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.

View Full Image

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).

Almost 51 million square feet of office space is vacant in Southland, and that number is expected to continue growing well into next year.

Though Wall Street investors are showing some enthusiasm about the direction of the economy, shell-shocked business owners in Southern California are still more inclined to shrink than grow their companies. ¶ Problems at white-collar firms are bleeding the region’s enormous office rental industry. Almost 51 million square feet of office space Buy Xenical pills in Los Angeles County, Orange County and the Inland Empire is now empty — more than 17% of the total. ¶ The exodus from office buildings that started in late 2007 accelerated during the third quarter as the anemic business climate took its toll on the real estate rental industry, according to the Cushman & Wakefield real estate brokerage. ¶ “These vacancies are a direct reflection on unemployment,” said Joe Vargas, an executive vice president at Cushman & Wakefield. “Companies continue to reduce their workforce, or they are not hiring.”

Troubled business owners facing expiring leases often choose to downsize these days and take less office space, even though rents are falling, he said.

Real estate rentals are a lagging indicator of the economy, so the shrinking-space trend is expected to persist well into next year even if the nation’s financial outlook continues to improve.

Industry observers were divided in their assessments about whether tenants at least showed signs of interest in renting new office space.

“There was a dramatic drop-off in leasing velocity last quarter,” said John McAniff, managing director of brokerage Jones Lang LaSalle. “Apparently the rebound on Wall Street did not translate to a rebound in tenant commitments. That tells me there is a lot of uncertainty out there.”

Office landlord Jeff Worthe of M. David Paul & Associates, which caters to the entertainment industry in Burbank and Santa Monica, was more optimistic.

“People are thinking about getting back to their business plans and not being on defense,” Worthe said. “We’re seeing people ready to make commitments.”

Last month, his property company arranged the early renewal of a lease with Lions Gate Entertainment Corp. at the MTV Building in Santa Monica.

The $40-million deal represented a reduction in rent but gave the landlord peace of mind to know the entertainment company wouldn’t be vacating its 125,000 square feet any time soon.

“We were better off not to face the prospects of them talking to other people” about leasing elsewhere, Worthe said.

Indeed, competition is plentiful. Office vacancy in Santa Monica was 15.4% last quarter, up markedly from 10% a year earlier.

Early lease extensions such as Lions Gate’s are a sign of the times, experts say, as tenants decide to take advantage of lower rents in exchange for agreeing to stick around longer.

Broker Gary Weiss of Madison Partners, who specializes in representing tenants, said he’s seeing more business owners figuratively “kicking the tires” and considering moves. He predicts the office market will stay soft — in favor of tenants — well into the first quarter of next year, but perhaps not much longer.

“A lot of us on the Westside believe we have seen the bottom, and now is the time to cut deals,” Weiss said.

The more pessimistic McAniff, who compares the weak market with the depths of the last big real estate down cycle in the mid 1990s, also described the moment as an opportunity for tenants.

“You only see the bottom of the market in your rearview mirror,” he said. “If you are confident about your business plan, you should go ahead and execute.”

Cushman & Wakefield’s Vargas predicts Southern California will remain a tenant’s market through mid-2010 and perhaps longer if employment doesn’t start picking up.

“This is certainly the worst downturn we’ve seen,” Vargas said. “We’re not going to see real improvement until job growth occurs.”

Source article LA Times

From Bloomberg: FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show (hts Mike in Long Island, Ron at WallStreetPit)

… The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. …

“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview.

This is recurring theme. The examiners in the field, for both the FDIC and the Fed, recognized problems fairly early, but the agencies failed to take aggressive action.

Here are two related posts: Inspector General: FDIC saw risks at IndyMac in 2002 and Federal Reserve Oversight and the Failure of Riverside Bank of the Gulf Coast

The from a state regulator:

“We should have been more strict,” Joseph Smith, North Carolina’s bank commissioner and chairman of the Conference of State Bank Supervisors, said in a telephone interview. …

“Had we required the reduction of CRE lending, it would have been thought of as an intrusion by regulators into the businesses of banks and to the operations of local economies,” Smith said. “Yes, it would have been the right thing to do. It would have caused a firestorm then. That might have been better than a firestorm now.”

I believe the regulators should have clamped down on CRE lending in 2006 – and the FDIC was aware of the problem. Here is a proposed interagency guidance on CRE lending from January 13, 2006.

Concentrations of CRE loans may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the general commercial real estate market. … The proposed guidance reinforces existing guidelines for real estate lending and provides criteria for identifying institutions with CRE loan concentrations that may warrant greater supervisory scrutiny.

The final comments from Joseph Smith provide a clue as to the real problem. The examiners in the field prescription medications online were finding the problems, but the regulators were failing to act because “it would cause a firestorm” and it would be “thought of as an intrusion by regulators”.