NREI – With approximately $700 billion worth of loans coming due on distressed properties over the next four years, transaction activity in commercial real estate is picking up this year, albeit slowly, and is expected to intensify in 2011 and 2012.

Investment capital that had been waiting on the sidelines from mid-2008 and the first quarter of this year is getting back into the game as confidence returns in the form of the market’s stabilizing fundamentals.

“For example, life insurance companies, a traditional source of capital, are back in the market,” says Craig Butchenhart, the president and director of capital services for NorthMarq Capital, a national firm that offers commercial real estate investment banking. “And as more traditional sources come back to the market, there will be available capital to access.”

Many of the loans originated in 2006 and 2007 — the height of the commercial real estate boom — come due in 2011 and 2012. Morningstar, an investment resource specializing in fund investing, believes that will create an environment that fosters asset sales more aggressively than in 2010. To date, 2010 has produced better opportunities for refinancing than outright asset sales.

“Most institutions that we deal with believe that values are fairly stable now,” Butchenhart says. “Confidence that fundamentals are stabilizing and not deteriorating further is bringing these institutions back to the market.”

Of course, available capital is just one aspect of the picture. Financial institutions are lending again, but underwriting requirements remain conservative as stronger cash flows continue to be required as well as longer leases, and the ability of the borrower to pay back its loan.


One surprise that may generate more transaction activity in the near future is the return of the commercial mortgage-backed securities (CMBS) market. Many analysts hadn’t expected the CMBS market to turn around this early after it was considered dead for nearly two years during the recession. Since then, few CMBS-backed deals have occurred as investors and issuers, aware of the creditworthiness risks involved, painstakingly do their homework on these securities.

In June, JP Morgan Chase Commercial Mortgage Securities Corp. issued a $716.3 million CMBS-backed bond, primarily consisting of retail properties, in the second such deal this year.

“There’s a little life in the CMBS market,” Butchenhart says.

There’s significant maturity in the CMBS loan pipeline, and most of those maturing CMBS loans are being refinanced due to low interest rates as they are maturing at rates higher than the current interest rates. If they can’t be refinanced, the CMBS loans are being modified or extended for a period of time as the borrowers await capital.

“As long as those properties have maintained a reasonable amount of leasing, loans can be refinanced,” Butchenhart says.

As reported by CNNMoney.com

One may be surprised to see that shares of real estate investment trusts, or REITs, are on fire this year. The iShares Dow Jones Real Estate (IYR) exchange-traded fund, which owns about 75 real estate stocks, is up 9% so far in 2010.

There are various types of REITs focusing on different types of properties. And REITs across the board are having a good year.

Hotel owner Host Hotels & Resorts (HST, Fortune 500), which is in the S&P 500, has shot up 25% this year. So have shares of Kimco Realty (KIM), a REIT that primarily owns shopping centers. Office property owner Boston Properites (BXP) is up nearly 15%.

What’s the attraction of REITs in what remains a stormy market for residential and commercial real estate? It’s tempting to sum it up in one word. Yield.

Real estate investment trusts pay at least 90% of their taxable income to shareholders in the form of dividends. Doing so exempts REITS from having to pay federal income taxes.

For that reason, REITs tend to sport eye-popping dividend yields that make them more intriguing than bonds for fixed-income investors, especially in a low interest rate environment such as this.

The yield on the iShares REIT ETF is currently 4.5%. By way of comparison, the benchmark U.S. 10-year Treasury is yielding about 3.9%.

“REITS have been running up a bit as investors chase yield. Individuals that are largely in fixed income are starting to realize that there are better investments,” said Jill Cuniff, president of Edge Asset Management, a Seattle-based investment firm that runs the Principal Equity Income fund.

So the REIT rally makes sense when you consider that owning stocks that consistently pay dividends is a smart strategy for a long-term investor.

According to Ned Davis Research, stocks that steadily grow their dividends have had an average annualized return of 9.3% going back to 1972. That beats the S&P 500′s average return of 7.1% and is far better than the puny return of just 1.3% for stocks that don’t pay dividends.

But there’s more to the real estate run than a hunt for a high yield. Jeung Hyun, principal with Adelante Capital Management, an Oakland. Calif.-based money manager, points out that another sector known for steady dividends — utilities — has lagged the market this year.

Hyun said that even though there are still worries about the current state of the economy, investors are anticipating improvement later this year and in 2011 — and that’s helping to lift REIT stocks.

“There have been expectations of a commercial estate crash. We expect softness but we think some of the concerns about a crash are overdone, she said. “If real estate investors are waiting for a sell-off and huge bargains, they are not going to come.”

But Cuniff said that investors need to be more cautious when looking at REITs since the sector has already enjoyed a solid run. She said investors shouldn’t paint REITs with the same brush and need to focus more on individual stocks.

Along those lines, Cuniff said REITs that own hospitals and other health care facilities could benefit from the recently passed health care reform bill. One that the Principal Equity Income fund owns is simply called Health Care REIT (HCN). It pays a dividend that yields 5.9%.

Hyun said investors that are optimistic that the recovery is for real should be looking beyond defensive areas like health care though.

Because of the prolonged weakness of the economy, there hasn’t been a rush to build new shopping centers, apartment buildings, hotels and offices. That will help REITs since it should keep prices stable, Hyun said.

He said his firm owns shares of Taubman Centers (TCO), a firm that owns shopping centers that yields 4%, and hotel owner Starwood Hotels and Resorts (HOT, Fortune 500). Starwood is not a REIT, however, and its yield is just 0.4%.

Cuniff said her firm is also looking at REITs that can do well in an improving economy. The Principal fund owns Annaly Capital Management (NLY), a REIT that invests in residential mortgages and yields a whopping 14.7%, and Kimco, which yields 4%.

Merger activity could help REITs as well, according to Hyun. He pointed out how General Growth Properties (GGP), a mall owner that went bankrupt last year, has surged following a takeover bid from rival Simon Property Group (SPG).

Another investment group, led by Toronto-based REIT Brookfield Asset Management (BAM), mutual fund company Fairholme and private equity firm Pershing Square are planning to invest more in General Growth to keep it independent once it emerges from bankruptcy.

“General Growth is highlighting the value in real estate,” Hyun said. “The fact that there is a bankrupt company that is attracting significant investor interest is proving that.”

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 Federal Reserve has held interest rates near zero while also highlighting increased momentum in the US economy’s recovery, during its latest meeting on monetary policy.

The Fed’s nod to a firmer rebound from the deepest recession in decades hints that it is moving closer to dropping its promise to hold borrowing costs at rock bottom levels, suggesting rate hikes could come within several months.

Kansas City Federal Reserve Bank President Thomas Hoenig said the commitment to keep rates exceptionally low for an extended period was no longer warranted.

It said the US labour market was stabilising, which is a view that is more upbeat than at the last meeting in late January, when the policy-setting committee said only that deterioration in the labour market was ‘abating’.

The Fed also said business spending on equipment and software had risen ‘significantly’. Again, this is a brighter assessment than the one it gave in late January.

The US economy resumed growth in the second half of last year, and expanded at a robust 5.9% annual pace in the final three months of the year.

The Fed has allowed special lending facilities to close as financial markets have returned to normal after the crisis, and it recently raised the discount rate it charges banks for emergency loans to 0.75% from 0.5%. Fed officials stressed the move was in keeping with the settling of financial markets and was not a precursor to efforts to tighten lending conditions.

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