How Low Can the Fed Go?

The Federal Reserve is pulling out most - if not all — of the stops to thaw credit.  The central bank has cut its federal funds rate for overnight borrowing to just 0.25 percent, the lowest level ever.  But the move is likely too little, too late because the problem is not the lack of capital — but a lack of confidence.  Marginal rate cuts won’t help commercial real estate.  Rather, the buy-back of real estate securities and extending credit are needed to fuel recovery. 

The Fed’s Open Market Committee had been expected to cut the fed funds rate to 0.50 percent, so the drop was a bit of a surprise.  “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the statement said.  Possibilities are the ongoing purchase of agency debt and mortgage-backed securities, as well as the “potential benefits of purchasing longer-term Treasury securities.” 

http://www.nytimes.com/2008/12/17/business/economy/17fed.html

Green Buildings Impacted by the Credit Crunch, Recession

The credit crunch and sluggish return-on-investment environment are impacting green commercial real estate development - and not in a good way.  Even on projects where dirt actually gets moved, it will be more difficult to incorporate sustainable design principles as companies become more cost conscious.  The greening of the workplace should pick up once again if the high cost and availability of capital eases during 2009.  Already, the Federal Reserve Board’s two half-point interest-rate cuts, which slashed the overnight Fed funds rate to one percent, are having a measured but positive influence. According to National Real Estate Investor magazine, the credit freeze is not the only stumbling block to green projects right now.  Moderating fuel prices, currently at their lowest level in four years, are making renewable power sources - such as solar and wind - seem expensive at a time when people want to save money.  Still, companies with a serious commitment to green principles are motivated by a willingness to minimize their carbon footprint and conserve resources, rather than to just save a few dollars on utilities. 

The bad news for sustainable-design proponents is that the recession may frustrate the federal government’s plan to offer tax credits to promote green design.  The reason is that tax credits cut a company’s tax bill; they offer little motivation to firms whose earnings are likely to be flat or suffer net losses during 2009.  Looking on the bright side, the credit crunch may stimulate awareness of sustainability by businesses looking for ways to control expenses over the long term. 

The economy shouldn’t put green in the tank, and people should recognize that deflation is always temporary.  The options and futures market will bring energy costs up again.Â

How Will President Obama Impact Commercial Real Estate? Part 2

So what to make of President-Elect Obama’s progressive economic policies?  What his critics miss are some of the most intriguing features of his plan — providing companies with tax credits for hiring new employees; raising the investment expensing limit for small businesses; eliminating the capital gains rate for investing in small businesses; and the massive infrastructure rebuilding plans to fix roads, bridges and schools.  The last initiative has the potential to create millions of new jobs for the construction trades. 

Although it will take time, we believe that the incoming president’s stimulus plans are visionary and ultimately will succeed.  In time, these progressive programs will lead to a wealthier middle class, increased consumer spending and overall economic growth. 

http://nreionline.com/research/real-estate-community-unfavorably-obama-victory/

http://www.costar.com/News/Article.aspx?id=9AC9C706FEA405FD83297485144907A7

http://www.marketwatch.com/news/story/Commercial-real-estate-stocks-rally/story.aspx?guid=%7BF3669FE9-C7E9-4D5C-9A85-AE7FECF0E5DF%7D

How Will President Obama Impact Commercial Real Estate? Part 1

With change expected to begin in Washington, D.C., on January 20, 2009, the commercial real estate industry is bracing itself for the incoming Obama administration and the 111^th Congress.  CoStar Advisor recently polled commercial real estate professionals on the top issues of the first 100 days.  The resulting list includes such policy issues as saying “no” to capital-gains increases and other investment taxes; moving forcefully to stabilize the Treasury and capital markets; suspending market rules regulating perceived asset value; making the biggest investment in the public infrastructure since the 1950s; and reforming Fannie Mae and Freddie Mac. 

The overall attitude within the industry, according to a poll by National Real Estate Investor, is negative because of Obama’s plan to hike taxes on dividend income, capital gains and high-earning individuals.  The poll notes that 54 percent of responders are registered Republicans.

So, should our industry be wary of the new team? 

http://www.marketwatch.com/news/story/Commercial-real-estate-stocks-rally/story.aspx?guid=%7BF3669FE9-C7E9-4D5C-9A85-AE7FECF0E5DF%7D

Will Surge in Mortgage Applications Find a Home?

The residential mortgage market is experiencing an unexpected - but welcome — boom, a result of interest rates for 30-year fixed-rate loans falling to 5.47 percent from 5.99 percent.  According to the Mortgage Bankers Association’s (MBA) weekly review, the average rate for a 15-year fixed-rate loan - popular when refinancing - fell to 5.13 percent from 5.78 percent.  A one-year adjustable-rate mortgage decreased to 6.61 percent from 6.87 percent. The existing-mortgage refinance rate tripled during Thanksgiving week, while purchase volume increased 38 percent.  Refinance applications were 69.1 percent of the total volume, a significant increase over the 49.3 percent reported during the previous week.  The survey covers approximately 50 percent of all weekly residential mortgage originations. 

The MBA reported that the application rate more than doubled during the short Thanksgiving week.  The trade group’s application rate rose to 857.7 in the week ending November 28, compared with 404.4 the previous week. 

Clearly, part of the demand is being driven by buyers locked into floating-rate or short-term debt or adjustable-rate mortgages looking to refinance into fixed-interest vehicles.  While Frannie and Freddie should fill some of the void in light of their $20 billion bailout, the market will still have a financing shortfall with the disappearance of CDOs and the securities market. 

http://www.chicagotribune.com/business/sns-ap-mortgage-applications,0,4401742.story

The Alter Group’s One11 West Illinois Street Receives Praise from the Chicago Tribune’s Blair Kamin

The Alter Group’s One11 West Illinois Street, its 10-story, 227,604 SF Class-A-to-own office building in downtown Chicago’s dynamic River North neighborhood recently received a rave review and from the Chicago Tribune’s Pulitzer Prize-winning architectural critic Blair Kamin. Kamin praised architect Martin F. Wolf, Senior Principal with Solomon Cordwell Buenz & Associates, who “was challenged with a particularly daunting hurdle:  a pair of ungainly, three-story buildings whose owners didn’t want to sell.  The two holdouts created a seemingly unusable panhandle at the western end of Alter’s otherwise rectangular plot.  But Wolf and his colleagues…took the leftover space and transformed it into something dramatic:  a prow-like edge that resembles the front end of a ship ready to steam across LaSalle.” 

According to Kamin, “Instead of cramming the problem panhandle with a stubby rectangle of office space, Wolf sliced the building on a diagonal and opened a triangular outdoor plaza in the bargain.  But the slicing yielded that eye-catching glass

prow.  It’s displayed, like a jewel within a setting, inside an exposed steel framework that extends beyond the building proper.” 

Kamin continued:  “Its highly articulated corner captures the eye of the passerby with its play of light and shadow, solid and void, transparency and reflectivity.  Look closely, and you can see a moiré effect on the mesh.  Step inside the recess between the prow and the mesh, and you are treated to an upward look at the trapezoid-shaped metal grates that form platforms for lights that shine on the prow at night.” 

It is heartening to see architecture on a mid-rise office building recognized.  One11 West Illinois Street’s anchor is the Erikson Institute, one of the nation’s leading graduate schools dedicated to the education of child-development professionals, which occupies approximately 75,000 SF. �

Throwing a BRIC at the Economy

Wonder where real estate titan Sam Zell’s investment dollars are going during these recessionary times?  Despite the global financial crisis, Zell is investing in countries like Brazil, Egypt, Mexico and China - all of which he says have a shortage of affordable housing and lack infrastructure. Zell, the chairman of Chicago-based Equity Group Investments, LLC, likes Brazil for its large pool of skilled professionals, self sufficiency and unlimited resources.  As recently as last April, Brazil’s largest mall owner reported that retail sales grow 10 percent every year.  “If you look at all of the facts, I don’t think there is a better environment in all the world than Brazil,” according to Zell, who thinks the South American nation could overtake China in economic strength within 30 years.  In Brazil and Mexico, the funding to develop housing has not been affected by the credit crunch because their financial markets are well capitalized.  Conditions are similar in Egypt, where a serious housing shortage exists, as well as in China where Zell is profiting from his investment in affordable residences. 

Zell’s comments draw attention to the BRIC countries - Brazil, Russia, India, China - which continue to give hope to observers worldwide with growth rates still in strong single digits and enormous populations who have gained tremendous buying power in the last decade. 

http://www.chicagorealestatedaily.com/cgi-bin/news.pl?id=32035

http://www.reuters.com/article/usDollarRpt/idUSN2551924320080925

It’s now official.  We are in a recession and it started a lot longer ago than we thought - in December of 2007.  That’s the verdict of the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, the non-profit organization that economists and the government regard as the arbiter on recessions. 

According to the organization’s official statement, reported in Commercial Property News, “The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007.  The peak marks the end of the expansion that began in November 2001 and the beginning of a recession.  That expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.”  Unfortunately, the economic think tank did not suggest when the economy is likely to turn around.  According to the Chicago Tribune, the recession may continue well into 2009 or even 2010. 

The good news here is that we’re finally using a definition of recession that actually makes sense.  Using the standard definition, the current slowdown does not meet the usual criterion, which is two consecutive quarters that show a decline in the GDP (the first two quarters of 2008 were in positive territory, with the third quarter registering a 0.5 percent decline).  The NBER instead considered a wider variety of indicators, including employment, industrial production and personal income, in declaring the recession.Â

US Bank Bailout vs. UK Bank Bailout: A Comparison

Britain’s bailout of its ailing banks reflects a model that some critics characterize as nothing short of socialism, while the $750 billion bailout program in the United States is viewed as corporate welfare with very little oversight. Without supporting one or the other, following is a bare-bones comparison of the two programs: 

In the United Kingdom: 

• Bailout cash by written agreement must be infused into the economy to free up tight credit markets.
• Government representatives now sit on the rescued banks’ boards of directors, and have the right to vote on major decisions.
• The government will receive a 12 percent return on investment.

In the United States: 

• Banks are not required to use bailout money to free up tight credit markets; in fact, some have used the money to compensate their CEOs and pay dividends to stockholders.
• The government gains no controlling interest in the banks, and no seats on the board.
• The government will receive a five percent return on investment.
• The oversight panel over the U.S. bailout still has not been created six weeks after passage of the bill.

We believe that there are bankers on both sides of the Atlantic who are principled and hold their interests of their stakeholders with the utmost concern.  The question is:  Which plan is more likely to work? 

http://www.thenation.com/doc/20081117/klein

http://www.annistonstar.com/opinion/2008/as-editorials-1119-editorial-8k18u1219.htm

Rising Inflation Rates Demand Caution When Investing

Inflation has returned with a vengeance, with a 1.1 percent increase reported during June - courtesy of soaring energy and food prices.  The Federal Reserve reacted to the warning signs on June 25, when it froze the Fed funds rate at two percent - ending nine months of rate cuts that it hoped would revive the shaky economy.  Right now, the Fed believes that rising food and energy costs will negatively impact the economy for several quarters to come.  Consumers agree.  A survey conducted by the University of Michigan’s Year-Ahead Inflation Survey concluded that consumers believe inflation will reach an annual rate of 5.2 next year, the highest level since 1982.  Because they feel so pinched, people will be extremely cautious with their money. 

Typically in an inflationary environment, investors look to lock their capital into assets that will protect value over the long term.  However, every time the Fed hikes its overnight fund rates, it becomes more expensive for banks to lend money.  So we have the capital markets acting as a restraint against the natural cycle of surging reinvestment in an inflationary environment.  The best advice for investors seeking a haven is to focus on quality - triple-net-leased, high-credit buildings in strong markets.  These buildings will protect the value of capital and even have good prospects for appreciation. 

As consumers, we have the deflationary economy until the dwindling profits hit our businesses.  What’s the best way to ease the slide?