Moody's: Retail Outlook Improves As Holidays Begin

Moody’s has upgraded the retail sectors outlook from “negative” to “stable” over the next 12-18 months, though they remark that industry conditions “remain weak”. This positive change comes just as the Holiday season is about to kick in and reinforces the idea that retail will not have quite the discontented season as it did in 2008. For more, read Net Lease Insider’s insightful article.

The Party is Over: Net Lease & the Future of Commercial Real Estate

In a very interesting article by Globe St’s Amy Wolff Sorter, the typical real estate investor of the future is predicted to be quite different from the one of our near past. Due to real estates most unfortunate bubble, the new investor will be squarely focused on pragmatic investments for the future, rather than “Real Estate Riches in 14 Days”. If true, it sounds like this “future investor” would be very interested net leases.

Specifically the article states:

“Experts tell GlobeSt.com that, in the wake of the 2008 economic crisis, the real estate owner of the future will undergo a seismic shift from the buy-and-flip investor to one that is knowledgeable about real estate and will stay with an asset for the long haul.”

This description perfectly fits that of a net lease investor. Net leases are primarily characterized by long term leases with stable tenants of investment grade credit. As such, net lease properties are generally considered to be low risk, dependable investments. For a marketplace suffering the effects of a hangover fueled by a lost weekend of high risk binging, net leases could represent that cool cup of tea and handful of Advil in the morning.

TARP = Successful…..TALF = ????

By: Patrick Nutt

The alphabet soup of government stimulus programs can be both overwhelming and somewhat perplexing, however it does seem we are finally seeing the results of the initial TARP program, and any bi-partisan committee will most likely tell you it worked (while then adding their political spin of whether or not they approve of the current or former administration).

No, the $350 Billion dollars pumped into the financial system to prop up banks did not help you or your friend’s sister’s aunt get that new loan she wanted to buy a vacation condo, but that was never the intent. What that program was designed to do, and accomplished, was to re-gain the overall confidence of the consumer in the overall banking system. Bank of America stock, trading at $2.50 just six months ago, has rebounded to $17.50; JP Morgan Chase was at $15.00 and is back up near $45.00. If these prices are any indication that the consumer is confident in the largest financial institutions in the United States, I would say TARP worked.

The Term Asset-backed Loan Facility (TALF) is an entirely different program aimed at thawing the frozen market for securities collateralized by consumer debt (such as credit card debt and auto loans), student loans, SBA loans, and now commercial real estate mortgages. The TALF program was announced back in November 2008, however Shopping center REIT, Developers Diversified (NYSE: DDR) is one of the first firm to actually secure financing through this program. DDR recently applied for and finalized the details on $2B in TALF financing….and here comes the interesting part, it’s not cheap! DDR is working with two investment banks; Goldman Sachs and Citigroup, to prepare the two issuances of debt. While all the details have not been made public, a board member recently commented on the basic terms:

Tranche 1
- Underwriters performed a 5-year cash flow projection
- Carved out 15% for additional vacancy and credit loss
- Applied a 9% CAP rate on the resulting Income
- Providing financing based on 30% LTV with an all-in cost of debt near 6%

While the cost of debt is attractive, the extremely low leverage point constricts the assets being used to either debt free or nearly debt free. What happens if you want more leverage you ask???? Well DDR asked for more debt with the second batch of properties valued at $1B and here is the result:

Tranche 2.
- Underwriters performed a 5-year cash flow projection
- Carved out 15% for additional vacancy and credit loss
- Applied a 9% CAP rate on the resulting Income
- Providing financing based on 30% LTV with an all-in cost of debt near 6%
- For the debt component covering from 30% to 35%, the cost of debt is above 11%
- For the debt portion increasing leverage from 35% to 40%, the cost of debt is around 13.5%

As you can see, if you need a higher ratio of debt, it becomes cost prohibitive very quickly. While this solution worked for DDR to help shore up their overall portfolio and deal with some of the smaller debt maturities, this is clearly not the answer to the $700 Billion dollar problem formerly know as the CMBS market circa 2003-2007.

Does “Green” Construction Affect Net Lease Investments?

By: David Sobelman


Calkain recently published the first of its kind report on environmentally sensitive (“Green”) construction for net lease investments. We found there are obvious benefits for everyone involved in a transaction. The argument from the development community has always been that the costs for building green building do not justify the benefits. However, it has been proven that the proper use of materials and education allow for a green building to be constructed at the same costs, or less, than conventional methods. Additionally, tenants may begin to require green buildings as their costs of operations will decrease and the social stigma of occupying green buildings develops into more of the mainstream. Lastly, landlords and investors will enjoy the benefits because most green buildings qualify for tax breaks and the intrinsic value of the asset will be more marketing in decades to come.



I think it is a proven fact that there WILL be changes in construction requirements as time goes on and more people begin to realize the benefits of green buildings. Some tenants have already begun occupying prototype locations and they are gaining in popularity among various users. See more about this topic at www.calkain.com/green.

It’s the Loans, Not the Land: The CMBS Refinancing Crisis

It seems to be a generally accepted fact that Commercial Real Estate is about to hit the ground like a ripe watermelon thrown off a ten story building. Stories abound about how its impending collapse will send systemic shocks rattling through our weakened economy, delivering a rude kick to the face just as it is trying to get up. Investors stand quivering on the sidelines and banks are trying to find out how they can hire Jimmy Stewart (aka It’s a Wonderful Life) to perform some crowd control once their money evaporates with the popping of this last bubble.

And you know what? These predictions, dire as they are, may not be totally off base. If recent reports are to be believed, things are not all well with the world. The delinquency rate for CMBS rose to 3.14% in July, which is more than six times as high as the level last year and by 2012, $100 billion of the $153 billion worth of CMBS loans (65%) will face difficulties being refinanced. With this kind of information, it’s easy to see why so many are pessimistic.

The thing to be remembered, however, is that this is all the result of massive artificial inflation. There is nothing inherently wrong with the land; there is nothing inherently wrong with commercial real estate. There was something horribly wrong with the way people behaved between 2004 and 2007. Essentially, taking a Louisville Slugger to the figurative credit piñata and declaring “come get it!” resulting in drastic overpricing and horrible loans. The land itself was the innocent victim of this all and today faces the repercussions of our malfeasance.

In-fact, the cash flow from most of those properties whose loans expire in 2012 is enough to “pay interest and principal on their debt”. Even in the midst of this deep recession, commercial real estate is still producing wealth. The problem is that its values have inevitably fallen from their inflated highs, making it almost impossible for borrowers to extend their existing mortgages or refinance with more debt. But is this necessarily a bad thing? Clearly the market was flooded with bad credit, so is it wise to take out more debt, or in the case of government action, tax payer funded debt, to refinance bad loans? Perhaps it is best just to let the market clear itself of its toxic waste.

We collectively went on a binge of epic proportions and today have to face the consequences. But we never destroyed or devalued assets, we overvalued them. When the dust settles it will be found that commercial real estate is still a great investment, still capable of building wealth and in reality, still is today. If the economy does get hit by a wave of CMBS foreclosures, it’s not because of the land, it’s because of us.

Bloomberg Gives Real Estate Two Sentences

By David Sobelman

I was listening to Bloomberg radio in the car today and they started talking about macroeconomic indicators. After they got done talking about retail sales and the Cash for Clunkers program, they began to delve into real estate. The most amazing part of the conversation was the length of time they spent on the topic. I was so ready to start my mental rolodex of every real estate term I have ever learned in order to keep up with their conversation. But low and behold, I was disappointed. They essentially mentioned real estate as an indicator and that, at this point of the “recovery,” everything would be fine. Discussing the decrease in pricing for homes while the volume of sales increased was mentioned. Commercial real estate got an acknowledgement insofar as to say that it’s a small part of the real estate market and an even smaller part of the economy; so they weren’t too worried. Does that mean I shouldn’t be too worried? Does our entire industry deserve a long segment of discussion from the economists on Bloomberg or should we be as blasé about the market turning around as they were? Two sentences are all we got from them. All I can say is that while I see signs of improvement on a daily basis, I think there is a little more to the real estate market than could be said in two sentences. Stay tuned, hopefully we’ll get more hindsight, insight and foresight from our experts.