Friday, January 30, 2009

"Its Always Sunny in Philadelphia" - Part III

Earlier this week, we examined the credit market turbulence's affect on the commercial real estate market at a national level, as well as local to Philadelphia. Regardless of location, there will be opportunities. But where and how can they be found? Read on...


Experience is a dear teacher, but fools will learn at no other.

No matter the geographic location, there were many buyers who took short-sighted views of the marketplace, had ridiculous assumptions in their models, had access to cheap debt through the CMBS markets, and overpaid tremendously for assets acquired between 2004-2007. It happened in excess in Southern California and Florida, but it happened locally as well. As short term debt associated with these properties begins to mature and balloon over the next few years, there will certainly be owners who are forced to sell because their properties won’t be worth the debt affixed to them, thus stymieing their ability to refinance.

Furthermore, those owners wishing to workout their sour deals have found that their lenders are simply burying their collective heads in the sand, as if the problems will go away by ignoring them. Banks are only returning phone calls from distressed operators when they default on their mortgages and miss a few payments. Then, and seemingly only then, do lenders realize the severity of this crisis and acknowledge it through workouts.

I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.

There will also be developers whose projects will not be able to find anchor tenants due to the recent economic swoon. Owners of projects with bridge debt or construction loans may soon decide to cut their losses rather than wait out the storm or continue to keep their fingers crossed.

However big a gap that exists between the debt and the current value of said properties will determine whether buyers will see these assets through the brokerage community or directly from lenders.

The intelligent and most successful buyer will be the one who doesn’t wait for either one, but rather proactively identifies underperforming assets and inquires directly with ownership as to their interest in divesture.

Also, more than ever, it may be worth reexamining past deals, and following up with brokers to see if any of their deals are likely to fall out of bed. Investors must dig deep and buck the traditional sources to finding favorable deals.

Finding pain is an art, not a science. And as more pain mounts in the marketplace, perhaps we should recall a famous quote not attributed to Benjamin Franklin:

"The early bird gets the worm, but the second mouse gets the cheese"

Wednesday, January 28, 2009

"Its Always Sunny in Philadelphia" - Part II

On Monday we took a look at the Macro level economy as far as how credit market turmoil has disrupted the commercial real estate cycle. Today we will take a brief look at how it has affected the Philadelphia marketplace.

On Friday, we will post a verdict, which is our cryptic attempt at advice for the commercial real estate investor as how to best keep deal flow fluid in a stagnant marketplace.....


An investment in knowledge pays the best interest.

The real question is: what will be the reality for sellers in the Philadelphia MSA?

Due to the pressures of the economy, investors often flock to safer investments and safer markets in times of uncertainty. Philadelphia, across all product types, has long been viewed as a static market. It never provides huge upside in an up cycle, but it provides more stability and downside protection when the market crashes as it has recently, hence its current attractiveness. While many buyers consider the current process to evaluating and buying real estate as a waiting game, in markets like Philadelphia, there simply may not be as much pain to find, or wait for, as there is nationally.

If we use the housing market as a precursor of what’s to come locally versus nationally, considering the commercial real estate arena is often a lagging indicator, there won’t be much opportunity to find here in Philly. Sure, there are home/condo foreclosures in Philadelphia. Just try finding one in center city. They don’t exist. As investors position themselves with the local banking community to attempt to gain access to their REO coffers, they will find the same thing on the commercial side. Sure, banks will foreclose on properties in the next 12-36 months; they just likely will not be properties investors have any interest in buying.

So you may be asking yourself: So what should I do? Stay tuned as we attempt to answer that question Friday!

Monday, January 26, 2009

“It’s Always Sunny in Philadelphia”

(All quotes in bold courtesy of Benjamin Franklin, the penultimate Philadelphian)

Is it always sunny in Philadelphia? More like cloudy. One thing is for sure in Philadelphia, however; it’s never too hot or cold. While winter winds make gloveless hands subject to frostbite in under five minutes this time of year, many have speculated that the commercial real estate market is every bit as cold. While that may be true on a more macroeconomic and national scale, the local marketplace sings a different song. Over the next three posts, we will take a quick look at the macro economy, the economy local to the Philadelphia MSA, and then on the third day provide a verdict for what it means to investors.


The most negative macro outlook we’ve heard is that markets won’t fully rebound until 2012 when some other creative Wall Street vehicle is created to facilitate the flow of capital back into the marketplace. The most optimistic view? That while the beginning to 2009 will be rough, this recession more closely mirrors that of the post “dot-bomb” era of earlier this decade than that of the S & L crisis of the late eighties, rampant inflation of the late seventies, or dare we suggest as other pundits have (gasp!) the Great Depression.

He that can have patience can have what he will.

Inflation numbers, while they may be misleading, are still in the single digits. Interest rates are still at historical lows. Yes, the stock market has dropped close to 40 percent from August 2008, but the sky is not falling. Local banks are still lending. Yet many real estate investors, at least those who can afford to, have been sitting on the sidelines for the last 6 months and have no immediate plans to switch gears. While there is an abundance of capital being raised in various vulture funds in an effort to take advantage of distressed properties and the debt that saddles them, nobody seems to know if, or exactly when, we will reach the bottom.

Diligence is the mother of good luck.

While the bid-ask spread between buyers and sellers has gradually narrowed over the last few months, there still remains a considerable gap between the two. Yes, sellers are finally starting to adjust their pricing expectations due to rising operating and financing costs. Buyers’ underwriting standards are as stringent as ever, and rarely will you see contingencies waived during due diligence without loan commitments being firmly in place. Yet while many sellers still remain enamored with 1Q 2007 prices, buyers are firmly entrenched in reality.

Stay tuned on Wednesday when we take a look at what's going on at a Micro level in Philadelphia....

Llenrock Blog Update

Llenrock Group will begin posting multiple times a week, starting today, and every subsequent Monday, Wednesday and Friday morning.

The purpose is to keep our readers coming back for more information, and to build a regular following. Please make a personal note of this, and be sure to check back every Monday Wednesday & Friday for the latest and greatest in the world of Commercial Real Estate & Finance.

Thursday, January 22, 2009

So where are we today?

While reading Redwood Trust's Q3 report, which is one of the more detailed company reports out there, the following well-known psychological graphic was included. The CFO and CIO of Redwood seem to claim that in terms of RMBS, we are near capitulation, or a turning point. Given that RMBS lead us in to this crisis, logic (and all of the well-wishers) protend that it will lead us out. With CMBS the well-known lager in the markets, perhaps there remains some additional stress, or opportunity depending where you sit.

Llenrock Group

Tuesday, January 13, 2009

Staying in touch with TED (Ben, and Lee)

So the story of the day seemed to be that of the TED spread beginning to reach pre-Lehman implosion areas. The TED spread is commonly used to gauge banks willingness to lend to their counterparts worldwide. It is based on the difference in like-maturity Treasury yields and LIBOR, with 3-month being the most often quoted. Today it is sitting just north of 100 bps, which is down significantly from the 400+ bps spread when the credit crunch turned into a credit tsunami.

In the below chart, the 3-month TED was 201 bps on Sept 15th 2008, the day Merrill was sold, and Lehman Brothers (founded in 1850!) failed. The spread hit the 405 bps peak on October 13, 2008, doubling in under a month. The lead up to the turmoil is not really obvious, and displays just how out of touch our appointed officials (Ben, Hank, and Tim) really were with the systemic risks far outweighing any gained moral hazard sobriety. Too bad there are not models for that?

The real story will be when there is a pick-up in reported borrowings released by the Fed. Given Bernake's recent statement, he doesn't sound like he is optimistic on the way we are currently systematically structured, stating...

“Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises,”

Lee Scott, in his last public speech as the CEO of Wal*Mart made some insightful comments on the state of the consumer, absent the heady economic language. He was at The National Retail Federation's Annual Convention, and positively made attendees second guess forging ahead with their retail plans.

Rachel Dodes from the Heard on the Runway blog over at WSJ reports this eye opener - "The recession could fundamentally change the way consumers live, adding that he’s “not convinced” that people will be willing to take on additional debt for a long time. Retailers “are closer to working men and women…than any other industry,” said Mr. Scott, who noted that the biggest jump in sales at Wal-Mart has been in the frozen meals department, as consumers stop going out to dinner but still find themselves strapped for time and in need of convenience."

Recent struggles in holiday retailing don't seem to be pointing in the right direction, nor the increase in microwave dinners. Wonder what the margins are on a frozen turkey dinner?

We will strive for a positive next post, promise.

Llenrock Group

Wednesday, January 7, 2009

Lunch with Paulson

So the fine bloggers at Real Estate Bisnow report that our trusted Treasury Secretary mentioned that Fannie/Freddie either become "utility" like entities or are returned to the private markets (likely broken into smaller entities as they would have difficulty raising funds).

Looks to be an interesting year for not only the residential finance market, but also the Multifamily finance sector, which many brokers believe is not doing too badly, relatively speaking. The brokers mention most often that there is a floor provided by the various DUS lenders and HUD programs for "affordable" multifamily properties, allowing the leverage needed to reach their returns. However buyers continue to submit low-ball offers, and in many cases may win the deal a few months later.

Llenrock Group