Several major commercial real estate groups are fighting a proposed federal tax provision that they say would have a devastating effect on real estate investment partnerships.

Commercial real estate groups contend that the Tax Extenders Act of 2009 (HR 4213) would more than double the taxes on carried interest received by general partners in real estate partnerships because the carried interest would no longer be taxed as capital gains at 15%, but as ordinary income with rates as high as 35%.

“That’s a huge increase at a time when the industry is on the precipice, so to speak,” says Thomas Bisacquino, president of the NAIOP, the Commercial Real Estate Development Association. “There really isn’t any real estate-related group that supports it. We’re trying to stimulate the industry. We feel it would create a huge impediment.”

The House of Representatives passed the “tax extenders” bill on Dec. 10. It would prolong a number of tax breaks currently scheduled to expire at the end of the year. Although the bill contains elements that benefit commercial real estate, such as an extension of tax credits for owners who conserve energy through retrofits or remediate brownfields, the prospective change in policy toward real estate investment partnerships has many investors seeing red.

NAIOP antibiotics online has issued a “call to action” to its approximately 16,500 members urging them to contact senators to defeat the proposal. If enacted, it could bring about the largest modification to the taxation of real estate in more than 20 years, since the Tax Reform Act of 1986, NAIOP said in its alert.

The group added that the proposed tax change would have an effect far beyond the Wall Street hedge funds whose practices originally gave rise to the proposal.

The Institute of Real Estate Management (IREM), an association of property managers, has sent a joint letter with the National Association of Realtors and the CCIM Institute, urging all 100 U.S. senators not to change the current capital gains treatment of carried interest for real estate partnerships.

Other organizations are expressing similar concerns. “Changing the current capital gains treatment of carried interests would undermine job creation and have a negative impact on commercial real estate values, which would devastate local property tax revenues and put pension fund investments at risk,” says IREM’s senior legislative liaison Vijay Yadlapati. “Just as importantly, such a policy would slow the national economic recovery.”

This week, in IREM’s latest legislative report, the group says the loss of capital gains treatment for real estate investment partnerships would turn long established taxation rules upside down and have a far-reaching effect. “Real estate partnerships, from the smallest venture to the largest investment fund, have a carried interest component. Approximately $1 trillion of commercial and residential properties are held by partnerships.”

The tax measure would put additional pressure on the commercial real estate industry at a time when it already faces heavy burdens, IREM notes, including a rapid rise in delinquencies and foreclosures and restricted access to credit.

Because of the health care debate, the Senate is unlikely to introduce its own version of the tax extenders bill until early in 2010. But the commercial real estate groups fear that the Senate could quietly add the tax measure affecting partnerships to any unrelated bill now under consideration.

The Senate Finance Committee intends to take action on its own “tax extenders” bill shortly after lawmakers return from the holiday recess in mid-January, says Yadlapati. However, it’s not known whether the carried interest provision will be included in that bill.

Source Article National Real Estate Investor

Ilene writes “Hi Mish, I thought you might find this interesting, and perhaps want to use some or all of it. I know my interviewee well, and his thoughts in this area have been consistently correct.”

With that backdrop here are a few excerpts from Interview with a Commercial Real Estate Developer about the CRE Industry.

Mr. Solomon (name changed) is a CRE veteran with 40 years of experience developing commercial real estate in 15 states and has kindly agreed to be interviewed about the current conditions in the CRE market.

Ilene: What are you seeing in the CRE market now?
Mr. Solomon: CRE is undergoing deleveraging with the rest of the economy, debts are being reduced or going into default. Large numbers of projects are not cash flowing and will have to be liquidated, or ownership will have to be transferred. Concurrently, there’s an oversupply caused by the same ill advised financing that led to the overbuilding.

Ilene: How far into the decline are we now?
Mr. Solomon: So far about 25%. A lot has been recognized. And it’s no longer a surprise. Some properties have already been foreclosed out. There are a lot of vacancies. I think a further substantial group of commercial properties will get foreclosed. I don’t see it leveling off for another few years because of the problems of contraction, debt, and oversupply. Oversupply in real estate doesn’t get worked off, the buildings have to be used. Less consumption and less business mean less demand. Creative financing, excessive easy money caused the oversupply, caused hyped up prices. Now there’s less demand, less employment, less consumption, and on top of that, the excess debt still has to be paid off – there’s more deleveraging coming. There are probably many years of value declines ahead.

Ilene: Do you think the recession is over?
Mr. Solomon: No, we will be in it for a number of years. Assuming the GDP is up in the short term, it doesn’t matter. It’s due to more debt expansion. The real world debt must eventually decline. It’s a government induced blimp that cannot go on, it’s not sustainable.

Ilene: Are there any areas where you would be building now?
Mr. Solomon: Regions will do better in the lower tax states that are less unionized, with less government regulation, for example Texas.

Ilene: I know many of your projects are in CA, how is that state doing?
Mr. Solomon: The California government is dysfunctional, too little revenue and too much expenditure. Compared to WA, there are more people, more speculation, more bureaucracies, and now more contraction. CA also has extra political risks, the state is bankrupt. The U.S. is also bankrupt. If there were no restrictions due to traveling and language, many people would be going elsewhere. All things being buy medications equal, I’d be building where opportunity is greatest, taxes are lower, and there’s less regulation. I’d be more apt to buy something in TX because the economy is stronger than in CA, there is less regulation, no income taxes and the budget is better balanced.

Ilene: Does it matter that we’re bankrupt?
Mr. Solomon: We seem to be functioning as though we’re not. There’s no question that only two trillion of revenue can’t service $100 trillion of debt. It’s pretty clear that there’s a major problem.

Ilene: In your business, would you be hiring people any time soon?
Mr. Solomon: No hiring. Due to the economy and health care issues, we’re not hiring anyone. Hiring is a liability, might be taking on a life-long obligation. We prefer to be firing now, decreasing the number of employees.

Source Article Mish’s Blog

After months of waiting, opportunity investors are finally getting a break. Over the past 12 months, defaults on CMBS loans have jumped from less than 1% to nearly 9%. Overwhelmed with the sheer number of troubled securitized loans falling into their laps, many special servicers are opting to sell or liquidate the notes and underlying properties rather than work with borrowers to keep distressed loans alive.

“When it comes to the investor community, we’re hearing there’s more and more meaningful engagement with special servicers as they continue to get overwhelmed and are clearly electing sale/liquidation strategies,” commented Dave Warmund, a vice president for Trepp LLC, during a webinar titled “Distressed CRE Debt: Where are the Opportunities?” The presentation was delivered to an audience of investors and media on Tuesday.

Trepp bases its research on mortgage and property performance of more than 80,000 CMBS loans representing approximately 100,000 properties with an outstanding balance of more than $800 billion. The New York-based provider of CMBS and commercial mortgage information was selected by the Federal Reserve Bank of New York as a collateral monitor for CMBS as part of the Term Asset-Backed Securities Loan Facility (TALF) in June.

To dispose of troubled loans, special servicers now favor liquidation strategies that include foreclosure, bankruptcy, REO, deed in lieu of foreclosure and note sales. Over the past 60 days, there has been an 18.3% increase in such strategies, representing 1,387 loans, up from 1,172.

Meanwhile, over the same period strategies that focus on working with borrowers to cure distressed loans, including modification, resolution, extension and discounted payoff have increased by only 4.9% to 812 loans, up from 774.

To identify where future loans in distress will originate, Warmund advises investors to look at the underlying debt-service coverage of loans as well as net operating income (NOI).

“Regardless of whether loans are performing or not, there are 9,000 to 10,000 loans that have debt-service coverage under 1.0, or marginal coverage, many of which are not yet delinquent,” Warmund explains. Moreover, there are almost 4,800 loans backed by assets with deteriorating NOI that have experienced 20% to 50% decreases in cash flow. “This represents a large pool of loans that will provide opportunity for distressed asset buyers,” he says.

Prospective buyers of distressed assets also will benefit as the dollar volume of loans that are experiencing changes in credit quality continues to grow, according to Trepp. In November, for instance, $15.6 billion worth of CMBS loans were categorized as having deteriorating delinquencies, and another $14.8 billion were placed on a watch list. At the same time, some $9.1 billion in loans were sent to special servicing and another $3.4 billion had appraisal reductions.

By property type, the greatest likelihood of opportunity for distressed buying can be found in the hotel and multifamily sectors. At the end of November, 17.3% of all CMBS-backed hotels and 13% of multifamily properties were in special servicing. In contrast, just 4.9% of office properties backed by CMBS loans had been turned over to special servicing, although that sector makes up 30.2% of all CMBS loans.

Over the past two months, the Mountain region has recorded the biggest rise in the delinquency rate (10.4%), followed by the East South Central region (7.2%) and the West South Central region (6.6%).

Despite the distressed asset concentrations in specific regions or markets, trouble knows no geographic boundaries. “Because of the granularity cheap drugs online of the data at the loan and property level,” Warmund notes, “there are likely opportunities in virtually any market.”

Source Article

Why do some landlords hire property managers who cycle in and out of their jobs?  And, why should tenants receive calls from their “New Property Manager” every few months?

Why do so many landlords “Yes” their tenants and not follow-through on promises?  Do they believe that if a tenant stopped complaining, they forgot about what they needed and no longer require service?

What steps can landlords take to build mutually beneficial relationships with tenants, and not just provide lip service?

The best landlords don’t need to answer these questions, because they figured this out long ago!

Here’s an idea or two for those old school landlord types:

Start by changing how you engage in lease negotiations.  Lose the “stick it to them before they stick it to us” perspective still held by some old fashioned entrepreneurial, and even some institutional, landlords.  That doesn’t mean give away your profits!  It means that you will likely benefit by viewing tenants, both existing and prospective, as customers…Yes, CUSTOMERS!  Take a customer focused approach to negotiating.  Transform your organization to focus on words like “Service” and “Excellence”.   I know, for some of you, this is a real novel idea!  Remember…you’ll get more flies with honey!

Build two-way relationships with your tenants.  Do that on an enterprise-wide or institutional-wide basis.  Don’t leave building good tenant relationships to a seemingly friendly property manager after the damage has already been done through uncomfortable negotiations.

In order for such a major shift to take hold, those tenants who attempt to beat the hell out of landlords must also change their negotiating approach. Change must occur in both directions.

Treat your existing tenants like new customers.  They’re more important than new ones anyway, since they’ve already created value for you, and likely will continue to do so.  Prospect your existing tenants – treat them like they’re not yours, court them, build and sustain real relationships with them.  When treated well, existing tenants can be more profitable customers and easier to please than new ones.

Seek to understand how you can support your tenants’ business objectives. Don’t simply consider your tenants as meal tickets.  That kind of attitude shows, and no one likes to be treated that way, no matter how slick you think you are.  Follow the lead of some of the most successful landlords around the country…they’ve been running their businesses like this, and succeeding, for a very long time!

Create an excellent “experience” for all of your tenants.  Don’t simply permit them to occupy your building.  And, that doesn’t mean just buying them ice cream once a year.  Find ways to become a partner to your tenants.

Considering the challenges that so many companies, even landlords, are experiencing in the current economic environment, now is the time for landlords to forge solid relationships with their tenants.  And, NO!…that doesn’t online pharmacy prescription mean agree to lease terms that don’t make sense.  Afterall, landlords are entitled to weather this storm, too!

In hard times like these, some people take advantage of others who need their help and some turn a deaf ear.  Others step up to recognize that by helping others succeed, they’ll likely pave the way for their own greater success when the recovery kicks in.  Remember that companies, and the people who work for them, have long memories.  Give your tenants a lot of good things to remember about their relationship with you.

The best landlords practice these ideas, and as a result, they often achieve greater success than their slower-to-learn competitors.  Now is the time for those other landlords, you know who you are, to benefit by doing the same.

 Source article www.globest.com

Two years ago, almost everyone was discussing, and looking forward to, a tsunami of distressed assets which would be coming to market based upon the sub-prime mortgage crisis and the stresses it would exert on the credit markets in general. In September of 2008, when Lehman failed and Wall Street as we knew it was structurally transformed from an investment banking platform to one of bank holding companies, the “almost everyone” mentioned above was changed to “everyone”. But the tsunami has not arrived, not even close.

The fact that only a few distressed assets have been put in play is not because they aren’t out there. The pipeline is chock full of them.

Let’s use the New York City marketplace as an example. In the 2005-2007 period, there were $109 billion of investment sales in New York City. Based upon reductions in revenue (rent levels) across all product types including residential, office, retail and industrial and cap rate expansion, values have declined by 32%, on average, year to date. If we eliminate multifamily properties from this analysis, values have fallen from peak levels approximately 48%. Based upon these reductions, we estimate that, of the $109 billion buying medicine online spent on investment properties, $80 billion of that was spent on properties which now are in a negative equity position. This relates to about 6,000 properties.

If we include properties which were refinanced during the 2005-2007 period, the number of properties having negative equity jumps to 15,000. We estimate that there is about $165 billion in debt on these properties and, based upon today’s underwriting standards, there should only be about $65 billion in debt on them. This means that in order to have a conservatively leveraged marketplace, we would need to extract $100 billion in debt.

Clearly, this will not happen. Many investors have the ability to feed their properties and, based upon a desire to own them on a long-term basis, will do so. Other transactions will be worked out utilizing any of our favorite terms which have become commonplace in today’s vernacular including, “extend and pretend”, “delay and pray”, “a rolling loan gathers no loss” or “kicking the can down the road”. We do believe, however, that $30 to $40 billion will ultimately be extracted from the market in the form of losses.

So where are those distressed assets now? Some have not come to the market because they aren’t even in default yet due to mortgages which are still in interest only periods or are operating on an interest reserve set up by the lender when the loan was originated. Others have loans floating over 30-day LIBOR which closed on friday at 23 basis points (3-month LIBOR is only at 26 basis points). At 150 over LIBOR, the rate being paid on those loans would only be 1.73% and they can cash flow at those levels of debt service. While some properties are fundamentally under water, they are not yet in default, but likely will be when these advantageous terms expire.

Other distressed assets haven’t come to market because everything that has happened legislatively has allowed lenders to hide bad assets on their balance sheets. The FASB mark-to-market accounting rules have been modified to allow loss avoidance. Similarly, bank regulators will now allow lenders to hold a loan on their balance sheet at 100 even if they know that the underlying collateral for that loan is only worth 60. Additionally, modifications to the REMIC regulations have made it easier for CMBS loans to be kicked down the street.

Any of these delaying tactics will only be beneficial if appreciation is anticipated in the short-run. Given the massive deleveraging the market must experience and unemployment rates which are anticipated to remain elevated for at least another year to 18 months, we do not see support for the short-run appreciation argument.

We really don’t understand the reluctance of lenders to deal with these problem properties. Many of those that are in default are currently in the foreclosure process. This is a frustrating process, especially in New York, as it can take years to get through the process and obtain the title to the collateral. Many borrowers further complicate things by going into bankruptcy, which, based upon backlogs in the bankruptcy courts, adds additional time to the process.

It is very difficult to say this without sounding completely self-serving ( After all, I do sell buildings and notes for a living) but, if a lender wants out of a bad deal, selling a note today is likely to lead to a better recovery than waiting a year or two.

We believe this because the lack of product on the market toady has created a dynamic in which many investors are fighting over relatively few opportunities. Because of this, particularly on our income producing properties for sale, we are generally receiving 25 to 35 offers for each. Furthermore, on each note we have sold this year, we have received over 50 offers. This is due to the fact that buyers today would rather purchase from a lender than a private seller, believing they will get a better deal. “Believing” is the key word in the last sentence.

Due to the excessive demand for distressed assets, buyers are currently paying aggressive prices for anything banks are selling.  In many cases this year, we have obtained prices for notes that, we believe, are at or very near the value of the underlying collateral.

Some lenders are taking advantage of these dynamics to rid their balance sheets of underwater loans and are using the proceeds to make good loans today. Consider that two years ago, bank spreads, based upon all of the competition to put money out, were as low as 30 or 40 basis points. Those spreads can be 300-400 over corresponding treasuries today. Additionally, today’s loans have less risk associated with them as, rather than a loan to value ratio of 75%-85%, LTVs today are generally in the 60%-65% range. These loans are also significantly less on a price per square foot basis than they were two years ago.

If your business was 10 times as profitable as it used to be and there was much less risk involved, wouldn’t you be trying to do as much business as you could?

“Out with the bad, in with the good”, should be the mantra of lenders today. Until now, this has been slow to develop. To illustrate this, consider the following very telling statistics: Massey Knakal is asked by potential sellers to provide opinion of value reports and provide an explanation of our marketing program and we exclusively list about 31% of the properties that we are asked to analyze. It is just like a batting average in baseball, if we are hitting .300, we feel pretty good. With lenders and special servicers we are working with, we have completed just over 1,000 valuations and have exclusively listed just 12 properties/notes. That is a batting average of just .012. Many of these opportunities have simply not come to the market in any form. Perhaps the lender/servicer is waiting to see what the future will bring; perhaps they are simply making deals with the borrowers.

We have, however, seen this freeze thawing slightly as 2009 comes to a close. We expect to be coming to market with several distressed notes from lenders and special servicers right after the holidays and remain optimistic that we will be able to continue to achieve pricing at levels where the recovery versus collateral value is significant. There are also some foreclosures which should be concluding shortly which will lead to some REO which should be placed on the market shortly thereafter.

Let’s hope that 2010 sees a significant rise in these opportunities coming to market. It appears that the year will, at least, start out that way.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,000 properties in his career.

Possibly related posts: (automatically generated)

Source Article www.globest.com

Prices nationwide have fallen 42.9% from their October 2007 peak, according to the latest Moody’s/REAL Commercial Property Price Index report issued Thursday, while Real Capital Analytics says total transaction volume for 2009 will be the lowest of the decade. The November Moody’s/REAL report … covers transactions through Sept. 30 … September’s index represented a 3.9% value decline compared to August.
…
“Further price declines are almost certain over the short term,” says Nick Levidy, Moody’s managing director, in a statement. “However, it is notable that the pace of deterioration appears to be moderating.”

Here is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the “Real” in the title – this index is not inflation adjusted. Moody’s CRE price index is a repeat sales index like Case-Shiller – but there are far fewer commercial sales – and that can impact prices.

order medicine online style=”margin: 10px; float: right; border: #000000 1px solid;” src=”http://4.bp.blogspot.com/_pMscxxELHEg/Swbw6l7JTLI/AAAAAAAAG10/0-1YPsciFAs/s320/CRESept2009.jpg” border=”0″ alt=”CRE and Residential Price indexes” /> Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

This shows residential leading CRE (although we usually talk about residential investment leading CRE investment, but in this case also for prices), and this also shows that prices tend to fall faster for CRE than for residential.

source article

SACRAMENTO-Two new potential ballot initiatives are afoot that would drastically change how commercial properties in California are assessed and how much they are taxed. One calls for a 55% increase in the current property tax rate for commercial properties while the other wants commercial properties’ fair market value appraised more frequently. Currently, under Prop. 13, properties are taxed annually at 1% of their appraised value when purchased and may only have its fair market value adjusted after a majority stake is sold.

Attorneys from the San Leandro-based law firm Remcho, Johansen & Purcell LLP filed title and summary language for the proposed 2010 ballot initiatives earlier this month. They are the “Protect Homeowners and Close Corporate Tax Loopholes Act” and the “Education and Taxpayer Fairness Act.” In order to qualify as a potential constitutional amendment for the November 2010 ballot, each initiative would have to garner 700,000 signatures by the spring.

The latter initiative would add 0.55 percentage points to the current tax rate of 1.0% of the assessed value upon a sale, with the extra revenue diverted to a fund for K-12 schools, community colleges and state universities. The former would require that all non-commercial, non-public properties have their fair market value assessed every three years, beginning with properties that have gone the longest between appraisals. It would also exclude $1 million in personal property tax for businesses “in order to give small business owners immediate tax relief,” double homeowners’ property tax exemption and increase the tax credit for qualified renters.

The initiative claims that the lack of more frequent fair-market-value appraisals is a “gigantic loophole” for commercial properties that places the burden of paying for things like police and fire services more heavily on homeowners. “Unlike single-family residences, commercial buildings produce income for their owners,” the initiative finds. “It makes sense, therefore, to tax commercial real property at a higher rate than private homes. Furthermore…it makes sense…to reassess commercial real property at current market value and use the increased revenues to restore vital services to our seniors and health care to our kids, protect funding of public safety, and also improve the funding prescription drugs online without a prescription of California’s public schools.”

The initiatives are two of three that would institute a split roll property tax system where in single-family residential properties are treated differently than non-residential properties. In mid-October, Chula Vista-based attorney Frank D. Walker filed language for an initiative that calls for all land having rental value to be taxed monthly at 75% of its assessed rental value instead of the 1% tax upon sale.

Matthew Hargrove, SVP of government affairs for the California Business Properties Assoc. tells GlobeSt.com he has looked at all three proposals. “We have for years been seeing these types of split roll property tax proposals come forward and they are just not a good idea,” he says. “It would not raise the revenue that the proponents say they would and would really hurt both the commercial and residential real estate industries because business owners would raise their prices to offset the increased property expense and homeowners would end up paying more for services.”

Hargrove directs any interested persons to a study on the SBPA web site titled “The Economic Effects of California Adopting a Split Roll Property Tax.” The Remcho, Johansen & Purcell law firm that submitted the latest initiatives referred calls to Sacramento-based Kaufman Campaign Consultants, which was not immediately available Monday for comment. Walker, the attorney for the third initiative also was not immediately available.

Amid the jobless recovery, some landlords are showering flat-screen TVs, cash, rent cuts and other incentives on tenants to encourage them to renew their apartment leases and thus avoid the expense of filling empty units.

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UDRThe poor apartment-rental market has slowed new construction. Above, The Residences at Stadium Village in Surprise, Ariz., developed by UDR.

The rise in unemployment has prompted tenants to seek roommates, move home or trade down to cheaper units. In the third quarter, the national apartment-vacancy rate hit 7.8%, a 23-year high, according to Reis Inc., which tracks vacancies and rents in the top 79 markets.

“Many companies are doing whatever they can to keep units occupied, especially heading into the seasonally slower leasing period,” said Paula Poskon, an analyst with Robert W. Baird & Co.

The trends are taking a toll on the bottom line. Apartment Investment & Management Co., which owns and operates roughly 150,000 units nationwide, reported Friday that its funds from operations, a key REIT metric, fell to 19 cents a share from 60 cents a year earlier. UDR Inc., which has about 45,000 units on the West Coast and in Washington, D.C., reported earlier this month that its funds from operations dropped 42% to 19 cents.

“We do need job growth in order for our business to prosper,” said David Neithercut, chief executive of Equity Residential, the country’s largest apartment REIT by market capitalization. “I think 2010 will be another year of doing the best we can.”

Some of the large REITs were able to keep their occupancies up. UDR managed to increase occupancy to 95.6% from 95% a year earlier. Colonial Properties Trust, which operates 35,000 Sunbelt apartments, said its third-quarter occupancy fell to 94.4% from 96%a year earlier.

But landlords attracted and retained tenants by offering incentives and rent cuts. Equity Residential said new tenants in the third quarter paid 9% to 10% less rent than the previous residents. AvalonBay Communities Inc., an upscale operator, said its decline was about the same.

Owners buy prescription drugs on line are focusing on keeping existing tenants because when apartments become vacated they can sit empty for months and often require marketing, painting, brokerage commissions and other expenses to attract new tenants. Denver-based UDR is offering renewing tenants a flat-screen TV, new carpet, kitchen upgrade or, $300 in cash. The money is the most popular choice, said Chief Executive Thomas Toomey,

Mr. Neithercut said Equity Residential doesn’t initially offer rent cuts to existing tenants to persuade them to renew. But if the tenant plays hardball, the company asks: “What can we do to keep you?” he said.

One problem for landlords is that existing tenants can easily check the Web to see what deals new tenants are being offered. And new tenants are getting incentives like a waived pet deposit or two months’ free rent.

Some landlords have also become more open-minded about tenants with credit issues involving home foreclosures. In the past, a foreclosure on a credit record could have meant an automatic denial. Now such blemishes are so commonplace that the stigma is easing. Equity Residential looks for reasonable credit history “outside of a problem that they’ve had with a single-family home,” Mr. Neithercut said.

Another sign of the times: In New York City, landlords are paying broker fees. Typically in New York, which has traditionally been a tight rental market, tenants have to pay fees as high as 15% of a year’s rent. But so far this year, Equity Residential has paid about $1.5 million in such commissions.

Apartment landlords say that one benefit of the bad market is that it has practically halted new construction. New completions are expected to be 98,000 next year and 109,000 in 2011, compared with 188,000 last year and 204,000 this year, according to Green Street Advisors Inc.

But when loss rates are taken into account—the removal of units because of obsolescence—the actual addition will be immaterial. That means that when the economy rebounds, the supply will be tight, increasing landlord profits.

“I have utmost confidence in our ability to be successful when we get to there,” said Mr. Neithercut. “I just don’t know how far away ‘there’ is.”

Source article http://online.wsj.com/article/SB10001424052748704746304574506040208385548.html

From the Mercury News: Santa Clara County apartment rents plunge

Apartment rents plunged 10 percent in Santa Clara County in the third quarter compared with a year earlier, the biggest decline in any metro area in the Western United States …

From the Las Vegas Sun: LV apartment rental rates decline in third quarter

RealFacts … said the average asking price for apartments in the Las Vegas area in the quarter was $837, down 2.1 percent from $855 in the second quarter and down 5.7 percent from $887 one year ago.

From Bloomberg: Apartment Rents Decline in U.S. West as Unemployment Increases

Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates.

The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
…
In California’s Oxnard-Thousand Oaks-Ventura region, rents fell 7.4 percent to $1,429, and in the Seattle area they dropped 7.3 percent to $1,036.

Falling rents is great for renters, but it means falling apartment values, more losses for lenders and CMBS investors, more pressure on home prices, and possibly a declining CPI (rent is the largest component). 

From the Mercury News: Santa Clara County apartment rents plunge

Apartment rents plunged 10 percent in Santa Clara County in the third quarter compared with a year earlier, the biggest decline in any metro area in the Western United States …

From the Las Vegas Sun: LV apartment rental rates decline in third quarter

RealFacts … said the average asking price for apartments in the Las Vegas area in the quarter was $837, down 2.1 percent from $855 in the second quarter and down 5.7 percent from $887 one year ago.

From Bloomberg: Apartment Rents Decline in U.S. West as Unemployment price Xenical Increases

Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates.

The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
…
In California’s Oxnard-Thousand Oaks-Ventura region, rents fell 7.4 percent to $1,429, and in the Seattle area they dropped 7.3 percent to $1,036.

Falling rents is great for renters, but it means falling apartment values, more losses for lenders and CMBS investors, more pressure on home prices, and possibly a declining CPI (rent is the largest component).

Oct. 21 (Bloomberg) — Lehman Brothers Holdings Inc., the investment bank brought down by the U.S. mortgage crash after 158 years, is set to return to funding home loans through its Aurora Loan Services unit, people familiar with the matter said.

Aurora, which helped make Lehman the top underwriter of mortgage bonds during the housing boom, has started hiring staff for the effort, said the people who declined to be identified because the plan isn’t public.

The expansion comes even as New York-based Lehman is shrinking through asset sales, 13 months after filing for the biggest bankruptcy in history and selling its North American investment-banking unit to Barclays Plc. While Aurora will be forced to focus on the government-backed mortgages now accounting for 90 percent of new home loans, overseas online pharmacy rather than the riskier debt it specialized in as recently as two years ago, reduced competition has made that market more profitable.

“For the ones that are left, there’s opportunity,” Steve Jacobson, chief executive officer of Madison, Wisconsin-based Fairway Independent Mortgage Corp., said in an interview. His originations soared 67 percent from a year earlier to $2.6 billion in the first nine months of 2009.

Less competition has boosted per-loan profits, to $1,088 in the first quarter from $657 in 2004, according to Mortgage Bankers Association studies. The difference between rates on typical 30-year mortgages and 10-year Treasuries has widened to 1.8 percentage point, compared with an average of 1.27 percentage point in the five years through 2007, according to data compiled by Bloomberg and Bankrate.com.

Averting Seizure

Aurora, once a specialist in so-called Alt-A mortgages, may start lending again through other companies and brokers, as well as directly to consumers, according to the people familiar with the plans. The Littleton, Colorado-based firm has remained a servicer of outstanding mortgages and is owned by Aurora Bank FSB, formerly Lehman Brothers Bank FSB. The bank unit didn’t enter bankruptcy protection with its parent.

Deborah Munies, a spokeswoman for Aurora, Kimberly Macleod, a Lehman spokeswoman, and Janet Frank, a spokeswoman for the U.S. Office of Thrift Supervision, the bank’s regulator, declined to comment.

Lehman was the largest underwriter of so-called non-agency home-loan securities in 2007, when the market collapsed, selling $67.6 billion of the debt, or 9.6 percent of the total, according to newsletter Inside MBS & ABS. The firm ranked as the second-largest issuer, creating $49.5 billion of the bonds.

Aurora, which ranked as the top Wall Street-owned lender with $98 billion of originations in 2004 and 2005, announced plans to end most lending in January 2008. During the bankruptcy, Lehman has been lending to Aurora Bank, as well as contributing assets to the unit and buying its loans, to avert a regulatory seizure and protect its stake.

Spinning Off Assets

Lehman also has supported its Salt Lake City-based Woodlands Commercial Bank. A seizure of both bank units could reduce returns to Lehman’s creditors by as much as $3.6 billion, Lehman CEO Bryan Marsal has said.

Lehman listed $639 billion in assets in its bankruptcy filing. Lehman’s North American brokerage and New York headquarters building and other real estate were bought by Britain’s Barclays within days of the bankruptcy for $1.54 billion. Nomura Holdings Inc. took over the investment bank’s Europe, Asia and Middle East operations. Managers at Lehman’s Neuberger Berman money management unit acquired 51 percent of that firm without putting up any cash. The rest of Neuberger is owned by Lehman’s creditors.

Aurora ranked as the 14th-largest servicer as of June 30, handling billing and collections on about $93 billion of loans, according to industry newsletter Inside Mortgage Finance. Aurora has been granting new mortgages to its servicing customers, one of the people said.

Subprime Lending

Lehman founded Aurora in 1997 with servicing contracts and staff acquired from Harbourton Mortgage, and later began lending through the unit. Aurora grew in originations through its acquisition in 2003 of Independence Community Bank Corp.’s SIB Mortgage Corp. unit, which split from its parent as the bank sold itself in a sale arranged by Lehman.

Lehman entered subprime lending in 1999, buying a stake in Finance America and made an investment in BNC Mortgage the next year, before taking full control of those lenders and merging them under the BNC name. Lehman exited subprime in 2007, after shifting some of BNC’s business and staff to Aurora. BNC joined its parent in bankruptcy in January.

Subprime mortgages were offered to borrowers with the worst credit records. Alt-A loans, a step above, were given to borrowers seeking atypical terms, such as a lack of income verification.

Reduced Competition

Few start-ups have tried to take advantage of reduced competition in the remaining mortgage market because lenders to mortgage banks and bigger mortgage companies that buy loans remain wary, Fairway’s Jacobson said. For instance, they may seek to only do business with firms with $10 million in net worth, he said.

That’s a shame because “what’s great about today is the big guys are very vulnerable,” as they struggle to manage costs and service levels, said Terry Wakefield, a consultant in Grafton, Wisconsin, and former Salomon Brothers Inc. executive who helped run a lender owned jointly by that firm and a Prudential Financial Inc. predecessor.

Passing Bear Stearns

Lehman surpassed New York-based Bear Stearns Co. as the top underwriter of home-loan bonds without government backing in 2006, managing $128 billion of sales. The success of the firms in fueling their fixed-income businesses with lending units led to purchases of mortgage firms by Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc. and investment-bank units of Deutsche Bank Inc. and Barclays.

As non-agency bond sales began to seize two years ago after peaking at $1.2 trillion in both 2005 and 2006, Lehman and Bears Stearns sought to keep their units open by focusing on mortgages that could be sold as securities guaranteed by government- supported Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae. Bear Stearns sold itself last year to JPMorgan Chase & Co. to avoid a bankruptcy.

Aurora remains led by Tom Wind, who Lehman wooed in 2006 from JPMorgan to head U.S. residential lending. Wind is “a very capable guy, full of common sense,” said Wakefield, who he worked with at Prudential Home Mortgage, which originally focused on relocation loans under mortgage-bond pioneer Lewis S. Ranieri and was bought by a Wells Fargo & Co. predecessor.

Wind will join a former Bear Stearns executive in returning to originations. Jeff Walton, who headed the Bear Residential Mortgage Corp. unit that made loans through brokers, said this month he is starting a company to make loans on behalf of First Arizona Savings FSB in Phoenix. He will focus on lending eligible for government-related programs and “nothing will be held for our portfolio,” he said in an interview.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).