We won't be fooled again...or will we?

I think Jonathan Miller at Trend Czar may have largely hit the nail on the head with this post last week, captioned "Don't be fooled." The gist, in my opinion? The financial system has stabilized for now but it is in recovery mode yet. Some provocative points he makes are:

1. Banks are building huge reserves with government encouragement while not lending much, hoping the economy will turn enough so it can write down some of its bad loans to reasonable levels. Then lending can get back to reasonable levels.

2. The people closest to the toxic asset problem don't want us to know how bad things really are.

3. Government is skirting around the issue of why it is not forcing more lending, all the while printing more money.

I don't want to get overly gloomy either (2017?), but I have had some of these questions in my mind for a while now too, and I also got a new thought or two from this post.

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Thinking small ball...

In baseball some managers play small ball: a game strategy emphasizing single run production through bunts, hit-and-runs and base stealing. You see that more in the NL, where there is no DH. (And yes, I hate the DH rule.)

The same is true in commercial real estate. While the big deals you read about in the papers are at a near-standstill, the smaller deals -- bloop singles, reaching on an error, etc. -- are getting done. There's money for those small deals out there, and that's all because of less risk. That and the fact that you do not have to depend on CMBS to do a deal.

These deals aren't sexy, nor are the returns so great sometimes, but the deals are at least there. Face it, if you cannot do a Wal-Mart bond lease deal, a GSA building or medical offices, you may as well hang it up. I like seeing clients go after singles and doubles and then swing for the fences once in a while too.

Full disclosure: I have a vested financial interest in saying something like this because these types of smaller deals are in my wheelhouse, so I stand to make money from those deals. I am not equipped (or even interested, for that matter, other than as a spectator) in the mega-deals we saw a few years ago. But it also happens to be my humble opinion.

All that said, we need to start seeing activity on the larger deals and construction to effectuate a CRE recovery. Banks are afraid, and perhaps this is why. But, much as I enjoy small ball personally, the market also has to swing for the fences in order to thrive.

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Welcome to the property boom of....2017?

That is what the head analyst at Deutsche Bank Securities is saying according to this Reuters story.

The question in my mind is this: How can the rest of the economy come back without a viable CRE market? Does this analysis take into account improvement in other sectors which could lead to more deals, or is this just an analysis based on current falling rents and a prediction that we will not get back to past levels for eight more years?

My personal opinion is that these predictions are a little too dire. Just as we were too optimistic at one point, one can get too pessimistic. Compare, for instance, this thought. That said, the 1990s were not exactly great years for some, were they? Nor am I an analyst, which could be a good or a bad thing depending on who you are and what you do.

(H/T to Jeff Vinzani for pointing this story out on Twitter.)

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Are you a vulture?

I keep hearing the word "vulture" in stories like this. There are so many vultures out there you have to wonder what kind of real estate carrion they are actually eating.

Most any sophisticated investor will tell you they are looking for value in deals, value that will allow them to make money. But right now we have two problems in the market. The first you know about: getting cash to do a deal and make it work. Here I speak mainly of loans, although you can also factor in finding equity to do deals or to refinance properties that have declined in value combined with increased LTV requirements.

The other is the buyer-seller disconnect. Sellers are not willing to part with properties at what "vultures" consider to be cheap enough. And buyers are not willing or able to come up to the numbers the sellers want. And there is very little middle ground. Only when that middle ground is reached along with reasonably available loans are we going to see this ice jam break.

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Wednesday Tidbits - 6-17-09 Edition

Busy day today...but here are a few items on my radar screen this morning:

A Chicago panel says the worst is yet to come. They've obviously seen a bid-ask spread. That and lenders have to start lending again. Don't believe what you are reading about that topic, in my opinion.

Mark Walsh is back. You heard that right. "[T]he lead executive who loaded Lehman Brothers Holdings Inc. with toxic property investments, is part of a group chosen by Lehman to take over the bankrupt firm's real-estate private-equity arm." Read the comments in this story if you want some entertainment.

Motions to dismiss a number of the SPE bankruptcy filings of GGP by some of the lenders are being held today. Read about the lenders' positions here.

When is the last time you saw a headline like this: "Commentary: Extended Stay Bankruptcy Is An Exercise In Stupidity." Don't hold back now, folks. Tell us how you really feel.

Finally, without mentioning names or blogs, why are so many blogs about business, especially those written by lawyers, written so dryly, without any flair whatsoever? Is it a personality thing? Are they afraid of upsetting current or future clients? As for me, I'd rather not write if there was not at least a modicum of what I think is interesting. This blog's for fun, not profit.

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$100 a square foot in Manhattan? Is that true, and, if so, is that the new market?

A couple of years ago, while trying to explain that my little local market was cheap, I told a friend that a large office building, 100% leased to a single credit tenant, and on a very good corner if redevelopment was necessary, sold for $100 a square foot. By contrast, I was just involved in a deal with a local medical office building costing and worth twice that.

CPN is reporting:

With rumors circulating of a sale price around $100 per square foot, the sale of the 66-story American International Group headquarters in Lower Manhattan likely set the bar for the biggest sale in the area market thus far in 2009.

Youngwoo & Associates (YWA), a New York-based investment and development firm, together with Kumho Investment Bank (Kumho), entered into an agreement to acquire the AIG building, 70 Pine Street (pictured), and an adjacent office building, 72 Wall Street. The two buildings will total 1.4 million rentable square feet in the heart of Manhattan's Financial District.

Okay. Let's assume the rumors are true. Now, this asset will require significant, if not complete re-leasing, which depresses the value since your income is, well, zero. I do not know the lower Manhattan market well anymore. But $100/sf? That's fire sale pricing in my humble opinion. Does it make a market? Beats me.

Another claim in the story is actually more interesting to me; namely, that there is a little thawing in the credit markets, especially in deals involving less than $100 million of $50 million. (I have always called these deals my sweet spot. I never liked big portfolio transactions and avoided them like the plague back in the day.) You mortgage guys out there would have to tell me about that and whether it is true.

UPDATE: Let's go to the other coast, where the WSJ is reporting the sale of a new office building in Irvine, California owned by Maguire Properties at a 40% discount to construction costs.

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Want to know more about lender issues with recapitalization?

I think this post and accompanying charts from the Llenrock Blog pretty much say it all. So much so, in fact, that except for the quote below I have nothing more to say about it. They managed to make a lawyer speechless, and that's saying something. The quote?

After working through this example however, I’m beginning to ask myself whether I’d rather just see the bank go out of business as opposed to putting an equity band-aid on its bleeding balance sheet.

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It might be, it could be....CMBS relief?

That is what today's WSJ is reporting. In short, Treasury is looking at giving some guidance that would allow borrowers and servicers to actually talk about some meaningful restructuring rather than having to wait to get to the special servicers, defaults, 1066 and All That. (The reason? Tax consequences.)

Being proactive in this crazy market is, in my humble opinion, a very good thing. The most annoying thing, according to people I know, is knowing you have a deal that needs to be reworked, only to be told, for all intent and purposes, "We can't do anything until you stop paying on the loan." Sad but true, and necessary until something changes.

But, given the scary market out there, is this move enough? I guess time will tell, sports fans.

P.S. My wife thinks my use of pseudo-Dennis Millerisms (i.e., references to books, movies, etc.) is too obscure. I'll stop if you readers tell me to. :)

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Commercial real estate sales decline up to 99% in Chicago

That's right. You read here and at Crain's. Many properties cannot sell because (a) there is basically no lending going on, regardless of what you may hear, and (b) buyers are afraid the worst is yet to come.

Here are the Q1 2009 sector numbers for Chicagoland, per the story and Real Capital Analytics:

Industrial: down 81%.

Office: down 85%.

Apartments: down 94%.

Retail: down 99%. (Yup. Two properties, $12.5 million.)

I guess the good news is that it can't get worse. Or can it?

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Is CRE okay, a ticking time bomb or a lifetime opportunity?

That is what some people seem to be saying to Congress, even as the major banks are repaying TARP money to get the Feds off their backs.

I am not making any predictions. But we know this: tons of loans are coming due. Special servicers are just trying to hold on, often by granting short-term extensions. Refi money isn't there for many deals, and when it is the LTVs aren't great, meaning capital calls or mezz debt. (Can you say Barry Sternlicht?)

The question is whether the bleeding will remain stanched until things turn around or whether the stiches will burst and we will have Banking Crisis #2 for the Obama administration. Optimists say we're good and that current measures will work; pessimists say the worst is yet to come, especially since printing more money is going to be a problem. Vultures are supposed to be waiting to pounce, but there's a disconnect on some asset pricing that still hasn't settled yet. (I think Mr. Sternlicht even talked about 20 caps in a worst case scenario...wow! Check out Deal Junkie to see the interview)

Sorry if you wanted a prediction. The crystal ball just isn't working. The only thing that is certain is that we're in for some very interesting times.

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Why is BigLaw Shrinking?

This has been one of the top stories at the New York Times website for a few days now. I can give you my opinions, which you can also call a condensed version of the story.

Not enough transactional work to keep people busy.

Ebb and flow. This happened in the 90s, too, people. Granted these layoffs are bigger, but that's because BigLaw is bigger.

Salaries got out of control. I was a beneficiary of this, admittedly. Firms are rolling back these increases a bit and I htink that is a good thing for them. (Don't even get me started about how I think we should close about 2/3 of our law schools.)

To pay for everything, billable rates have become insane. Work that is not "bet the company" work going to people like me. Would you rather pay BigLaw rates for a routine deal or pay me a fraction of that for the same work? (I am busy enough to tell you what I think clients are saying.)

In some cases, greed. Per partner profits have become -- for better or worse -- the measurement of success. Just as pro athletes move from team to team, so do lawyers with books of business.

Unlike some, I do not think BigLaw is done and history. There will always, in my opinion, be a place for that kind of model. If you need the best of the best on a deal, then get it - and many times that means going to the biggest players in the biz. Also, if you are a GC at a company, boards are not likely to fire you because you hired BigLaw in the major deal or major litigation. But I think there is a trend toward finding guys like me to handle other matters in a cost-effective and efficient manner while getting first-rate service. So there's room for all.

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It's Friday already?

Work, etc., has been slamming me too much to write, but here are a few things crossing my desk:

The sad story of the partially-built Waterview Tower: foreclosure and mechanic's liens from here to eternity. Expect this in bankruptcy court.

I"m happy to see that my former colleague Carrie Risatti was named a principal at the Much Shelist law firm. Good for you, Carrie!

Do we really need to change TALF again? Read David Bodamer's take.

Is there retail optimism from franchisees and other smaller entrepreneurs? Will they help fill the void caused by some national tenants?

Have a good weekend, everyone.

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GGP phrase of the day: "Relief from the Automatic Stay"

That's what lenders want. They want out of the quagmire so they can foreclose or do whatever they have to in order to protect their secured interests. Here's a great summary of what the lenders think:

Attorneys for Metropolitan Life Insurance Co. and KBC Bank N.V., a unit of KBC Groep N.V., wrote in their motion to dismiss entities related to White Marsh Mall in Maryland: "It is clear that the petitions of the White Marsh debtors were not filed with any reorganizational purpose; they were filed solely to obtain leverage and a tactical advantage in any future efforts to extend the maturity of the loan."

General Growth legally created its malls as special purpose entities (SPEs), separate from the parent company. This prevented it from being on the hook for any of the SPEs' obligations.

"In determining to underwrite the loan, MetLife and KBC relied on the separateness and credit worthiness of the borrower and the underlying property, especially because no parent company repayment guaranty was required," attorneys for White Marsh wrote.

It gets better...wait for it....

The SPEs are governed by independent directors. But some of them, including SPEs related to Fox River Shopping Center in Wisconsin, say General Growth fired the independent directors minutes before the bankruptcy filing.

"Governed" really isn't the precise term. Usually the independent person(s) only step in to approve a bankruptcy or similar filing. But that's besides the point. Creditor-friendly judge or no, the firing of (possibly recalcitrant?) managers on that timeframe is very interesting, at say the least. Assuming that was permitted by the loan documents (and I have seen deals that would have allowed this so long as the new directors met the independence test), then there was some very good lawyering on GGP's behalf when the loans were documented.

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Recovery in CRE - two and a half years away?

That is the prediction you will find here. The lag of the commercial sector behind housing will be a factor, and certainly vacancies will also have to be absorbed on top of any new construction. Chicago has plenty of that right now. I guess once you see a flattening of new unemployment claims that will help. The step I always think is critical is an increase of temp hiring. I think companies hedge in initial hiring needs and a pickup there might be an initial sign of movement. Now if we can only see that! My hope of course is that we rebound faster, but I do know people that are planning projects with 2011 openings in mind.

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