Commercial Property Herald

How Far Down will Commercial Real Estate Continue to Go

Ariel Fisher, a co-member of the Corporate Real Estate Group on Linkedin asked the question:

"How close is the real estate industry to hitting "bottom?" And what do you think is the number one sign that we've reached that point and are on our way to a real recovery?

A Colleague of mine recently wrote a blog post on the state of the real estate industry. He believes that the "bottom" is in sight and that we are on our way to a real recovery.

He cites private REITs recently going public and Tishman Speyer handing Stuyvesant Town back to the lender in lieu of bankruptcy, with several creditor/buyers trying to snap it up at a bargain price, as just two examples that the "bottom" is near.
(Click: http://blog.buildingengines.com/?p=423 to read the full article, including other examples of an impending "bottom.")

Once we see employment rates increasing, he argued, we will know real estate recovery is on the way. What do you believe is the number on sign to look for that things are on the up-and-up?"

I answered as follows:

Commercial real estate still has a way to go before it bottoms out and I think that we are only still in the early stages of the problem. Probably about 1 1/2 to 2 more years before it bottoms out. The fact that there is still money out there to spend on real estate only means that there are potential bottom dweller buyers, including REITS looking to snatch up the deals, which I believe there will be plenty of. This is what the REITS did in the mid to late 90's.

The more interesting questions is how will the continuing fall of commercial real estate effect the economy? In answer to that question, I answer, "some," but not as much as the collapse of the residential market. I see the economy more likely to continue to effect commercial real estate then the other way around. As long as unemployment continues to remain high and less money is available from a large pool of consumers there will continue to be commercial real estate failures and bank or lender failures and maybe some REIT failures.

To make my answer even more verbose, with the current backlash over government spending, the federal deficit and the effectiveness over prior and existing bailout plans, I have serious doubts that the government is about to bail out commercial real estate investors, anytime soon. The most likely scenario that I see is that commercial property owners will continue to fail, causing banks to continue to fail, which the FDIC will have other banks take over who will pick over the good assets of the failed bank and leave the rest to the FDIC, who will then sell the bad assets at a highly discounted rate. When that process begins to slow down is when you will see signs of the real estate industry hitting bottom.

For other interesting discussions and information on commercial real estate, visit the Corporate Real Estate Group of LInkedin, which can be found at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=13118264&gid=35901&trk=EML_anet_qa_ttle-d7hOon0JumNFomgJt7dBpSBA

Frank Suggests Tarp Funds To Be Used for Unemployed Mortgage Payments

Representative Barney Frank is now suggesting that Tarp funds be used to pay the mortgages of unemployed workers Congressman Calls for Bailout Money To Go to Unemployed Workers.  Now this is an idea that I might actually get behind as long as the government can assure that the funds are used to pay the mortgages.  In this way, we are not just giving money to the bank's executive's bonuses and are actually doing something to help the unemployed.  Might actually slowdown the foreclosures and prop up property values.  Sounds good so long as you believe the government can get this done and actually control the fraud and abuse.

Deficiency Judgments allowed in Arizona

For those living in California, take heed of Arizona's new law allowing deficiency judgments in foreclosure actions.

In July, Arizona passed legislation removing the ban on a lender obtaining a deficiency on a foreclosed home except in instances in which the borrower lived in the residence for more than 6 consecutive months and was able to prove it with a certificate of occupancy. The bankers love it but public criticism has prompted legislators to repeal the July legislation.

Arizona bankers are not taking this sitting down though and are appealing to the Arizona Supreme Court trying to block the repeal on technical grounds.

For more of an explanation of when a lender can obtain a deficiency, see my earlier article Commercial Foreclosure Basics, Part II.

The Future is Skilled Nursing & Assisted Living Facilities

LTC Properties, a self-administered real estate investment trust recently announced its results from operations for the nine months ending September 30, 2009, LTC Announces Third Quarter Operating Results.  It not only made money, but it repaid debt secured by an assisted living facility.

I am only too familiar with the growing need for assisted and skilled nursing facilities in the United States, since I am responsible for my mother's care who has Alzheimer's.  There is a growing, aging, baby boomer population that will be living longer.  I look for investments where there is a need.

While there is and will be a growing need for assisted living and skilled nursing facilities, investing in the operations of these facilities are at an unusual and particular risk that concerns me.  While there is considerable room for profit, there is a peculiar risk of total collapse. There are many and significant regulations that operators must adhere to, with little room for mistake. Any allegation of negligence or abuse at the facility, whether true or not, could bring the whole house of cards down, not just at the facility, but for the whole company.

On the other hand, investing in the properties and facilities for these operators seems to me to be a far better bet.  The real estate investment vehicles should be able to insulate themselves from the liability that the operators are exposed while having the flexibility of providing facilities to different operators. 

Investing in long-term care and other health care related facilities through mortgage loans,facility lease transactions and other investments may  be a more conservative but likely profitable approach to senior living that I could get into.

Some Say Commercial Property Market to Hit Bottom in 2010

Finally an article on the state of the commercial real estate market that I can almost agree with. Roger Vincent of the LA Times reports in Commercial property market to hit bottom in 2010, report says,  that many experts believe that the commercial market will hit bottom in 2010. The report, a study by PriceWaterhouseCoopers and the Urban Land Institute further says that the commercial property market has been stuck in neutral.

I think that "neutral," description is pretty accurate although I might describe it as "neutral, looking down." I also don't think the "looking down" will remain looking down but more like "going down," in 2010 with a bottoming out in 2011 with some aggressive investing by those with cash in mid 2011.

The Vitamin Shoppe - Positive News

Here is some positive news for the commercial brokers and landlords.  The Vitamin Shoppe raised $155 million by selling 7.7 million shares in the first retail chain IPO since November 2007 as reported by Shopping Centers Today, a publication of the International Council of Shopping Centers, (ICSC).  If I were a commercial real estate broker, (which I am but not actively pursuing deals because I am too busy as a lawyer), I would be contacting them about opening a shop in my center.  Get on the phone!!!!

Geithner confident that Economy has Stabilized

DSNNEWS.COM quotes Timothy Geithner as saying that the financial system is stabilized in their article, Banks can Handle Commercial Real Estate Losses Geithner Says. Sounds a little like Prime Minister Chamberlain stating that "Peace in our Time," after meeting with Hitler just before Germany attacked Poland to start World War II.

I get it that part of Mr. Geithner's job is to instill confidence in our financial system.  The less confidence, the more instability.  But lets get real.  I just don't see how he can be so confident.  No, I don't think that our banking system will collapse, but I do see many, many more bank failures and while we don't have the RTC taking over banks and Savings & Loans as they did in the 90's, I see us doing the same thing by having the government give money to the big banks so they can survive all of the loan defaults and so that they can buy out the smaller banks.  Can you spell g o v e r n m e n t  s u p p o r t e d  b a n k  c o n s o l i d a t i o n? And by the way, I am paying for all of this along with the bonuses being paid to the bank executives for doing such a great job.

The only thing that I am confident in at this point is that someway, somehow, we or our children are going to have to pay back all that this is costing and the rich will likely get richer and the middle class and the poor will likley get poorer.

Capmark Bankruptcy to be in Better Shape?

Interesting article in Shopping Centers Today Week publication of October 30, 2009, Vol. 14 No. 43.  In that they discuss the possible overall effects of the bankruptcy on the overall market, suggesting that since the bankruptcy is intended to be a restructuring rather than a liquidation, the effect on the overall market is expected to be minimal. What the positive looking analysis overlooks however is that only about 5% of the chapter 11 reorganization bankruptcies make it to plan confirmation. However, those that are well planed before they file their bankruptcy petition have a much greater chance of emerging out of chapter 11 with a confirmed plan.  Capmark is led by a pretty heavy weight group of investors that you would have to believe have the best bankruptcy lawyers available; you would think.

Conducting a Poll on Linkedin re: What do You Want in an Eviction Attorney

I am conducting a poll on Linkedin What do You Want in an Eviction Attorney, seeking feedback from commercial property managers and commercial owners on what they are looking for when they retain an attorney to handle commercial evictions.  Please go to the above link to give me your feedback.

Playing Real Estate Like Blackjack

It seems that some pension managers manage the funds a little like how I play Blackjack; only not as conservatively as I gamble.

Just so you don't get confused and wonder what this posting has to do with real estate; I am using Blackjack as an analogy. I'll be getting to the real estate part shortly after the Blackjack.

My wife and I go to a local indian casino or Las Vegas about 3 times a year, just to get away from the kids and have some private time together.  We are not big gamblers but we do like to play Blackjack together. I usually bring $300.00 - $500.00 that I can afford to lose and which I consider my cost of entertainment, if I lose it all.  However, I can't recall a time that I have lost it all since I usually pull up stakes if I am on a losing streak because I don't like losing.

My basic betting strategy is to bet light when the odds are against me and to put money on the table when the odds are in my favor. When the odds are in your favor, you better put your money on the line to make up for your loses. I swear that when I see the dealer showing a 6 and I have an 11, I start to swoon and can't get my chips on the table fast enough. Understand that I do this with the clear understanding that over the long term, the odds are always in favor of the house.

So, lets use the dealer showing a 6 as an example.  If the dealer is showing a 6, the odds are likely that the dealer has a picture card or a 10 down so the dealer is likely to have a bust hand.  The key word here is "likely", I don't count cards, particularly when the dealer is dealing from a 6 deck shoe.  It doesn't always go according to Hoyle.  As I mentioned earlier, if the dealer is showing a 6 and I have a 5 and a 6 for a total of 11, I am going to double down because it is likely that I will draw a picture card or a 10, end up with 21 and the dealer is likely to bust.  If I have a 5 and 6 and the dealer is showing a picture card, although I see many people double down in this situation betting that they are going to get a picture card, being the conservative gambler that I am, I usually will not double down and be happy just winning my originally bet, if the gambling gods are smiling down at me.

Now comes the fun part. What does my gambling habits have to do with fund managers and real estate investing, you ask? A great deal too much, apparently. This post came to my mind after reading the blog posts, Laying on bets at biggest US pension fund and California pension funds close to bankruptcy.

Apparently, the fund managers over at CALPERS, like probably many other managers, bet big during the real estate run up.  They put their member's money on the table, not only when the dealer was showing a 6, but when the dealer was showing a picture card. And now, it seems like they are continuing to gamble with their member's money even when they have a 10 or 9.

There are some huge differences between how I gamble and the reported investment strategies of some of the fund managers:

• I am gambling with my own money not other peoples money who have put their trust in me;
• I am a conservative gambler and will only put at risk what I can afford to lose.  I have made a conservative risk assessment;
• I gamble for entertainment, not for business

Look, I understand that when managing a pension fund, there is a certain risk to any investment.  The managers are under a fiduciary duty to maximize returns and if they don't, the will be damned for being too conservative. But they are also subject to a fiduciary duty to make a reasonable risk assessment and not put too much of their member's life support at risk and I get the sense that the managers got so caught up in the thrill of gamble and their apparent successes that they began to believe that they were, perhaps a little smarter than their members good.