Not the Beattles: This time it's the Asian Invasion

Much like the Beattles and the British Invasion of the 1960’s a new foreign invasion, this time of the Asian variety, is about to take place....and it appears it may have just as big an impact in the U.S. culture in terms of the commercial real estate markets.
Rumblings at lunch. Last week I had lunch with a few prominent and stealth venture funds and land venture partnerships and it seems “Sovereign Wealth Fund” is the hot topic coming into the end of CY 2009 and first half of CY 2010. These guys I was talking to were striking deals with China (of course), Japan (2nd biggest holder of U.S. Treasuries), and India. I was happy to hear there is finally going to be some action in the market because of bid-ask gaps that are starting to narrow and foreign liquidity starts to infuse into the U.S. property markets. Are commercial property owners starting to throw in the towel because they realize the markets are too seized up, or are they being forced to do so as the financing bell tolls on their now troubled assets? Foreign investors are going to be a larger and larger part of this market going forward. Consider this from the Association of Foreign Investors:
“Two-thirds of foreign investors plan to buy some U.S. property before March 2010 according to a midyear survey of Association of Foreign Investors in Real Estate members. Equity investors planned to place seven times more equity and debt investors planned to place three times more debt, the survey reported. Foreign investors picked office as their top investment choice, replacing multifamily, and Washington, D.C., as their top U.S. location. While global investments in the U.S. were close to $15 billion in 2008, by midyear they were less than $5 billion.”
According to my fellow lunch partners the $15B number will be dramatically dwarfed when the acquisition plans start kicking in over the next two years. This means a lot of sidelined foreign cash is coming into the market. I introduced the venture firms I had lunch with to a platform that helps them intelligently plan their acquisition strategies and confidentially buy and sell troubled commercial assets. This platform is free to use and is a must-have tool if you are involved with disposition of distressed assets in a fiduciary capacity. I’m speaking of the RIISnet / Argus ADAPT platform. It’s well worth a look and I honestly feel that this is a transformative tool for the Commercial Real Estate business. Go HERE to check it out. If you want to see where the industry is headed it’s definitely worth a few minutes of your time. NEXT POST: Dating in the Dark for CRE

Bring Me Your Huddled Masses

So when I returned from my U.S. government sponsored safari in the Middle East my partner in crime at Fidelity Major Accounts Group, Scott Miller, and I sat there and discussed what had transpired in the CRE market while I was away in 2009. Not good. But he and I share the same drive to serve our clients and the industry and we wanted to be where we could make a difference. What was obvious to us was the Distressed Asset market within the CRE business had a large educational and community void within it. We had clients asking many questions. We had associates and partners with both questions and answers regarding opportunities, best practices, and just plain useful practical information regarding the Distressed Asset marketplace. Ok let’s join an association specializing in Distressed Assets where we can learn and contribute was our answer. To our surprise there wasn’t an association that was dedicated to supporting the CRE industry with respect to Distressed Assets. Oh there were many sites that listed distressed properties or operated vulture mills to target exposed and troubled commercial properties but that wasn’t what we were looking for. After consulting with some trusted advisors we enlisted their talent, connections, and support and our association was born: The Commercial Real Estate Distressed Asset Association, CREDAA. Along with co-founder J.W. Najarian, a leading real estate investment and social media expert, and a talented advisory team (see founders and advisory team HERE) CREDAA is already making significant strides in building a world class site to promote expertise, facilitate professional connections, and provide practical tools to help our members engage the Distressed Asset market.
Are you engaged in the Disposition, Acquisition, Valuation, Determination, Development and / or Finance of CRE Distressed, Unstable or Toxic Assets, REOs or Non-Performing Notes? CREDAA is dedicated to educating our members on current Commercial REO, Distressed Assets or Non-performing Notes and attracting legitimate investors, brokers, lenders and sellers to communicate together in on-going daily forums. CREDAA will become a powerful information resource for this industry as a growing community effecting positive change. CREDAA offers
> Industry Analytics: Real time supply and demand data, pricing support, and market data> Education Center: webcasts, podcasts, eLearning, and videos> Connection Center: social media, networking, forums, blog access, and a service provider database> Tools: Portfolio Builder, Acquisition Search, Disposition Search> Best Practices: White papers, research, and articles> Build Deal Teams: Partner with service providers and connect with investors
Check out the pre-launch for CREDAA HERE. The final live site is due for release in the February / March 2010 timeframe. We are getting some very good response and the association is being received very well by all types of participants in CRE. Check it out if you want to make some new connections learn more about Distressed Assets. We are building the education center now with podcasts, videos, eLearning, and webcasts but you can join early to share ideas and learn about developments in the troubled asset markets.

Bed Bugs Bite Hospitality

From the Distressed Opportunities Department:
I’ve been trying to get in to meet the top dog (unsuccessfully so far ) with an investment firm that is going on a shopping spree next year for some well placed distressed and troubled hotels. They are a cash buyer but a friend of mine at the organization gave me some of their research to chew on:
From Real Capital Analytics “Hotel distressed assets are now the number two property behind Retail in regard to highest amount at $29.3 Billion currently listed as distressed. That’s a 65% increase over the amount listed in August 2009.”
Manhattan and South Florida have the most listings and that makes sense when you look at their Distressed CRE per Capita statistics. Manhattan has about $3500 per capital in distressed commercial properties with South Florida clocking in at just over a $1,000.

Check this out: CMBS Performance for HospitalityPercentage of loans 30 or more days delinquentin August 2008: 0.46% February 2009: 2.04% August 2009:6.15%

With hotel property values and occupancy rates on the decline, commercial mortgage-backed securities (CMBS) backed by hotel loans currently have a 60-day delinquency rate of 6.81%, according to recently released research by Fitch Ratings.
The delinquency rate of hotel loans is the highest among all major commercial real estate (CRE) types and is nearly double the overall CMBS delinquency rate of 3.86%, Fitch said. While the overall CMBS rate is projected to peak at 12% by 2012, hotel CMBS delinquency rates are expected to exceed that, Fitch added. In October alone, 26 hotel loans worth $1.1bn became newly delinquent.

From HotelNewsNow.com:
Overall, in year-over-year measurements, the industry’s occupancy fell 6.4 percent to end the week at 52.6 percent, ADR dropped 9.9 percent to US$95.86, and RevPAR decreased 15.7 percent to finish at US$50.47 This is a two year slump for the hotel industry. Although occupancy is off 6.4% compared to 2008, occupancy is off about 18% compared to 2006 and 2007. There are standard hotel deals being done. Here’s by who: Hotel transactions under $10 million are still occurring, according to HotelNewsNow.com. The majority of the buyers are Asian-American owner-operators, who are using existing bank relationships or Small Business Administration loans for financing. The site that runs our Fidelity CRE media page also has posted some distressed hotel data on our site. You can find it HERE if you want to see the latest hotels placed for sale under distressed conditions.

Speaking of distressed what’s this new Distressed Asset association I’ve been hearing so much about? Sounds like a good place to make new connections, learn about what’s unfolding in the distressed and troubled asset world, and get access to some real time market data. Check out CREDAA HERE or HERE. NEXT POST: Bring Me Your Huddled Masses

Saved by the Geeks...Again?

As our nation looks to create sustainable job growth much talk is given to the new and alternative energy fields as a job growth engine but little is seen as far as hard evidence. Contrast that with healthcare and technology sectors and you will see these two areas will be the engines that truly drive job and ultimately wage growth for the next decade. Tech has done it twice before with the age of computing and the age of the Internet. Yes the Internet bubble burst and shed jobs but that was more due to financial and venture firms overheating the market and spawning bad business models with cheap money. It will be Tech once again that creates stable job growth and possibly another boom for America. Yes it’s possible I’m biased as my background is technology ventures and I do sit on an advisory board for a tech venture firm but it’s that perspective that allows me to speak with a variety of technology firms… and growth is coming from what I hear lately.
The implications for CRE are material and worth evaluation. New technologies are being implemented to even further increase our national productivity every day. 3G and 4G wireless technologies will fuel the mobile sector to new growth. Government policies being drafted to offer Internet access to all citizens will power nationwide infrastructure improvements, spur on more entrepreneurship, and force the Internet technology and service providers to grow and retool their platforms. Increases in R & D budgets are starting to take place at our large corporations and technological enhancements are coming out now at record pace as evidenced by the rise in technology related patents being awarded at the U.S. PTO. Overall patents are down but tech-related (software, hardware, devices, services, and content) are all up.
Known as the hub of the Silicon Forest Seattle ranks 4th overall in tech employment nationwide and Tech is expected to be a sector that is in GROWTH mode even during this down cycle. This from the Milken Institute:
Top U.S. High-Tech Centers
Metro area Employment (in thousands) Share of North American wages (%)
San Jose, CA 244.0 5.7
Seattle, WA 226.3 3.2
Cambridge, MA 163.6 2.8
Washington, D.C. 275.7 4.2
Los Angeles 376.4 5.1

NEXT POST: Bed Bugs Bite Hospitality

Wayne Gretzky, Hockey, and CRE Trends

One time when the hockey great Wayne Gretzky was asked about his supreme skill on the ice he replied “I skate to where the puck is going to be, not where it has been.” It seems many policy makers, participants, and financiers in our American economy should take that to heart. So much of what we are doing in business and the economy lately is based on “historical models” which is utterly failing us. Unless you’ve been on sabbatical in a sandy hostile desert like I was for the last year you know that we are in a new age. All of us in the business world will join this new world one way or another, some of us under extreme protest, and some of us will skate to where the puck is going to be.
Rumblings at breakfast. So I was at breakfast with a variety of CRE types from attorneys and brokers to investors and the question came up about future puck locations. Some interesting comments followed:
Sovereign Wealth Funds make another appearance in my life. Apparently the momentum is indeed picking up to find and service foreign buyers of American commercial property. Affordable housing was another hot topic. Medical facilities, expansion, and clinics were widely agreed upon to be growing steadily and in a pre-boom phase. One investor at this breakfast was negotiating with strip malls, large mall complexes, and even owners of vacant office properties in suburban locations to place many of his MRI, diagnostics, and “self-health and healing” facilities into a large number of locations and indicated that this was a market that was nascent and ready to grow at leaps and bounds. I was convinced. Some brokers mentioned the new resurgence in “re-industrializing” America and the implications of that within the industrial CRE space. Supporting data from Real Capital Analytics and other predictive indices seem to support this not to mention policy that is being formed as we speak on The Hill in our nation’s capital. What else was hot? Every meeting I’ve had lately has discussed Distressed and Troubled Asset disposition so as the ownership and wealth shifts in these properties much opportunities abound in making this necessary transition happen. Finally the Tech sector drew much attention and conversation. I took copious notes and will share the insights with you all in near future blog posts. NEXT POST: Saved by the Geeks…Again?

FDIC Issues Statement to Save the Baby

The FDIC released the recent Policy Statement on Prudent Commercial Real Estate Loan Workouts to avoid throwing the baby out with the bathwater:

“This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.”

Find the press release HERE or download the full Policy Statement HERE (PDF) or you can find it in our CRE Trends library HERE.

This takes the valuation pain out of the equation for a significant amount of CRE loans and will be used aggressively to buy time for the underlying business fundamentals to right themselves. As for those ludicrous deals that never made business sense and were based on using unrealistic or fraudulent assumptions….they’re going down hard and business Darwinism will take over. Those firms and properties will be culled from the herd and repurposed or sidelined until they can be made productive or useful again. The faster the better with respect to anything based on bad business modeling.

It's not the fall that kills you...it's the sudden deceleration trauma.

I'm thankful for the formation of a potential bottom in CRE. Ya it's a bit of a hard landing but hey any bit of good news with respect to commercial property valuations is cause for some celebration.

This from MIT’s CRE Group:
"Results for the 3rd quarter of 2009 show a 4.4% increase in prices compared to the previous quarter for properties sold from the NCREIF database, placing the price index 36.5% below its 2007Q2 peak. The demand-side index rose by 11.8% (second highest in index history), to 41.9% below its 2007Q2 peak. The supply-side of the market recorded a continued modest drop of of -2.5%, taking that index to 31.8% below its 1Q08 peak. Transaction observations underlying the TBI increased for the second quarter in a row, from 0.6% to 1.0% of the NCREIF population of properties." GET TBI CHART HERE.

We’re starting to see some deceleration in the freefall in CRE property prices. As the market girds for massive extended financing and re-financing this deceleration provides some relief that a bottom may be forming and the functions of price, time, and capacity to for absorption will determine the future trajectory of valuations. Massive fire sales are not good for any industry and propping up bad investment decisions via government support just robs from the future. For those investments that were good business propositions and performing somewhat, they will see some expected relief from 2010 as evidenced by the next post: FDIC POLICY TO SAVE THE BABY