Real Insight. Real Estate.

Archive for August, 2009

The idea of “pop-up” stores is nothing new.  These pop-up stores allow retailers to increase revenue during critical sales periods including the back-to-school, Halloween, and holiday shopping seasons, but without taking on the risk of a permanent location.   Recently, however, pop-ups no longer cater exclusively to these specialty shops.  Thanks to this weak economy, there is a new pop-up store strategy, and it makes perfect sense. Read the rest of this entry »

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How does 28:1 leverage sound?

Traders like to say the market tends to cause the most amount of pain to the greatest number of people.  If everyone you know is long Yen, you can bet Yen are about to go down.

More broadly, as we have all learned in recent years, the markets have a way of testing - if not outright obliterating - commonly held beliefs.  Remember when we were told not to worry about government guarantees (implicit or otherwise) for Freddie and Fannie?  Talk about maximum pain!

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The Week of August 22-28

- Why you should never believe what a developer says about their own project.

- Could retail really rebound so soon?

- A Spanish acquisition has created the 15th largest U.S. commercial bank.

- According to the Distressed Commercial Real Estate Journal, August saw the total of distressed assets climb above $114B.

- Has the hospitality sector hit bottom?  One player thinks so. Read the rest of this entry »

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10. Las Vegas

What happens in Vegas depends on the rest of the American economy, and until Americans start to travel (and gamble) again, nearly one-fifth of Sin City’s commercial space will stay vacant.

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As if landlords didn’t already have enough to worry about, dealing with delinquent rent payments, having to offer concessions left and right to increase occupancy, and wondering what they will do when their current loan balloons, they now may have to increase their capital expenditure budgets and rework their ARGUS models too. Why you ask?  Well if new legislation in Philadelphia gets passed this fall, and then catches on in other major cities with older infrastructure, landlords may have to pay for exterior building maintenance. Read the rest of this entry »

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One immediately garnered huge popularity.  The other?  Not so much.  In the past week, the government announced the end for the popular one, and an extension of the not so popular one in an effort to jump-start its popularity. So of course, the question naturally follows: Why did Cash for Clunkers take off, but TALF can barely get its feet off the ground? Lets get the obvious out of the way.  These two programs are similar in that they were designed to help jump start the economy out of recession, the former through a boost to retail sales, and the latter through unfreezing the credit markets that are clogged with a mess of CMBS.  They also give their target customers big benefits for participating.  Auto buyers received what amounts to a significant credit towards the purchase of a new, fuel-efficient vehicle, essentially giving free money to those who qualify and were likely in the market for a new car anyways. Likewise, real estate investors could get significantly below market, government sponsored debt to buy securitized commercial real estate assets, thus juicing their returns.

Ah, but thats just it.  On the surface, they both seem beneficial, but let’s take a closer look.  On one hand, with the Cash for Clunkers program, you had all of the onus, not to mention risk, on the car dealerships.  If they didn’t fill out the paperwork correctly, they didn’t receive the credit, but the buyer was at home happy with his or her new auto regardless.  In fact, it is the sheer glut of paperwork that caused the program to be halted prematurely, because they government had no idea how many claims, and the subsequent amount of dollars, they would have to  honor.  If this number exceeded the set aside billions for the program, they would have to come up with additionally earmarked funds (which they had already done once, and is never a popular decision after the fact) or take a hit, which wasn’t going to be popular with taxpayers after they have watched Washington D.C. hemhorage money of the past 12 months.  Thus, the Cash for Clunker program was essentially idiot-proof from the consumer side. Furthermore, cars have MSRP’s, and its widely known that anybody, at any point in history, could negotiate with a dealer to come down off of that number.  Therefore the market was established.  All the Cash for Clunker program did was increase demand without affecting supply.  The dealers got paid the same, and artificial demand was created and subsidized by the government.

But TALF is a completely different story. The government is trying to create artificial demand to the same effect as Cash for Clunkers, but the problem is that there is no market.  Therefore, while we can broadly say with confidence that low interest government loans provided to buy CMBS debt is better than buying CMBS debt without it, we cannot say that it will actually spur a copious amount of activity.  If I would pay $3 for a hamburger thats priced at $10, and the government offered me a $5 loan at a 0.9% interest rate, would it make me want to by the hamburger any more?  No. And just to be clear, the government is not offering an interest rate that low on TALF deals.  Furthermore, unlike Cash for Clunkers, the onus IS on the customer.  First of all, rather than worrying about getting in before its too late, investors must worry about getting in too soon.  As we all know, somebody has to jump first, and whoever that is runs the risk of setting the upper benchmark, while rival investors seek alpha based on that benchmark return. But that isn’t even the worst risk.  The worst risk is buying assets solely because of a program that could disappear at any second at the sole discretion of a swath of bureaucrats.  This is exactly the reason that some car dealerships shut down their Cash for Clunkers programs weeks before Monday’s official deadline; They simply were not willing to risk the headache of filling out all of the paperwork just to break even. Frankly, without a market, regardless of government incentives to buy, investors buying assets through the TALF program may be going through their analyses and assumptions ultimately to break even themselves.

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Yesterday, Rishy wrote an interesting article about Hedonic Pricing models, and the urge to refine them in the face of a tumultuous market that leaves it very difficult to price assets. But, to determine value, whether components or aggregate, one must first look more closely at what “value” means. The three most common definitions, per Merriam-Webster, are: Read the rest of this entry »

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An interesting article in the New York Times last week highlighted the heated debate that is taking place amongst lenders, realtors, mortgage brokers, and appraisers in the residential real estate market.  The debate stems from the new Home Valuation Code of Conduct, which has been in effect since May 1st as a method of reducing the inherent conflict of interest amongst lenders, brokers, appraisers, and owners.

Personally, I think the Code of Conduct creates more problems than it solves.  But after reading the article I began to wonder if there was any imminent threat of similar regulation creeping into the commercial real estate market as well.  After all, sloppy lending and bogus valuations have caused every bit of trouble in the commercial space as they have in residential.  If we don’t regulate the valuation process which, believe me, is the last thing I want to see, how do we arrive at better property valuations that best serve all the parties involved in a transaction?  How can we value a property in stagnant markets where no transactions are taking place for comparison? Read the rest of this entry »

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Jerry Sweeney, head of Philly-based REIT Brandywine Property Trust talks about how his REIT is up 284% with former Philly wing-nut, Jim Cramer.

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The Week of August 15-21

- Abercrombie & Fitch may be losing its shirt(s)

- A 1200 unit apartment portfolio on Long Island obtained a $77M refi.

- The Fed Treasury Announced a TALF extension.

- Stalin would never let this happen with $1.5 billion.

- Here comes Chinese money…again…this time to buy U.S. mortgages through PPIP. Read the rest of this entry »

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