased new business activity and modest glimmers of loan growth," Mooney said. "However, on net you still see pressures in the Western markets. They were late into the cycle, but we do see some pickup in business activity and clearly signs of stability in the middle market book, as well as in the core leasing portfolio, which intersects with a lot of that same client base of renewed activity."

Bank executives also highlighted a greater willingness to sell buildings and reported more success in disposing of troubled assets on their third quarter earnings conference calls.

"We’re very pleased with the overall results of our problem assets disposition strategy, and the momentum we are building toward this effort," said Clarke Starnes, chief risk officer and senior executive vice president at BB&T Corp. "In the third quarter, we actually assembled a team of about 12 sales specialists, together with some significant operational and marketing support to begin a sales program for about $1.3 billion in commercial nonperforming loans that were transferred to the held for sale category."

"Our effort consists of a four-pronged strategy. It’s in this priority: short sales to the borrowers; third-party direct; third-party bulk, and then some other option," Starnes added. "We get our best pricing execution when we’re dealing more directly with the borrowers, but it takes a longer time to do that. At auctions you can do it much quicker, but you’ve got to do your discounts. So what we’re really trying to do is blend these various liquidation alternatives to achieve the best execution that we can, while balancing the time to liquidate."

Bob Kaminski, COO, executive vice president at Mercantile Bank Corp., said: "I think our staff has done a good job of working with borrowers on properties that were even in foreclosure to try to affect sales of those properties so that they may be never make it into the ORE bucket. Loans that do make it into foreclosure due to foreclosure process, many times have buyers that are waiting at the end of the redemption period to complete those sales."

"So it’s really on a page-by-page basis," Kaminski added. "You have some properties that are little bit hard to sell, may be spending a little bit of a longer time in the ORE buckets, and others that are more attractive from a purchasing standpoint tending to spend a lot less time in those categories."

Mary Tuuk, chief risk officer of Fifth Third Bancorp, said they have been very focused on higher risk portfolios such as non-owner occupied real estate.

"We’ve worked hard over time to achieve the best solutions possible on troubled credits," Tuuk said. "As part of that process, [the special assets group] continually identifies the loans most likely to result in a successful workout given enough time and which loans are less likely to result in an acceptable outcome. For that latter group of loans, our options include a long-term workout strategy or a shorter-term solution, one of which is the possibility of selling a loan and the redeploying the resources that would be devoted to a longer-term solution."

"We are marketing these loans in several pools targeted at particular (buyer basis). Land loans in one pool, vertical CRE in another, syndicated loans in another and a final pool that we intend to sell to investors, loan-by-loan," Tuuk said. "These loans, particularly the nonperforming ones, would generally represent the more troubled parts of our commercial portfolio with a high content of commercial real estate in general, particularly land and construction."

RETAILERS CAUTIOUSLY UPBEAT FOR BACK-TO-SCHOOL

2010-09-06T20:39:00.000-07:00

By Sherri Cruz

Orange County retailers are midway through their first real test of the fledgling economic recovery: the back-to-school shopping season.

“We’re very optimistic,” said Blake Windal, general manager for The Block at Orange, part of Indianapolis-based Simon Property Group Inc. “Our sales are doing well.”

Back-to-school shopping, which runs from mid-July to the middle of September, is the second busiest time for retailers after the holidays.

This year, the New York-based International Council of Shopping Centers predicts a 5.4% rise in back-to-school sales from 2009, when the economy still was in recession.

Families are expected to spend 10% more this year, or $600 on average, on clothes, shoes and school supplies, according to the Washington, D.C.-based National Retail Federation.

Last year, families spent an estimated $548 each, according to the federation.

This year’s projected gains are welcome news for local retailers, which continue to see tough going amid high unemployment and the lingering mindset of the recession.

“All retailers still understand that value is what customers are looking for,” Windal said.

A survey by New York-based Deloitte LLP found that shoppers plan to spend more on clothes, with discount retailers such as Target and Wal-Mart seeing most of the spending.

Deloitte’s survery also showed more people this year plan to shop at specialty clothing stores and department stores as well.

photo

Irvine Spectrum Center: “We still believe that the worst is behind us,” Irvine Co.’s Robinson says

“That was a pleasant surprise,” said Greg Palme, an audit partner for the retail sector for Deloitte’s Costa Mesa office.

That’s a sign spending is getting back to normal and that people aren’t just shopping for the lowest price, according to Palme.

Local retailers aren’t resting easy. On any given day there’s an economic indicator that brings either cheers or consternation. Last week it was Wal-Mart Stores Inc., which said shoppers are waiting until the last minute to do school shopping.

“What troubles retailers right now is the volatility,” Palme said.

Retailers appear upbeat.

So far, so good at Costa Mesa’s Surfside Sports, which sells clothes inspired by surfing and skateboarding. The store has seen brisk sales of pants, T-shirts, lunch boxes, backpacks and messenger bags, owner Duke Edukas said.

Backpacks—usually the last to go—are selling “like gangbusters,” he said.

“This year we’ve been selling them earlier, which is a great indicator,” Edukas said.

The store doesn’t sell ordinary backpacks. They’re colorful and have bold designs, with an average price tag of about $58 and going as high as $100.

They’re made by Costa Mesa’s Hurley International LLC, part of Nike Inc., Huntington Beach-based Quiksilver Inc., Costa Mesa-based Volcom Inc. and others.

DaKine, part of Irvine-based Billabong USA, and Volcom’s Electric Visual bags have been selling the best, Edukas said.

Surfside recently held its annual back-to-school sale, with some items selling for 20% less and summer items discounted even more.

The Block also recently held its annual back-to-school “super sale” with most of its stores offering some kind of discount.

“We noticed heavy traffic,” Windal said. “We’re assuming that’s just the kickoff of it.”

The Block has a number of outlet stores, which offer department store goods at discounted prices.

H&M has been an early back-to-school winner with its trendy clothes at relatively lower prices, according mall operators.

Sweden’s H&M Hennes & Mauritz AB has stores at The Block, Brea Mall, Irvine Spectrum Center and South Coast Plaza. Another is opening this year at The Shops at Mission Viejo.

On a recent weekend, H&M at Irvine Spectrum Center had long lines of people waiting to check out, as did Old Navy and Urban Outfitters.

Bed Bath & Beyond is one of the Market Place’s busiest stores during the back-to-school season.

“They really market well to the college student population,” said Nina Robinson, spokeswoman for the retail arm of mall operator Irvine Company.

Others doing brisk business at Irvine Co. shopping centers, according to Robinson: Anthropologie, Old Navy, Lululemon and Jack’s Surfboards at Corona del Mar Plaza.

“We still believe that the worst is behind us, and we are gaining steady and positive momentum,” Robinson said.

Ikea in Costa Mesa has been busy selling towels, cookware, lamps and other items to the college crowd. In July, weekday sales were up 16% from a year ago, while weekend sales were 26% higher, spokeswoman Yumiko Whitaker said.

During August, Ikea has many of what it calls its “red peak” days of busy shopping after its yearly catalog arrives in homes.

“It’s all hands on deck,” Whitaker said. “It’s been pretty healthy, pretty brisk for us.”

HB COSTCO GAINS FIRST APPROVALS

2010-09-06T20:38:00.000-07:00

By Jaimee Lynn Fletcher

HUNTINGTON BEACH–A new Costco for Orange County gained its first approvals Tuesday night when the Planning Commission unanimously approved a proposal for the wholesale retailer to be built at the Village at Bella Terra.

The 154,113-square-foot store would include a tire shop, a 16-pump gas station and outside food sales and is expected to be part of a larger project at the Village that would include up to 468 multi-family homes and 30,000 square-feet of additional retail space, city officials reported.
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Costco is proposed to be built at 7601 Edinger Ave., which is east of the Southern Pacific Railroad and west of the Bella Terra mall. The store would replace the Montgomery Wards and the Mervyn's buildings, which would be demolished.

The City Council will have to approve the zoning and general plan amendments that go with the Costco project but would only have to consider approval of a site plan if the project is appealed, city officials said.

The Huntington Beach Independent reported that only one resident out of about 10 who spoke about Costco at the meeting was in opposition to the project. Traffic was brought up as a concern but the commissioners and some residents said the wholesale retailer would be an asset to the city, the Independent reported.

The Huntington Beach Costco would be the company's 10th Orange County location. Other stores include Tustin, La Habra, Garden Grove, Fullerton and Irvine, among other cities.

OC, NO DOUBLE DIP

2010-09-06T20:36:00.000-07:00

By Ann Milbourn

After a spurt earlier in the year, Orange County's economic recovery is slowing but it is unlikely to fall into a double dip recession, Wells Fargo Bank's senior economist said today.

Scott A. Anderson

Scott A. Anderson told a Wells Fargo breakfast group in Irvine that he expects local employment to decline 0.2% this year — not good but better than the -7.4% in 2009.

Next year, however, he predicts hiring in Orange County will grow at a 1.6% pace, outperforming the state, which will see 1.1% job growth.

"The big drag in Orange County going forward is the state and local budget problems — you're seeing some pretty big job losses," he said.

Nationwide, Anderson said the recovery has slowed considerably. He expects second quarter gross domestic product growth to be revised downward on Friday to 1.2% to 1.5% from the previous 2.4%.

That's a major pullback from the first quarter when the Bureau of Economic Analysis said GDP grew at 3.7% pace.

"We're in a quicksand recovery," said Anderson, noting the economy can't seem to gain traction in jobs or other economic growth. "We keep getting pulled into this morass."

He said the one thing he is watching now is whether people are simply pausing in the recovery or whether they are starting to revise their business plans. He placed the odds of a double dip recession at the national level at 25%.

The major problem is that the economy remains weighed down by the housing bubble, Anderson said. With foreclosures this year likely to approach 2009's high levels, he expects home prices to drop another 6% over the next 12 months.

"Orange County won't be able to avoid lower home prices," he said, with a 6% drop likely here, too.

That means Orange County would give back most or all of the price gains homeowners have seen this year. Recent real estate surveys say local home prices were up 3% to 6% in July over July 2009. (Read more on Orange County home prices on Lansner on Real Estate.)

Anderson noted that in the first half of the year, Orange County's economy was showing some strength, with a net gain of 29,000 jobs through June. July's loss of 10,300 jobs may have been an anomaly due to the layoff of temporary census workers, he said.

"Even with the monthly job loss in July, Orange County’s employment performance year-on-year improved to a positive 0.5%, while U.S. employment was unchanged from a year ago," Anderson said. (Click on chart to enlarge.)

Orange County has benefited from growth in leisure and hospitality jobs as Americans vacation closer to home.

"That's a big driver for the economy in this community," Anderson said.

Still the county has a deep hole to dig out of. He noted employment here dropped 10% from peak to trough during the recession, twice the national rate. Local employment in financial services and manufacturing both fell 25% and jobs in construction dropped 40%.

4 STORE OPENINGS IN LAGUNA HILLS MALLS

2010-09-06T20:35:00.000-07:00

By Hang Nguyen

Irvine Spectrum Center names two store openings.

Reflection, which sells shoes and accessories for women, opened last month. Things Remembered is slated to open Sept. 17. The retailer can engrave its products with a name, date or message as well as engrave gifts purchased elsewhere.

Also, the Nike 6.0-Hurley-Converse store at the Spectrum was recently renamed Salvation.

At The Market Place, Costume Castle is slated to open Sept. 8.

At Laguna Hills Mall, Toys ‘R’ Us Express opened last month. Its lease is for 1 year, but it may extend that, said Greta Smoke, spokeswoman for the mall.

The Spectrum and Market Place are owned by the Irvine Company. Laguna Hills Mall is owned by Simon Property Group.

OC 4th-HIGHEST IN US HOME PRICE GAINS

2010-09-06T20:33:00.000-07:00

By Jeff Collins

In the midst of a week filled gloomy housing news, a glimmer of sunshine has broken through.

Sure, Orange County house sales may be down for the first time in two years and new home sales contracts may be down 35%.

But things are looking up in O.C.’s housing market, if you believe the Federal Housing Finance Administration – the agency that oversees Fannie and Freddie. According to FHFA, Orange County’s home-price appreciation was fourth highest among 303 of the nation’s metro areas this past spring.

That’s right, we’re Number 4 according to the federal government’s House Price Index, which dates back 35 years.

Based on FHFA math — which compares repeat transactions involving Fannie and Freddie loans for home purchases and refinancing — O.C. home prices increased 1.45% in the 12 months ending on June 30.

Of course, that’s old data, preceding the end of federal tax credits and the damper their demise put on billowing home sales.

And it gives you a sense of how bad things must be in the rest of the country. After all, Orange County was able to elbow it’s way up to Number 4 in the nation with an appreciation rate of just 1.45%.

Still:

* It’s the first time in the federal HPI that O.C. home values increased since the winter of 2007. The HPI pegged O.C. values as dropping from year-ago levels for the past three years, with values down as much as 18.2%.
* The HPI determined that home values were up 0.36 of a percent from the first quarter of 2010.
* However, the HPI pegs local home values as down 17.18% from where they were five years ago — in the spring of 2005. That was two years before O.C. home prices reached their peak.
* The HPI puts just three other U.S. metro areas ahead of O.C.: Springfield, Ill., with prices up 2.68%; Dubuque, Iowa, with prices up 2.41%; and San Jose, with prices up 1.89%.
* Nationally, U.S. home prices fell 4.9% in the year ending June 30, according to the HPI.
* O.C. ranked high in the HPI’s fourth quarter 2009 results — Number 1 in the nation. But that was in a relatively new index that includes the nation’s biggest 25 metro areas only. That index is based on purchase loans only.
* In the traditional index, which is based on both purchases and appraisals from refinance loans, O.C. home prices were down 2.18% in the fourth quarter of 2009, and the county ranked 111th in the nation.

The FHFA index’s strength is that — like the S&P Case-Shiller Index — it pairs a property’s appraisal with that same property’s past appraisals. But its weakness is it’s based entirely on loans of $417,000 or less, leaving out the market’s distressed high end.

IRVINE COMPANY LOOKING TO BUY?

2010-09-06T20:32:00.000-07:00

By Mark Mueller

Irvine Company has a new management team that could be readying a commercial real estate buying push.

Newport Beach-based Irvine Co.’s investment properties group, which oversees nearly 87 million square feet of commercial real estate, recently made official a number of changes to its upper management team.

Key among the moves was the formal addition of longtime real estate executive Ray Wirta, the former chief executive of Los Angeles-based CB Richard Ellis Group Inc. Wirta now serves as a senior adviser to Irvine Co. owner and Chairman Donald Bren.

Wirta, who also is chief executive of Newport Beach developer Koll Co. and plans to continue in that role, joined Irvine Co. as a consultant a few months ago in a move some company watchers thought might be temporary.

In addition, Irvine Co. investment properties group President Rick Gilchrist has been tasked with a new role heading up acquisitions.

The changes were formally announced this month in a memo from Bren’s office to senior executives.

Irvine Co.’s investment properties group oversees nearly 475 office buildings, 117 apartment complexes, 41 shopping centers, three hotels and marinas in Orange County, Los Angeles, San Diego and Silicon Valley.

The investment properties group’s run separately from Irvine Co.’s community development division, which heads up planning and development of housing projects on the historic Irvine Ranch.

That division is led by President Dan Young and has been the company’s busiest in the past year or so with projects in Irvine.

Bren, Wirta and Gilchrist now make up a management committee for the investment properties group.

Bren and Wirta, who’s in his mid-60s, will oversee operations.

Bren’s memo appears to solidify Wirta’s role at Irvine Co. He shares the same senior adviser title as longtime Bren confidant Clarence Barker, who now oversees development efforts for the apartment division.

Moves made since Wirta came aboard as an adviser include plans to consolidate legal and accounting functions of the group’s office and retail divisions.

Wirta headed up brokerage CB Richard Ellis from 1999 to 2005 and took on the chief executive role at Koll Co. late last year.

Gilchrist, who recently returned to work after heart surgery, will focus on acquisitions, according to the memo.

There are “significant acquisition opportunities that now exist in the commercial and multifamily real estate segments,” the memo said.

“We believe that there will be increasing opportunities in our markets that were not available over the last few years,” Gilchrist said in an e-mail to the Business Journal. “As a result, we are highly focused on identifying appropriate apartment and office projects that will enhance our existing portfolio of high quality, well located projects.”

If a renewed acquisition push plays out, it would be a shift for Irvine Co. The company’s stayed on the sidelines in the past few years as numerous properties—many of them financially distressed—traded hands in its key markets.

Gilchrist, a former chief executive at Maguire Properties Inc., joined Irvine Co. in 2006 in the midst of the company’s last office buying spree. Irvine Co. spent nearly $1 billion on office towers in OC and San Diego that year.

The pace of the company’s acquisitions slowed considerably after 2006.

Aside from a $1.4 billion apartment portfolio purchase in 2007, Irvine Co. has spent the past few years focusing on leasing up buildings it bought and built, along with managing existing buildings.

The company has seen high vacancy and others issues at La Jolla Executive Tower acquired in 2006, but none of its offices or apartments acquired near the market peak are believed to be in financial distress.

Whether the company goes after distressed buildings remains to be seen. Irvine Co. historically has paid top dollar for acquisitions, focusing on trophy buildings.

The company is rumored to be on a shortlist of potential buyers for Costa Mesa’s Pacific Arts Plaza office campus, home to law firm Rutan & Tucker LLP. The site also includes land for apartments and office development.

Irvine Co.’s name hasn’t come up in connection with another expected office sale, that of Irvine’s Quintana campus, formerly the local home of Washington Mutual Inc.

In Los Angeles, the most expensive downtown office building nearing a sale is believed to be the 40-story Union Bank Plaza, which traded hands in 2005 for $143 million.

Another Newport Beach investor, KBS Realty Advisors, is said to be the front runner to buy that building, according to reports.

Beyond that, they aren’t too many high-end offices on the market right now in Irvine Co.’s main markets, according to sources familiar with the company’s investment strategy.

SINGLE-FAMILY HOMEBUILDING UP SLIGHTLY

2010-09-06T20:28:00.000-07:00

By Jeff Collins

Construction of new houses in Orange County is up this year following two of the slowest years for builders on record, new figures from the Construction Industry Research Board show. Building permits for single-family homes increased 24% during the first seven months of the year.

Jan.-July SF MF Total
2001 3,914 1,334 5,248
2002 3,874 2,382 6,256
2003 3,337 2,237 5,574
2004 3,159 2,302 5,461
2005 2,524 2,225 4,749
2006 2,971 2,863 5,834
2007 1,600 2,278 3,878
2008 900 1,441 2,341
2009 754 605 1,359
2010 937 515 1,452

The research board reported:

* Permits have been issued for 937 single-family homes (houses, townhomes and other side-by-side condos) this year so far.
* That’s up from 2009 and 2008, the slowest two years for homebuilding in Orange County since World War II.
* However, that’s down from the county’s average for the January-July period. During the past 23 years, builders averaged nearly 3,500 single-family permits in the first seven months of the year, or about 3 1/2 times this year’s tally.
* This year’s January-July total is the third-lowest since at least 1988, and is likely the third-lowest since 1955.
* Builders have pulled a total of 1,452 building permits for both single-family and multi-family housing this year so far. That compares to a 23-year average of 6,257 permits in the January-July period.
* In July alone, developers pulled permits to build 203 new housing units — 140 for single-family homes, 63 for multi-family units (apartments and multi-story condos).
* That’s the third-lowest number for July since 1988 and compares to a 23-year July average of 669 units.

GOOD NEWS: MORTGAGE DELINQUENCIES DECLINING

2010-05-21T10:15:00.000-07:00

There was a recent article in the Wallstreet Journal that mortgage delinquencies fell in March for the second month in a row, according to new data.

The number of mortgage loans that were at least 30 days past due or in foreclosure declined 8.6% in March, according to LPS Applied Analytics, which tracks loan performance. The biggest slide came in loans that were 30 days past due. Such loans fell by a record 342,000 to roughly 1.45 million, a level not seen since spring 2008.

While the number of bank-owned homes rose, the total number of loans that are delinquent or in foreclosure has fallen by more than 647,000 since January, according to LPS. The estimates include loans that carry government backing, those packaged into securities or held by banks.

"We're not out of the woods, but this appears to be a turning point," said LPS Applied Analytics President Ted Jadlos. "This is the first time we've seen improvement across all stages of mortgage delinquency." Still, he said, "we still have a long way to go."

The drop in troubled loans comes amid other signs of improving consumer credit. The portion of credit cards that were at least 60 days past due fell to 2.67% on a seasonally adjusted basis at the end of March from 2.86% at the end of December, according to Equifax Inc. and Moody's Economy.com. Delinquencies also fell for auto and other consumer loans.

There is still plenty of pain left in the mortgage sector. More than 320,000 loans that started the year current were at least 60 days past due at the end of March, according to LPS. More than 3.6 million homes will be lost from 2010 to 2012 because borrowers can't make their loan payments, Moody's Economy.com estimates.

Among other reasons for caution, mortgage delinquencies typically fall in February and March as borrowers get their tax refunds, said Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, which works with financially troubled homeowners. In the Cleveland area, foreclosure filings are on pace to equal the highs of 2008.

The number of borrowers seeking aid also continues to rise. At Consumer Credit Counseling Service of Greater Atlanta, foreclosure-prevention counseling sessions were up 4.7% through March compared with a year earlier. "We're probably seeing, at mortgage-counseling programs across the country, 5,000 to 7,000 new people a week," says Douglas Robinson, a spokesman for NeighborWorks America, which administers the government's national foreclosure-mitigation-counseling program.

Some borrowers are being helped by the Obama administration's foreclosure-prevention program and other modification efforts. Irma Bravo, the owner of a cleaning service in San Diego, recently received a loan workout that lowers the monthly payment on her $522,000 mortgage to $1,736 from nearly $5,000.

"It's a big, big relief," Ms. Bravo says.

Through March, more than 230,000 borrowers have received permanent modifications through the government program, according to the Treasury Department. It isn't clear how many borrowers will remain current once their loan is modified.

But getting a loan workout remains difficult. "There are still a huge number of cases in the pipeline or on hold," said Gabe del Rio, a senior vice president with Community HousingWorks in San Diego, which counsels borrowers facing foreclosure.

CARRIED INTEREST DELAYED UNTIL NEXT WEEK IN THE HOUSE

2010-05-21T09:21:00.000-07:00

ICSC has said from the beginning that consideration of the tax extenders package has been fluid and today was a great example of that.

Last night the House Ways and Means Chair announced that HR 4213, the "American Jobs and Closing Tax Loopholes Act of 2010" would be brought to the House floor for a vote Friday, May 21.

Late this afternoon House leadership announced that there would be NO votes tomorrow and that the bill will come to a vote next week. What this delay translates to is that the proponents simply do not have the votes to pass this legislation in the House at present. Again, your grassroots efforts are working! Don't let up!

We recognize many of you will be at RECON starting this weekend. ICSC Government Relations will continue to keep you updated via email and ensure that you can communicate to Congress through your hand-held devices.

The consternation and pushback created by real estate constituents on this issue is resonating on both sides of the Capitol -- House and Senate.

WE'RE HEADED TO THE INTERNATIONAL COUNCIL OF SHOPPING CENTERS - GLOBAL RETAIL REAL ESTATE CONVENTION

2010-05-19T23:21:00.000-07:00

Founded in 1957, the International Council of Shopping Centers (ICSC) is the global trade association of the shopping center industry and Retail Real Estate. Its 60,000 members in the U.S., Canada and more than 80 other countries include shopping center owners, developers, managers, marketing specialists, investors, lenders, retailers and other professionals as well as academics and public officials. As the global industry trade association, ICSC links with more than 25 national and regional shopping center councils throughout the world.

CALIFORNIA LEGISLTIVE BILL WOULD REPEAL IRC SECTION 1031 AND OTHER TAX-FREE EXCHANGE PROVISIONS IN CALIFORNIA

2010-05-18T23:17:00.000-07:00

As an apparent attempt to increase tax revenue California, A.B. 2640, introduced on February 19, 2010, would repeal IRC Section 1031 and several other tax-free exchange provisions of the Internal Revenue Code for California income tax purposes. Section 1031 is widely used by taxpayers, principally to engage in tax-free exchanges of business or investment real estate for other like-kind real property. Over time, the IRS has made Section 1031 a user friendly provision by allowing deferred exchanges where funds are held by a neutral third party while the exchanging taxpayer looks for replacement property.

Other sections of the Internal Revenue Code that would be repealed for California income tax purposes include: i) Section 1032 which permits a corporation to issue its stock for money or property without paying income tax on the proceeds; ii) Section 1033 which permits the tax-free replacement of property that has been condemned or involuntarily converted to cash as the result of a casualty; iii) Section 1035 which allows for the tax-free exchange of certain insurance policies; iv) Section 1041 which permits spouses to transfer property to each other incident to a divorce without recognizing taxable gain; and v) Section 1042 which allows sales of certain companies to an employee stock ownership plan (“ESOP”) without recognizing gain for tax purposes if the proceeds of the sale are invested in certain types of qualifying investments.

In the present form of the bill, these repeals would be effective starting with the current 2010 tax year. The provision repealing Section 1042 also changes the rules for tax years between 1998 and 2010 by making the tax free rollover provision inapplicable to sales of S corporations. The repeal of these provisions by California would cause a serious lack of conformity between Federal and California tax law and act as an impediment to many types of transactions. The bill has been referred to the Committee on Revenue and Taxation and a hearing on the bill has been scheduled for May 3. We will keep you posted on further developments.

A PLAN TO SAVE COMMERCIAL REAL ESTATE

2010-03-13T16:05:00.000-08:00

By Janet Morrissey, Fortune contributor

NEW YORK (Fortune) -- Economists have long been predicting commercial real estate could be the next day of reckoning for the financial markets, with a wave of defaults looming as billions of dollars in troubled loans come due in the coming months.

But a little-noticed bill introduced in January could help bring a new source of desperately-needed liquidity to the sector: foreign investment.

Introduced by Joseph Crowley, a six-term Democratic congressman representing parts of New York City's Queens and Bronx boroughs, the Real Estate Revitalization Act of 2010 would eliminate certain taxes that were part of the Foreign Investment Real Estate Property Tax of 1980, or FIRPTA -- which requires foreign investors to pay as much as a 55% tax on capital gains from the sale of U.S. real estate or shares in real estate investment trusts and real estate operating companies.

Repealing the tax, Crowley and the bill's supporters say, would get rid of a major impediment to foreign investment in the sector -- and could open the floodgates to new liquidity at a time when commercial real estate loan defaults pose a serious risk to the nation's fragile economic recovery.

The FIRPTA tax, the bill's supporters say, penalizes foreign investors who want to put cash into U.S. real estate because those same investors don't face such taxes when they buy into other U.S. assets, like Treasury securities, corporate equities or corporate bonds.

If a British citizen buys stock in IBM (IBM, Fortune 500) and sells stock in IBM, for instance, that person is not subject to tax in the U.S. and only pays UK-levied taxes. But if he buys and sells REIT shares, he will pay an additional tax on the sale of those shares.

Foreign investors also don't pay added taxes when they make real estate investments in other foreign markets. "London doesn't have this FIRPTA layer of tax, so comparing a London building to a [Washington] DC building -- it makes the London building more attractive, and that is enough to tilt the needle," says Laine Kenan, Atlanta-based executive director of Arcapita, a Bahrain-based global private equity firm with a large real estate investment portfolio. Currently, only about $3 billion of his firm's $10 billion in real estate exposure is in the U.S. If the tax was lifted, "it would make a difference," Kenan says.

A recession doesn't help
Investors have become particularly sensitive to the tax in the current environment, where property values, occupancies and rents have fallen, which increases risk and lowers potential returns. "We're talking about bringing in foreign investment to be on equal footing if they invest in real estate versus non real estate," says Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a real estate think tank in Washington.

Industry analysts say there is a pent-up demand from foreign investors looking for opportunistic investments. "There is a tremendous amount of foreign capital out there," says Robert O'Brien, head of the U.S. real estate practice at Deloitte LLP. Removing the tax, he says, would "level the playing field."

Currently, foreign investors make up only about 10% of the acquisitions of U.S. commercial real estate, says Dan Fasulo, managing director of Real Capital Analytics. In the UK, it represents over half of overall capital flows. "Could [removing the tax] double the amount of investment activity in the U.S.?" he says. "Sure."
The chances of its success
Just how likely the bill is to pass is still unclear. There are no vocal opponents, but it hasn't gotten much attention, either, largely due to Congress' preoccupation with the health-care agenda. "Every time we meet with a congressman, they're looking at their watch and saying they've got to go to a health-care meeting," says Arcapita's Kenan who has been a vocal supporter of the bill. The bill's authors are pushing to have it added to more timely legislation, such as the estate tax bill or the bill dealing with the expiring Bush tax cuts, both of which must be passed in 2010.

Peter Peyser, managing principal at Blank Rome Government Relations LLC, a lobbying firm in Washington, says the bill will likely need to be tacked onto a larger piece of legislation to get passed in 2010. "A small targeted provision like this one would need to be part of a larger package because it's unlikely that something like this is going to gather enough steam to get through on its own," he says.

James Stuckey, divisional dean at New York University's Schack Institute of Real Estate, concurs the bill may have a tough time gaining political momentum on its own at a time when so much focus is on healthcare.
"Obviously a lot of political energy is being used on healthcare, so it does raise legitimate questions on whether or not there will be the political will, energy and clout, particularly in a mid-term election, to start focusing on these kinds of real estate initiatives," he says.

Also, the idea of giving tax exemptions to foreign companies on real estate may be a tough sell to some congressmen and taxpayers. "You can imagine how that could be spun to the taxpayers," he says. Still, he notes that the bill's passage could bring badly-needed liquidity into the real estate sector, which would help to stabilize both real estate and the overall economy.

Stuckey believes the bill's best shot at quick passage is being tied to an existing bill that's already got political legs in Congress. "In this environment, yes, I think it would stand a greater chance being tied onto something that has a lot of political movement to it."

Who stands to benefit
If it does pass, U.S. REITs and real estate operating companies could be big winners. Many property owners, who purchased real estate at the cycle's peak in the go-go years of 2005 through 2007, are now facing debt calls at a time when property prices have fallen about 40% from their peak, and the commercial mortgage-backed securities market has dried up. Experts predict values will fall another 10% to 20% on average before the sector bottoms, with even steeper declines in weaker markets.

Approximately $1.4 trillion in U.S. real estate loans will come due between 2010 and 2014, with nearly half of those loans currently "underwater," according to a Congressional Oversight Panel report released earlier this month.
Of course, scrapping the tax would also eliminate a source of government revenue at a time when politicians are scrounging for ways to pay down the deficit. Experts estimate the cost of repealing the tax at about $8.3 billion over 10 years. But proponents argue the benefits the bill would offer the country's fragile real estate market and overall economy would more than offset the lost revenue.

"A wave of commercial real estate loan failures could threaten America's already-weakened financial system ... and... trigger economic damage that could touch the lives of nearly every American," according to the Congressional Oversight Panel report.

Still, some are doubtful removing the tax will lead to a surge in foreign investment dollars into U.S. real estate if only for one reason: The fundamentals are still weak. "Foreigners aren't any stupider than U.S. investors," says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank, who notes that U.S. investors who don't face the tax aren't exactly jumping into real estate these days.

"There'd be plenty of U.S. investors who'd be willing to buy the stuff -- even at higher prices if they commanded that -- but they don't," he says. "So the idea that somehow we're going to make it more conducive to foreigners and we'll get them to be suckers -- I mean, that's silly."

DON’T BELIEVE EVERYTHING YOU READ ABOUT THE REAL ESTATE MARKET

2009-12-20T22:18:00.000-08:00

Since last month’s issue, a lot has been said and written about the real estate market we’re in currently. “Sales are up,” “Sales are down,” “The market is jittery again,” etc. So what is the truth? Dataquick published an article on their website September 15th reporting that, “Home sales dipped in Southern California last month, the result of a thinning of properties (available) and financial uncertainty among potential home buyers.” This column begs to differ. The two problems with the sales numbers they cite are sort of mutually exclusive. It’s difficult to have a thinning inventory, because properties are flying off the shelves, and have buyer hesitancy. Actually, talk to those of us in the business and we will tell you that it is not unusual for a property at or below the median price (more on that in another article), to have 25 to 50 offers on it. No, there is no joke or punch line here. The truth is we are in an inverted or, if you prefer, a counter intuitive market. We are in a buyers market because of price, but definitely with a decidedly “seller’s flair” in that we are short of inventory.
Expect that to change by first or second quarter of 2010. The prediction here is that we will see inventory of real estate owned properties, bank owned properties in other words, to climb 300% to 400%. There is no need to panic. There is little doubt that these properties will be absorbed by the demand, no problem. There is also an industry sentiment that the banks learned their lesson in regards to flooding the market with too much inventory, so expect these problem properties to be released in waves.
There have been two differing attitudes discussed by the media in past weeks. The first is by economists who study all factors in a recession and in the general economy. Their belief, at least for the Chapman Report and the Fed, is that the recession has bottomed and we can expect a faltering and shaky recovery, barely noticeable next year.
But there are naysayers, who adamantly exclaim that we are no where near recovery. It is true that jobs came out weaker than expected, consumer confidence took a dip and unemployment hit a high for California since 1967. We have to face the facts. But it is also true that many people did not climb on the loan frenzy bandwagon, and they did not buy a home at sky high prices and would like to do so now. It is also true that some businesses are beginning to hire and some companies are thriving. Perhaps we see what we want to see, but real estate activity seems to be a bright spot, at least right now, without falsifying itself to spur that activity. These are real prices and real loans transpiring right now, no smoke and mirrors.

PRESIDENT SIGNS FEDERAL TAX CREDIT EXTENSION

2009-12-19T11:42:00.000-08:00

President Obama signed a bill extending and expanding the Federal Tax Credit for Home
Buyers. The bill now includes current homeowners.

The tax credit will be extended through April 30, 2010, with a 60-day extension if a binding contract is in place prior to the deadline. First-time home buyers will continue to receive a tax credit of up to $8,000, while existing homeowners will receive a reduced credit of up to $6,500. Existing homeowners will be eligible for the $6,500 if they have lived in their current residences for at least five years. The bill also will increase the qualifying income limits from $75,000 for single tax filers and $150,000 for joint filers, to $125,000 and $225,000, respectively. The purchase price of the home is capped at $800,000.

Under additional provisions in the bill, taxpayers can claim the credit on purchases completed in 2010 on their 2009 income tax returns. The bill maintains the provision that home buyers do not have to repay the credit provided the home remains their primary residence for 36 months after purchase, and waives this requirement for active duty military personnel who move due to a military order.