We are all conscious of the dark cloud of commercial real estate debt which lingers on the brightening horizon – with $3.4 trillion in outstanding debt, $1.4 trillion of which is coming due by the end of 2012— many feel this will spur the next leg in the credit crisis and possibly derail the broader economic recovery.

The situation seems especially ominous given that commercial real estate values are out by up to 40% from market highs and credit markets are only now raising their heads from hibernation. This means indebted owners do not have the ‘get out’ option of disposing the property and repaying their mortgage with the proceeds.

It also makes refinancing difficult. Borrowers have to put more of their own equity into a deal and lenders have increasingly tighter standards. Loan-to-value (LTV) ratios are not only lower than they were at market peaks, but have to be based on the current value of the property, which again is much lower than it was years previously.

However, according to many real estate economists, this fear is largely misplaced. Commercial real estate debt will likely put a dent in the the recovery in the credit markets, but due to a few key factors such as the the limited impact of commercial real estate loans on the overall economy, it won’t bring about the same wave of distress as the housing downturn did.

“As far as the impact of commercial real estate on the overall economy, I don’t think it’s going to be the next shoe to drop,” says Robert Bach, senior vice president and Chief Economist with Grubb & Ellis. “These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don’t see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it.”

The FDIC, however, faces some concerns. A recent analysis by the agency’s Office of Inspector General found that during the peak of the real estate market many banks ignored FDIC’s 2006 recommendation that they keep commercial real estate holdings at less than 300 percent of total capital. Meanwhile, after dealing with 100 bank bankruptcies last year, today the agency is facing a deficit for the first time since 1933 and might lack the funds to deal with the potential fallout of a commercial real estate crisis.

In 2009, bank failures cost the agency $25 billion on top of the $20 billion it doled out in 2008. To deal with the money shortage, the FDIC is requiring banks to prepay $45 billion of insurance premiums by the end of this year. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012. Overall, the agency is projecting that bank failures between 2009 and 2013 will cost it $70 billion.
Meanwhile, more than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate, a real estate investment management firm.

That’s coming at a time when new sources of refinancing remain scarce and valuations of commercial real estate properties are getting battered by weakening fundamentals. In the first half of 2009, the volume of distressed commercial assets grew 122 percent, ING reports, to $138 billion, including $32 billion in the retail sector.

The good news is that total volume of commercial real estate debt is about a third of the total amount of outstanding residential mortgage debt, which stands at approximately $10.9 trillion, according to the Federal Reserve Board’s figures.

Another important factor to keep in mind is that the residential mortgage crisis affected almost every homeowner in the country and so had a devastating follow on impact on consumer spending. Americans had been refinancing their homes and using the proceeds in the high street. By contrast, troubles in the commercial real estate industry might cause damage to banks and large institutions, but will have a limited effect on Main Street, says Clint Myers, strategist with Property & Portfolio Research, a Boston-based real estate research firm.

Any potential damage will also be mitigated by the fact that commercial real estate debt has been largely concentrated on the balance sheets of regional banks, rather than the big national players, and that most of the loans issued before 2005 feature solid underwriting, adds David J. Lynn, managing director with ING Clarion Real Estate.

Today, 54 percent of all commercial real estate loan defaults come from loans sponsored through commercial mortgage-backed securities (CMBS), which were a major source of real estate debt between 2005 and 2007. Loans issued by national and regional banks account for only 12 percent and 11 percent of all defaults, respectively.

That’s not to say that all those commercial loans won’t cause serious problems in the credit markets. As long as banks avoid realizing losses on commercial mortgages, commercial asset values will remain artificially high, Myers says. That, in turn, will likely limit the flow of new credit into the commercial real estate market, leaving some owners cash-strapped.

“The real stress in the system [will be on] the banks,” he says. “The pace at which regional banks fail will probably accelerate from this year to the next. And what it will mean is that there will be very little new lending activity for commercial real estate and it’s going to be very hard to grow.”

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

The US economy grew at a faster than expected 5.7% annual pace in the fourth quarter, the quickest in more than six years.

The first estimate put Q4 gross domestic product growth at its fastest pace since the third quarter of 2003. The economy expanded at a 2.2% annual rate in the third quarter. Analysts had forecast GDP, which measures total goods and services output within US borders, growing at a 4.6% rate in October-December period.

Growth was boosted by a sharp slowdown in the pace of inventory liquidation, a factor that could serve to mask the strength of the economic recovery. However, even stripping out inventories, the economy expanded at an annual rate of 2.2%, accelerating from the 1.5% increase in the third quarter, reflecting relatively strong performance from other segments of the economy.

Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period.

The change in inventories alone added 3.4 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.

In the last three months of 2009, consumer spending increased at a 2% annual rate, below the 2.8% recorded in Q3 when consumption received a boost from the government’s car scrappage scheme.
Consumer spending, which normally accounts for about 70% of US economic activity, has been held back by the worst labor market in a quarter century.

Business investment in the fourth quarter grew for the first time since the second quarter of 2008 as the drag from the troubled commercial property sector was offset by robust spending on equipment and software. Business investment rose at a 2.9% rate.

The growth of spending on new home construction slowed sharply in the fourth quarter to an annual rate of 5.7% from an 18.9% pace in the third quarter. Export growth outpaced imports, leaving a trade gap that contributed half a percentage point to GDP growth in the last quarter.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Leading central bankers believe a ‘progressive normalization’ of the world economy has taken hold, driven by emerging economies, according to the president of the European Central Bank.

‘At a global level there is a confirmation of the progressive normalization of the economy,’ ECB chief Jean-Claude Trichet said on behalf of the participants in a meeting of central bankers in Switzerland.
During their first quarterly meeting of the year at the Bank for International Settlements (BIS), they concluded that a global economic recovery was underway.

‘We are in the recovery mode, that is something that is very much due to the emerging economies,’ Trichet said. He said these economies had shown resilience, describing them as being in ‘a more dynamic mode now’.

The ECB chief did go on to warn that commercial banks must ensure that they clean up their balance sheets in the wake of the financial crisis to ensure a steady recovery. ‘We are telling our banks that they have to do themselves everything to reinforce their balance sheet by all appropriate means,’ he said.

The central bankers met the heads of several big banks at the BIS over the weekend to underline the need for a sound financial system to prop up long term growth.

They said afterwards that they hoped that new international standards aimed at bolstering the banking industry’s ability to weather future financial crises would be finalized by the end of this year.
Leading central bankers and national regulators in the Basel Committee on Banking Supervision said last month that they were aiming to strengthen financial requirements on banks by the end of 2012, once their proposals were refined and tested this year.

The reforms, which have been in the offing for several months, are part of the international response to the crisis triggered by the collapse in financial markets and several major ban

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

LaSalle Investment Management today released the 2010 edition of their Investment Strategy Annual. A publication that provides an outlook for global real estate markets.

The report notes that the plunge in values has stopped in most major markets it follows and sings of increasing investor confidence are beginning to be seen.

LaSalle anticipates a further re-alignment in the pricing of risk with an increase in deal flow as sellers slowly move from denial to acceptance. Investors should seek an appropriate balance between total risk aversion and inappropriate risk tolerance. The former is already resulting in a surplus of capital targeting a handful of ultra-safe deals.

Jacques Gordon, Global Strategist at LaSalle Investment Management said: “Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010. However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes. The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come.”

“At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors. And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate’s diversifying power in a portfolio will be restored.”

The firm goes on to state that in 2010 investors can look forward to more rational pricing and, in cases of distressed properties and owners, some hugely interesting opportunities. As they develop investment strategies for 2010-2011, investors with a clear view of the returns they require can take full advantage, says LaSalle.

William Maher, Head of US Strategy, LaSalle Investment Management said, “Investment opportunities in North America will improve but are likely to remain limited in 2010, particularly in the United States and in Mexico. In the US, the best opportunities, both core and higher return, will evolve from the resolution of the large level of maturing and failing loans.”

La Salle go on to recommend that investors in the US focus on low-risk re-priced core properties. A large number of opportunities are expected to emerge from the problems caused by the excessive leveraging of the real estate sector over the past five years.

As regards high return strategies, the areas to focus on include distressed debt (public and private) and a wide range of structures that focus on the provision of “rescue capital” to private real estate funds, developers, individual assets, and lenders.

Not surprisingly, the major risks to Commercial Real Estate according to the report is with the capital markets, which are expected to be the main driver of performance, while economies are weak. Real estate capital markets could be quite volatile in the years ahead, says LaSalle. The unintended consequences of monetary and fiscal stimulus policies could lead to too much money flowing back into property ahead of a solid recovery in fundamentals. This excess liquidity risk is already building in China and, to a lesser extent, the UK. To manage this risk, investors should maintain a strict discipline that focuses on achieving a required return with realistic and diligent underwriting.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

The acronym REIT stands for Real Estate Investment Trust.

This is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and offer investors high yields, as well as a highly liquid method of investing in real estate. Essentially, it is a liquid, dividend-paying means of participating in the real estate market.

We can distinguish between a few differing types of REIT.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. They loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. The revenue is generated mainly through interest earned on the mortgage loans.

Hybrid REITs: Hybrid REITs combine both investment strategies of equity REITs and mortgage REITs by investing in properties and mortgages.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Still reeling from the large losses in Real Estate investments over the last few years it may seem futile to search for any ray of light to ease the pain.

But, wearing an optimistic hat, it is possible to see some benefits for the investor moving forward. The main positive is in the area of fee’s and how they are structured into the deal.

At the height of the boom, the general partner was soaking up a large chunk of the deal through exorbitant management fees. Everyone was happy, deals were going well, and people were taking the eye off the ball when it came to what was going to the sponsor. Figures got so out of hand that the sponsor was finding themselves with as big a piece of the pie as the investor, without having to stump up much cash, if any.

It was not uncommon to see 6%+ placement fees greeting investors at the door with an annual charge of 1%+ on Gross Asset Value thrown in for good measure. Not to mention the piece of the action at the back end which in many cases left the developer/sponsor with up to 50% of the profits.

When one looks at it logically, it simple did not make sense that those who are providing the equity were being left with a decidedly meager offering of the riches on offer.

This is no longer acceptable and developers need to start taking a long hard look at their investment model and ensuring that the fees are at an acceptable level. Investors are wiser as a result of their recent hard knocks and simply won’t accept a sponsor trying to take all the good out of a deal with unreasonable fees.

The institutional investment world is no different and managers here are also in for a serious wake up call.

Until recently, fund managers structured their funds with “2/20” fees. This meant charging investors a 2% fee on their contributions during the fund raising period, and then another fee of up to 20% based on a percentage of the fund’s total profits once it closed.

London-based private equity researcher Preqin, say that today’s fees vary widely and have come down from the old 2/20 standard. For example, most real estate funds now charge from 1.5% to 1.74% during their fund raising program.

Even more recently, managers have come under increasing pressure to trim their fees even further and to better align their fee structures to the actual performance of the funds.

Developers, and fund managers alike, are becoming incrasingly aware that they are now dealing with a whole different species of investor. One that has felt that wrenching feeling of a deal gone South and will not take that leap of faith so easily next time. Once bitten……

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

During the last number of golden years in the Real Estate market, the only word that investors wanted to hear was ‘returns’. Now, according to Ernst & Young, this is being replaced by another ‘R’ word: risk.

Ernst and Young are witnessing a marked change in the priorities of large Real Estate investment firms. When once, at the height of the real estate boom, they were focused on generating the highest possible returns for their investors now that attention is primarily targeted at managing risk.

In material documented from market research on over 40,000 client meetings globally, Ernst and Young said that firms should be developing a “plan of action” if they are to benefit from the downturn. That plan needs to focus on capital availability, reevaluating the business model and risk management.

With almost 75% of real estate executives anticipating a “permanent change” in the risk management of their organizations, Ernst & Young said everyone had to learn lessons as they tried to prepare for “success”.

In the ‘Lessons From Change’ report, the firm added that real estate companies need to be adept at controlling the expectations of investors who were used to seeing exorbitant returns in times past. They now need to “accept lower returns as some companies focus on lower yielding but lower risk investment”.

The issue of increased regulation is also something that the report identifies. Global Real Estate leader Howard Roth said this would be one issue facing all investors, particularly private equity and real estate funds. Here there is a growing demand and expectation for greater disclosure of investment plans and asset verification.

Dean Hodcroft, Ernst & Young’s Real Estate leader for Europe, the Middle East, India and Africa, continued by stating that: “Two years ago, real estate executives spent most of their time on new deals. Now they spend most of their time firefighting: protecting assets, controlling costs and, most importantly, managing cash flow.”

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Lending conditions for the commercial real estate industry continued to worsen in the third quarter, according to an index by San Francisco based Banc Investment Group. The index is supported by data from the US Bureau of Labor Statistics, CB Richard Ellis, Grubb & Ellis and Reis.

The index dropped 10.6% to 63.67 in the third quarter from 71.24 in the second quarter, which was an 11.6% decline from the first quarter.

The BIG CRE Index is essentially a forward-looking measure of strength of Commercial Real Estate market conditions for community banks. Values are derived from third-party providers and data collected by Banc Investment Group’s consulting services group, which provides a loan pricing model for community banks nationwide.

In summary, conditions in the industrial sector fell 21.2% representing the largest fall, according to Banc Investment Group. Retail sector lending conditions dropped 7.7% while the the office sector dropped 7.1%. Multifamily fell 9%.

This data foretells a testing lending environment for the fourth quarter of 2009 and into 2010.

Retail

•    The retail sector of the index fell to 60.89 in the third quarter from 65.99 in the prior quarter, down 7.73%. Half as much as compared to the second quarter.
•    For neighborhood and community shopping malls, rents fell an average 0.7% during the quarter. Vacancy rates at neighborhood and community shopping malls exceeded 10%, while rates rose nearly 2.5% at regional malls. In both subsectors, the rate of deterioration is only about half that of the second quarter.
•    More than six in ten markets experienced a rise in vacancy rates, and more than 95% recorded negative rent growth.
•    Lending conditions benefitted from a modest improvement in retail sales (less gas and autos). Sales rose 0.6% in August and 0.4% in September.

Industrial

•    The industrial sector of the index fell to 43.97 in the third quarter from 55.84 in the prior quarter, which is a decrease of 21.27%. This was slightly tempered in comparison to the decline between the first and second quarter.
•    Vacancies rose again, up an average of 3.4% in the quarter.
•    With inventory levels sinking, industrial production has turned positive for every month in the third quarter.

Multifamily

•    The Multifamily sector of the index fell at an increased pace of 9.06% to 76.74 in the third quarter from 84.39 in the previous quarter.
•    Unemployment rose 30 basis points from June through September. The average vacancy rate increased 1.3% over the quarter to a 23-year high. The vacancy rate is expected to climb further, although at a slower pace. In tandem, rent growth dropped 30bps.
•    Across the U.S., about 65% of metropolitan locations reported a rise in vacancies, while more than five out of ten saw rent decline.

Office

•    The office sector of the index fell to 73.07 in the third quarter, down 7.19 % from 78.73 in the prior quarter.
•    The sector posted negative net absorption levels with vacancies rising nearly 4% over the third quarter, despite only half the amount of space coming online as the second quarter. Nearly 85% of Metropolitan areas experienced a rise in vacancies.
•    Year-to-date, average rents dropped 7%, with nine in 10 areas suffering rent declines.

Equity Interface is proving to be a rich source of funding for many of our developers/sponsors.

Having launched our community only 18 months ago, we know have a membership of nearly one thousand members. Our membership consists of a myriad of Real Estate professionals from individual investors, institutional funds, and hard money lenders, to mortgage brokers and attorneys.

This has allowed us forge close relationships with many different areas of the financing tree and so offer developers numerous solutions to their financing requirements. For example;

To begin using the Equity Inteface community and benefit from its financing capabilities, please click here.

Real Estate has long been labeled as a finite commodity. After all, as we have heard so many times before, there is only so much land available. As true as it may seem, us humans seem to be doing everything in our power to push these boundaries and prove that this may not be the case!

The rapid pace at which technology is being developed and introduced to the market can be thanked for this. As these advances continue, more and more real estate opportunities raise their heads.

Who would have thought that church steeples would be the big real estate earner in the late 90’s! People would have laughed you out of the room if you had made such a claim. However, one invention suddenly made the steeple a viable business opportunity. As many will remember, telecommunications companies such as Sprint PCS and Pacific Bell Mobile Service raced to build antenna networks to transmit their new digital cellular phone service and church steeples seemed to be the ideal spot to transmit from.

More than ten years after the church steeple phenomenon a new technological advance has spurred a fresh demand for real estate. It now seems that flat roofs are set to take off as we move from worshipping the skies, to worshipping the sun. Solar power is becoming more and more viable as an alternative source of energy and where best to harness this power than a flat roof, possibly even on your private residence.

The trend first began with deals between energy companies and various large manufacturing and warehouse operations to install solar panels on their premises in return for a fee.

The energy companies have now started to tap the residential sector. The inherent logic of this development is obvious; once they’ve got local authority approval energy companies can extend their ’solar parks’ quickly and with relatively little hassle by fixing normal residents up with solar power. Homeowners are interested because they get a fee for renting out their roofs to professionally managed solar panel operators.

Duke Energy in North Carolina is one such company following this route. It recently became the latest company to announce it would start renting the roofs of ordinary houses for solar power generation. The energy giant will rent 425 roofs across the state as early as next year.  You could argue that Duke, which aside from the Carolinas is also present in parts of the Midwest, found a vital niche because not everybody can afford decent solar panels and this offers people the chance to participate in the solar revolution.

Indeed, throughout the United States, homeowners are being compensated by their energy utility to have solar panels installed. This is arising from the power companies’ urgent need for roof space. They are in a race against the clock to replace ever increasing portions of the regular energy supply by power sourced from renewables.

Independent companies are also getting in on the act of offering people the option of renting out their roofs. Outside renewable energy providers will pay for, install, own and operate the solar systems. The homeowners simply agree to pay a rental fee for the solar electricity generated – based on their usage at the previous year’s rate. Cost reductions of around 20% are feasible.

A good example of this in operation is the Delaware renewable energy company Citizenre which offers customers living in states that have a net metering law the option of renting panels for one, five or twenty-five years. These customers pay a per-kilowatt flat fee instead of the utility bill. Citizenre then sell the excess power generated back to the local utility.

Looking towards the future, it is worth considering how advances in technology can result in the further inception or birth of fresh real estate. Social networking, instant messaging, VoIP, and countless other advancements are leading us down the path to distance communication whereby there will feasibly be no benefit from having company staff in situ. It is not a wild leap to suggest that in the not too distant future, these developments will have led to colleagues connecting with each other from the sanctity of their own homes.

Where does this leave the vacant office blocks? Real Estate is a finite commodity – we beg to differ!

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com