Tag Archives: industrial real estate

Who is Still Against Federal Foreclosure Legislation?

As the Congress comes closer to passing legislation to help homeowners facing foreclosure, it is worth taking a look at the opposition to federal foreclosure aid.

Of course, there are those who strictly oppose nearly all forms of government intervention in the economy.  Congressman and presidential candidate Ron Paul and his free market libertarian supporters would be among this group.

Then are those who are opposed to market interventions in general, but will support some government interventions when the stability of the market is at stake.  Most Republicans fit into this group — including Federal Reserve Chairman Ben S. Bernanke.

That’s why it was significant that it was Bernanke who last week made the most convincing argument from a free market perspective for federal aid to homeowners facing foreclosure.

As we noted in an earlier post, Bernanke told an audience at the Columbia Business School that the foreclosure crisis posed the clear and present danger of wreaking economic havoc far beyond the housing market. “High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

What is at stake, according to Bernanke, is not merely the homes and financial well-being of hundreds of thousands of borrowers, but “the stability of the financial system.”  In this extreme circumstance, even staunch free market advocates, such as Bernanke himself, recognize the need for the government to intervene in the market.

We think, then, that the overwhelming vote in the House of Representives in favor of government intervention to stop the rising tide of foreclosures — legislation that now has the support of many free market Republicans — was rooted at least as much in the economic reality of averting catastrophe as the political expediency of government largess in an election year.

Who then is still opposed to foreclosure aid?

The answer is the apartment owners.

Behind any legislative process is a power struggle of conflicting interests, and very often these interests are economic.  In the case of foreclosure aid, there this now a growing consensus that the foreclosure crisis threatens not merely the borrowers and the lenders, but the economy as a whole and hence the economic interests of almost every sector of the economy.

Except apartment owners.

The National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) have consistently argued that the blame for the foreclosure crisis is what they have called the “misguided” national policy of “home ownership at any cost” and that “People were enticed into houses they could not afford and the rarely spoken truth that there is such a thing as too much homeownership was forgotten.”

The fact is that in sharp contrast to other sectors of the real estate market, the apartment industry has not suffered as a result of the current housing crisis.  Rather, as we’ve noted before, the real estate crisis is forcing the lower end of the single-family housing market back into multi-family rental apartments.  People have to live somewhere — if they can’t afford to live in a house that they own, they will be forced to live in a house that someone else owns, such as multi-family apartment units. As homeowners suffer, apartment owners benefit.

The apartment industry has some very powerful supporters in Congress, including Senator Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking Committee.   Senator Shelby,  who has opposed federal intervention to stop foreclosures, has made millions as a landlord and is the owner of a 124-unit apartment complex in Tuscaloosa called the Yorktown Commons. 

“I want the market to work if it can, and most of the time it will, but not without some pain,”  Senator Shelby has said.

This time, the pain appears to be too great, too wide-spread, and too dangerous, for most other members of Congress, as well as most important players in the economy, to allow it to continue unabated.

Indeed, Shelby has already signaled that he would support a version of the legislation — and that the White House would sign the bill into law.

“I think if we reach a compromise,” Shelby said, “it would be acceptable to the White House because, as a Republican and former chairman of the committee, I’m going to do everything I can, work with the administration, to make sure that the program works for those it’s intended to do and make sure we can afford it as a nation.”

In this crisis, even Senator Shelby has other, larger, and more important economic interests at stake than helping the apartment industry.

 

 

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Sam Zell Sees Little Damage, Quick Recovery, in Commercial Real Estate — with Mortgage Backed Securities Leading the Way

Billionaire real estate investor Sam Zell has never been shy about expressing his views or going against majority opinion. 

He has embraced the description of himself as a “contrarian” — and not only in regard to investment strategies.  

While just about everyone else has been publicly sympathetic to the many thousands of people who’ve been forced into or close to foreclosure, Zell told an audience last week at the Milken Institute Global Conference in Los Angeles that “What this country needs is a cleansing” in the residential market. “We need to clear out all of those people who should never have been in houses in the first place and who for sure shouldn’t be getting sympathy,” Zell said.

The blame for the current housing slump, according to Zell, isn’t the financial industry’s subprime mortgage practices or overbuilding by contractors.  Rather, the blame belongs to the federal government’s policy of “encouraging homeownership at any cost.” The rise in the U.S. homeownership rate from 63% to 69% during the boom was totally unjustified, Zell said, other than by “the political impetus of, ‘Let’s put more people into homes they can’t afford.'”

Zell, of course, is perhaps the nation’s largest apartment owner. 

As Chairman of Equity Group Investments, Zell controls Equity Residential, the largest publicly traded owner, operator and developer of multifamily housing in the United States with nearly 160,000 apartments in 25 states and the District of Columbia.  And, as we’ve noted in an earlier post, the apartment industry has adamantly opposed federal aid to homeowners facing foreclosure and blamed the housing crisis on what it has called the “misguided” national policy of “home ownership at any cost.”

Zell also went against majority opinion this week when he asserted that the real estate crisis was just about ended, as least for commercial properties, and mortgage-backed securities would be leading the comeback. 

According to Zell, institutional investors are beginning to return to the market for mortgage-backed securities to finance commercial real estate deals and new construction. “I believe the overall market has already started to ease,” Zell said. “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”

In particular, Zell did not see real damage being done to office properties.  His former company, Equity Office, which he sold to The Blackstone Group in February 2007 for $39 billion, is the largest owner of office buildings in the United States. 

“I’m sure there’s going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building,” he said. “I don’t think there is going to be any casualties in Manhattan. I don’t think there’s going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.”

On this point, we think he’s probably right.

We wouldn’t want to argue with a real estate investor who has been smart enough to become number 164 on Forbes Magazine’s list of the richest people in the world.

On the other hand, Zell told an audience at the Wharton School last September that the turmoil in the financial markets was only an “emotional reaction” that would soon stabilize.

He was wrong on that one.

And he does own the Cubs.

 

 

Commercial Real Estate Still Resisting Slump — But Caution Advised

Standard & Poor’s announced the results of it’s January S&P/GRA Commercial Real Estate Indices (SPCREX) yesterday, showing that commercial real estate prices across most sectors are either holding steady or still rising despite the subprime crisis and the free fall in the residential housing market.

According to David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poor’s, “The National Index was relatively flat for this month and all sectors and regions are losing momentum compared to a year or two ago. At the same time, there were some big moves in the individual components.”

More specifically, the report found a national composite annual price appreciation of 7% from January of 2007, up from the 6.7% price increase reported in December’s data but still far below the 14.5%, peak price increase reported in June of 2006.

In the property sector, Warehouses reported the biggest gain for the month with a 1.9% increase and a 12 month increase of 10.1%. Office reported the only monthly decline of 0.2%, but has still returned 9.9% over the past 12 months. Apartments and Retail reported annual gains of 5.8% and 4.3%, respectively, from January of last year.

Among the regions, the Northeast had the highest return over the previous month at 1.4%, as well as the highest annual return over the past 12 months at 9.4%. The Desert Mountain West reported the largest price declines in the January/December period at -1%, but still remained marginally positive (up 0.9%) on an annual basis. The Mid Atlantic South and Midwest regions also reported slight declines.

Blitzer cautioned against reading too much that was positive into the data.

“Compared to residential property price trends, the impact of financial market developments remains unclear for commercial property,” he said.  “We do need a few more months of data to see if this market is going to remain relatively healthy or follow in the path of the U.S. housing market.”

We think that apartments will increase or hold their value as more homeowners are forced back into renting.  We also think that slower retail sales will eventually have a negative impact on retail real estate, at least in certain regions, and that the office sector, particularly in areas hit hard by the residential meltdown, will also suffer. 

We think too that, even more than residential real estate, the value of commercial real estate will depend on the health of the local economy.  In areas where the local economy is still strong, such as Austin, Denver, Seattle, and New York, commercial real estate prices will continue to increase.

On the other hand, where we work — Irvine, California, the epicenter of the subprime mortgage meltdown — we expect sharp decreases in value, partcularly in the office sector.

Bascom Group Expands Reach for Distressed Real Estate

Another major player has expanded its participation in the distressed real estate market.

Bascom Group, an Irvine, California, real estate (apartment) investment and asset management firm, has announced a new joint venture called Bascom Portfolio Advisors (BPA) that will target distressed multi-family, office, industrial and retail properties in markets throughout the nation,  including broken condo deals.

According to the Bascom Portfolio Advisors’ press release, “In anticipation of looming credit problems stemming from impending loan maturities, potential capital imbalances and decreasing property values, BPA offers workout expertise. Through a range of consulting services, BPA will evaluate distressed assets, identifying financial, operational and market driven issues and present effective solutions to optimize asset values and minimize losses. BPA has resources in place to implement work out solutions, including, asset management/oversight, new capital infusion, and assistance with liquidation.”

Bascom Group has previously engaged in several other join ventures in the distressed property market, including a 2006 joint venture with the private equity firm Warburg Pincus Real Estate I, L.P. to invest up to $200 million in non-performing loans and distressed multi-family properties and both non-performing and sub-performing loans by investing in the underlying senior and mezzanine debt instruments.

We noted in a recent post that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are about to spend billions of dollars buying distressed debt and real estate.

We think that Bascom Group’s announcement is further evidence that there is currently no hotter market than distressed real estate, and that major investors are ready to scoop up distressed properties with significant equity or which they believe to have been mismanaged.