Will Tax Bill Eventually Deliver for CRE?

By Erika Morphy

WASHINGTON, DC-The House of Representatives has sent legislation that extends the Bush-era tax cuts as well as several other business-friendly initiatives to President Barack Obama for his signature. 

For the most part it is a mirror image of the $858-billion deal that passed the Senate earlier this week. The crux of the package extends the tax cut as well as unemployment insurance--along with a new 2% payroll tax reduction for all workers. Energy and other tax breaks that were expiring this year have also been folded into the package. Some House Democrats balked at the last minute, protesting a revision to the estate tax, which exempts families inheriting up to $10 million. Democrats did win some measures of their own, in the form of government spending on certain projects. 

In the end, neither side was completely disgusted or totally enthralled by the bill, which has largely been pushed by the president and the Republican party. The Democrats see it as adding to the nation’s ever-growing national debt, but Republicans wanted the tax cuts to be made permanent instead of extended for two years. 

For the real estate community as well as the debt and equity market, and particularly the residential market, the bill’s passage is a net positive, says Dennis Yeskey, senior advisor and leader of the commercial real estate practice at AlixPartners.

The bill cuts Social Security payroll taxes and extends jobless benefits, key tax credits and mortgage insurance deduction--basically, all of this means people have a little more money in pockets, he tells GlobeSt.com. “The theory is that consumers will spend that extra money which will help the residential real estate market, which has been really hurt by the downturn.” Also, in terms of commercial real estate, increased consumer spending will benefit retailers, which will help the retail real estate market and eventually industrial real estate. 

Finally, Yeskey says, leaving capital gains rate the same through 2012 is very important to commercial real estate “very, very important. One of the reasons is that the rate on dividends will remain the same as well--the REIT market is really a dividend play and this has the potential to help the REIT market.”

Also, the bill has extended bonus depreciation, says Harvey Berenson, managing director in the Business Tax Advisory group at FTI Schonbraun McCann Group in New York City. “The law also extends 15-year depreciation for qualified leasehold improvements. This will also encourage investment in rental property.”

The bill’s passage will also go far to improve the mood in the business community, which should help, observers say. In discussions with local real estate professionals, the primary benefit they see from the passage of this bill is the removal of a big near-term uncertainty, Edward F. Manzi Jr., chairman and CEO of Fidelity Bank, a Leominster, MA-based community bank, tells GlobeSt.com. “Generally speaking, for the decision-makers in the real estate investment community, less uncertainty is better because they can complete analysis and move forward with more clarity,” he says.

Based on the overall dollars saved by the bill, it won’t promote new development in the commercial real estate industry, agrees Scott Spector, a principal at Spector Group in New York. “However, the perception will be very attractive to developers and end-users and this will help to provoke more much-needed activity across the industry.”

Perhaps the most intriguing--but also the most amorphous--benefit of the bill is its promise to increase employment. The package has been forecast to create 3.1 million jobs, Peter Cohan of Peter S. Cohan & Associates tells GlobeSt.com. Whether that is worthwhile from a fiscal perspective--those jobs are coming at a cost of $276,774 per job, higher than the $254,857 per job cost of the $787-billion stimulus bill--is debatable, he says. But from a pure commercial real estate perspective, those jobs will all require new office, retail and industrial space. 

The bill just may push the economy towards the tipping point of businesses seeking to create jobs because demand is there for their products and services, Cohan adds. “We are not at that point yet,” he says. Even with a 9.8% unemployment rate, businesses are ringing up profits just fine.  

But businesses may have to step up hiring if they want to save face--even if they haven’t reached the point of responding to growing demand. The 20 executives that met with President Obama this week promised that if the bill goes through they will be on the road to hiring people again, says Howard Hammer, of Fiske & Co., a CPA and consulting firm in South Florida. “I don’t see how it can’t help…the  government is encouraging businesses to buy equipment, to grow, and that will require more employees and new hires,” he tells GlobeSt.com. 

Source: GlobeSt.com

Inflation, Interest Rates to Remain Tame in 2011

By Hessam Nadji

Primarily due to concerns over short-term economic weakness and potential deflation, the Fed recently implemented the controversial QE2, the second round of quantitative easing. Over the past year, prices for all goods rose a meager 1.1%, and core inflation, which excludes the volatile food and energy sectors, inched up 0.8%. Most of these increases occurred before July.

Since July, core inflation has increased by only 0.1%. While certain goods and services have indeed witnessed large increases, notably gasoline, which has increased 7.3% in the past 12 months, and medical care, which has jumped 3.2%, these gains have been offset by flat or negative growth for other goods and services.

For example, there has been no growth in the housing sector, -0.8% downturn for apparel, and -4% for computers. One of the biggest components of inflation is wage pressure and because of high unemployment, there is none and that is one of the major reasons the Fed acted. A drop in housing costs has also helped, as has aggressive pricing by retailers of consumer goods.

Yield curves for one-, two- and even three-year Treasury Bills remain exceptionally low, reflecting little concern over short-term inflation. Currently, yield curves are in the 0.3% to 1.08% range, whereas in 1990, one- to three-year T-Bills were in the 8% to 9% range; and in 2000 they were in the high 5% range. In the past two months, however, interest rates on 10-year T-Bills have spiked 94 basis points to 3.53%.

The rise in long-term rates is due to expectations for faster growth in 2011. Better-than-expected readings on multiple economic indicators, the proposal to extend Bush-era tax cuts and other proposals by the Obama Administration to stimulate the economy, such as the payroll tax reduction, have prompted this shift in sentiment. This shift also reflects the desired outcome by the Fed to encourage capital rotation out of safety and into asset investments. Nonetheless, interest-rate movements and recovery patterns seldom move in straight lines, especially in this recovery. Another round of European debt concerns, negative surprises on banking and foreclosures and disappointing hiring in the United States could easily spur a temporary reversal in interest rates. The longer-term implications of the Fed’s QE2 and tax extensions are serious, and could negatively impact confidence and interest rates down the line. 

Over the next nine months, the 10-year Treasury yield should settle in the 3.5% to 4% range, which is still low by historical standards. Interest rates are unlikely to rise much beyond this range, partly because of low inflation and the Fed’s commitment to purchase $600 billion in Treasuries next year. In a way, QE2 can be characterized as insurance to limit the rise in rates and support short-term economic momentum.

Longer term, once the economy and job creation pick up momentum, the Fed must move swiftly to remove excess liquidity from the system to fight off inflation early, without killing the recovery. This will be a delicate balance to strike since the markets are looking for “just-in-time” deficit reduction measures that do not cause a recession or stagnation.

Interest rates will rise again in late 2011 or early 2012, as the recovery turns into an economic expansion. Assuming an inflation run-up is avoided and deficit reduction plans are executed effectively, the rise in interest rates should be orderly, and within a reasonable range so as not to pose a significant valuation risk to commercial real estate. This is a big assumption that carries substantial risks, but the Fed has the benefit of past cycles – the 1994 and 2002 through 2004 cycles – both of which were extremes; with one nearly causing a recession, and the other creating a severe housing bubble. 

The underpinning of a favorable outcome for today’s investors is locking in still low interest rates ahead of above-average rent growth. This requires realistic asset-specific underwriting, achievable rent growth assumptions and a cap rate spread that accommodates for higher, but not hyper interest rates.

Source: GlobeSt.com

Commercial property mortgage delinquencies rise in 3Q 2010

By THOR KAMBAN BIBERMAN, The Daily Transcript

Friday, December 3, 2010

The Mortgage Bankers Association (MBA) reported there are indications of a strengthening economy, but that doesn't mean there aren't plenty of commercial property owners in San Diego County more than 90 days delinquent with their payments.

The MBA analysis looked at commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae (OTC: FNMA) and Freddie Mac (NYSE: FMCC) in the third quarter.

Together these groups hold more than 80 percent of outstanding commercial/multifamily mortgage debt.

The report said that the 90-plus day delinquency rate on loans held by FDIC-insured banks and thrifts increased 0.15 percentage points to 4.41 percent.

In San Diego County, a number of assets have loans more than 90 days delinquent.

Topping the list is the 329-room Park Hyatt --formerly the Four Seasons -- Aviara in Carlsbad, which is more than three months behind on a $186.5 million loan, as noted by Bloomberg News.

A venture including Broadreach Capital Partners and Maritz Wolff & Co. owns a majority stake in the Aviara.

While high profile hotels receive much of the attention, other types of assets here are in a similar situation.

One of these is the 433,320-square-foot Pacific Center I & II office complex in Mission Valley, on which GE Asset Management has defaulted. A total of $121.2 million is owed on that property.

Other properties that are delinquent more than 90 days include the 90,000-square-foot Village Faire shopping center in Carlsbad ($16.9 million); the 75,000-square-foot Carlsbad Corporate Plaza office complex ($21.3 million); the 240,000-square-foot Gateway Chula Vista office complex (two loans totaling $50.5 million); and the 26,000-square-foot Prospect Plaza office building in La Jolla ($7.2 million).

There are about 20 other commercial properties with delinquent loan balances of $1 million or more in San Diego County.

The MBA report said delinquency rates for different commercial/multifamily mortgage investor groups were mixed in the third quarter.

The delinquency rate for loans held in CMBS is the highest since the series began in 1997.

Delinquency rates for other groups remain below levels seen in the early 1990s, some by large margins.

"Greater strength in the economy is bringing some stability to commercial mortgage delinquency rates," said Jamie Woodwell, MBA's vice president of commercial real estate research.

"Commercial mortgage performance among most investor groups, including life insurance companies, Fannie Mae and Freddie Mac, and commercial banks and thrifts, continues to be better than during the last major downturn of the early-1990s."

"Although weak, the economic recovery is just beginning to be seen in commercial real estate fundamentals and the mortgages they support," the report added.

The MBA reported the 30-plus day delinquency rate on CMBS loans rose 0.36 percentage points in the third quarter to 8.58 percent.

Maturing CMBS loans may be a $1 trillion problem nationally but William Hoffman, president of the Trigild Inc. receivership firm, said he hasn't really seen the maturities yet.

However, Hoffman suggested hotel owners have plenty reason to worry -- particularly if they bought their properties within the past three years.

"It's going to be nasty for them," Hoffman said.

There have been encouraging signs, but mixed signals as well.

The 60-plus day delinquency rate on multifamily loans held or insured by Fannie Mae decreased 0.15 percentage points to 0.65 percent during the third quarter.

The 60-plus day delinquency rate on multifamily loans held or insured by Freddie Mac increased 0.07 percentage points to 0.35 percent during the same period.

Hoffman said that while his firm has no shortage of multifamily properties, it remains the strongest asset class -- even in tough markets such as Arizona.

"There are buyers for multifamily. That's the easiest property to move," Hoffman said.

Source:  San Diego Source The Daily Transcript