Nationwide housing market stabilizing, but New York lags behind

August 5, 2009 01:00PM
By Candace Taylor
The Real Deal

Nationwide home prices showed their first monthly gain in three years in May, according to S&P/Case-Shiller Home Price Index data released today, indicating that the housing market may be stabilizing. But New York isn't improving as quickly as some other areas.

Home prices within a 50-mile radius of New York City fell 12.2 percent in May from the same month last year, and stayed roughly the same as the previous month, said Maureen Maitland, the vice president of index services for Standard & Poor's, the provider of the report.

That's a slight improvement from the previous months. New York prices fell 1.6 percent between April and March of this year, and posted a record decline of 2.5 percent between February and March. Since the data does not include condo or co-op units, the report primarily reflects home prices in the outer boroughs, Connecticut, New Jersey and Westchester County.

But other areas showed more improvement.

Nationwide, the pace of decline is slowing, Maitland said. The Case-Shiller index, providing a gauge of values in 20 major U.S. cities, increased 0.5 percent from April, the first monthly gain since July 2006, the report shows. The index was down 17.1 percent from May 2008, an improvement from April, when it declined 18.1 percent year-over-year.



Thirteen of the 20 metro areas measured by the index saw month-over-month improvements, and eight of them, including Boston, Chicago and Cleveland, saw a monthly price increase of more than 1 percent.

The New York metropolitan area still has the highest index value, 170.51, of any of the 20 cities measured by the index. This indicates that homes in the area have held their value better than homes in the other areas. The index was set at a base value of 100 in January 2000, meaning that homes in the New York metropolitan area have appreciated 70.51 percent since then. New York's home prices peaked in June of 2006 with an index value of 215.83.

"Over the last 10 years, New York has been one of the markets that has held onto a lot of its value," Maitland said. As a result, prices here are "better than the national average, but it's not one of the better performing markets at this point. It's hovering in the middle."

Sixteen of the metro areas measured by the index showed double-digit year-over-year declines, with Miami, Las Vegas, Los Angeles, Phoenix, Seattle and Tampa posting their lowest index levels yet. With an index value of 144.59, Miami showed declines of 25.2 percent from last year and a drop of 0.8 percent from last month. Phoenix showed the highest year-over-year declines with 34.2 percent.

This month's data shows improvement, Maitland said, but she pointed out that spring is traditionally the most active home-buying season of the year.

"We're approaching this with cautious optimism," she said. "There are positive indicators, there's no doubt about it. But you can't use one month of data to say the market is turning around."

Distressed NY metro-area assets hit market

August 3, 2009 12:00PM

By Candace Taylor
The Real Deal


At least one of the projects on the city's list of stalled development sites may soon be changing hands.

Chinatrust Bank has named Eastern Consolidated as the exclusive broker in the sale of two non-performing commercial mortgages, at 75 First Avenue in Manhattan and 333 Fairmont Avenue in Jersey City.

Originally slated to become residential condominiums, 75 First Avenue is now listed by the Department of Buildings as one of nearly 400 stalled construction sites in New York City.

Foreclosure proceedings have commenced on both properties, according to David Schechtman, a senior director at Eastern Consolidated, who is handling the sale along with senior director Ety Lee.

Located between 4th and 5th streets, 75 First Avenue is a vacant 24-by-100-foot lot with amassed air rights, Schechtman said. The site, which contains 31,230 square feet of zoning floor area, was previously occupied by a now-demolished four-story commercial building.

The owner is Anthony Marano, who purchased 75 First Avenue for $3.7 million in 2005, according to city data. A former associate broker at the Corcoran Group, Marano is the founder of Ozymandius Realty, a real estate brokerage and the developer of projects such as 50 Bond Street and 87 Leonard Street, according to his company's Web site.

The $21 million loan on 75 First Avenue has an unpaid balance of $7.5 million, and was 122 days past due as of June 1. Chinatrust filed to foreclose on the property in New York County Supreme Court June 23, court documents show.

Marano was not immediately available for comment.

Other stalled development sites identified by the city include Five Franklin Place and 56 Leonard Street, luxury condominium projects that have struggled to secure adequate financing.

The Jersey City property that is on the market, 333 Fairmont Avenue, is a five-story, 53-unit art deco condo conversion, Schechtman said. Nineteen units have been sold, he said, but the real estate downturn hindered further sales, and some units in the building have been rented. Out of the $6.4 million loan, $4.1 million is outstanding, he said.

Further information about the New Jersey project was not readily available.

With banks reluctant to lend money, real estate insiders say distressed asset sales are still rare, despite a growing number of troubled loans in the wake of the real estate boom.

According to a recent survey of investors by Ernst & Young, 47 percent of respondents had not purchased distressed or nonperforming loans in the last 18 months, and 45 percent of those said they believed it was too early in the cycle of distress to purchase nonperforming loans.

"What we found in a nutshell is that we're in a stalemate between the investors and the sellers," said Chris Seyfarth, Ernst & Young's national director of nonperforming loan services and the report’s author. "Investors just are not offering the type of pricing that the banks need or expect to sell these bad loans, and until we get equilibrium on the price side, that's not going to change."

Additional pressure from regulators could push banks to unload distressed loans, he said, but thus far, banks aren't in a hurry to sell for a discount.

"I think over time the banks will likely come down in price," he said.

Schechtman said Chinatrust isn't putting an asking price on the loans, but is "poised to sell" and will consider "any and all cash offers."

He added, "This is an example of a well-capitalized bank making the business decision to invite bona fide investors to purchase these loans at the bank's basis, which was conservative to begin with."

At 75 First Avenue, for example, Chinatrust lent less than $240 per buildable square foot, he said.

"We're not starting from a number that was very 2006 or 2007," he said.

In deciding to jump into the market now, Chinatrust is "recognizing that non-performing commercial mortgages are better sold in the secondary market," Schechtman said. "That's how they can best mitigate loss, as opposed to completing the foreclosure themselves and owning the real estate."

Or, in other words, "local operators are better with these deals," he said.

Office Leasing Strategies: Filling space in a down market

The ongoing recession and an uncertain business environment continue to negatively impact the U.S. office market, pushing vacancy rates up and rental rates down. But even in this tough market, new office leases have been signed.

“All the things that are important in a good market are five times more important in a down market,” says John Brownlee, senior vice president of KDC, a Dallas-based owner and developer. “The simple things like relationship-building, a high level of customer service, listening well and good follow-up really make a difference.”

Across the United States, office vacancy rates have returned to levels not seen since 2005, increasing 95 basis points to register at 14.74 percent at the end of the first quarter, according to Colliers International.

Meanwhile, lease rates dropped substantially during the first quarter 2009, with asking rents for CBD space dipping by 5.5 percent to $43.36 per square foot. Suburban asking rents also fell during the quarter, declining by 1.4 percent to $27.69 per square foot. On an annual basis, CBD rents are down 13 percent and suburban rents are down 3.8 percent, according to Colliers International.

Weak demand is at the root of the declining market. First quarter absorption was again negative with occupied space contracting by 27.8 million square feet, the fifth consecutive quarterly contraction and significantly worse than a year ago when absorption was –a negative 1.3 million square feet. Companies are now shedding space at the quickest pace since the third quarter 2001 when occupied space shrank by 28 million square feet, according to Colliers International.

However, many owners are keeping up the fight. GE Capital Real Estate, for example, has completed tenant renewals and new leases totaling about 6.6 million square feet of office space in North America during the first half of 2009. Roughly 5.2 million square feet of that total were lease renewals, while the remaining leases were new.

“In these tough market conditions, we’re realizing success by sticking to the basics,” says GE Capital Real Estate President and CEO Ron Pressman. “We’re taking time to understand what tenants need, including use of surveys, focus groups and one-on-one discussions.”

The Global Real Estate Monitor talked with office owners across the United States to determine the most successful office leasing strategies for a down market. Read on for details.

Position your assets properly

Dallas-based KDC has inked more than 340,000 square feet of new office deals at the Campus at Legacy, a 1.2-million-square-foot, three-building project in Plano, Texas. KDC purchased the buildings from EDS in 2005, and after months of market research, it redeveloped the buildings into Class A office space.

“We looked at doing a more radical redevelopment that would take us to a price point similar to most of the other buildings in the market,” Brownlee notes. “Instead, we positioned the project as a great value for the Legacy submarket, and that strategy is paying off for us now.”

In the past 12 months, KDC has signed leases with Pepsi Co. for just under 100,000 square feet, as well as a 40,000-square-foot lease with Dr Pepper/Snapple Group Inc. and another 40,000-square-foot lease with St. Jude Medical Center, according to Brownlee.

“You have to find your position in the market by learning the market and asking potential tenants their opinions on your property,” Brownlee says. “You have to be realistic about your position in the market.”

Offer concessions and other perks

The leasing environment today strongly favors tenants, and that means owners must be willing to offer concessions and other perks such as increased tenant allowances, building signage and free parking, according to Simon Adams, a partner with Reed Smith.

“Owners with tenants and cash flow in place with little or no mortgage debt are willing to do almost anything to capture tenants,” says Kurt Rosene, senior vice president of The Alter Group, a Chicago-based company that develops and owns office properties. “The folks who have a lot of leverage find that lenders are much less willing to work with them in offering huge concessions.”

The most common concession that owners are offering today is free rent. It’s not uncommon for owners to offer as much as 12 months of free rent to a new tenant, Rosene says, adding that he’s recently seen owners offer two years of free rent as an enticement.

Along with free rent, many owners have increased their tenant improvement allowances by 10 percent to 15 percent, Adams says. And most owners are more willing to provide monument or eyebrow signage as part of the overall lease when they previously would have required additional payment.

Parking rates and after-hours utilities charges are other areas where owners are being more flexible, says Craig Ersek, principal and executive vice president of Essex Asset Management, an Irvine, Calif.-based firm that manages more than 16 million square feet of commercial property throughout California and Arizona. “All those soft costs tend to be put on the negotiating table in a down market,” he notes.

Some owners are taking concessions to the next level by agreeing to cap expenses, says David Weisman, a partner in Greenspoon Marder’s real estate group. “Although it’s difficult for owners to cap expenses because they don’t what they’ll be from year to year, they’re agreeing not to pass on those expenses,” he notes.

And finally, larger credit tenants are even wrangling standard non-disturbance (SND) clauses from owners, says Jonathan Larsen, an executive managing director with Transwestern Commercial Services. Without an SND, a lender can come in and change the lease rate if the owner is forced to relinquish the property because of default. The SND protects tenants, but it is not commonly offered in hot markets.

Engage the brokerage community

In a down market, concessions and other types of perks aren’t just for tenants – they’re for brokers too. In an effort to drive traffic to their buildings, many owners have become very creative with their broker incentives, Ersek says.

Many owners have increased broker commissions from the standard three percent to four percent and are offering bonuses of $1 to $2 per square foot. They’re even giving away gift certificates for expensive dinners, golf trips, exotic vacations and designer clothing to encourage property tours.

Moreover, owners are changing the payment schedule for broker commissions. “Because of concerns about the financial health of building owners today, the brokerage community is very concerned about getting paid,” Rosene says. “That’s why a lot of owners are offering to pay 100 percent of commissions up front.”

Serve as a community liaison

Many owners have found that they can differentiate their properties simply by serving as a liaison between tenants and the community. “We’ve found that we can reduce the competition by developing a strong relationship with municipalities,” says Grady Johnson, senior real estate director for Opus North Corp.

The company recently signed a 144,500-square-foot lease with DeVry Inc. at Highland Landmark V, a 251,000-square-foot Class A office building in Downers Grove, Ill. DeVry Inc. will occupy approximately 60 percent of the eight-story building, which was completed in September 2008. It is the fifth and final building in the 42-acre Highland Landmark office park, developed by Opus.

Strong relationships with local neighborhood groups and city officials can benefit tenants in a variety of ways, Johnson says. From job training programs to tax abatements, an owner can work with local economic development personnel to create tenant incentives that go beyond free rent or building signage.

“Owners are realizing that this tough market is here to stay for some time,” Rosene says. “They know they must do more to capture tenants and keep their buildings full.”