November 2009

Earlier this year, commercial real estate had all the hallmarks of a distressed asset sale of the millennium. Across America, hundreds of billions of dollars’ worth of office buildings, hotels, apartment complexes and malls were tanked up with debt and rapidly tanking in value. They were so far under water, conventional wisdom had it, that there was no way they could be refinanced. Wholesale foreclosures would follow. Banks would be forced to unload properties at bargain-basement prices.

… [this blog only includes excerpts from article written by Matt Miller – please visit to read full article]

However, few properties have been foreclosed on — perhaps 10% of the defaulted loans, according to some estimates. Even fewer distressed sales have taken place. Distressed investors “thought it would be like shooting fish in a barrel,” says a lawyer who represents both financial institutions and real estate interests. “A year later, they can’t find the fish.”

BLOGGER COMMENT: Who will blink first, the private equity groups that have raised billions looking for IRRs of 15-30% or the financial institutions that control the REOs and mortgage debt on trillions of dollars of non-performing, sub-performing or defaulted commercial real estate loans?


I’m not so much concerned
about the return on my money
as the return of my money.
Will Rogers, 1933

Billionaire Bill Gross of PIMCO makes the case for an alternative to money market accounts in his December newsletter. With interest earned on money markets and bank accounts in the range of 1 to 50 basis points he suggests looking at alternative forms of investment. His conclusion is that utilities are the place to park money in this environment in order to achieve a 5-6% yield.

Visit Bill Gross’ December Outlook

What his analysis does not consider is commercial real estate. Below is a list of the cap rate targets for the end of 2010 prepared by ULI.  While real estate is much less liquid than utility stocks, well located, solidly underwritten commercial real estate is expected to achieve unleveraged returns in the 8-10% range. Considering how real estate values have dropped, commercial real estate can now be purchased for a substantial discount to replacement cost. I believe that now is the time to buy well located properties for cash flow today and substantial capital gains in the future.

D.C.-area developer Jeff Neal gives the Huffington Post Investigative Fund a tour of empty commercial properties just blocks from the Capitol. He says we were, “drunk on a binge of easy credit and the bartender (the market) took away the bottle (credit).”

BLOGGER COMMENT: Private equity groups are looking to double down. They are building massive cash war chests to acquire properties from banks and distressed sellers for a fraction of replacement cost. Should the government create a false bottom or allow the market to find the true bottom where transactions can take place to eliminate the “Zombie overhang” on the market?

CMBS Savior? Developers Diversified Deal Is Nearer –

Posted using ShareThis


A closely watched deal that may help uncork the commercial-property debt market is picking up steam after being threatened by some queasiness by the Federal Reserve, according to people familiar with the matter.

The Fed is sending signals that its concerns over the deal are easing, paving the way for the first sale of commercial-mortgage-backed securities, or CMBS, through a major rescue program called the Term Asset-Backed Securities Loan Facility, or TALF. The credit-starved real-estate industry has been hoping that the debt sale by shopping-center giant Developers Diversified Realty Corp. would lead to other CMBS sales. (see link above to read the entire story)

BLOGGER COMMENT: I recently attended the Crittenden Commercial Real Estate Finance Conference. The commercial real estate world is abuzz talking about TALF. If DDR can pull off this transaction the thinking is that there will be CMBS securitizations in 2010. While not to the level of 2007 CMBS getting some traction should encourage commercial real estate lenders to begin lending again.  This will also break the ice for CMBS 2.0 with non-recourse rates between 7-8% fixed for 10 years on a 30 year amortization schedule. Leverage is not expected to be 80% as in the last cycle, but 70% LTV sure beats 0%.