July 24 (Bloomberg) -- Corporate credit in the U.S. and Europe rallied this week to levels last seen more than a year ago as company earnings beat estimates at a record pace.
Yields on investment-grade bonds fell relative to benchmark rates to the lowest since August and half their level in March, while the riskiest bonds are trading at the highest prices since Lehman Brothers Holdings Inc. collapsed in September, according to Merrill Lynch & Co. index data. The cost to protect U.S. and European bonds from default dropped to a one-year low.
Credit markets worldwide are rallying for a fourth month as investors snap up the riskiest securities, reversing last year’s losses. The cost of protecting debt from default in the credit- swaps market has tumbled as traders bet higher-than-forecast profits will help companies meet their commitments.
“Just about every company is beating on the bottom line,” said Rajeev Shah, a London-based credit strategist at BNP Paribas SA.
About 75 percent of the 204 Standard & Poor’s 500 companies that have posted second-quarter earnings exceeded forecasts, bolstering optimism the recession is over, according to data compiled by Bloomberg.
Demand for high-risk, high-yield or junk assets has returned after the market was effectively shut for more than a year as investors shunned all but the safest securities. High- yield bond spreads narrowed 53 basis points this week to 988 basis points yesterday, falling below “distressed” levels for the first time since Sept. 25, Merrill data show.
Debt with spreads of 10 percentage points or more is considered distressed. A basis point is 0.01 percentage point.
Fiat’s Junk Bonds
“This year’s persistently strong returns in high-yield bonds are without precedent,” Martin Fridson, chief executive officer of Fridson Investment Advisors in New York, wrote in an e-mail to clients today. “Issuers that were on the brink of insolvency benefited the most from the reopening of the capital markets.”
Fiat SpA’s new 1.25 billion euros ($1.78 billion) of junk bonds jumped almost 3 percent when they started trading today. The yield premium over similar-maturity government debt dropped 162 basis points from the issue spread, Royal Bank of Scotland Group Plc prices on Bloomberg show.
High-yield bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Bonds rated CCC or less, the riskiest debt, are trading at an average price of about 69 cents on the dollar, the highest since Lehman filed for bankruptcy Sept. 15, Merrill data show.
‘V-Shaped Scenario’
“The lowest-quality category of high-yield bonds is pricing in a recovery scenario as optimistic as any V-shaped scenario could be,” Bank of America Corp. strategists Oleg Melentyev and Mike Cho in New York said yesterday in a report. “Unless this credit cycle is fully in the rear view mirror, this level has no historical precedence.”
The extra yield investors demand to own U.S. investment- grade bonds rather than Treasuries fell to 302 basis points yesterday, the lowest since Aug. 11, down from 600 basis points on March 13, Merrill index data show. Spreads on bonds issued by European companies have narrowed 215 basis points to 248 basis points from a high of 463 basis points in March.
Credit-default swaps on the Market CDX North America Investment-Grade Index, linked to 125 companies in the U.S. and Canada, declined 10.5 basis points this week to a mid-price of 118 basis points, the lowest since June 19, 2008, according to CMA Data Vision.
The Markit iBoxx European Corporate index, which includes bonds sold by Vodafone Plc, Rolls Royce Plc and Deutsche Bank AG rose as much as 60 basis points this week to 87.98, the highest since Sept. 9. Benchmark credit risk indexes fell close to a one-year low.
Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is equivalent to $1,000 a year on a contract protecting $10 million of debt.
Friday, July 24, 2009
Thursday, July 23, 2009
Industrial Strength: This sector's durability gives it long-term investment advantages.
By Steve Poole, CCIM, and Jennifer Norbut
Commercial Investment Management Insight Magazine
Listen to Steve Poole's podcast for more insights on the industrial market's recovery.
Like all investment property types, industrial real estate is attempting to hold its own through the economic recession. These three articles examine the highlights and lowlights of this evolving sector.
A seismic drop in activity characterized the nation’s first-quarter 2009 industrial trends. Leasing activity fell 41 percent from one year ago, driving average vacancy to 9.5 percent — the highest point in 4.5 years. Net absorption plunged to a negative 39.8 million square feet during 1Q09 as cutbacks across all sectors led to diminishing activity. Construction volume dropped to 40 million sf, the lowest volume since the early 1990s.
The 1Q09 average asking rate for all types of industrial space was $5.57 per square foot triple net. This represents a decline of 1 percent from year-end 2008 and 3 percent from 4Q07. Effective rental rates declined by a larger margin of 15 percent as concessions increased. The greatest rate drop was seen in warehouse properties, where asking rates fell by 4.9 percent year over year. Research and development/flex space rates declined by 2.2 percent, while manufacturing space rates actually rose by a slight 1.6 percent. Warehouse rents were influenced by a larger construction pipeline as well as a greater downturn in retail and home building, which are warehouse-intensive industries. The average rental rate increase for general industrial product was likely due to a lower overall vacancy for this property type — 6.9 percent versus 10.9 percent for warehouse/distribution space.
Industrial’s Hidden Strength
The current recession has cut across all economic segments including those that feed industrial growth. On the job loss front, manufacturing has taken the largest hit in terms of layoffs, losing 1.3 million jobs during the past 12 months. Construction, another strong industrial sector, ranks third with nearly 1 million jobs lost. Wholesalers and retailers, significant warehouse and distribution players, also lost a combined 581,000 jobs during the past year.
Despite the significant job losses, the industrial market has a key competitive strength when compared to the retail and office sectors. Industrial development can be turned off fairly quickly given the 9- to 12-month construction cycle, while office development continues to roll through the cycle for up to two years as vacancy continues to rise. A little more than 26 million sf of new industrial space was delivered during 1Q09, with another 39.7 million remaining under construction. Only 27 million of this represents speculative product, and nearly all will be delivered later this year. This lack of overbuilding means that while vacancy rates are nearing a decade high, product remaining in the pipeline will not continue to flood the market. In contrast, the office market vacancy rate will rise by an additional 140 basis points nationally based on deliveries alone. It may well set a new record by Grubb & Ellis’ historic calculations.
Best-Performing Markets
While there are no truly optimistic markets in the current recession, some markets have had a lesser industrial decline than others. The submarket with the lowest overall vacancy rate is Los Angeles County at 2.7 percent. Reno, Nev., posts the highest vacancy rate, above 15 percent. It and the other hardest hit markets — Orlando, Fla., Phoenix, and Las Vegas — are victims of the housing industry slump. Detroit also is suffering from significant vacancy increases resulting from auto industry fallout.
Some cities did experience positive absorption for 1Q09, including tech hotbed Boston and middle-America cities such as Cleveland and Oklahoma City. Long term, port cities will rebound as global trade bounces back. Current port volume is down and 2008 volumes were off significantly for large ports, such as the 5.3 percent decline in Los Angeles and 10.1 percent in Long Beach, Calif. Only Houston and Jacksonville, Fla., saw significant increases in port activity, partially due to the energy industry activity in these areas.
The top 10 cities to watch include areas poised for growth, cities with developable inventory already planned, as well as cities that can capitalize on shifting port demand. Port cities with efficient on-dock rail capacity such as Savannah, Ga., and Norfolk, Va., will gain market share. (See sidebar, “Regional Updates Southeast.”) Other cities are investing significantly in port infrastructure and also will likely gain from added capacity. Examples of this include Houston, Northwest Ohio, Joliet, Ill., and Jacksonville, Fla. While Los Angeles will remain a market to watch given sheer volume of transactions, the trend toward East Coast versus West Coast shipping will favor more significant growth in markets such as Dallas and improved eastern ports.
Investment Activity
Investment spending plummeted in 1Q09. Total investment spending for all industrial properties totaled only $1.3 billion, or only 10 percent of spending nearly a decade ago in the first quarter of 2001. Industrial capitalization rates remain the highest of any property type, rising to 8.2 percent. This is up 100 basis points from a year ago, 150 basis points from the 2007 peak, and 30 basis points over the offering cap rate for new properties on the market.
This meager investment volume represents only 9 percent of peak spending, and offerings outpaced sales six to one, demonstrating the remaining distance between buyers and sellers. Buyers are changing as well, with seller or assumed financing responsible for 55 percent of transactions and commercial mortgage-backed securities and Wall Street financing notably absent. During 1Q09, industrial properties represented 18.5 percent of properties sold and 15 percent of spending.
Looking to the future, investment potential is excellent for those with immediate access to internal or private capital. Underperforming real estate investment trusts with limited or no access to reserve funds are a prime target. Solid investments will include properties in markets with limited need to absorb existing product and those with expanding tenants in the renewable energy and medical device sectors. Functionally strong industrial product with modern clear height, loading, accessibility, and energy efficiency will retain value in the long term.
On a fundamental level, look for rental rate declines to taper off and vacancy increases to slow once construction activity has halted. Reductions in landlord concessions will begin in mid-2010. As mentioned, there will be a resurrection in U.S. port volumes. The April consumer confidence shift is extremely positive news for the retail and shipping sectors, especially as the forward-looking component was the highest. R&D/flex space will likely take a hit in the short term as tenants are able to flee to higher quality office spaces for lower rates.
Industrial Markets to Watch
Columbus, Ohio
Dallas
Houston
Indianapolis
Jacksonville, Fla.
Joliet, Ill.
Los Angeles
Norfolk, Va.
Northwest Ohio
Savannah, Ga.
5 Ways to Improve NOI
Increase industrial property value in slow market conditions.
by Jennifer Norbut
Improving industrial property value may seem impossible in an environment where sales prices are plummeting and tenants are demanding concessions just to stay put. But there are ways to improve a property’s net operating income, industrial market experts say, even in the bleakest economic conditions. These five tips can help industrial owners and managers plug spending leaks and improve their properties’ bottom lines.
1. Renegotiate Service and Supply Contracts. “It’s incumbent upon owners to push vendors and suppliers to lower costs in this competitive market,” says C. Mark Ambard, CCIM, president and principal broker of Ambard & Co. Commercial Real Estate in Kailua, Hawaii. Waste removal, landscaping maintenance, advertising, and security provide opportunities to lower routine costs.
Renegotiating service contracts to get the best rates possible also lays the foundation for future lease renewals, says Lee Y. Wheeler III, CCIM, president of Fidelis Commercial Real Estate Services in Beaumont, Texas. “Lowering rates keeps tenants happy and we stay in close contact with the providers to ensure top-notch service.”
2. Reduce Insurance Premiums. Unnecessary coverage adds significantly to a property’s insurance costs. A common — and expensive — mistake is to insure land where no risk of loss exists, “usually due to a misguided lender requirement,” says Nick Nicholas, CCIM, CRE, MAI, president of Nicholas Co. in Dallas.
Replacement cost insurance is another area for potential savings. “Replacement costs are generally priced from a manual or online pricing service. These numbers can vary greatly from reality,” Nicholas says. He’s successfully negotiated 50 percent reductions in replacement cost insurance premiums by providing credible cost figures from respected local contractors and proving the insured components are not “at risk.”
For example, in Dallas, tornadoes, wind, and fire pose the biggest threats to properties. “If you have 7 acres of concrete parking area and 3 more acres of concrete building slab on grade, there is no need to insure them against fire or tornadoes,” Nicholas says. Grading, site work, and underground utilities are other building development costs that are not at risk.
Finally, reviewing the policy’s deductible is a wise idea. “If the deductible is too low, the premium can be unnecessarily high. The goal is proper balance between risk and premium,” he says.
3. Reassess the Property’s Value. Commercial property tax valuations are subjective, thus leaving room for reductions. This is particularly true “if the property is located in a state that relies heavily on ad valorem taxation, which is an area of significant potential savings,” Nicholas says. In addition, many appraisers use a “mass appraisal” process to value parcels that present “an inadvertent opportunity for overvaluation.”
Owners can appeal their tax values directly or leverage the knowledge of experienced property tax appeal consultants, says Scott L. Reed, CCIM, managing director of Reed Realty Advisors in Portland, Ore. To maximize the process, owners and consultants must “craft a supportable valuation based on appraisals, market comparables, and in some cases higher vacancy and lower rents,” he says.
4. Green Your Space. Energy efficient strategies may not seem like windfall opportunities, but the benefits add up. For instance, replacing traditional interior warehouse lighting with T5 motion sensor fixtures has a payback period of two years with use of government and private tax credits, Reed says.
In addition, users report up to 50 percent energy savings. “Every dollar tenants save on energy reduces their occupancy cost as much as a dollar reduction in rent,” Reed adds. “Some owners have actually begun paying for lighting retrofits in vacant industrial spaces to improve their marketability.”
5. Lower Landscaping Costs. Landscape maintenance can wreak havoc on water and utility bills, experts say. To reduce these costs, “review landscaping against irrigation system zone design for compatibility with plant materials,” Nicholas says. “I reconfigured several zones at one of our industrial buildings where large turf areas were included on the same zone with planting beds that required much less water.” The result was significant water conservation and cost savings.
Xeriscaping, or using indigenous and low water-intensive plant species to reduce or eliminate costly irrigation, is another way to save. While using river rock or other xeriscape materials can cost up to 20 percent more than traditional landscaping, water and maintenance cost savings of up to 60 percent can be achieved, Reed adds.
Rail Returns
Intermodal development provides a route for today's energy-minded investors.
by Jennifer Norbut
High fuel costs and congested highways are putting the squeeze on traditional warehouse/distribution space. Intermodal rail-based projects, however, provide an energy-efficient alternative for suppliers in inland port markets. Commercial Investment Real Estate talked with Adam Roth, CCIM, a vice president with NAI Hiffman’s Industrial Services Group in Oak Brook, Ill., about the intermodal sector’s advantages in the current market. As a director of NAI Global Logistics, Roth focuses on providing real estate and supply chain solutions to distribution and warehouse companies worldwide.
CIRE: What are the biggest challenges facing the industrial real estate market right now?
Roth: Uncertainty in the banking community and the economy as a whole has forced the majority of corporations to restrict growth plans. This coupled with the aggressive speculative development that occurred in the last few years has halted nearly all new spec construction in the Chicago market. One of the few areas that is still seeing activity is the CenterPoint Intermodal Center, which is preparing to break ground on a 1.2 million-square-foot spec facility adjacent to Burlington Northern Santa Fe railroad’s Logistics Park — Chicago, located about 40 miles southwest of the city in Elwood, Ill.
CIRE: What’s driving intermodal projects in the current market?
Roth: With corporations now more focused on controlling costs, there have been more in-depth discussions about the entire supply chain. More corporations are talking in terms of landed cost versus lease rate or purchase price. In other words, studies show that transportation is typically five to seven times the cost of real estate. So if a company can effectively take a holistic approach to their supply chain, the result will be very different than operating in silos and solely searching for the lowest lease rate or purchase price.
CIRE: Have you applied this principle to any recent transactions?
Roth: We recently worked with a corporation that is saving more than $650,000 per year based on a nine-mile difference between two facility locations they were considering. Based on this company’s operations of 500,000 square feet, their savings translate into $1.30 per sf per year as well as greatly reducing their exposure to fuel costs.
CIRE: What factors make intermodal-related projects a wise choice for industrial investors?
Roth: Underscoring the significance of these developments is the ever-growing importance of rail — particularly with the class I rail providers. There are five critical factors facing the global supply chain for our nation: The state of our highway infrastructure, energy (fuel) cost increases, import volumes, concerns over truck driver shortages in the years ahead, and a focus on more green alternatives. Rail addresses all of these.
CIRE: What other key industrial property trends will emerge as the economy begins to rebound?
Roth: Midsize to small corporations will be more sophisticated in their supply chain strategies and will be taking the landed cost approach. In addition, third-party logistics, or 3PL, activity will continue to increase as it has in the current environment. Companies want to be able to flex their space and respond more quickly without long-term obligations. 3PLs have the ability to do that.
Commercial Investment Management Insight Magazine
Listen to Steve Poole's podcast for more insights on the industrial market's recovery.
Like all investment property types, industrial real estate is attempting to hold its own through the economic recession. These three articles examine the highlights and lowlights of this evolving sector.
A seismic drop in activity characterized the nation’s first-quarter 2009 industrial trends. Leasing activity fell 41 percent from one year ago, driving average vacancy to 9.5 percent — the highest point in 4.5 years. Net absorption plunged to a negative 39.8 million square feet during 1Q09 as cutbacks across all sectors led to diminishing activity. Construction volume dropped to 40 million sf, the lowest volume since the early 1990s.
The 1Q09 average asking rate for all types of industrial space was $5.57 per square foot triple net. This represents a decline of 1 percent from year-end 2008 and 3 percent from 4Q07. Effective rental rates declined by a larger margin of 15 percent as concessions increased. The greatest rate drop was seen in warehouse properties, where asking rates fell by 4.9 percent year over year. Research and development/flex space rates declined by 2.2 percent, while manufacturing space rates actually rose by a slight 1.6 percent. Warehouse rents were influenced by a larger construction pipeline as well as a greater downturn in retail and home building, which are warehouse-intensive industries. The average rental rate increase for general industrial product was likely due to a lower overall vacancy for this property type — 6.9 percent versus 10.9 percent for warehouse/distribution space.
Industrial’s Hidden Strength
The current recession has cut across all economic segments including those that feed industrial growth. On the job loss front, manufacturing has taken the largest hit in terms of layoffs, losing 1.3 million jobs during the past 12 months. Construction, another strong industrial sector, ranks third with nearly 1 million jobs lost. Wholesalers and retailers, significant warehouse and distribution players, also lost a combined 581,000 jobs during the past year.
Despite the significant job losses, the industrial market has a key competitive strength when compared to the retail and office sectors. Industrial development can be turned off fairly quickly given the 9- to 12-month construction cycle, while office development continues to roll through the cycle for up to two years as vacancy continues to rise. A little more than 26 million sf of new industrial space was delivered during 1Q09, with another 39.7 million remaining under construction. Only 27 million of this represents speculative product, and nearly all will be delivered later this year. This lack of overbuilding means that while vacancy rates are nearing a decade high, product remaining in the pipeline will not continue to flood the market. In contrast, the office market vacancy rate will rise by an additional 140 basis points nationally based on deliveries alone. It may well set a new record by Grubb & Ellis’ historic calculations.
Best-Performing Markets
While there are no truly optimistic markets in the current recession, some markets have had a lesser industrial decline than others. The submarket with the lowest overall vacancy rate is Los Angeles County at 2.7 percent. Reno, Nev., posts the highest vacancy rate, above 15 percent. It and the other hardest hit markets — Orlando, Fla., Phoenix, and Las Vegas — are victims of the housing industry slump. Detroit also is suffering from significant vacancy increases resulting from auto industry fallout.
Some cities did experience positive absorption for 1Q09, including tech hotbed Boston and middle-America cities such as Cleveland and Oklahoma City. Long term, port cities will rebound as global trade bounces back. Current port volume is down and 2008 volumes were off significantly for large ports, such as the 5.3 percent decline in Los Angeles and 10.1 percent in Long Beach, Calif. Only Houston and Jacksonville, Fla., saw significant increases in port activity, partially due to the energy industry activity in these areas.
The top 10 cities to watch include areas poised for growth, cities with developable inventory already planned, as well as cities that can capitalize on shifting port demand. Port cities with efficient on-dock rail capacity such as Savannah, Ga., and Norfolk, Va., will gain market share. (See sidebar, “Regional Updates Southeast.”) Other cities are investing significantly in port infrastructure and also will likely gain from added capacity. Examples of this include Houston, Northwest Ohio, Joliet, Ill., and Jacksonville, Fla. While Los Angeles will remain a market to watch given sheer volume of transactions, the trend toward East Coast versus West Coast shipping will favor more significant growth in markets such as Dallas and improved eastern ports.
Investment Activity
Investment spending plummeted in 1Q09. Total investment spending for all industrial properties totaled only $1.3 billion, or only 10 percent of spending nearly a decade ago in the first quarter of 2001. Industrial capitalization rates remain the highest of any property type, rising to 8.2 percent. This is up 100 basis points from a year ago, 150 basis points from the 2007 peak, and 30 basis points over the offering cap rate for new properties on the market.
This meager investment volume represents only 9 percent of peak spending, and offerings outpaced sales six to one, demonstrating the remaining distance between buyers and sellers. Buyers are changing as well, with seller or assumed financing responsible for 55 percent of transactions and commercial mortgage-backed securities and Wall Street financing notably absent. During 1Q09, industrial properties represented 18.5 percent of properties sold and 15 percent of spending.
Looking to the future, investment potential is excellent for those with immediate access to internal or private capital. Underperforming real estate investment trusts with limited or no access to reserve funds are a prime target. Solid investments will include properties in markets with limited need to absorb existing product and those with expanding tenants in the renewable energy and medical device sectors. Functionally strong industrial product with modern clear height, loading, accessibility, and energy efficiency will retain value in the long term.
On a fundamental level, look for rental rate declines to taper off and vacancy increases to slow once construction activity has halted. Reductions in landlord concessions will begin in mid-2010. As mentioned, there will be a resurrection in U.S. port volumes. The April consumer confidence shift is extremely positive news for the retail and shipping sectors, especially as the forward-looking component was the highest. R&D/flex space will likely take a hit in the short term as tenants are able to flee to higher quality office spaces for lower rates.
Industrial Markets to Watch
Columbus, Ohio
Dallas
Houston
Indianapolis
Jacksonville, Fla.
Joliet, Ill.
Los Angeles
Norfolk, Va.
Northwest Ohio
Savannah, Ga.
5 Ways to Improve NOI
Increase industrial property value in slow market conditions.
by Jennifer Norbut
Improving industrial property value may seem impossible in an environment where sales prices are plummeting and tenants are demanding concessions just to stay put. But there are ways to improve a property’s net operating income, industrial market experts say, even in the bleakest economic conditions. These five tips can help industrial owners and managers plug spending leaks and improve their properties’ bottom lines.
1. Renegotiate Service and Supply Contracts. “It’s incumbent upon owners to push vendors and suppliers to lower costs in this competitive market,” says C. Mark Ambard, CCIM, president and principal broker of Ambard & Co. Commercial Real Estate in Kailua, Hawaii. Waste removal, landscaping maintenance, advertising, and security provide opportunities to lower routine costs.
Renegotiating service contracts to get the best rates possible also lays the foundation for future lease renewals, says Lee Y. Wheeler III, CCIM, president of Fidelis Commercial Real Estate Services in Beaumont, Texas. “Lowering rates keeps tenants happy and we stay in close contact with the providers to ensure top-notch service.”
2. Reduce Insurance Premiums. Unnecessary coverage adds significantly to a property’s insurance costs. A common — and expensive — mistake is to insure land where no risk of loss exists, “usually due to a misguided lender requirement,” says Nick Nicholas, CCIM, CRE, MAI, president of Nicholas Co. in Dallas.
Replacement cost insurance is another area for potential savings. “Replacement costs are generally priced from a manual or online pricing service. These numbers can vary greatly from reality,” Nicholas says. He’s successfully negotiated 50 percent reductions in replacement cost insurance premiums by providing credible cost figures from respected local contractors and proving the insured components are not “at risk.”
For example, in Dallas, tornadoes, wind, and fire pose the biggest threats to properties. “If you have 7 acres of concrete parking area and 3 more acres of concrete building slab on grade, there is no need to insure them against fire or tornadoes,” Nicholas says. Grading, site work, and underground utilities are other building development costs that are not at risk.
Finally, reviewing the policy’s deductible is a wise idea. “If the deductible is too low, the premium can be unnecessarily high. The goal is proper balance between risk and premium,” he says.
3. Reassess the Property’s Value. Commercial property tax valuations are subjective, thus leaving room for reductions. This is particularly true “if the property is located in a state that relies heavily on ad valorem taxation, which is an area of significant potential savings,” Nicholas says. In addition, many appraisers use a “mass appraisal” process to value parcels that present “an inadvertent opportunity for overvaluation.”
Owners can appeal their tax values directly or leverage the knowledge of experienced property tax appeal consultants, says Scott L. Reed, CCIM, managing director of Reed Realty Advisors in Portland, Ore. To maximize the process, owners and consultants must “craft a supportable valuation based on appraisals, market comparables, and in some cases higher vacancy and lower rents,” he says.
4. Green Your Space. Energy efficient strategies may not seem like windfall opportunities, but the benefits add up. For instance, replacing traditional interior warehouse lighting with T5 motion sensor fixtures has a payback period of two years with use of government and private tax credits, Reed says.
In addition, users report up to 50 percent energy savings. “Every dollar tenants save on energy reduces their occupancy cost as much as a dollar reduction in rent,” Reed adds. “Some owners have actually begun paying for lighting retrofits in vacant industrial spaces to improve their marketability.”
5. Lower Landscaping Costs. Landscape maintenance can wreak havoc on water and utility bills, experts say. To reduce these costs, “review landscaping against irrigation system zone design for compatibility with plant materials,” Nicholas says. “I reconfigured several zones at one of our industrial buildings where large turf areas were included on the same zone with planting beds that required much less water.” The result was significant water conservation and cost savings.
Xeriscaping, or using indigenous and low water-intensive plant species to reduce or eliminate costly irrigation, is another way to save. While using river rock or other xeriscape materials can cost up to 20 percent more than traditional landscaping, water and maintenance cost savings of up to 60 percent can be achieved, Reed adds.
Rail Returns
Intermodal development provides a route for today's energy-minded investors.
by Jennifer Norbut
High fuel costs and congested highways are putting the squeeze on traditional warehouse/distribution space. Intermodal rail-based projects, however, provide an energy-efficient alternative for suppliers in inland port markets. Commercial Investment Real Estate talked with Adam Roth, CCIM, a vice president with NAI Hiffman’s Industrial Services Group in Oak Brook, Ill., about the intermodal sector’s advantages in the current market. As a director of NAI Global Logistics, Roth focuses on providing real estate and supply chain solutions to distribution and warehouse companies worldwide.
CIRE: What are the biggest challenges facing the industrial real estate market right now?
Roth: Uncertainty in the banking community and the economy as a whole has forced the majority of corporations to restrict growth plans. This coupled with the aggressive speculative development that occurred in the last few years has halted nearly all new spec construction in the Chicago market. One of the few areas that is still seeing activity is the CenterPoint Intermodal Center, which is preparing to break ground on a 1.2 million-square-foot spec facility adjacent to Burlington Northern Santa Fe railroad’s Logistics Park — Chicago, located about 40 miles southwest of the city in Elwood, Ill.
CIRE: What’s driving intermodal projects in the current market?
Roth: With corporations now more focused on controlling costs, there have been more in-depth discussions about the entire supply chain. More corporations are talking in terms of landed cost versus lease rate or purchase price. In other words, studies show that transportation is typically five to seven times the cost of real estate. So if a company can effectively take a holistic approach to their supply chain, the result will be very different than operating in silos and solely searching for the lowest lease rate or purchase price.
CIRE: Have you applied this principle to any recent transactions?
Roth: We recently worked with a corporation that is saving more than $650,000 per year based on a nine-mile difference between two facility locations they were considering. Based on this company’s operations of 500,000 square feet, their savings translate into $1.30 per sf per year as well as greatly reducing their exposure to fuel costs.
CIRE: What factors make intermodal-related projects a wise choice for industrial investors?
Roth: Underscoring the significance of these developments is the ever-growing importance of rail — particularly with the class I rail providers. There are five critical factors facing the global supply chain for our nation: The state of our highway infrastructure, energy (fuel) cost increases, import volumes, concerns over truck driver shortages in the years ahead, and a focus on more green alternatives. Rail addresses all of these.
CIRE: What other key industrial property trends will emerge as the economy begins to rebound?
Roth: Midsize to small corporations will be more sophisticated in their supply chain strategies and will be taking the landed cost approach. In addition, third-party logistics, or 3PL, activity will continue to increase as it has in the current environment. Companies want to be able to flex their space and respond more quickly without long-term obligations. 3PLs have the ability to do that.
White House Proposes Tougher Rules for Rating Agencies
By Denise Kalette, National Real Estate Investor
Jul 22, 2009 4:54 PM,
The Obama administration is pressing ahead with proposed tough reforms for credit rating agencies, starting with potential conflicts of interest.
Treasury Department officials delivered proposed legislation to Capitol Hill that would bar credit rating firms from consulting with any company they rate. Agency accountants would not be permitted to provide financial services to the rated companies, for instance.
In an effort to put a halt to the practice of shopping for favorable ratings, issuers would be required to disclose preliminary ratings received from other agencies. This would give investors a more transparent picture of how the eventual rating compared with earlier scores.
Business relationships that pose a potential conflict would have to be disclosed, and the agencies would be required to appoint a compliance officer who reports to the board or head of the company. The government wants the compliance officers to file annual reports with the Securities and Exchange Commission (SEC).
Some commercial real estate investors and analysts have blamed rating agencies for not providing a more accurate assessment of risks associated with commercial mortgage-backed securities (CMBS) and other investments. The CMBS market has virtually dried up since late 2007, eliminating an important source of credit for commercial real estate transactions.
A key provision of the government’s current reform package is that rating agencies would need to present a more complete picture of the risks associated with a rated security. According to the Treasury Department, investors did not fully realize that risks presented by structured products such as asset-backed securities are fundamentally different from those posed by corporate bonds, including those with similar ratings.
Under the reforms, the rating agencies would use different symbols for structured finance products to show different risks.
Fitch supports ‘thoughtful review’
The rating agencies are examining the proposals sent to Congress on Tuesday, but at least one, New York-based Fitch Ratings, cautiously welcomed the reforms.
"The Administration's proposals are generally consistent with Fitch’s views on the importance of providing the markets with greater transparency into the ratings process and managing more effectively any conflicts of interest,” said Fitch CEO and president Steve Joynt in a statement.
Fitch has frequently noted the benefits to the market of a globally
consistent approach to regulating the agencies, Joynt added. “Fitch
supports a thoughtful review of ways to encourage the market to use ratings in a balanced and constructive manner."
Standard & Poor’s, also based in New York, is taking a look at the proposals. “We’re studying the document from the Treasury and the administration,” says spokesman Ed Sweeney. “We’re committed to restoring confidence in the ratings process and the credit markets.”
The reforms would give the SEC greater authority in supervising the rating agencies. An office would be set up within the SEC to carry out the new regulations, Treasury officials said.
The Commercial Mortgage Securities Association (CMSA), based in New York, supports aspects of the plan, while opposing other provisions. “We certainly advocate some checks and balances for the rating agencies so they can avoid conflicts of interest, and we’ve always supported the need for additional transparency in the ratings,” says spokesman Ken Reed.
However, CMSA objects to using a different system for rating mortgage-backed securities versus other financial products.
“We do strongly oppose the ratings differentiation described in some of the recent Treasury provisions,” Reed says. The organization feels it causes confusion in implementing the different measures for ratings.
“We feel it reopens a previously settled debate, a debate we feel will delay and exacerbate the market’s current recovery effort,” says Reed.
CMSA supports transparency, but feels that insights on credit risks can be better served through more disclosures rather than a separate ratings scheme, he explains.
The reforms would include mandatory registration of credit rating agencies, rather than the voluntary system now in place.
Jul 22, 2009 4:54 PM,
The Obama administration is pressing ahead with proposed tough reforms for credit rating agencies, starting with potential conflicts of interest.
Treasury Department officials delivered proposed legislation to Capitol Hill that would bar credit rating firms from consulting with any company they rate. Agency accountants would not be permitted to provide financial services to the rated companies, for instance.
In an effort to put a halt to the practice of shopping for favorable ratings, issuers would be required to disclose preliminary ratings received from other agencies. This would give investors a more transparent picture of how the eventual rating compared with earlier scores.
Business relationships that pose a potential conflict would have to be disclosed, and the agencies would be required to appoint a compliance officer who reports to the board or head of the company. The government wants the compliance officers to file annual reports with the Securities and Exchange Commission (SEC).
Some commercial real estate investors and analysts have blamed rating agencies for not providing a more accurate assessment of risks associated with commercial mortgage-backed securities (CMBS) and other investments. The CMBS market has virtually dried up since late 2007, eliminating an important source of credit for commercial real estate transactions.
A key provision of the government’s current reform package is that rating agencies would need to present a more complete picture of the risks associated with a rated security. According to the Treasury Department, investors did not fully realize that risks presented by structured products such as asset-backed securities are fundamentally different from those posed by corporate bonds, including those with similar ratings.
Under the reforms, the rating agencies would use different symbols for structured finance products to show different risks.
Fitch supports ‘thoughtful review’
The rating agencies are examining the proposals sent to Congress on Tuesday, but at least one, New York-based Fitch Ratings, cautiously welcomed the reforms.
"The Administration's proposals are generally consistent with Fitch’s views on the importance of providing the markets with greater transparency into the ratings process and managing more effectively any conflicts of interest,” said Fitch CEO and president Steve Joynt in a statement.
Fitch has frequently noted the benefits to the market of a globally
consistent approach to regulating the agencies, Joynt added. “Fitch
supports a thoughtful review of ways to encourage the market to use ratings in a balanced and constructive manner."
Standard & Poor’s, also based in New York, is taking a look at the proposals. “We’re studying the document from the Treasury and the administration,” says spokesman Ed Sweeney. “We’re committed to restoring confidence in the ratings process and the credit markets.”
The reforms would give the SEC greater authority in supervising the rating agencies. An office would be set up within the SEC to carry out the new regulations, Treasury officials said.
The Commercial Mortgage Securities Association (CMSA), based in New York, supports aspects of the plan, while opposing other provisions. “We certainly advocate some checks and balances for the rating agencies so they can avoid conflicts of interest, and we’ve always supported the need for additional transparency in the ratings,” says spokesman Ken Reed.
However, CMSA objects to using a different system for rating mortgage-backed securities versus other financial products.
“We do strongly oppose the ratings differentiation described in some of the recent Treasury provisions,” Reed says. The organization feels it causes confusion in implementing the different measures for ratings.
“We feel it reopens a previously settled debate, a debate we feel will delay and exacerbate the market’s current recovery effort,” says Reed.
CMSA supports transparency, but feels that insights on credit risks can be better served through more disclosures rather than a separate ratings scheme, he explains.
The reforms would include mandatory registration of credit rating agencies, rather than the voluntary system now in place.
Loan Tracker Creates Audit Trail for Beleaguered Banks
Loan Tracker Creates Audit Trail for Beleaguered Banks
As banks struggle to cope with a flood of commercial real estate loan workouts and defaults, some have called for help in tracking the loans and creating audit trails for regulators and auditors.
Loan servicing software has been used for years by private lenders and government agencies, but now big banks’ need to track assets while seeking new sources of revenue has created a more acute demand for highly specialized loan tracking and database technology.
Jones Lang LaSalle, the real estate brokerage and services firm based in Chicago, has just debuted a proprietary loan tracking database called OneViewSM for banks and public institutions as part of its value recovery services program, initiated last November.
“In working with banks, one of the things we found is that their systems weren’t set up to deal with their current issues and the strategy that’s necessary to deal with assets as they are flowing through the banks now,” says John Vick, managing director of Jones Lang LaSalle’s development and asset strategy team.
“We’ve been working for a Midwest bank for a year and a half now. They basically realized early in the downturn that they needed help and they didn’t have a large REO [Real Estate Owned] department and they needed assistance.”
What the program offers is not software, but rather a secure Web link to a real-time, in-depth view of the institution’s portfolio. That includes an overview of the bank’s portfolio contents and financial assets, or the tool can zero in on particular assets and supporting documents.
Banks can’t create an effective financial strategy unless they can determine precisely what assets they have and their current status, says Vick. If an REO property has already been foreclosed on, it can be grouped with other non-performing loans and tracked as it moves through the transition in status.
Designed for banks with a portfolio of at least $100 million, the database draws relevant information from a number of sites and synthesizes it in one place. “It’s really about taking data and pulling it together so you have information that you can make good business decisions from,” says Vick.
Loan technology programs already on the market from other providers vary from those capable of processing database information in various languages and currencies while documenting loan data, to those that perform credit bureau reporting or loan servicing.
Jones Lang LaSalle has more than 1,200 tracker databases in use around the world for different kinds of applications. The new loan tracking service for banks, adapted from programs used for other applications, helps financial institutions to become more transparent in the way they handle loans.
“They need to be able to show to their committees, to their auditors, to their oversight [managers] as they’re disposing of these assets, that they’re being responsible, that they’re getting the best value. And we can create a clear trail on an audit of that process, because we track the activities,” explains Vick.
Not is financial data associated with a loan available, so is a list of names or roles of those who dealt with the loan. If a manager needs to know who bid on a loan sold six months earlier, how it was marketed, and the terms of the loan, that level of archiving is supported by the database, and it allows the viewer to follow the audit trail.
The database is Microsoft-based and can be accessed remotely with a high-speed Internet connection. The Web application is not marketed separately, but is provided in connection with the distressed asset program.
As banks struggle to cope with a flood of commercial real estate loan workouts and defaults, some have called for help in tracking the loans and creating audit trails for regulators and auditors.
Loan servicing software has been used for years by private lenders and government agencies, but now big banks’ need to track assets while seeking new sources of revenue has created a more acute demand for highly specialized loan tracking and database technology.
Jones Lang LaSalle, the real estate brokerage and services firm based in Chicago, has just debuted a proprietary loan tracking database called OneViewSM for banks and public institutions as part of its value recovery services program, initiated last November.
“In working with banks, one of the things we found is that their systems weren’t set up to deal with their current issues and the strategy that’s necessary to deal with assets as they are flowing through the banks now,” says John Vick, managing director of Jones Lang LaSalle’s development and asset strategy team.
“We’ve been working for a Midwest bank for a year and a half now. They basically realized early in the downturn that they needed help and they didn’t have a large REO [Real Estate Owned] department and they needed assistance.”
What the program offers is not software, but rather a secure Web link to a real-time, in-depth view of the institution’s portfolio. That includes an overview of the bank’s portfolio contents and financial assets, or the tool can zero in on particular assets and supporting documents.
Banks can’t create an effective financial strategy unless they can determine precisely what assets they have and their current status, says Vick. If an REO property has already been foreclosed on, it can be grouped with other non-performing loans and tracked as it moves through the transition in status.
Designed for banks with a portfolio of at least $100 million, the database draws relevant information from a number of sites and synthesizes it in one place. “It’s really about taking data and pulling it together so you have information that you can make good business decisions from,” says Vick.
Loan technology programs already on the market from other providers vary from those capable of processing database information in various languages and currencies while documenting loan data, to those that perform credit bureau reporting or loan servicing.
Jones Lang LaSalle has more than 1,200 tracker databases in use around the world for different kinds of applications. The new loan tracking service for banks, adapted from programs used for other applications, helps financial institutions to become more transparent in the way they handle loans.
“They need to be able to show to their committees, to their auditors, to their oversight [managers] as they’re disposing of these assets, that they’re being responsible, that they’re getting the best value. And we can create a clear trail on an audit of that process, because we track the activities,” explains Vick.
Not is financial data associated with a loan available, so is a list of names or roles of those who dealt with the loan. If a manager needs to know who bid on a loan sold six months earlier, how it was marketed, and the terms of the loan, that level of archiving is supported by the database, and it allows the viewer to follow the audit trail.
The database is Microsoft-based and can be accessed remotely with a high-speed Internet connection. The Web application is not marketed separately, but is provided in connection with the distressed asset program.
Buyers Prepare to Snatch Troubled Loans From Securitized Pools
Buyers Prepare to Snatch Troubled Loans From Securitized Pools
W. Joseph Caton
Jul 14, 2009 10:13 AM, By W. Joseph Caton
Rating agencies are busy reviewing and downgrading existing commercial mortgage-backed securities issued between 2005 and 2007. The downgrades — which follow fallout primarily from the office, multifamily and retail sectors — are encouraging opportunity buyers still waiting for disaster to strike commercial real estate.
As these investors look for bargains among the anticipated wreckage of properties, notes, and securities, they are paying close attention to every report of a securitized loan going into default. While individual loans experiencing repayment difficulties have been a prime target, findings by Fitch Ratings suggest that asset managers seek to put a damper on expectations by bargain hunters.
Rescuing defaulted loans
In the most recent release of its Commercial Real Estate Loan Collateralized Debt Obligation Delinquency Index, Fitch concluded that delinquencies are leveling off. The rating agency observed a larger number of asset managers buying out credit-impaired assets (loans with repayment difficulties or reduced property values since the loans were issued) at prices below par. And even though the result has been realized losses to CDO collateral, many issuers have offset this deterioration through a process called "par building."
Par building was coined by the investment banking community to reflect removal of troubled loans from securitized pools, primarily through buying into troubled securities, at prices well below par value. This process has become the favored tool of asset managers.
Oftentimes asset managers are securities investors themselves, and can be working on behalf of current securities holders or investors seeking profits by strategically buying into troubled bonds. They can also represent opportunity investors who want access to the underlying real estate rather than a position in securities.
Fitch says that despite eight new delinquent loans entering its CDO delinquency index — loans that are 60 days or more delinquent — the May 2009 reading was relatively stable at 7.9%. That figure is up slightly from the April level of 7.8%. But the index keepers do not expect this trend to continue.
"Asset managers have been removing credit-impaired assets from CDOs, often in order to preserve overcollateralization ratio tests, which has tempered this month's delinquencies," says Karen Trebach, senior director for Fitch. The overcollateralization ratio tests are minimal collateral values or pledged assets that analysts use to assign or preserve a rating of underlying securities.
"However, Fitch anticipates that this reprieve will be short with delinquencies continuing to rise measurably through year's end, and more CDOs facing overcollateralization test failures in the coming months," Trebach concludes.
At center stage in this tug-of-war between first-loss investors and secured senior tranche owners are the asset managers, who seek to strike a balance that satisfies all parties. During the past two months they have been buying up tranches such as mezzanine and first-loss pieces, hoping to exercise their rights to cure these troubled securitized loans.
Discounted payoffs
The Fitch report points out that at least two asset managers reported accepting discounted payoffs on two loans, including a matured balloon loan. The securities issuer allowed the maturing balloon loan to be paid off at 56% of par.
In May, Fitch also reported that asset managers extended 33 loans, many of which were short-term extensions. Even though this trend is expected to be short-lived, no one can doubt the motivation of asset managers to preserve loans from reaching the point of a dreaded pileup in CMBS maturity defaults.
In fact, there are companies like Boston-based Investcap Advisors that provide opportunistic investors with listings of maturing CMBS loans.
"Investors are trying to get access to troubled loans early in the process, but that information is not readily available," says Scott Barrie, president of Investcap Advisors. "Our system of identifying these loans and passing the information on to investors gives them a solid base from which to either buy into some bond structures, or to take over troubled loans and assets at discounts."
Regardless of how investors access distress opportunities, the idea of discounted payoffs is catching. So as one group of asset managers pushes to resolve troubled securitized loans, another group is pulling for identifying and buying these troubled assets at a discounted payoff. And the tug-of-war continues.
W. Joseph Caton
Jul 14, 2009 10:13 AM, By W. Joseph Caton
Rating agencies are busy reviewing and downgrading existing commercial mortgage-backed securities issued between 2005 and 2007. The downgrades — which follow fallout primarily from the office, multifamily and retail sectors — are encouraging opportunity buyers still waiting for disaster to strike commercial real estate.
As these investors look for bargains among the anticipated wreckage of properties, notes, and securities, they are paying close attention to every report of a securitized loan going into default. While individual loans experiencing repayment difficulties have been a prime target, findings by Fitch Ratings suggest that asset managers seek to put a damper on expectations by bargain hunters.
Rescuing defaulted loans
In the most recent release of its Commercial Real Estate Loan Collateralized Debt Obligation Delinquency Index, Fitch concluded that delinquencies are leveling off. The rating agency observed a larger number of asset managers buying out credit-impaired assets (loans with repayment difficulties or reduced property values since the loans were issued) at prices below par. And even though the result has been realized losses to CDO collateral, many issuers have offset this deterioration through a process called "par building."
Par building was coined by the investment banking community to reflect removal of troubled loans from securitized pools, primarily through buying into troubled securities, at prices well below par value. This process has become the favored tool of asset managers.
Oftentimes asset managers are securities investors themselves, and can be working on behalf of current securities holders or investors seeking profits by strategically buying into troubled bonds. They can also represent opportunity investors who want access to the underlying real estate rather than a position in securities.
Fitch says that despite eight new delinquent loans entering its CDO delinquency index — loans that are 60 days or more delinquent — the May 2009 reading was relatively stable at 7.9%. That figure is up slightly from the April level of 7.8%. But the index keepers do not expect this trend to continue.
"Asset managers have been removing credit-impaired assets from CDOs, often in order to preserve overcollateralization ratio tests, which has tempered this month's delinquencies," says Karen Trebach, senior director for Fitch. The overcollateralization ratio tests are minimal collateral values or pledged assets that analysts use to assign or preserve a rating of underlying securities.
"However, Fitch anticipates that this reprieve will be short with delinquencies continuing to rise measurably through year's end, and more CDOs facing overcollateralization test failures in the coming months," Trebach concludes.
At center stage in this tug-of-war between first-loss investors and secured senior tranche owners are the asset managers, who seek to strike a balance that satisfies all parties. During the past two months they have been buying up tranches such as mezzanine and first-loss pieces, hoping to exercise their rights to cure these troubled securitized loans.
Discounted payoffs
The Fitch report points out that at least two asset managers reported accepting discounted payoffs on two loans, including a matured balloon loan. The securities issuer allowed the maturing balloon loan to be paid off at 56% of par.
In May, Fitch also reported that asset managers extended 33 loans, many of which were short-term extensions. Even though this trend is expected to be short-lived, no one can doubt the motivation of asset managers to preserve loans from reaching the point of a dreaded pileup in CMBS maturity defaults.
In fact, there are companies like Boston-based Investcap Advisors that provide opportunistic investors with listings of maturing CMBS loans.
"Investors are trying to get access to troubled loans early in the process, but that information is not readily available," says Scott Barrie, president of Investcap Advisors. "Our system of identifying these loans and passing the information on to investors gives them a solid base from which to either buy into some bond structures, or to take over troubled loans and assets at discounts."
Regardless of how investors access distress opportunities, the idea of discounted payoffs is catching. So as one group of asset managers pushes to resolve troubled securitized loans, another group is pulling for identifying and buying these troubled assets at a discounted payoff. And the tug-of-war continues.
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