Posts Tagged ‘REITS’

The 4th Quarter Rush to Sell

Friday, January 4th, 2013

With the Bush era tax cuts on capital gains poised to expire at the end of the year, the investment sales market went on a tear in the 4th quarter. According to CoStar, total deals were up 46% from the same time a year ago based on transaction data through Dec. 31, according to Brian Kerschner, real estate economist for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting company.

Not surprisingly, it was small-cap deals — assets most likely to be sold by owners hoping to mitigate the tax consequences of a sale – that really spiked, increasing in volume by 77% in the fourth quarter. Large-cap deals typically have less exposure to capital gains because they tend to involve REITs and pension funds which are tax advantaged investors.

The maximum rate for long-term capital gains had been 15% for individuals earning up to $85,650 a year or families earning up to $142,700. If we had gone over the cliff, the rate would have jumped to 20%.

Deals that closed in the waning days of 2012 included the following:

  • Amazon.com had the blockbuster of the year:  It paid $1.16 billion for its Seattle headquarters, encompassing 11 buildings totaling 1.8 million square feet.
  • Cupertino, CA-based Mission West Properties, Inc. sold all of its real estate assets for about $1.3 billion in two separate transactions
  • Dexus Property Group sold the majority of its U.S. industrial portfolio for $561 million as part of its strategy to exit the U.S. market by April, reallocating proceeds from offshore property sales to core Australian properties, CEO Darren Steinberg said. The sale of 26 of Dexus’  27 American properties was achieved at a significant premium to their book value.

Incidentally, the same logic applied to the residential market. New York, for example, saw an extraordinary 2,598 home sales in the last three months of 2012 — the highest for a Manhattan fourth quarter in at least 25 years.

Under the terms of the fiscal-cliff deal reached Tuesday, capital-gains taxes increased only for annual incomes over $400,000 for individuals and $450,000 for households. They will pay a new capital gains tax rate of 23.8%.

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

Robert Knakal on the Bulls vs. the Bears – Who Do You Trust?

Monday, October 18th, 2010

Robert Knakal discusses whether the bulls or bears are right about the economy. Who’s right about the state of the economy and commercial real estate – the bulls or the bears?  Robert Knakal, chairman of New York-based Massey Knakal Realty Services, weighs both sides to help us cut through the mixed messages.

In a recent interview for the Alter NOW Podcasts, Knakal noted that the bulls like to cite the best back-to-back GDP growth since 2003 – 5.9 percent in the 4th quarter of 2009 and 3.2 percent in the 1st quarter of 2010.  Bears, on the other hand, believe that weak consumer spending will cause the GDP to grow at an anemic two to three percent for the rest of the year.  Knakal views this is an interesting dynamic because of the growing number of economists who back the bears’ position – numbers that are well below the trend coming out of a recessionary period.

Knakal, a graduate of the Wharton School of Business, also writes StreetWise, a nationally syndicated real estate industry blog, is concerned that many loans made by community and regional banks are five-year loans, which will mature in 2011 and 2012.  These loans raise the loudest alarms, because many are still performing thanks to very advantageous interest rates – possibly in the form of interest-only loans or with interest reserves that are carrying the property.  When these loans – which now could have an interest rate as low as two percent – mature, it will be renewed at a 5 ½ or six percent interest rate that will require a de-leveraging process.  Some $10 billion banks are carrying half of all their commercial real estate exposure in Small Business Administration (SBA) loans.

Despite the bears’ lack of confidence in the commercial real estate markets, capital is available to credit-worthy users chasing high-credit projects.  The amount of available private equity is currently estimated at approximately $173 billion.  Public REITs raised more in common stock offerings in 2009 than they did in the previous nine years.  Non-public REITs are expected to raise $10 billion this year.  Sovereign wealth funds are said to have access to an astonishing $3.5 trillion.  What Knakal cautions us to recognize is that these often represent the same pools of equity and to draw the distinction between capital that has been promised and that which is actually available.

 
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Commercial Real Estate Is Recovering

Wednesday, June 30th, 2010

American commercial real estate is gradually regaining its value.After nearly two years of waiting, watching and hoping, American commercial real estate is finally regaining strength. This is one conclusion of the Reuters Global Real Estate and Infrastructure Summit held recently in New York City.  Starting in the fall of 2008, real estate investors feared there would be a wide-ranging sell-off of debt-laden commercial properties after Lehman Brothers collapsed.  And while office building and other commercial property values have fallen since the capital markets froze, the anticipated spate of foreclosures has not come to pass.  According to James Koster, president of Jones Lang LaSalle’s capital markets group, that is now unlikely to happen.

“We should be in a relatively good position to not have this other shoe drop,” according to Koster.  Banks have extended, restructured and modified loans to give the real estate industry the opportunity to regroup.  Values also are on the rise once again, although some properties whose loans were securitized are troubled.  The percentage of CMBS loans that are a month late in making payments climbed to 8.42 percent in May, according to Trepp, which follows CMBS performance.  Koster notes that special servicers who oversee troubled loans are not selling the properties at bargain basement prices.  Rather, they are holding onto them and being paid for managing them.

Institutional investors and REITs have the money to purchase good but debt-laden real estate.  When those properties hit the market, their price tags will be higher than two years ago.  “There is fresh capital coming in.  It’s a better market now,” Koster concluded.

Little-Known Legislation Could Increase Foreign CRE Investment

Wednesday, March 17th, 2010

The Real Estate Revitalization Act of 2010 could open floodgates to foreign investment in U.S. commercial real estate.  A little-noticed bill was introduced in Congress in January that could bring a new source of liquidity to the commercial real estate sector – foreign investment.  Legislation introduced by Congressman Joseph Crowley (D-NY) called the Real Estate Revitalization Act of 2010 would cut taxes that were introduced as part of the Foreign Investment Real Estate Property Tax of 1980 (FIRPTA).  This required foreign investors to pay as much as 55 percent on capital gains from the sale of American real estate shares in REITS and other investment vehicles.

Crowley and the legislation’s other supporters believe that repealing FIRPTA could open the floodgates to needed liquidity at a time when commercial real estate loan defaults pose a risk to the nation’s recovery.  According to the bill’s supporters, the FIRPTA tax penalizes foreign investors willing to infuse their cash into American real estate because they aren’t taxed similarly when they buy Treasury securities, corporate equities or corporate bonds.

Dan Fasulo, managing director of Real Capital Analytics, points out that foreign investors comprise only 10 percent of commercial real estate acquisitions in the United States.  Fasulo notes that “Could (removing the tax) double the amount of investment activity in the U.S.?  Sure.”

Crowley’s legislation has received little attention, although it has little vocal opposition, because it is being drowned out by Congress’ preoccupation with the healthcare reform debate.  Peter Peyser, managing principal of the lobbying organization Blank Rome Government Relations LLC, believes the legislation will likely be attached to a larger bill to assure passage this year.  “A small targeted provision like this one would need to be part of a larger package because it’s unlikely that something like this is going to gather enough steam to get through on its own.”

Sovereign Wealth Funds Back in the Saddle?

Tuesday, November 3rd, 2009

sovereign-wealth-fundsThe Western European commercial real estate bright spot is the activity by German investors, according to the latest Global Capital Trends report from Real Capital Analytics (RCA).  “In April, the Germans raised a half billion Euros — approximately $690 million – for their open-ended funds.  That is in addition to the billion Euros raised in the first quarter,” says Robert M. White, Jr., RCA’s founder and president.  Although that fund-raising mechanism is “kind of unique” to Germany, White adds that it doesn’t differ a lot from the non-traded REITs that have amassed capital from retail investors.  “We’re definitely seeing more capital raised, and it’s not institutional,” he says.  “It’s definitely the mom-and-pop, entrepreneurial type of investors capitalizing some of these deals.”

German investors have gravitated toward quality rather than distress.  And they aren’t the only ones who have been active lately in cross-border transactions.  White points out recent Saudi activity in London as a case in point of renewed sovereign wealth fund (SWF) investment.  “There are a lot of foreign investors eyeing the U.S., but they tend not to be the first movers,” he says.  White predicts that overseas buyers will be a major part of the recovery here, “but not the leading wave.”

SWFs are known to be extremely conservative in their investment philosophy and likely will stick with acquiring trophy and other Class A assets.

Commercial Real Estate Still Troubled

Monday, July 6th, 2009

Don’t look for the country’s commercial real estate market to improve any time soon.  In fact, expect it to continue to get worse for the next year or so.  That was the conclusion from a panel at the National Association of Real Estate Editors journalism conference in Washington, D.C., that addressed the question:  “Commercial Real Estate in the Obama Era:  Next Domino to Fall?”

“The (other) shoe has dropped,” NAREIT president Steve Wechsler said of commercial real estate.  While the public commercial real estate market of publicly traded REITs likely hit bottom in March, the remaining 90 percent of the market that is private won’t bottom out until next year.6a00e551d321cb883401157034b517970c-800wi

The $6 trillion property market is split evenly between debt and equity, thanks to the explosion of securitization that occurred in the 10 years prior to the current credit crisis, said Chip Rodgers, Jr., a senior vice president of the Real Estate Roundtable.  At the end of 2008, the commercial real estate industry had $3.5 trillion of outstanding debt.  Ten years ago, the industry’s outstanding debt was $1.3 trillion.

Washington-based Real Estate Roundtable has a plan to help end the crisis that’s paralyzed practically all speculative development on the commercial side.

First, Rodgers said, the Term Asset-Backed Loan Facility (TALF) program needs to be expanded to include commercial mortgage based securities.  Rodgers expects this to restart the securitization market.

Second, the United States needs to repeal or change tax laws that have curtailed foreign investment.  Changing the laws will attract new capital to the market.

Also, accounting rules and regulations need to be amended to ensure they do not create “a pro-cyclical impact on credit capacity,” Rodgers said.  And, banks that have existing cash flow need to be encouraged to extend loans.

The panel’s third member, Jamie Woodwell, a commercial real estate researcher at the Mortgage Bankers Association, said the current real estate recession differs from the 2001 recession.  In 2001, the dot-com bust results in large amounts of office vacancies while the retail market remained relatively stable.  Vacancy rates in office were closely tied to the country’s unemployment numbers.

“This time around,” Woodwell said, retail is more closely following unemployment numbers and being hit harder than the office market.  “More firms still have (office) leases in place,” he said.

But things will change, Woodwell said.  “Real estate is a very cyclical business, especially now.”

Our guest blogger is Tony Wilbert.  He is owner of Wilbert News Strategies, a public relations firm specializing in real estate.  Prior to moving into PR, Wilbert covered real estate at several newspapers and served as editor of National Real Estate Investor.

Titanic Healthcare

Monday, April 7th, 2008

The February issue of Healthcare Real Estate Insights reported on the Titanic of MOB transactions – the acquisition of 28 medical office buildings (MOBs) by Nationwide Health Properties, a healthcare REIT based in Newport, CA. The deal, worth $915 million, included a portfolio of existing and future MOBs totaling 2 million SF. There is no question that, with its stable earnings and NOI, healthcare real estate has some of the strongest fundamentals in the real estate industry (there are now 13 healthcare REITs). The reasons for this have been amply reported – the retirement of 76 million Baby Boomers, the migration of services from inpatient to outpatient environments (especially MOBs); and healthcare’s preeminence as an economic engine. Between 2007 and 2015, 3 out of 10 jobs will be in healthcare; 20% of the GDP will be healthcare by the same date. Sales of MOBs in 2007 came in at just under $5 billion according to Real Capital Analytics, Inc, and CEL Associates. We see no sign of this trend abating with our current demographics (almost 40% of the population will be over 55 by 2010). The wildcard may be the capital markets, particularly the bond market which has been affected by the fluctuations owing the subprime crisis. Considering that hospitals still rely on bond issues to fund development, they may be confronted by a changing risk profile on transactions and a resultant rise in interest rates. In light of this, third-party healthcare real estate developers with strong balance sheets become even more important because of their ability to finance and even own facilities without contingencies.