Wednesday, 19 May 2010 11:03

Commercial Real Estate is Pretty Much Doing What We Expected It To Do, Returning to Reality

Moody's has released data that shows CRE has fallen for a second straight month. Thus far, things are rolling along exactly as we anticipated in our  CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36), available for free download.

moody's real estate research

moody's real estate research1

You can view the full report here: Moody’s/REAL Commercial Property Price Indices, May 2010.

For those into CRE, outside of our consulting abilities ( CRE Consulting Capabilities (655.48 kB 2009-12-17 14:17:01), subscribers can access a bevy of  CRE related forensic valuation reports on individual REITs and developers, the macro scene and the performance of prominent industry investors through our download service.

Non-subscribers should click here for recent content in the commercial real estate space. You'll notice a lot of funny stuff going on in CRE if you just look past that pretty glossy cover in the front of the annual report (feel free to click the links if you want to dig in deeper)...

Reference the truth: CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36),

  1. rents are dropping rapidly;
  2. CRE values are collapsing;
  3. CAP rates are exploding;
  4. the refinancing market is looking for much lower LTVs while the property values of recently purchased properties are dropping simultaneously,
  5. and an often overlooked occurrence – REITs are selling off the more valuable assets to fund the gaps necessary to rollover overpriced debt, further reducing rent rolls and dramatically reducing the overall value of the existing portfolios.

These five ingredients combine to make a deadly elixir. Click any of the charts below to enlarge…


The truth as applied to certain REITS


the truth as applied to REIT holdings...

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).


Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates.

and the Truth as Wall Street Sees it...

Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

A hypothetical example easily illustrates how the financial structure of a typical real estate fund is so tilted to the advantage of the fund sponsor as to be analogous to a cost-free “Call Option” on the real estate market.

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders – lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.



Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds…

Sourced from Zerohedge

Last modified on Wednesday, 19 May 2010 11:21


  • Comment Link Reggie Middleton Wednesday, 07 July 2010 08:43 posted by Reggie Middleton

    In CNBC, "Shopping Center Vacancy Rates Rose in Second Quarter":
    Retailers shuttered more stores in U.S. shopping centers during the second quarter, further delaying a rebound in the struggling retail real estate market, according to research firm Reis Inc.


    Shopping centers and strip malls have been pounded harder than other types of real estate, hurt by weak consumer spending, anemic job growth and an oversupply built to serve new housing that never materialized.

    "Until we see stabilization and recovery take root in both consumer spending and business spending and employment, we do not foresee a recovery in the retail sector until late 2012 at the earliest," said Victor Calanog, Reis director of research.

    For U.S. strip centers, the vacancy rate in the second quarter rose 0.10 percentage point from the first quarter to 10.9 percent, slightly below the 11 percent in 1991 during the prior real estate bust, according to the Reis quarterly report, released on Wednesday.

    Retailers gave up 1.85 million square feet of occupied space in the second quarter at neighborhood shopping centers, while developers opened less than 400,000 square feet of new strip mall space.

    That compares with an average of about 7 million to 8 million square feet of shopping centers built each year from about 2001, according to Reis.

    Unlike the office or apartment real estate sectors, a meaningful recovery in retail real estate is expected to be very sluggish, Calanog said.

    Rents are not expected to return to 2008 levels before 2016, he said.

    "It's really the one sector where because of persistent overbuilding across time, things will really get way down and even a recovery defined by a bottoming out will be pretty tepid," he said.

    A recovery also will depend on type of real estate, tenants and location, he added.

    Asking rents fell 0.3 percent from the first quarter to $19.07 per square foot, the lowest since the end of 2006, according to the report.

    Factoring in months of free rent and other perks landlords offered to attract and retain tenants, effective rent fell 0.5 percent to $16.58 per square foot, the lowest in nearly five years.

    Reis said that roughly half of its clients plan to take advantage of the cheap rents in their expansion plans.

    "Only about 20 percent expressed such sentiments in the first quarter, and none were in a position to plan for expansion in 2009 for obvious reasons," Calanog said.

    This also ties in closely with "The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?" from last week:

  • Comment Link Reggie Middleton Wednesday, 07 July 2010 08:38 posted by Reggie Middleton

    I am not sure what kind of reply you are anticipating. I made a very long post on what I considered manipulation and fraud in the CRE space. I recommend you read it to get a broad perspective of my thoughts on the situation.

  • Comment Link Kenny G Sunday, 04 July 2010 02:05 posted by Kenny G

    I'm new to the game and loss big on srs an now waiting to recoup what i can if the manipulation is over..... please reply

  • Comment Link Matto Thursday, 20 May 2010 02:45 posted by Matto

    Someone on zerohedge kindly posted this link.

    Click the bank on the right of the pie chart and check their delinquincies.

  • Comment Link Reggie Middleton Wednesday, 19 May 2010 12:31 posted by Reggie Middleton

    Fraud and misrepresentation, perhaps may be a good guess...

  • Comment Link hmc Wednesday, 19 May 2010 11:55 posted by hmc

    Why the hell is MAC still over $40 and SRS under $30? Crazy! Can anyone think of any reason that they should not collapse this year?

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