2009 March | CPE Blog

Economy: Unsung Heroes at Freddie Mac and Fannie Mae

Mar 302009

The multi-family divisions of Freddie Mac and Fannie Mae – “the other side of the house” – rarely receive the credit due to them. It is estimated that 22-28% of American households live in rented homes. The large majority of these households fall squarely into the lower to middle income brackets. Their ability to find safe, well maintained rental communities often depends on the health of the apartment market. Critical to that marketplace is the availability of debt that helps finance the construction and acquisition of rental communities. Clearly, apartment operators/owners are willing to invest in rental properties if they have confidence in the availability of capital and ultimate value of these properties.

Not only have Freddie Mac and Fannie Mae dominated this marketplace maintaining the flow of capital while others have left, they have done so while maintaining exceptional underwriting standards and related loan delinquency performance. In fact, their delinquency rates are consistently well below 1% and each multi-family division makes hundreds of millions of dollars of annual profits.

Unfortunately, the multi-family divisions are frequently overlooked as the continued political fallout is on the homeowner/residential side of the businesses. In fact, if the residential sides of Freddie Mac and Fannie Mae were in such good financial shape as multi-family, the political conversations would be dramatically different. Speaking as one company who produces those apartment loans for Freddie Mac and Fannie Mae, let’s hope our representatives in Washington do not inadvertently hurt an effective division as they try to deal with the other side of the house.

Economy: Leasing Observations in a Down Cycle

Economy No Responses »

Mar 232009

Tamara Kos, a colleague in our office who specializes in leasing representation for owner clients in downtown Chicago, shared with me some interesting recent observations as follows.

As we all know and as we are all aware, the recent events in the capital and financial markets have drastically impacted businesses and their decision making process. What has been unusual about the recession of 2008/2009 has been its significant impact on virtually every industry, and we are seeing very high levels of workforce job losses so early on in this business down-cycle.

As a result, many businesses have been delaying earlier plans to expand, relocate or upgrade the location or image of their facilities. At present, both the investment sales markets and leasing velocity has slowed considerably as a result of corporate America “treading water” during these current uncertain economic times.

This has created an interesting dichotomy however, for owners of commercial office buildings. With many tenants delaying their plans for long term commitments, they are seeking instead to renew in existing locations for shorter terms of one to two years, to give them time to better evaluate their longer term need for space while the market is in turmoil. For landlords of existing buildings with reasonably high levels of occupancy, this has actually been a boon to net revenue generation. The short term renewals that are being consummated are typically at the full asking rents in a building, but with minimal to no concessions such as tenant improvement allowances or rental abatement. Interestingly, from a bottom line perspective, these short term leases are favorable given their lack of costly concessions although they do not add to the long term value of the building.

On the flip side, owners of properties looking to add tenants are in the position of competing for a smaller pool of tenants who will actively consider a new location and longer term lease commitment, and as a result, the concessions necessary to secure these tenants has increased measurably. Until more confidence is felt in the overall economy, this cycle will likely continue.

So despite the challenging times, the current economic trend has lent an unusual benefit to the owners of those buildings that are well leased and positioned, where many tenants are committing to renew, although for shorter lease terms in many instances.

Finance: Where Will Needed Debt Capital Come From? Can CMBS Make a Comeback?

Finance No Responses »

Mar 232009

Over the next several years, hundreds of billions of debt capital will be needed to refinance maturing loans, and when market fundamentals rebound, additional debt will be needed for new acquisition and development projects.

The future role of the agencies, which provided a lion’s share of debt capital for the multifamily market, is somewhat uncertain as the present conservatorship expires at the end of 2009. Smaller regional and community banks have begun to provide some debt but larger banks remain paralyzed. The number of insurance companies providing debt has diminished and the ones quoting are very conservative. But even if non CMBS sources start to approach “normal” volumes, that still falls short of the expected demand.

The securitization of commercial and multifamily mortgages is critical to providing needed liquidity and, after the market for existing CMBS paper strengthens and market fundamentals stabilize, I expect CMBS new origination to occur, hopefully by 2011. But, in my opinion, prior to a CMBS comeback certain underwriting and regulatory changes will be required for the return of bond buyers’ confidence. These changes include:

* Underwriting needs to adjust from the past to reflect the risk of commercial loans. This will require originators to have to “skin in the game” and not be rewarded simply on volume of securities packaged and sold.

* Rating agency models need to be more conservative with more attention made to the underwriting of individual loans rather than the past reliance on diversified pools and subordination levels.

* REMIC laws need to be revised to allow for greater special servicer flexibility on such matters as extensions, restructurings, assumptions, and the post closing collateral adjustments.

* Some exceptions from market-to-market accounting should be considered for investors electing to limit their ability to sell bonds for some time period.

So, what do you think? Will CMBS come back? What changes do you anticipate? Let us know your thoughts.

Resonant, Relevant and Reflective Store of the Future

Global Green Design No Responses »

Mar 232009

Our work designing major commercial centers and boutiques across the globe offers a view to the future of retail environments – a vision to the store of the future.

From Globalization to Localization:

Consumer reduction in discretionary spending, a desire to travel shorter distances to shop and focus on quality and sustainability are driving interest in localization. The store of the future will reflect its community, culture and landscape, while opening a window to the world. The store will be an engaging and dynamic heart of the community, a world portal radiating outward the dynamic energy of its world within. The store will reflect the spirit of the community through orchestrated transparency and containment, projecting the life of the store inside-out, both to passers- by, and to those that are on their way to an iconic community destination.

Dailan Pier Re-development, Dalian, China

On this pier redevelopment in the major port city of Dalian, China, historic register buildings are re-used for artist residence, workshops and gallery spaces. The new buildings include soho (small office home office) work-live spaces, retail, residential, hotel, and community gathering places. The site sits at the intersection of land to sea trade routes. It blends a working waterfront to leisure and cultural centers, an urban environment with nature, and Dalian’s past with it’s future.

A sense of place and time are expressed through texture, color and materiality. While striking on a grand scale, smaller, intimate settings are carved out to capture pleasing scents and warm voices.

Scale shifting:

Café at Wellcome Trust Sanger Institute, Cambridge, UK photography Matt Milios/NBBJ

As retailers manage the dual challenges of rising costs and limited capital, many are investigating more profitable store formats. Some retailers are shrinking square footage and experimenting with small-format stores as a way to encourage quicker and more frequent neighborhood shopping trips. These smaller stores offer retailers tighter inventory control and consumers a more personalized shopping experience.

These smaller stores focus on selling to highly targeted audiences, a phenomenon known as “long tail” or “niche” retailing. In these environments, craftsmen, designer, maker, collectors and sellers join together in collaboration. Boutique and curated collections will be enveloped with their own highly customized spaces. Each collection, complete with unique enclosures, will be connected by both clearly articulated pathways and visual connections to new destinations.

Opportunities for promenading and viewing, gathering and intimate connections are provided in an orchestrated procession as shoppers are pulled along a journey, from one inspiration to the next discovery. The store will be unfused with natural and dramatic illumination, identity expressions, art installations, unique collections, gatherings and events. The experience will be ever-changing, tied to events of the day, season and cultural celebrations. The richness and depth of emotional and sensory experiences will create compelling memories to all those who enter.

Daelim Ttukseom, mixed use development, Seoul, Korea

Management Matters with Mike Myatt: Longing for The Gipper

Business Management No Responses »

Mar 202009

Where’s the Gipper when you need him? There are great lessons to be learned from Ronald Reagan.

Few would argue that Reagan was a true statesman and one of the greatest presidents of the modern era. Virtually every politician, republican and democrat alike, have fondly referred to him on many occasions. Barack Obama would even quote him while stumping on the campaign trail. So why is it that the current administration doesn’t pay more attention to the wisdom contained in the words of President Reagan as they go about their day-to-day actions? The answer is simple; they are too busy feathering their own nest and acquiring more power for themselves, rather than looking out for our best interests.

In the text that follows I’ll do no editorializing whatsoever, as I believe President Reagan’s words speak volumes on their own accord. The following quotes from Reagan are just a few of my favorites, and given today’s environment, they provide more than sufficient food for thought:

“Government does not solve problems; it subsidizes them.”

“Government’s first duty is to protect the people, not run their lives.”

“The problem is not that people are taxed too little, the problem is that government spends too much.”

“The most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

“Governments tend not to solve problems, only to rearrange them.”

“It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first.”

“No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth.”

“One way to make sure that crime doesn’t pay would be to let the government run it.”

“The best minds are not in government. If any were, business would steal them away.”

“Democracy is worth dying for, because it’s the most deeply honorable form of government ever devised by man.”

“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

“Government always finds a need for whatever money it gets.”

Business Management: Do Not Overlook the Importance of Succession Planning in this Environment

Business Management No Responses »

Mar 172009

The last major and protracted crisis that specifically affected our industry was during the period from 1991 to 1995. How many of you were around to remember a phrase that permeated the industry – “Stay alive to 95”?

Well, there has been one long-term effect emanating from that period of time. Have you ever noticed that there are fewer professionals in our industry today between the ages of thirty-five and thirty nine years of age?

This will have a serious impact on succession planning for our industry for the near term future. It is all too easy to look at your young professionals, with little experience of a downturn, as a prime candidate for “right sizing” your organization during this deep recession.

However, we want to be sure that in the near future we do not lose our young professionals through disillusionment with real estate as a viable profession, and by 2020-2025 there will be a strong and experienced group of leaders available in the industry, with the proven experience of handling the various cycles we will continue to encounter, and ensure the health of our companies moving forward.

This is the time to invest in their career development. I applaud many of my senior colleagues for the effort and resources they are dedicating to mentoring, encouraging and teaching our young professionals new skills in cold calling, bringing value to a client in these difficult times, and sharing how they excelled and prospered during down cycles.

There is nothing more gratifying than seeing those new skills placed into the hands of enthusiastic young professionals – who armed with this knowledge, and the support of their mentors, will come out of this current cycle far more valuable to the company than anything they learned before while riding the crest of an “up market”.

Economy: Sector Slicing or Market Dicing?

Economy No Responses »

Mar 162009

Let’s stop talking about how bad everything is for awhile. Let’s think about getting onto the next phase: Recovery. I’m not suggesting the “when”, because we have all heard pundits taking shots at that. The range I have heard is somewhere between 6 months… and never. That’s probably correct. I would like to solicit opinions on how the recovery will start, not when. Will it be a regional thing? Will the Southwest (Phoenix, Vegas, etc.) lead us out the way they led us in? Or will the Rust Belt get a huge boost from the governmental incentives to the auto industry? Will California lead us out, just because they are so big, and just so cool? Or Florida? New England?

If you think the recovery will come from a part of the country, or the world, let us know by sending a reply to this blog. We are looking for interaction.
If not a region, will it be a sector? Multifamily seems to be the last sector standing. Will it be like accounting…Last in, first out? Or will the stimulus plan take hold in Industrial real estate first? If you think a particular sector of the commercial real estate market will show life before the others, let us know. Take your pick and give us your reasons by placing a reply on this blog.

Video Blog: RealTech with Peter Boritz: Marketing While Staying Green

Technology No Responses »

Mar 122009

Postcard from Beijing – City of Contrasts

Global Green Design No Responses »

Mar 092009

My travels to Asia over the past few weeks included Seoul, Beijing and Hong Kong, intense experiences, leaving me with reflection on the people, the culture, and our work. I’m always trying to develop a deeper sense about what is meaningful to the people we are working with and ultimately designing for.

When I asked a young Chinese colleague about her hopes and dreams for her life and her community, her answer was, “I do hope I could leverage my knowledge to beautify our city by building better spaces for better living, working, making more money to help out more poor people, reestablishing China’s image by building a good image of myself and gradually influencing the people that have a bias toward Chinese people. I wish my country could be clean like Switzerland, sophisticated like France, polite like Japan, open like America.”

In this city of energy, where a grand choreography of bicycles, carts, motorcycles, cars, buses and taxis mix with 17 million people, somehow a grandfather and child make their way, weaving through an intersection of thousands.

These ancient places of Beijing are not small, the Forbidden City, the Great Wall, the Temple of Heaven, even the names are big, yet the details are intricate, carved, gilded, and richly painted.

On a cold, sunny, and slightly hazy morning, I walk through the gate to the Temple of Heaven. The scale of the compound stretches out and on, the grounds full of tai chi and dance groups, badminton players, and a gathering of singers at the temple gate.

Beijing is city where the most modern international architecture sits next to ancient ruins, where newly sprung highrise residences tower next to dwindling hutongs. The few remaining traditional neighborhoods give a snapshot of life from another century. This is progress, and it is fast. I noted in a previous post that more than half of the construction in the world during the next five to 10 years will be in China.

China presents us with the greatest opportunity and the greatest challenge for progress in sustainable design - to create socially, environmentally and economically relevant built environments. In the past 5 years since I have been working on projects here, there has been a great transformation. It is overwhelming to see the pace and scale, and witness the realization of the vision of developers and architects who concurrently wrestle with the demands for faster, cheaper, bigger.

The construction site for this new luxury retail and residential development that I toured is marketed to be the first LEED Platinum certified mixed use development in China. Another leading retail developer tells me that sustainable design is not that critical, that efficiency in energy consumption is just good basic design, and the government requirements are enough.

Beijing’s old warehouse district 798 has been converted to art galleries, shops and cafes, where the young and fashionable of Beijing stroll. It’s an early and successful example of adaptive re-use, along with a few of the restored hutong districts, now full with small designer boutiques and popular clubs. A new challenge of the day is to re-purpose the Olympic site for economic and social relevance beyond the events of last year.

Here the people of this city tell a powerful story of great contrast, as the designer-label clad couples pass by new immigrants, their large woven-plastic duffle bags holding all the hopes and dreams of their families back home in the country.

New York City Tri-State Area: Cash is King

New York City No Responses »

Mar 092009

Cash is increasingly becoming king. This is evidenced on several fronts:

Major corporations are increasingly evaluating the sale and leaseback of corporate facilities to generate cash. Longer leases (15 years or more) and parent guarantees are becoming the norm.
Lenders on commercial properties are requiring far more equity than in the past. Life companies are requiring 40% – 50% in equity and only lend on the highest quality real estate.
Funds that can write the check for the entire acquisition price without the need for financing are the preferred buyer among sellers. The assuredness of closing typically wins out over higher offers with financing contingencies.