September 2nd, 2010
America’s states are under water in more ways than one. This writer got a close-up view of how our aging infrastructure is being taxed by the elements. A summer storm that brought as much as eight inches of rain in just two hours in the wee hours of Saturday, July 24 wreaked havoc in Chicago’s near western suburbs as streets, viaducts and even condominium garages flooded with dirty water when overfilled sewers backed up. Mine was among them.
One of the hardest hit communities was my home of Forest Park, IL, a diverse suburb of approximately 15,000 just west of the more famous Oak Park and best known for its Irish bars and many cemeteries. Although President Obama has declared Cook and seven other Illinois counties as federal disaster areas because of the storm and flood, the federal money likely won’t solve Forest Park’s problem of outdated storm sewers that cannot handle rainfalls such as the one that occurred on July 24. At a recent meeting with Senator Dick Durbin (D-IL), Mayor Tony Calderone and Village Administrator Tim Gillian said that flood-ravaged Forest Park needs a minimum of $60 million to make necessary upgrades to the storm sewer system. “The Village of Forest Park will never have $60 million to do a project like that,” Gillian said. Calderone noted that the $60 million figure came from a 2000 study by village engineers. The project would now likely cost $70 million. “This is a complex issue, with no simple answer. That improvement would take the temporary burden off of one half of the system. If the pipes downstream could not handle any more water, then the water would still back up here,” Calderone said in a reference to public dissatisfaction about the projected 2019 completion date for the area’s Deep Tunnel project.
One possibility for small suburbs like Forest Park is the proposed U. S. infrastructure bonds, a vehicle designed to finance public works. Richard Keston of the Keston Institute for Public Finance and Infrastructure Policy (part of the University of Southern California), said “I don’t see anyone having a sustainable (funding) model in place for general government, let alone infrastructure. Why not create a vehicle where the federal government could issue infrastructure bonds?” Debt associated with a national infrastructure investment fund would be backed by fee revenues from projects undertaken by state and local governments.
Posted by: Sheila Roche
Categories: General, Residential
Tags: Dick Durbin, FEMA, Flood, Illinois, Infrastructure Bonds, Keston Institute, Metropolitan Water District, President Barack Obama, Richard Keston, Tim Gillian, Tony Calderone
September 1st, 2010
Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles. Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments. According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns. There’s a lot of guys clamoring for these returns.”
Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher. According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk. It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities. The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence. So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.
Posted by: James I. Clark III
Categories: Economics, Financing
Tags: auto-loan securities, cititgroup, CMBS, Dan Castro, Federal Reserve, Ford, Goldman Sachs, leveraged loans, mortgage-backed securities, quality of credit, treasury yields
August 31st, 2010
The nation’s financial system needs significantly more regulation than exists now. The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued. The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda. This is the opinion of Anthony Downs, a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation. In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets - including bank deposits, assets, equities, public and private debt - quadrupled relative to the world’s GDP, lifting millions of people out of poverty. Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them. In the end, the growth was unable to be sustained.
The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act - which separated investment and commercial banking — because banks will still be allowed to deal with securities. Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms. This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.
Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways. In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation. According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.” Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas. Because investors were avoiding the stock market, they put their money into real estate. That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.
Anthony Downs On Financial Reform:
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Posted by: Tom Silva
Categories: Development, Economics, Financing, Industrial, Office
Tags: Alan Greenspan, Anthony Downs, Ben Bernanke, Brookings Institution, derivatives, Federal Reserve, financial crash, financial reform, financial regulation, GDP, Glass-Steagall Act, Great Recession, Obama administration, reconciliation, securities, subprime
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August 30th, 2010
London remains the most expensive place to park a car, according to the 2010 Global Parking Rate Survey by Colliers International. The City and West End scored number one and two in terms of monthly parking rates with The City topping out at $933 USD per month (£643), followed by the West End at $874 USD (£602). Hong Kong came in third at $745 USD per month ($5,800 HKD). Two Australian cities again made the top 10 list: Sydney ranked number six and Perth number seven.
The highest daily parking costs were found in European cities, with Oslo occupying the number two spot at $54.52 (352.00 NOK). Amsterdam, Vienna, Athens and Copenhagen all made the top 10 list. In the 2010 survey, Abu Dhabi won the dubious honor as the world’s most expense place to park for the day at $55 USD. The cheapest city to park is Chennai, India - a bargain at 96 cents for the day.
August 26th, 2010
Sales of luxury goods are doing quite well, according to a recent report from LVMH, the manufacturer of Louis Vuitton bags and accessories and Dom Perignon champagne. The world’s largest luxury goods purveyor, LVMH reported a 53 percent increase in net profits to €1.1 billion ($1.4 billion) on sales of €6.9 billion in the 1st half of 2010. According to Bernard Arnault, LVMH chairman, the increase is due to his company’s status as “pioneer, and its early implantation in regions with strong growth.” Similarly, apparel notables Burberry and Hermes experienced a 27 percent increase in sales during the 1st quarter. Luxury cars like BMW and Porsche once again are in strong demand. However, Pam Danziger, president of Unity Marketing, urged caution. “We expect the pace of growth in luxury consumer spending to remain modest over the next two quarters,” Danziger said.
Posted by: Tom Silva
Categories: Economics
Tags: Asia, Bernard Arnault, BMW, Burberry, Dom Perignon, Hermes, Louis Vuitton, luxury goods, Pam Danziger, Porsche, Tag Heuer
August 25th, 2010
Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule - named for former Federal Reserve chairman Paul Volcker - limits banks from these practices and sets new levels on the size of private equity or hedge fund investments. In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital - a measure of their financial strength — in private equity or hedge fund investments.
Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation. The good news for the Wall Street banks is that they have several years in which they can reduce their holdings. “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray. “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”
The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds. “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments. This is particularly true for banks that quickly acquired hedge fund operations during the boom years. At that time, having a hedge fund was essential to the strategic mix. Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.
Posted by: James I. Clark III
Categories: Economics, Financing
Tags: Bank of America, banking, derivatives, Federal Reserve, Goldman Sachs, hedge funds, Morgan Stanley, Paul Volcker, President Barack Obama, private-equity firms, Volcker Rule, Wall Street
August 24th, 2010
A sign of Chicago’s River North neighborhood’s inherent commercial strength is the recent $165 million sale of the 424-room Westin River North Hotel at 320 North Dearborn Street. The purchase price was approximately $389,000 per room, an excellent price considering that the hotel market nationally has struggled. The price was 37 percent higher than Tishman Realty & Construction paid for the riverfront property 10 years ago.
According to Tishman, they “decided to take advantage of the pent-up (investor) demand for high-quality, performing hotel assets.” Since Tishman purchased the hotel, it has “posted strong returns and consistently outperformed its competitors.”
The purchaser is Host Hotels & Resorts, Inc., an East Coast-based real estate investment trust, which owns a six-property Chicago-area portfolio. Their Chicago hotel portfolio includes the Embassy Suites Hotel at 511 North Columbus Drive; the Swisshốtel at 323 East Wacker Drive; and the Courtyard at 30 East Hubbard Street.
August 19th, 2010
A leading candidate to head the new Bureau of Consumer Financial Protection is Elizabeth Warren, although her potential nomination is not without controversy. Writing on CNN Money.com, Katie Benner says “Detractors say that Warren lacks experience, that she’s not impartial, and that she could make it so expensive to extend credit that only the richest Americans and biggest businesses could get a mortgage, a credit card or a loan. But these knocks against Warren obscure the likely impact that she would have on the bureau. And mostly, they are straw men.”
Warren is a Beltway outsider and a Harvard law professor. She did take leave in 2008 to head the Congressional Oversight Panel (COP), which evaluates TARP and oversees the Treasury Department. Since its inception, the COP has published 22 detailed reports with little dissent, despite multiple differences of opinion regarding economics and politics among the staff members. Ken Trotske, an economist who serves on the panel, describes Warren as a consensus builder. “I’m in awe of the work they turn in to meet that schedule, because it’s a demanding schedule.”
In its two years of existence, COP has become an intellectual hub in Washington, D.C.’s efforts to understand the relationship between the federal government and Wall Street. According to Benner, “The outcry over Warren’s impartiality is a through-the-looking-glass twist on the current state of our regulatory affairs. It bears repeating that it’s a good thing for the head of an agency designed to protect consumers to actually put the interests of consumers first. For the last few years, as was made imminently clear by the implosion of 2008, Wall Street regulators were doing anything but regulating.”
In Benner’s words, “Someone like Warren is a shock to that system. She unabashedly sides with consumers. She hates fine print and contracts with ‘gotcha’ clauses. She wants to eliminate predatory loans. And she thinks that it’s okay for bank profits to be crimped in service of a level playing field between borrowers and their lenders.
August 18th, 2010
Although property investment - especially for trophy buildings - is coming back more strongly than industry analysts had anticipated, mid-tier properties are not yet enjoying a similar rebound. According to Real Capital Analytics (RCA), properties valued at $20.6 billion were sold during the 2nd quarter of 2010, an 86 percent increase over last year.
According to Dan Fasulo, an RCA analyst, owners of mid-tier properties are having more difficulty finding buyers. “Eventually the bidders who keep losing out on these competitions are going to readjust their expectations and will start to try other strategies, whether it’s investing in lower-quality property or going into a secondary market. It’s inevitable.”
Declining vacancy rates also could create renewed interest in mid-tier properties, said Ryan Severino, an economist with Reis, which believes that national office vacancy rate will fall from its 17.7 percent peak this year. “A lot depends on what happens to the office sector overall, but we are beginning to see the first glimmer of stabilization,” Severino said. Still, financing for smaller transactions is difficult to obtain - a stark contrast with trophy property deals.
Some smaller community banks are willing to provide capital to owners of mid-tier properties. In the 1st quarter of 2010, approximately 80 percent of mortgage originations refinanced existing projects, according to Randy Fuchs, a principal of Boxwood Means, a real estate analysis firm. In contrast, refinancing comprised just 50 to 60 percent of loan originations in 2006 and 2007.
Posted by: James I. Clark III
Categories: Development, Financing, Office
Tags: Boxwood Means, commercial real estate, Dan Fasulo, mortgage originations, Randy Ruchs, Real Capital Analytics, Reis, Reis Inc, Ryan Severino
David Owen, a staff writer with 